Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We hold available-for-sale fixed maturity securities, which are carried at fair value. We also report our equity securities at fair value with changes in fair value reported through the consolidated statements of comprehensive income.

Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories:


•	Level 1 - Quoted prices for identical instruments in active markets.


•	Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or whose significant value drivers are observable.


•	Level 3 - Instruments whose significant value drivers are unobservable.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities and actively traded mutual fund and stock investments.

Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes. These models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments. All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include corporate securities, U.S. Government-sponsored enterprise securities, municipal securities and certain mortgage and asset-backed securities.

Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information. There were no securities in this category at June 30, 2018.

The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated.



	June 30, 2018
Financial Assets	Level 1		Level 2	Level 3	Total Fair Value
	(In thousands)
Available-for-sale investments
Fixed maturities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	11,324	4,299	—	15,623
States and political subdivisions	—		559,539	—	559,539
Corporate	406		399,166	—	399,572
Residential mortgage-backed	—		1,598	—	1,598
Foreign governments	—		119	—	119
Total fixed maturities available-for-sale	11,730		964,721	—	976,451

Equity securities
Stock mutual funds	3,112		—	—	3,112
Bond mutual funds	12,094		—	—	12,094
Common stock	23		—	—	23
Non-redeemable preferred stock	143		—	—	143
Total equity securities	15,372		—	—	15,372
Total financial assets	$	27,102	964,721	—	991,823



	December 31, 2017
Financial Assets	Level 1		Level 2	Level 3	Total Fair Value
	(In thousands)
Available-for-sale investments
Fixed maturities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	11,808	4,496	—	16,304
States and political subdivisions	—		567,503	—	567,503
Corporate	—		388,703	—	388,703
Residential mortgage-backed	—		1,978	—	1,978
Foreign governments	—		121	—	121
Total fixed maturities available-for-sale	11,808		962,801	—	974,609

Equity securities
Stock mutual funds	3,217		—	—	3,217
Bond mutual funds	12,367		—	—	12,367
Common stock	24		—	—	24
Preferred stock	556		—	—	556
Total equity securities	16,164		—	—	16,164
Total financial assets	$	27,972	962,801	—	990,773

Financial Instruments Valuation

Fixed maturity securities, available-for-sale. At June 30, 2018, our fixed maturity securities, valued using a third-party pricing source, totaled $964.7 million for Level 2 assets and comprised 97.3% of total reported fair value of our financial assets. The Level 1 and Level 2 valuations are reviewed and updated quarterly through random testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades. In addition, we obtain information annually relative to the third-party pricing models and review model parameters for reasonableness. There were no Level 3 assets at June 30, 2018. For the six months ended June 30, 2018, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third-party prices were changed from the values received.

Equity securities. Our equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices.

We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. There were no transfers in or out of Level 3.

Financial Instruments not Carried at Fair Value

Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instruments. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions.

The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows:



	June 30, 2018			December 31, 2017
	Carrying Value		Fair Value	Carrying Value	Fair Value
	(In thousands)
Financial assets:
Fixed maturities, held-to-maturity	$	214,514	218,774	233,961	241,377
Mortgage loans	190		225	195	228
Policy loans	77,577		77,577	73,735	73,735
Cash and cash equivalents	63,333		63,333	46,064	46,064
Financial liabilities:
Annuity - investment contracts	56,025		54,125	55,035	57,575

Fair values for fixed income securities, which are characterized as Level 2 assets in the fair value hierarchy, are based on quoted market prices for the same or similar securities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other assumptions, including a discount rate and estimates of future cash flows.

Mortgage loans are secured principally by residential properties. Weighted average interest rates for these loans were approximately 6.56% at June 30, 2018 and 6.60% at December 31, 2017. At June 30, 2018, maturities ranged from 20 to 24 years. Management estimated the fair value using an annual interest rate of 6.25% at June 30, 2018. Our mortgage loans are considered Level 3 assets in the fair value hierarchy.

Policy loans had a weighted average annual interest rate of 7.7% as of June 30, 2018 and December 31, 2017, and no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets. These loans typically carry an interest rate that is tied to the crediting rate applied to the related policy and contract reserves. Policy loans are an integral part of the life insurance policies we have inforce, cannot be valued separately and are not marketable. Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy.

The fair value of cash and cash equivalents approximate carrying value and are characterized as Level 1 assets in the fair value hierarchy.

The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 assets, was estimated at June 30, 2018 using discounted cash flows based upon spot rates ranging from 2.48% to 3.81% based upon swap rates adjusted for various risk adjustments. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.