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 March 31, 2019.

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



	March 31, 2019
Financial Assets	Level 1		Level 2	Level 3	Total Fair Value
	(In thousands)
Fixed maturities available-for-sale
U.S. Treasury and U.S. Government-sponsored enterprises	$	11,333	4,380	—	15,713
States and political subdivisions	—		698,115	—	698,115
Corporate	50		454,384	—	454,434
Commercial mortgage-backed	—		887	—	887
Residential mortgage-backed	—		121,481	—	121,481
Asset-backed	—		4,765	—	4,765
Foreign governments	—		119	—	119
Total fixed maturities available-for-sale	11,383		1,284,131	—	1,295,514

Equity securities
Stock mutual funds	3,091		—	—	3,091
Bond mutual funds	12,143		—	—	12,143
Common stock	133		—	—	133
Non-redeemable preferred stock	305		—	—	305
Total equity securities	15,672		—	—	15,672
Total financial assets	$	27,055	1,284,131	—	1,311,186



	December 31, 2018
Financial Assets	Level 1		Level 2	Level 3	Total Fair Value
	(In thousands)
Fixed maturities available-for-sale
U.S. Treasury and U.S. Government-sponsored enterprises	$	11,274	4,280	—	15,554
States and political subdivisions	—		720,115	—	720,115
Corporate	47		381,749	—	381,796
Commercial mortgage-backed	—		40,014	—	40,014
Residential mortgage-backed	—		68,684	—	68,684
Asset-backed	—		4,757	—	4,757
Foreign governments	—		119	—	119
Total fixed maturities available-for-sale	11,321		1,219,718	—	1,231,039

Equity securities
Stock mutual funds	2,906		—	—	2,906
Bond mutual funds	11,774		—	—	11,774
Common stock	94		—	—	94
Non-redeemable preferred stock	294		—	—	294
Total equity securities	15,068		—	—	15,068
Total financial assets	$	26,389	1,219,718	—	1,246,107

Financial Instruments Valuation

Fixed maturity securities, available-for-sale. At March 31, 2019, our fixed maturity securities, valued using a third-party pricing source, totaled $1.3 billion for Level 2 assets and comprised 97.9% 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 March 31, 2019. For the three months ended March 31, 2019, 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. There were no transfers between Levels 1 and 2 securities during the three months ended March 31, 2019.

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 during the three months ended March 31, 2019.

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:



	March 31, 2019			December 31, 2018
	Carrying Value		Fair Value	Carrying Value	Fair Value
	(In thousands)
Financial assets:
Mortgage loans	$	185	221	186	222
Policy loans	81,474		81,474	80,825	80,825
Short-term investments	7,914		7,914	7,865	7,865
Cash and cash equivalents	34,093		34,093	45,492	45,492
Financial liabilities:
Annuity - investment contracts	55,821		55,109	56,658	55,977

Mortgage loans are secured principally by residential properties. Weighted average interest rates for these loans were approximately 6.6% at March 31, 2019 and December 31, 2018. At March 31, 2019, maturities ranged from 19 to 23 years. Management estimated the fair value using an annual interest rate of 6.25% at March 31, 2019. 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 March 31, 2019 and December 31, 2018, 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 corresponds 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 March 31, 2019 using discounted cash flows based upon spot rates ranging from 2.38% to 3.56% 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.