Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2018

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, 2017, 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 March 31, 2018, Level 3 invested assets comprised 3.0% 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
March 31, 2018
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	710,958	$	710,958	$	—		$	707,842		$	3,116
Other, including U.S. Treasury securities	761,967		761,967		13,249			748,718			—
Municipal bonds	1,861,304		1,861,304		—			1,811,556			49,748
Foreign government bonds	99,041		99,041		—			99,041			—
Corporate bonds	2,481,270		2,481,270		13,733			2,388,757			78,780
Other mortgage-backed securities	1,720,142		1,720,142		—			1,607,924			112,218
Total fixed maturity securities	7,634,682		7,634,682		26,982			7,363,838			243,862
Equity securities	131,023		131,023		79,870		—	51,147		—	6
Short-term investments	22,194		22,194		22,194			—			—
Other investments	25,130		25,130		—			25,130			—
Totals	$	7,813,029	$	7,813,029	$	129,046		$	7,440,115		$	243,868
Financial Liabilities
Investment contract and life policy reserves, embedded derivatives	$	518	$	518	$	—		$	518		$	—
Other policyholder funds, embedded derivatives	78,486		78,486		—			—			78,486

December 31, 2017
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	696,725	$	696,725	$	—		$	693,375		$	3,350
Other, including U.S. Treasury securities	735,408		735,408		13,393			722,015			—
Municipal bonds	1,893,253		1,893,253		—			1,843,925			49,328
Foreign government bonds	102,738		102,738		—			102,738			—
Corporate bonds	2,578,954		2,578,954		14,345			2,491,630			72,979
Other mortgage-backed securities	1,716,997		1,716,997		—			1,612,403			104,594
Total fixed maturity securities	7,724,075		7,724,075		27,738			7,466,086			230,251
Equity securities	135,466		135,466		82,208			53,252			6
Short-term investments	62,593		62,593		62,593			—			—
Other investments	28,050		28,050		—			28,050			—
Totals	$	7,950,184	$	7,950,184	$	172,539		$	7,547,388		$	230,257
Financial Liabilities
Investment contract and life policy reserves, embedded derivatives	$	594	$	594	$	—		$	594		$	—
Other policyholder funds, embedded derivatives	80,733		80,733		—			—			80,733

During the three month period ended March 31, 2018, there were no transfers between Level 1 and Level 2. During the three month period ended March 31, 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			Other Mortgage- Backed Securities (2)			Total Fixed Maturity Securities			Equity Securities			Short-term Investments			Total

Beginning balance, January 1, 2018	$	49,328		$	72,979		$	107,944		$	230,251		$	6		$	—		$	230,257		$	80,733
Transfers into Level 3 (3)	—			10,778			14,822			25,600			—			—			25,600			—
Transfers out of Level 3 (3)	—			—			—			—			—			—			—			—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			—			—			—			3			—			3			—
Net (gains) losses included in net income related to financial liabilities	—			—			—			—			—			—			—			(2,222		)
Net unrealized investment gains (losses) included in OCI	443			(887		)	(1,022		)	(1,466		)	—			—			(1,466		)
Purchases	—			—			—			—			—			—			—
Issuances	—			—			—			—			—			—			—			1,332
Sales	—			—			—			—			(3		)	—			(3		)
Settlements	—			—			—			—			—			—			—
Paydowns, maturities and distributions	(23		)	(4,090		)	(6,410		)	(10,523		)	—			—			(10,523		)	(1,357		)
Ending balance, March 31, 2018	$	49,748		$	78,780		$	115,334		$	243,862		$	6		$	—		$	243,868		$	78,486

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			29,918			15,039			50,171			—			—			50,171			—
Transfers out of Level 3 (3)	—			(6,110		)	—			(6,110		)	—			(751		)	(6,861		)	—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			—			—			—			—			—			—			—
Net (gains) losses included in net income related to financial liabilities	—			—			—			—			—			—			—			2,308
Net unrealized investment gains (losses) included in OCI	1,871			96			(771		)	1,196			—			—			1,196			—
Purchases	—			—			—			—			—			—			—			—
Issuances	—			—			—			—			—			—			—			3,389
Sales	—			—			—			—			—			—			—			—
Settlements	—			—			—			—			—			—			—			—
Paydowns, maturities and distributions	(120		)	(1,600		)	(6,133		)	(7,853		)	—			—			(7,853		)	(829		)
Ending balance, March 31, 2017	$	53,462		$	82,495		$	112,794		$	248,751		$	6		$	—		$	248,757		$	64,261

________________


(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 month periods ended March 31, 2018 and 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.

At March 31, 2018, the Company realized a gain of $3 thousand on one Level 3 security. At March 31, 2017, there were no net 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 month periods ended March 31, 2018 and 2017, a net investment gain of $2,222 thousand and a net investment loss of $2,308 thousand, respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held.

The valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets and liabilities 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, 2017. 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
March 31, 2018
Financial Assets
Investments
Other investments	$	154,211	$	158,891	$	—	$	—	$	158,891
Financial Liabilities
Investment contract and life policy reserves, fixed annuity contracts	4,471,733		4,373,529		—		—		4,373,529
Investment contract and life policy reserves, account values on life contracts	83,319		88,968		—		—		88,968
Other policyholder funds	642,035		642,035		—		575,784		66,251
Long-term debt	297,536		306,247		—		306,247		—

December 31, 2017
Financial Assets
Investments
Other investments	$	154,898	$	159,575	$	—	$	—	$	159,575
Financial Liabilities
Investment contract and life policy reserves, fixed annuity contracts	4,452,972		4,366,334		—		—		4,366,334
Investment contract and life policy reserves, account values on life contracts	82,911		88,620		—		—		88,620
Other policyholder funds	643,528		643,528		—		575,622		67,906
Long-term debt	297,469		311,315		—		311,315		—

- 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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