Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2020

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 (which are investment 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 each reporting date is included in Part II - Item 8, Note 4 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Financial Instruments Measured and Carried at Fair Value on a Recurring Basis

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. During the three months ended March 31, 2020 and 2019, there were no transfers between Level 1 and Level 2. At March 31, 2020, Level 3 invested assets comprised 5.9% 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, 2020
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	751,915	$	751,915	$	—	$	728,583	$	23,332
Other, including U.S. Treasury securities	468,673		468,673		18,557		450,116		—
Municipal bonds	1,769,931		1,769,931		—		1,665,039		104,892
Foreign government bonds	43,851		43,851		—		43,851		—
Corporate bonds	1,685,773		1,685,773		12,147		1,561,933		111,693
Other mortgage-backed securities	1,123,040		1,123,040		—		1,005,845		117,195
Total fixed maturity securities	5,843,183		5,843,183		30,704		5,455,367		357,112
Equity securities	87,033		87,033		42,106		44,844		83
Short-term investments	100,208		100,208		97,179		3,029		—
Other investments	18,147		18,147		—		18,147		—
Totals	$	6,048,571	$	6,048,571	$	169,989	$	5,521,387	$	357,195
Separate Account (variable annuity) assets ⁽¹⁾	$	1,954,201	$	1,954,201	$	1,954,201	$	—	$	—
Financial Liabilities
Investment contract and policy reserves, embedded derivatives	$	339	$	339	$	—	$	339	$	—
Other policyholder funds, embedded derivatives	$	87,506	$	87,506	$	—	$	—	$	87,506

December 31, 2019
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	724,319	$	724,319	$	—	$	711,004	$	13,315
Other, including U.S. Treasury securities	458,868		458,868		17,699		441,169		—
Municipal bonds	1,686,203		1,686,203		—		1,641,912		44,291
Foreign government bonds	45,370		45,370		—		45,370		—
Corporate bonds	1,581,424		1,581,424		14,470		1,463,002		103,952
Other mortgage-backed securities	1,295,492		1,295,492		—		1,161,979		133,513
Total fixed maturity securities	5,791,676		5,791,676		32,169		5,464,436		295,071
Equity securities	101,864		101,864		49,834		51,923		107
Short-term investments	172,667		172,667		172,667		—		—
Other investments	25,997		25,997		—		25,997		—
Totals	$	6,092,204	$	6,092,204	$	254,670	$	5,542,356	$	295,178
Separate Account (variable annuity) assets ⁽¹⁾	$	2,490,469	$	2,490,469	$	2,490,469	$	—	$	—
Financial Liabilities
Investment contract and policy reserves, embedded derivatives	$	1,314	$	1,314	$	—	$	1,314	$	—
Other policyholder funds, embedded derivatives	$	93,733	$	93,733	$	—	$	—	$	93,733

⁽¹⁾ Separate Account (variable annuity) liabilities are equal to the estimated fair value of the Separate Account (variable annuity) assets.

Changes in Level 3 Fair Value Measurements

The reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) was as follows:



($ in thousands)	Financial Assets																		Financial Liabilities⁽¹⁾
	Municipal Bonds			Corporate Bonds			Other Mortgage- Backed Securities⁽²⁾			Total Fixed Maturity Securities			Equity Securities			Total
Beginning balance, January 1, 2020	$	44,291		$	103,952		$	146,828		$	295,071		$	107		$	295,178		$	93,733
Transfers into Level 3⁽³⁾	63,751			18,833			22,475			105,059			—			105,059			—
Transfers out of Level 3 ⁽³⁾	—			(10,022		)	(2,947		)	(12,969		)	—			(12,969		)	—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			—			—			—			(24		)	(24		)	—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—			—			(5,042		)
Net unrealized investment gains (losses) included in OCI	(3,026		)	(5,481		)	(24,362		)	(32,869		)	—			(32,869		)	—
Purchases	—			6,875			1,890			8,765			—			8,765			—
Issuances	—			—			—			—			—			—			1,354
Sales	—			—			—			—			—			—			—
Settlements	—			—			—			—			—			—			—
Paydowns, maturities and distributions	(124		)	(2,464		)	(3,357		)	(5,945		)	—			(5,945		)	(2,539		)
Ending balance, March 31, 2020	$	104,892		$	111,693		$	140,527		$	357,112		$	83		$	357,195		$	87,506

Beginning balance, January 1, 2019	$	47,531		$	80,742		$	120,211		$	248,484		$	5		$	248,489		$	78,700
Transfers into Level 3 ⁽³⁾	—			3,074			21,934			25,008			—			25,008			—
Transfers out of Level 3 ⁽³⁾	—			—			—			—			—			—			—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			—			—			—			—			—			—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—			—			4,334
Net unrealized investment gains (losses) included in OCI	344			2,549			(152		)	2,741			—			2,741			—
Purchases	—			—			—			—			—			—			—
Issuances	—			—			—			—			—			—			3,018
Sales	—			—			—			—			—			—			—
Settlements	—			—			—			—			—			—			—
Paydowns, maturities and distributions	(119		)	(3,883		)	(6,203		)	(10,205		)	—			(10,205		)	(1,423		)
Ending balance, March 31, 2019	$	47,756		$	82,482		$	135,790		$	266,028		$	5		$	266,033		$	84,629


⁽¹⁾	Represents embedded derivatives, all related to the Company's fixed indexed annuity 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 months ended March 31, 2020 and 2019 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.

For the three months ended March 31, 2020 and March 31, 2019, the Company had no net losses on Level 3 securities. For the three months ended March 31, 2020, net investment gains of $5.0 million 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 months ended March 31, 2019, the respective net investment losses were $4.3 million.

Quantitative Information about Level 3 Fair Value Measurements

The following table provides quantitative information about the significant unobservable inputs for recurring fair value measurements categorized within Level 3.



($ in thousands)
Financial Assets	Fair Value at March 31, 2020		Valuation Technique(s)	Unobservable Inputs	Range (Weighted Average) and Single Point Best Estimate ⁽¹⁾
Municipal bonds	$	104,892	discounted cash flow	I spread ⁽²⁾	578 bps
Corporate bonds	111,693		discounted cash flow	N spread ⁽³⁾	762 bps
			discounted cash flow	T spread ⁽⁴⁾	378 bps
			discounted cash flow	I spread ⁽²⁾	495 bps
			market comparable	EV / TTM EBITDA (x) ⁽⁵⁾	5.11x
Other mortgage-backed securities	117,195		discounted cash flow	constant prepayment rate	20.0%
			vendor price	haircut	3.0%
			market comparable	EV / TTM EBITDA (x) ⁽⁵⁾	5.11x
			discounted cash flow	N spread ⁽³⁾	732 bps
			discounted cash flow	PDI interest margin ⁽⁶⁾	7.13%
			discounted cash flow	SBL interest margin ⁽⁷⁾	4.50%
Government mortgage-backed securities	23,332		vendor price	haircut	3.0%
			discounted cash flow	N spread ⁽³⁾	109 bps
			discounted cash flow	constant prepayment yield	100 bps
			discounted cash flow	constant default rate	0
Equity securities	83		Black Scholes	equity value	low - $43.27; high - $44.53



Financial Liabilities	Fair Value at March 31, 2020		Valuation Technique(s)	Unobservable Inputs	Range (Weighted Average) and Single Point Best Estimate ⁽¹⁾
Derivatives embedded in FIA products	$	87,506	discounted cash flow	lapse rate	5.25%
				mortality multiplier ⁽⁸⁾	61.00%
				option budget	1.50% - 2.50%
				non-performance adjustment ⁽⁹⁾	5.00%


⁽¹⁾	When a range of unobservable inputs is not readily available, the Company uses a single point best estimate.


⁽²⁾	"I spread" is the interpolated weighted average life point on the "on the run" (OTR) point of the curve.


⁽³⁾	"N spread" is the interpolated weighted average life point on the swap curve.


⁽⁴⁾	"T spread" is a specific point on the OTR curve.


⁽⁵⁾	This represents the enterprise value (EV) for trailing twelve months (TTM) of EBITDA plus multiplier.


⁽⁶⁾	"PDI" stands for private debt investment.


⁽⁷⁾	"SBL" stands for broadly syndicated loans.


⁽⁸⁾	Mortality multiplier is applied to the Annuity 2000 table.


⁽⁹⁾	Determined as a percentage of a risk-free rate.

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 Part II - Item 8, Note 4 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 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 include: benchmark yield, liquidity premium, estimated cash flows, prepayment and default speeds, spreads, weighted average life, and credit rating. Significant spread widening in isolation will adversely impact the overall valuation, while significant 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, 2020
Financial Assets
Investments
Other investments	$	163,360	$	167,127	$	—	$	—	$	167,127
Deposit asset on reinsurance	2,356,253		2,421,012		—		—		2,421,012
Financial Liabilities
Investment contract and policy reserves, fixed annuity contracts	4,708,953		4,618,673		—		—		4,618,673
Investment contract and policy reserves, account values on life contracts	94,784		99,601		—		—		99,601
Other policyholder funds	628,812		628,812		—		570,806		58,006
Short-term debt	135,000		135,000		—		—		135,000
Long-term debt	298,098		313,516		—		313,516		—

December 31, 2019
Financial Assets
Investments
Other investments	$	163,312	$	167,185	$	—	$	—	$	167,185
Deposit asset on reinsurance	2,346,166		2,634,012		—		—		2,634,012
Financial Liabilities
Investment contract and policy reserves, fixed annuity contracts	4,675,774		4,609,880		—		—		4,609,880
Investment contract and policy reserves, account values on life contracts	93,465		98,332		—		—		98,332
Other policyholder funds	553,550		553,550		—		495,812		57,738
Short-term debt	135,000		135,000		—		—		135,000
Long-term debt	298,025		322,678		—		322,678		—

- 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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