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Fair Value Measurements

12 Months Ended

Dec. 31, 2021

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 AFS fixed maturity securities, which are carried at fair value. We also report our equity securities and certain other long-term investments at fair value with changes in fair value reported through the consolidated statements of operations and comprehensive income (loss).

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 pricing 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, securities issued by states and political subdivisions 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. Real estate held-for-sale is in this category.

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 years ended December 31, 2021 and 2020.

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


December 31, 2021 (In thousands)	Level 1		Level 2	Level 3	Total Fair Value
Financial assets:
Fixed maturity securities available-for-sale:
U.S. Treasury and U.S. Government-sponsored enterprises	$	10,611	4,459	—	15,070
States and political subdivisions	—		383,958	—	383,958
Corporate	51		892,957	—	893,008

Residential mortgage-backed	—		133,795	—	133,795
Asset-backed	—		44,676	—	44,676
Foreign governments	—		110	—	110
Total fixed maturity securities available-for-sale	10,662		1,459,955	—	1,470,617

Equity securities:
Stock mutual funds	3,571		—	—	3,571
Bond mutual funds	5,060		—	—	5,060
Common stock	990		—	—	990
Non-redeemable preferred stock	161		—	—	161
Non-redeemable preferred stock fund	5,062		—	—	5,062
Total equity securities	14,844		—	—	14,844
Other long-term investments (1)	—		—	—	56,038
Total financial assets	$	25,506	1,459,955	—	1,541,499

(1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet.


December 31, 2020 (In thousands)	Level 1		Level 2	Level 3	Total Fair Value
Financial assets:
Fixed maturity securities available-for-sale:
U.S. Treasury and U.S. Government-sponsored enterprises	$	11,326	4,791	—	16,117
States and political subdivisions	—		409,665	—	409,665
Corporate	52		877,156	—	877,208
Commercial mortgage-backed	—		221	—	221
Residential mortgage-backed	—		139,963	—	139,963
Asset-backed	—		46,091	—	46,091
Foreign governments	—		118	—	118
Total fixed maturity securities available-for-sale	11,378		1,478,005	—	1,489,383

Equity securities:
Stock mutual funds	3,174		—	—	3,174
Bond mutual funds	12,354		—	—	12,354
Common stock	1,143		—	—	1,143
Non-redeemable preferred stock	281		—	—	281
Non-redeemable preferred stock fund	5,150		—	—	5,150
Total equity securities	22,102		—	—	22,102
Other long-term investments (1)	—		—	—	11,923
Total financial assets	$	33,480	1,478,005	—	1,523,408

FINANCIAL INSTRUMENTS VALUATION

Fixed maturity securities, available-for-sale. At December 31, 2021, fixed maturity securities, valued using a third-party pricing source, totaled $1.5 billion for Level 2 assets and comprised 94.7% of total reported fair value of our financial assets. The Level 1 and Level 2 valuations are reviewed and updated quarterly through 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 as of December 31, 2021 and 2020. For the year ended December 31, 2021, 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.

Limited partnerships. The Company considers the net asset value ("NAV") to represent the value of the investment fund and is measured by the total value of assets minus the total value of liabilities. The following table includes information related to our investments in limited partnerships that calculate NAV per share. For these investments,

which are measured at fair value on a recurring basis, we use the NAV per share to measure fair value. These investments are included in other long-term investments on the consolidated balance sheets.


		December 31, 2021				December 31, 2020
(In thousands, except years)		Fair Value Using NAV Per Share		Unfunded Commit- ments	Remaining life (In years)	Fair Value Using NAV Per Share		Unfunded Commit- ments	Remaining life (In years)
	Description
Limited partnerships
Middle market	Investments in privately-originated, performing senior secured debt primarily in North America-based companies	$	21,947	18,712	10	$	10,542	29,783	10
Global equity fund	Investments in common stocks of U.S., international developed and emerging markets with a focus on long-term capital growth	10,607		—	0	—		—	0
Term liquidity facility	Investments in a facility established by the U.S. Federal Reserve that provides financing to U.S. company market participants for levered asset purchases with a focus on asset-backed, commercial mortgage and collateralized loan obligation markets	—		—	0	1,381		—	3
Late-stage growth	Investments in private late-stage, established companies seeking capital to accelerate growth prior to an IPO or sale	20,468		4,459	6	—		16,291	7
Infrastructure	Investments in climate infrastructure assets, focusing on renewable power generation in wind and solar energy	3,016		16,653	12	—		17,497	12
Total limited partnerships		$	56,038	39,824		$	11,923	63,571

The majority of our limited partnership investments are not redeemable because distributions from the funds will be received when the underlying investments of the funds are liquidated. The life spans indicated above may be shortened or extended at the fund manager's discretion, typically in one or two-year increments. The international equity fund is redeemable monthly.

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 financial statements not otherwise disclosed for the periods indicated were as follows:


	December 31, 2021			December 31, 2020
(In thousands)	Carrying Value		Fair Value	Carrying Value	Fair Value
Financial assets:
Policy loans	$	80,307	80,307	83,318	83,318
Commercial mortgage loan	1,000		1,000	—	—
Residential mortgage loans	148		169	157	195

Cash and cash equivalents	27,294		27,294	34,131	34,131
Financial liabilities:
Annuity - investment contracts	64,384		72,352	60,861	71,547

Policy loans. Policy loans had a weighted average annual interest rate of 7.7% at both December 31, 2021 and 2020 and no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets. Policy loans are an integral part of the life insurance policies we have in force, 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.

Commercial mortgage loan. We financed $1.0 million of the sale of our training facility at a 6.0% interest rate. The loan is due in less than 1 year. Due to the short-term nature of the loan, the carrying value approximates fair value and is considered a Level 3 asset in the fair value hierarchy.

Residential mortgage loans. Mortgage loans are secured principally by residential properties. Weighted average interest rates for these loans were approximately 6.4% at both December 31, 2021 and 2020, with maturities ranging from 5 to 18 years. Management estimated the fair value using an annual interest rate of 6.25% at both December 31, 2021 and 2020. Our mortgage loans are considered Level 3 assets in the fair value hierarchy.

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

Annuity liabilities. The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 liabilities, was estimated at December 31, 2021 and 2020 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 0.50% to 2.63% and 0.22% to 2.34%, respectively. 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.

The following table summarizes the carrying amounts of other long-term investments.


As of December 31, (In thousands)	2021		2020
Other long-term investments:
Limited partnerships	$	56,038	18,135
FHLB common stock	192		190
Mortgage loans	1,148		157
All other investments	21		8,811
Total other long-term investments	$	57,399	27,293

We are a member of the FHLB of Dallas and such membership requires members to own stock in the FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value. Included in all other investments at December 31, 2020 was a Rabbi Trust holding $8.8 million for the benefit of our former Chief Executive Officer for the severance payment that was made to him on February 8, 2021.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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