Fair Value of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2020

Summary of Company's fair value hierarchy measured at 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.

Table for reconciliations for all Level 3 assets measured at fair value on a recurring basis

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.

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.

Summary of fair value assets and liabilities measured on nonrecurring basis

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		—