6.	Fair Value of Assets and Liabilities

Fair value is defined as 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. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

Level 1:

Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

Level 2:

Assets and liabilities whose values are based on the following:

(a)

Quoted prices for similar assets or liabilities in active markets;

(b)

Quoted prices for identical or similar assets or liabilities in markets that are not active; or

(c)

Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

Level 3:

Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.

The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.

The Company is responsible for the determination of fair value and the supporting assumptions and methodologies. The Company gains assurance that assets and liabilities are appropriately valued through the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. For fair values received from third parties or internally estimated, the Company’s processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third party valuation sources for selected securities. The Company performs ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data. When fair value determinations are expected to be more variable, the Company validates them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.

The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy. The first is where specific inputs significant to the fair value estimation models are not market observable. This primarily occurs in the Company’s use of broker quotes to value certain securities where the inputs have not been corroborated to be market observable, and the use of valuation models that use significant non-market observable inputs.

The second situation where the Company classifies securities in Level 3 is where quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources.

Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, limited partnership interests and policy loans. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the financial statements.

In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used.

Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis

Level 1 measurements

•

Fixed income securities: Comprise certain U.S. Treasury fixed income securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

•

Equity securities: Comprise actively traded, exchange-listed equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

•

Short-term: Comprise U.S Treasury bills valued on unadjusted quoted prices for identical assets in active markets that the Company can access and actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.

•

Separate account assets: Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.

Level 2 measurements

•

Fixed income securities:

U.S. government and agencies: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

Municipal: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

Corporate—public: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

Corporate—privately placed: Valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data. The primary inputs to the discounted cash flow model include an interest rate yield curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer.

Foreign government: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

ABS—consumer and other: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads. Certain ABS—consumer and other are valued based on non-binding broker quotes whose inputs have been corroborated to be market observable.

RMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.

CMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance and credit spreads.

Redeemable preferred stock: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.

•

Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active.

•

Short-term: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. For certain short-term investments, amortized cost is used as the best estimate of fair value.

•

Other investments: Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active.

Over-the-counter (“OTC”) derivatives, including foreign exchange forward contracts and options, are valued using models that rely on inputs such as currency rates that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.

Level 3 measurements

•

Fixed income securities:

Municipal: Comprise municipal bonds that are not rated by third party credit rating agencies. The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads. Also included are municipal bonds valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable and municipal bonds in default valued based on the present value of expected cash flows.

Corporate—public and Corporate—privately placed: Primarily valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. Other inputs include an interest rate yield curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.

ABS—collateralized debt obligations (“CDO”) and ABS—consumer and other: Valued based on non-binding broker quotes received from brokers who are familiar with the investments and where the inputs have not been corroborated to be market observable.

•

Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements.

•

Other investments: Certain OTC derivatives, such as interest rate caps, are valued using models that are widely accepted in the financial services industry. These are categorized as Level 3 as a result of the significance of non-market observable inputs such as volatility. Other primary inputs include interest rate yield curves.

•

Other assets: Includes a structured settlement annuity reinsurance agreement accounted for as a derivative instrument that is valued internally. The model primarily uses stochastically determined cash flows, ultimate reinvestment spreads and applicable market data, such as interest rate and volatility assumptions. This item is categorized as Level 3 as a result of the significance of non-market observable inputs.

•

Contractholder funds: Derivatives embedded in certain life and annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities. The models primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions. These are categorized as Level 3 as a result of the significance of non-market observable inputs.

Assets and liabilities measured at fair value on a non-recurring basis

Mortgage loans written-down to fair value in connection with recognizing impairments are valued based on the fair value of the underlying collateral less costs to sell. Limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments are generally valued using net asset values.

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2017. There were no assets or liabilities measured at fair value on a non-recurring basis as of December 31, 2017.


($ in thousands)	Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Counterparty and cash collateral netting			Balance as of December 31, 2017
Assets
Fixed income securities:
U.S. government and agencies	$	42,427		$	85,625		$	—					$	128,052
Municipal		—			708,155			21,178						729,333
Corporate—public		—			2,565,223			7,312						2,572,535
Corporate—privately placed		—			1,167,218			55,978						1,223,196
Foreign government		—			179,765			—						179,765
ABS—consumer and other		—			26,603			15,205						41,808
RMBS		—			21,955			—						21,955
CMBS		—			11,408			—						11,408
Redeemable preferred stock		—			9,672			1						9,673

Total fixed income securities		42,427			4,775,624			99,674						4,917,725
Equity securities		186,446			928			7,159						194,533
Short-term investments		20,594			68,192			—						88,786
Other investments: Free-standing derivatives		—			2,885			336		$	(115	)		3,106
Separate account assets		293,836			—			—						293,836
Other assets		—			—			166,290						166,290

Total assets at fair value	$	543,303		$	4,847,629		$	273,459		$	(115	)	$	5,664,276

% of total assets at fair value		9.6	%		85.6	%		4.8	%		—	%		100	%

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	(4,796	)				$	(4,796	)
Other liabilities: Free-standing derivatives		—			(1,601	)		—		$	345			(1,256	)

Total liabilities at fair value	$	—		$	(1,601	)	$	(4,796	)	$	345		$	(6,052	)

% of total liabilities at fair value		—	%		26.5	%		79.2	%		(5.7	)%		100	%

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2016. There were no assets or liabilities measured at fair value on a non-recurring basis as of December 31, 2016.


($ in thousands)	Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Counterparty and cash collateral netting			Balance as of December 31, 2016
Assets
Fixed income securities:
U.S. government and agencies	$	14,008		$	127,556		$	—					$	141,564
Municipal		—			689,420			22,723						712,143
Corporate—public		—			2,478,958			4,091						2,483,049
Corporate—privately placed		—			1,159,461			75,713						1,235,174
Foreign government		—			192,854			—						192,854
ABS—consumer and other		—			33,277			14,803						48,080
RMBS		—			35,611			—						35,611
CMBS		—			13,796			—						13,796
Redeemable preferred stock		—			9,903			—						9,903

Total fixed income securities		14,008			4,740,836			117,330						4,872,174
Equity securities		211,521			637			5,920						218,078
Short-term investments		40,111			52,587			—						92,698
Other investments: Free-standing derivatives		—			2,414			311		$	(145	)		2,580
Separate account assets		290,798			—			—						290,798
Other assets		—			—			109,578						109,578

Total recurring basis assets		556,438			4,796,474			233,139			(145	)		5,585,906
Non-recurring basis⁽¹⁾		—			—			—						—

Total assets at fair value	$	556,438		$	4,796,474		$	233,139		$	(145	)	$	5,585,906

% of total assets at fair value		9.9	%		85.9	%		4.2	%		—	%		100	%
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	(7,177	)				$	(7,177	)
Other liabilities: Free-standing derivatives		(1	)		(904	)		—		$	145			(760	)

Total liabilities at fair value	$	(1	)	$	(904	)	$	(7,177	)	$	145		$	(7,937	)

% of total liabilities at fair value		—	%		11.4	%		90.4	%		(1.8	)%		100	%

The following table summarizes quantitative information about the significant unobservable inputs used in Level 3 fair value measurements.

($ in thousands)

Fair
value

Valuation
technique

Unobservable
input

Range

Weighted
average

December 31, 2017

Other assets—Structured
settlement annuity reinsurance agreement

166,290

Stochastic cash
flow model

Ultimate
reinvestment
spreads

129.8 - 218.6
basis points

169.3 basis
points

December 31, 2016

Other assets—Structured settlement annuity reinsurance agreement

109,578

Stochastic cash
flow model

Ultimate
reinvestment
spreads

130.7 - 218.4
basis points

169.6 basis
points

If the ultimate reinvestment spreads increased (decreased), it would result in a lower (higher) fair value.

As of December 31, 2017 and 2016, Level 3 fair value measurements of fixed income securities total $99.7 million and $117.3 million, respectively, and include $94.0 million and $114.8 million, respectively, of securities valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. The Company does not develop the unobservable inputs used in measuring fair value; therefore, these are not included in the table above. However, an increase (decrease) in credit spreads for fixed income securities valued based on non-binding broker quotes would result in a lower (higher) fair value.

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2017.


($ in thousands)	Balance as of December 31, 2016			Total gains (losses) included in:						Transfers into Level 3			Transfers out of Level 3
($ in thousands)	Balance as of December 31, 2016			Net income⁽¹⁾			OCI			Transfers into Level 3			Transfers out of Level 3
Assets
Fixed income securities:
Municipal	$	22,723		$	15		$	347		$	—		$	—
Corporate—public		4,091			—			(64	)		—			(1,565	)
Corporate—privately placed		75,713			4,080			(4,520	)		—			—
ABS—consumer and other		14,803			—			402			—			—
Redeemable preferred stock		—			—			—			—			—

Total fixed income securities		117,330			4,095			(3,835	)		—			(1,565	)
Equity securities		5,920			585			492			—			(275	)
Free-standing derivatives, net		311			(54	)		—			—			—
Other assets		109,578			56,712			—			—			—

Total recurring Level 3 assets	$	233,139		$	61,338		$	(3,343	)	$	—		$	(1,840	)

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(7,177	)	$	2,381		$	—		$	—		$	—

Total recurring Level 3 liabilities	$	(7,177	)	$	2,381		$	—		$	—		$	—


	Purchases			Sales			Issues			Settlements			Balance as of December 31, 2017
Assets
Fixed income securities:
Municipal	$	—		$	—		$	—		$	(1,907	)	$	21,178
Corporate—public		4,989			—			—			(139	)		7,312
Corporate—privately placed		—			(18,000	)		—			(1,295	)		55,978
ABS—consumer and other		—			—			—			—			15,205
Redeemable preferred stock		1			—			—			—			1

Total fixed income securities		4,990			(18,000	)		—			(3,341	)		99,674
Equity securities		1,018			(581	)		—			—			7,159
Free-standing derivatives, net		127			—			—			(48	)		336
Other assets		—			—			—			—			166,290

Total recurring Level 3 assets	$	6,135		$	(18,581	)	$	—		$	(3,389	)	$	273,459

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	—		$	—		$	(4,796	)

Total recurring Level 3 liabilities	$	—		$	—		$	—		$	—		$	(4,796	)

⁽¹⁾

The effect to net income totals $63.7 million and is reported in the Statements of Operations and Comprehensive Income as follows: $60.7 million in realized capital gains and losses, $606 thousand in net investment income, $(556) thousand in interest credited to contractholder funds and $2.9 million in contract benefits.

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2016.


($ in thousands)	Balance as of December 31, 2015			Total gains (losses) included in:						Transfers into Level 3			Transfers out of Level 3
($ in thousands)	Balance as of December 31, 2015			Net income⁽¹⁾			OCI			Transfers into Level 3			Transfers out of Level 3
Assets
Fixed income securities:
Municipal	$	32,286		$	355		$	(495	)	$	—		$	—
Corporate—public		10,139			(2	)		(14	)		1,655			(7,479	)
Corporate—privately placed		211,858			(4,074	)		7,947			—			(131,723	)
ABS—CDO		9,650			—			350			—			—
ABS—consumer and other		15,704			—			(901	)		—			—

Total fixed income securities		279,637			(3,721	)		6,887			1,655			(139,202	)
Equity securities		6,935			(4,463	)		1,001			—			—
Free-standing derivatives, net		329			(30	)		—			—			—
Other assets		82,774			26,804			—			—			—

Total recurring Level 3 assets	$	369,675		$	18,590		$	7,888		$	1,655		$	(139,202	)

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(7,900	)	$	723		$	—		$	—		$	—

Total recurring Level 3 liabilities	$	(7,900	)	$	723		$	—		$	—		$	—


	Purchases			Sales			Issues			Settlements			Balance as of December 31, 2016
Assets
Fixed income securities:
Municipal	$	—		$	(7,515	)	$	—		$	(1,908	)	$	22,723
Corporate—public		—			—			—			(208	)		4,091
Corporate—privately placed		697			—			—			(8,992	)		75,713
ABS—CDO		—			—			—			(10,000	)		—
ABS—consumer and other		—			—			—			—			14,803

Total fixed income securities		697			(7,515	)		—			(21,108	)		117,330
Equity securities		2,987			(540	)		—			—			5,920
Free-standing derivatives, net		103			—			—			(91	)		311
Other assets		—			—			—			—			109,578

Total recurring Level 3 assets	$	3,787		$	(8,055	)	$	—		$	(21,199	)	$	233,139

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	—		$	—		$	(7,177	)

Total recurring Level 3 liabilities	$	—		$	—		$	—		$	—		$	(7,177	)

⁽¹⁾

The effect to net income totals $19.3 million and is reported in the Statements of Operations and Comprehensive Income as follows: $18.6 million in realized capital gains and losses, $44 thousand in net investment income, $(702) thousand in interest credited to contractholder funds and $1.4 million in contract benefits.

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2015.


($ in thousands)	Balance as of December 31, 2014			Total gains (losses) included in:						Transfers into Level 3			Transfers out of Level 3
($ in thousands)	Balance as of December 31, 2014			Net income⁽¹⁾			OCI			Transfers into Level 3			Transfers out of Level 3
Assets
Fixed income securities:
Municipal	$	42,422		$	336		$	(1,309	)	$	—		$	—
Corporate—public		16,035			—			(654	)		—			(4,642	)
Corporate—privately placed		236,530			7,611			(5,368	)		—			(14,772	)
ABS—CDO		9,525			—			125			—			—
ABS—consumer and other		15,820			—			(116	)		—			—

Total fixed income securities		320,332			7,947			(7,322	)		—			(19,414	)
Equity securities		5,000			14			(565	)		190			—
Free-standing derivatives, net		554			(178	)		—			—			—
Other assets		84,561			(1,787	)		—			—			—

Total recurring Level 3 assets	$	410,447		$	5,996		$	(7,887	)	$	190		$	(19,414	)

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(7,391	)	$	(509	)	$	—		$	—		$	—

Total recurring Level 3 liabilities	$	(7,391	)	$	(509	)	$	—		$	—		$	—


	Purchases			Sales			Issues			Settlements			Balance as of December 31, 2015
Assets
Fixed income securities:
Municipal	$	—		$	(7,256	)	$	—		$	(1,907	)	$	32,286
Corporate—public		—			—			—			(600	)		10,139
Corporate—privately placed		—			—			—			(12,143	)		211,858
ABS—CDO		—			—			—			—			9,650
ABS—consumer and other		—			—			—			—			15,704

Total fixed income securities		—			(7,256	)		—			(14,650	)		279,637
Equity securities		2,569			(273	)		—			—			6,935
Free-standing derivatives, net		62			—			—			(109	)		329
Other assets		—			—			—			—			82,774

Total recurring Level 3 assets	$	2,631		$	(7,529	)	$	—		$	(14,759	)	$	369,675

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	—		$	—		$	(7,900	)

Total recurring Level 3 liabilities	$	—		$	—		$	—		$	—		$	(7,900	)

⁽¹⁾

The effect to net income totals $5.5 million and is reported in the Statements of Operations and Comprehensive Income as follows: $(1.7) million in realized capital gains and losses, $7.7 million in net investment income, $283 thousand in interest credited to contractholder funds and $(792) thousand in contract benefits.

Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source. For example, in situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider and as a result the price is stale or has been replaced with a broker quote whose inputs have not been corroborated to be market observable, the security is transferred into Level 3. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. Therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the Level 3 rollforward table.

There were no transfers between Level 1 and Level 2 during 2017, 2016 or 2015.

Transfers into Level 3 during 2016 and 2015 included situations where a fair value quote was not provided by the Company’s independent third-party valuation service provider and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security being classified as Level 3. Transfers out of Level 3 during 2017, 2016 and 2015 included situations where a broker quote was used in the prior period and a fair value quote became available from the Company’s independent third-party valuation service provider in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant.

The following table provides the change in unrealized gains and losses included in net income for Level 3 assets and liabilities held as of December 31.


($ in thousands)	2017			2016			2015
Assets
Fixed income securities:
Municipal	$	15		$	16		$	71
Corporate		5			(4,079	)		7,611

Total fixed income securities		20			(4,063	)		7,682
Free-standing derivatives, net		(55	)		(30	)		(178	)
Equity securities		586			—			—
Other assets		56,712			26,804			(1,787	)

Total recurring Level 3 assets	$	57,263		$	22,711		$	5,717

Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	2,381		$	723		$	(509	)

Total recurring Level 3 liabilities	$	2,381		$	723		$	(509	)

The amounts in the table above represent the change in unrealized gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $59.6 million in 2017 and are reported as follows: $56.7 million in realized capital gains and losses, $606 thousand in net investment income, $(556) thousand in interest credited to contractholder funds and $2.9 million in contract benefits. These gains and losses total $23.4 million in 2016 and are reported as follows: $22.7 million in realized capital gains and losses, $14 thousand in net investment income, $(702) thousand in interest credited to contractholder funds and $1.4 million in contract benefits. These gains and losses total $5.2 million in 2015 and are reported as follows: $(2.0) million in realized capital gains and losses, $7.7 million in net investment income, $283 thousand in interest credited to contractholder funds and $(792) thousand in contract benefits.

Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value.

Financial assets


($ in thousands)	December 31, 2017				December 31, 2016
($ in thousands)	Carrying value		Fair value		Carrying value		Fair value
Mortgage loans	$	629,142	$	655,601	$	614,380	$	616,368
Cost method limited partnerships ⁽¹⁾		80,472		88,758		72,477		77,122

⁽¹⁾

Beginning January 1, 2018, due to the adoption of the new accounting standard for the recognition and measurement of financial assets and liabilities, cost method limited partnerships (excluding limited partnership interests accounted for on a cost recovery basis) will be measured at fair value with changes in fair value recognized in net income. The existing carrying value of these investments will increase to fair value with the offsetting adjustment recognized in retained income through a cumulative effect adjustment. See Note 2 for additional details on the new accounting standard.

The fair value of mortgage loans is based on discounted contractual cash flows or, if the loans are impaired due to credit reasons, the fair value of collateral less costs to sell. Risk adjusted discount rates are selected using current rates at which similar loans would be made to borrowers with similar characteristics, using similar types of properties as collateral. The fair value of cost method limited partnerships is determined using reported net asset values. The fair value measurements for mortgage loans and cost method limited partnerships are categorized as Level 3.

Financial liabilities


($ in thousands)	December 31, 2017				December 31, 2016
($ in thousands)	Carrying value		Fair value		Carrying value		Fair value
Contractholder funds on investment contracts	$	1,944,244	$	2,062,405	$	2,102,051	$	2,220,926
Liability for collateral		59,067		59,067		60,931		60,931

The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts incorporating current market-based crediting rates for similar contracts that reflect the Company’s own credit risk. Deferred annuities classified in contractholder funds are valued based on discounted cash flow models that incorporate current market-based margins and reflect the Company’s own credit risk. Immediate annuities without life contingencies are valued based on discounted cash flow models that incorporate current market-based implied interest rates and reflect the Company’s own credit risk. The fair value measurement for contractholder funds on investment contracts is categorized as Level 3.

The liability for collateral is valued at carrying value due to its short-term nature. The fair value measurement for liability for collateral is categorized as Level 2.