Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2017

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

The Company is required under GAAP to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the Company’s insurance contracts other than annuity contracts are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.

Information regarding the three-level hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at a point in time is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, specifically in “Note 3 -- Fair Value of Financial Instruments”.

Financial Instruments Measured and Carried at Fair Value

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. At September 30, 2017, Level 3 invested assets comprised 3.3% of the Company’s total investment portfolio at fair value.

($ in thousands)					Fair Value Measurements at
	Carrying		Fair		Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
September 30, 2017
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	645,402	$	645,402	$	—	$	642,110	$	3,292
Other, including U.S. Treasury securities	671,020		671,020		13,484		657,536		—
Municipal bonds	1,842,204		1,842,204		—		1,792,992		49,212
Foreign government bonds	100,177		100,177		—		100,177		—
Corporate bonds	2,821,703		2,821,703		14,798		2,712,660		94,245
Other mortgage-backed securities	1,550,128		1,550,128		—		1,431,802		118,326
Total fixed maturity securities	7,630,634		7,630,634		28,282		7,337,277		265,075
Equity securities	159,275		159,275		103,552		55,717		6
Short-term investments	111,488		111,488		111,488		—		—
Other investments	21,944		21,944		—		21,944		—
Totals	$	7,923,341	$	7,923,341	$	243,322	$	7,414,938	$	265,081
Financial Liabilities
Investment contract and life policy reserves, embedded derivatives	$	390	$	390	$	—	$	390	$	—
Other policyholder funds, embedded derivatives	72,986		72,986		—		—		72,986
December 31, 2016
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	614,891	$	614,891	$	—	$	611,476	$	3,415
Other, including U.S. Treasury securities	467,143		467,143		13,631		453,512		—
Municipal bonds	1,769,397		1,769,397		—		1,722,900		46,497
Foreign government bonds	98,669		98,669		—		98,669		—
Corporate bonds	2,810,221		2,810,221		13,532		2,736,498		60,191
Other mortgage-backed securities	1,696,387		1,696,387		—		1,595,143		101,244
Total fixed maturity securities	7,456,708		7,456,708		27,163		7,218,198		211,347
Equity securities	141,649		141,649		98,632		43,011		6
Short-term investments	44,918		44,918		44,167		—		751
Other investments	20,194		20,194		—		20,194		—
Totals	$	7,663,469	$	7,663,469	$	169,962	$	7,281,403	$	212,104
Financial Liabilities
Investment contract and life policy reserves, embedded derivatives	$	158	$	158	$	—	$	158	$	—
Other policyholder funds, embedded derivatives	59,393		59,393		—		—		59,393

During the nine month period ended September 30, 2017, an equity security was transferred into Level 1 from Level 2 as a result of increased liquidity in the market and a sustained increase in the market activity for this asset. The following table presents reconciliations for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis.

($ in thousands)	Financial Assets																				Financial Liabilities(1)
	Municipal Bonds			Corporate Bonds			Mortgage- Backed Securities (2)			Total Fixed Maturity Securities			Equity Securities		Short-term Investments			Total
Beginning balance, July 1, 2017	$	49,123		$	77,052		$	120,324		$	246,499		$	6	$	—		$	246,505		$	67,995
Transfers into Level 3 (3)	—			23,501			11,961			35,462			—		—			35,462			—
Transfers out of Level 3 (3)	—			1			(881		)	(880		)	—		—			(880		)	—
Total gains or losses
Net realized investment gains (losses) included in net income related to financial assets	—			(1		)	(160		)	(161		)	—		—			(161		)	—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—		—			—			2,587
Net unrealized investment gains (losses) included in other comprehensive income	382			(192		)	(377		)	(187		)	—		—			(187		)	—
Purchases	—			—			—			—			—		—			—			—
Issuances	—			—			—			—			—		—			—			3,752
Sales	—			(1,999		)	—			(1,999		)	—		—			(1,999		)	—
Settlements	—			—			—			—			—		—			—			—
Paydowns, maturities and distributions	(293		)	(4,117		)	(9,249		)	(13,659		)	—		—			(13,659		)	(1,348		)
Ending balance, September 30, 2017	$	49,212		$	94,245		$	121,618		$	265,075		$	6	$	—		$	265,081		$	72,986
Beginning balance, January 1, 2017	$	46,497		$	60,191		$	104,659		$	211,347		$	6	$	751		$	212,104		$	59,393
Transfers into Level 3 (3)	5,214			55,420			36,482			97,116			—		—			97,116			—
Transfers out of Level 3 (3)	(5,557		)	(11,962		)	(881		)	(18,400		)	—		(751		)	(19,151		)	—
Total gains or losses
Net realized investment gains (losses) included in net income related to financial assets	—			(1		)	(1,874		)	(1,875		)	—		—			(1,875		)	—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—		—			—			6,133
Net unrealized investment gains (losses) included in other comprehensive income	3,540			263			1,945			5,748			—		—			5,748			—
Purchases	—			—			—			—			—		—			—			—
Issuances	—			—			—			—			—		—			—			10,538
Sales	—			(1,999		)	—			(1,999		)	—		—			(1,999		)	—
Settlements	—			—			—			—			—		—			—			—
Paydowns, maturities and distributions	(482		)	(7,667		)	(18,713		)	(26,862		)	—		—			(26,862		)	(3,078		)
Ending balance, September 30, 2017	$	49,212		$	94,245		$	121,618		$	265,075		$	6	$	—		$	265,081		$	72,986

(1) Represents embedded derivatives, all related to the Company’s FIA products, reported in Other policyholder funds in the Company’s Consolidated Balance Sheets.

(2) Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities.

(3) Transfers into and out of Level 3 during the three and nine month periods ended September 30, 2017 were attributable to changes in the availability of observable market information for individual fixed maturity securities and short-term investments. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined.

($ in thousands)	Financial Assets																			Financial Liabilities(1)
	Municipal Bonds			Corporate Bonds			Mortgage- Backed Securities (2)			Total Fixed Maturity Securities			Equity Securities		Short-term Investments		Total
Beginning balance, July 1, 2016	$	47,647		$	73,408		$	96,581		$	217,636		$	6	$	—	$	217,642		$	47,706
Transfers into Level 3 (3)	—			10,375			7,655			18,030			—		—		18,030			—
Transfers out of Level 3 (3)	—			(5,967		)	(788		)	(6,755		)	—		—		(6,755		)	—
Total gains or losses
Net realized investment gains (losses) included in net income related to financial assets	—			1			(56		)	(55		)	—		—		(55		)	—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—		—		—			68
Net unrealized investment gains (losses) included in other comprehensive income	(2,361		)	1,292			3,951			2,882			—		—		2,882			—
Purchases	—			—			—			—			—		—		—			—
Issuances	—			—			—			—			—		—		—			6,710
Sales	—			—			—			—			—		—		—			—
Settlements	—			—			—			—			—		—		—			—
Paydowns, maturities and distributions	(120		)	(1,488		)	(5,194		)	(6,802		)	—		—		(6,802		)	695
Ending balance, September 30, 2016	$	45,166		$	77,621		$	102,149		$	224,936		$	6	$	—	$	224,942		$	55,179
Beginning balance, January 1, 2016	$	30,379		$	67,575		$	75,466		$	173,420		$	6	$	—	$	173,426		$	39,021
Transfers into Level 3 (3)	14,751			21,451			32,281			68,483			—		—		68,483			—
Transfers out of Level 3 (3)	—			(5,967		)	(788		)	(6,755		)	—		—		(6,755		)	—
Total gains or losses
Net realized investment gains (losses) included in net income related to financial assets	—			(656		)	(56		)	(712		)	—		—		(712		)	—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—		—		—			2,066
Net unrealized investment gains (losses) included in other comprehensive income	420			3,073			4,173			7,666			—		—		7,666			—
Purchases	—			—			—			—			—		—		—			—
Issuances	—			—			—			—			—		—		—			15,194
Sales	—			—			—			—			—		—		—			—
Settlements	—			—			—			—			—		—		—			—
Paydowns, maturities and distributions	(384		)	(7,855		)	(8,927		)	(17,166		)	—		—		(17,166		)	(1,102		)
Ending balance, September 30, 2016	$	45,166		$	77,621		$	102,149		$	224,936		$	6	$	—	$	224,942		$	55,179

(1) Represents embedded derivatives, all related to the Company’s FIA products, reported in Other policyholder funds in the Company’s Consolidated Balance Sheets.

(2) Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities.

(3) Transfers into and out of Level 3 during the three and nine month periods ended September 30, 2016 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined.

At September 30, 2017, the Company impaired two Level 3 securities for a $1,874 thousand realized loss. At September 30, 2016, there were no net realized investment gains or losses included in earnings that were attributable to changes in the fair value of Level 3 assets still held. For the three and nine month periods ended September 30, 2017, net realized losses of $2,587 thousand and $6,133 thousand, respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held; for the three and nine month periods ended September 30, 2016, the respective loss amounts were $68 thousand and $2,066 thousand.

The valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets classified as Level 3 are subject to the control processes as described in “Note 3 -- Fair Value of Financial Instruments -- Investments” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Generally, valuation techniques for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as those used for fixed maturity securities.

The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturity and equity securities included in Level 3 generally relate to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.

Financial Instruments Not Carried at Fair Value; Disclosure Required

The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities.

 

($ in thousands)					Fair Value Measurements at
	Carrying		Fair		Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
September 30, 2017
Financial Assets
Investments
Other investments	$	154,630	$	159,253	$	—	$	—	$	159,253
Financial Liabilities
Investment contract reserves	4,428,989		4,338,318		—		—		4,338,318
Life policy reserves, account values on life contracts	81,520		86,906		—		—		86,906
Other policyholder funds	644,383		644,383		—		575,579		68,804
Long-term debt	247,403		264,781		264,781		—		—
December 31, 2016
Financial Assets
Investments
Other investments	$	151,965	$	156,536	$	—	$	—	$	156,536
Financial Liabilities
Investment contract reserves	4,360,456		4,280,528		—		—		4,280,528
Life policy reserves, account values on life contracts	79,591		85,066		—		—		85,066
Other policyholder funds	649,557		649,557		—		575,253		74,304
Long-term debt	247,209		248,191		248,191		—		—