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Fair Value of Financial Instruments (Tables)
 6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
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 six months ended June 30, 2020 and 2019, there were no transfers between Level 1 and Level 2. At June 30, 2020, Level 3 invested assets comprised 6.3% 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
June 30, 2020
 
 
 
 
 
 
 
 
 
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
U.S. Government and federally
sponsored agency obligations:
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
718,974

 
$
718,974

 
$
—

 
$
694,513

 
$
24,461

Other, including U.S. Treasury securities
 
374,881

 
374,881

 
18,520

 
356,361

 
—

Municipal bonds
 
1,805,550

 
1,805,550

 
—

 
1,732,379

 
73,171

Foreign government bonds
 
43,550

 
43,550

 
—

 
43,550

 
—

Corporate bonds
 
1,862,440

 
1,862,440

 
12,773

 
1,723,375

 
126,292

Other asset-backed securities
 
1,216,588

 
1,216,588

 
—

 
1,040,903

 
175,685

Total fixed maturity securities
 
6,021,983

 
6,021,983

 
31,293

 
5,591,081

 
399,609

Equity securities
 
90,338

 
90,338

 
35,269

 
54,954

 
115

Short-term investments
 
182,670

 
182,670

 
179,651

 
3,019

 
—

Other investments
 
23,604

 
23,604

 
—

 
23,604

 
—

Totals
 
$
6,318,595

 
$
6,318,595

 
$
246,213

 
$
5,672,658

 
$
399,724

Separate Account (variable annuity) assets (1)
 
$
2,316,900

 
$
2,316,900

 
$
2,316,900

 
$
—

 
$
—

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Investment contract and policy reserves,
 embedded derivatives
 
$
1,113

 
$
1,113

 
$
—

 
$
1,113

 
$
—

Other policyholder funds, embedded derivatives
 
$
93,619

 
$
93,619

 
$
—

 
$
—

 
$
93,619

 
 
 
 
 
 
 
 
 
 
 
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 asset-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, April 1, 2020
 
$
104,892

 
$
111,693

 
$
140,527

 
$
357,112

 
$
83

 
$
357,195

 
$
87,506

Transfers into Level 3 (3)
 
10,726

 
13,970

 
64,239

 
88,935

 
—

 
88,935

 
—

Transfers out of Level 3 (3)
 
(45,917
)
 
(4,166
)
 
(3,438
)
 
(53,521
)
 
—

 
(53,521
)
 
—

Total gains or losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment gains (losses)
 included in net income related
 to financial assets
 
—

 
—

 
—

 
—

 
32

 
32

 
—

Net realized (gains) losses
 included in net income related
 to financial liabilities
 
—

 
—

 
—

 
—

 
—

 
—

 
5,966

Net unrealized investment gains
(losses) included in OCI
 
3,838

 
5,308

 
3,261

 
12,407

 
—

 
12,407

 
—

Purchases
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Issuances
 
—

 
—

 
—

 
—

 
—

 
—

 
2,513

Sales
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Settlements
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Paydowns, maturities and distributions
 
(368
)
 
(513
)
 
(4,443
)
 
(5,324
)
 
—

 
(5,324
)
 
(2,366
)
Ending balance, June 30, 2020
 
$
73,171

 
$
126,292

 
$
200,146

 
$
399,609

 
$
115

 
$
399,724

 
$
93,619

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, January 1, 2020
 
$
44,291

 
$
103,952

 
$
146,828

 
$
295,071

 
$
107

 
$
295,178

 
$
93,733

Transfers into Level 3 (3)
 
74,477

 
32,803

 
86,714

 
193,994

 
—

 
193,994

 
—

Transfers out of Level 3 (3)
 
(45,917
)
 
(14,188
)
 
(6,385
)
 
(66,490
)
 
—

 
(66,490
)
 
—

Total gains or losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment gains (losses)
 included in net income related
 to financial assets
 
—

 
—

 
—

 
—

 
8

 
8

 
—

Net realized (gains) losses
 included in net income related
 to financial liabilities
 
—

 
—

 
—

 
—

 
—

 
—

 
924

Net unrealized investment gains
(losses) included in OCI
 
812

 
(173
)
 
(21,101
)
 
(20,462
)
 
—

 
(20,462
)
 
—

Purchases
 
—

 
6,875

 
1,890

 
8,765

 
—

 
8,765

 
—

Issuances
 
—

 
—

 
—

 
—

 
—

 
—

 
3,867

Sales
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Settlements
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Paydowns, maturities and distributions
 
(492
)
 
(2,977
)
 
(7,800
)
 
(11,269
)
 
—

 
(11,269
)
 
(4,905
)
Ending balance, June 30, 2020
 
$
73,171

 
$
126,292

 
$
200,146

 
$
399,609

 
$
115

 
$
399,724

 
$
93,619

(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 and six months ended June 30, 2020 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.
($ 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, April 1, 2019
 
$
47,756

 
$
82,482

 
$
135,790

 
$
266,028

 
$
5

 
$
266,033

 
$
84,629

Transfers into Level 3 (3)
 
—

 
2,808

 
—

 
2,808

 
64

 
2,872

 
—

Transfers out of Level 3 (3)
 
—

 
(4,876
)
 
—

 
(4,876
)
 
—

 
(4,876
)
 
—

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
 
—

 
—

 
—

 
—

 
—

 
—

 
371

Net unrealized investment gains
 (losses) included in OCI
 
(537
)
 
1,961

 
2,807

 
4,231

 
—

 
4,231

 
—

Purchases
 
—

 
1,566

 
—

 
1,566

 
—

 
1,566

 
—

Issuances
 
—

 
—

 
—

 
—

 
—

 
—

 
2,431

Sales
 
—

 
—

 
(607
)
 
(607
)
 
—

 
(607
)
 
—

Settlements
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Paydowns, maturities and distributions
 
(235
)
 
(4,719
)
 
(9,552
)
 
(14,506
)
 
—

 
(14,506
)
 
(1,470
)
Ending balance, June 30, 2019
 
$
46,984

 
$
79,222

 
$
128,438

 
$
254,644

 
$
69

 
$
254,713

 
$
85,961

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, January 1, 2019
 
$
47,531

 
$
80,742

 
$
120,211

 
$
248,484

 
$
5

 
$
248,489

 
$
78,700

Transfers into Level 3 (3)
 
—

 
5,882

 
21,934

 
27,816

 
64

 
27,880

 
—

Transfers out of Level 3 (3)
 
—

 
(4,876
)
 
—

 
(4,876
)
 
—

 
(4,876
)
 
—

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
 
—

 
—

 
—

 
—

 
—

 
—

 
4,705

Net unrealized investment gains
 (losses) included in OCI
 
(193
)
 
4,510

 
2,655

 
6,972

 
—

 
6,972

 
—

Purchases
 
—

 
1,566

 
—

 
1,566

 
—

 
1,566

 
—

Issuances
 
—

 
—

 
—

 
—

 
—

 
—

 
5,449

Sales
 
—

 
—

 
(607
)
 
(607
)
 
—

 
(607
)
 
—

Settlements
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Paydowns, maturities and distributions
 
(354
)
 
(8,602
)
 
(15,755
)
 
(24,711
)
 
—

 
(24,711
)
 
(2,893
)
Ending balance, June 30, 2019
 
$
46,984

 
$
79,222

 
$
128,438

 
$
254,644

 
$
69

 
$
254,713

 
$
85,961

(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 and six months ended June 30, 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
June 30, 2020
 
Valuation Technique(s)
 
Unobservable Inputs
 
Range
(Weighted Average)
and Single Point Best Estimate (1)
Municipal bonds
 
$
73,171

 
discounted cash flow
 
I spread (2)
 
578 bps
Corporate bonds
 
126,292

 
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 asset-backed securities
 
175,685

 
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
 
24,461

 
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
 
115

 
Black Scholes
 
equity value
 
low - $43.27; high - $44.53
($ in thousands)
Financial
Liabilities
 
Fair Value at
June 30, 2020
 
Valuation Technique(s)
 
Unobservable Inputs
 
Range
(Weighted Average)
and Single Point Best Estimate (1)
Derivatives
embedded in
fixed indexed annuity products
 
$
93,619

 
discounted cash flow
 
lapse rate
 
5.25%
 
 
 
 
 
 
mortality multiplier (8)
 
61.00%
 
 
 
 
 
 
option budget
 
1.00% - 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. These financial assets and financial liabilities are further 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. 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
June 30, 2020
 
 
 
 
 
 
 
 
 
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
Other investments
 
$
168,541

 
$
172,364

 
$
—

 
$
—

 
$
172,364

Deposit asset on reinsurance
 
2,373,267

 
2,846,176

 
—

 
—

 
2,846,176

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Investment contract and policy reserves,
fixed annuity contracts
 
4,742,272

 
4,651,533

 
—

 
—

 
4,651,533

Investment contract and policy reserves,
account values on life contracts
 
95,885

 
100,673

 
—

 
—

 
100,673

Other policyholder funds
 
648,240

 
648,240

 
—

 
590,693

 
57,547

Short-term debt
 
135,000

 
135,000

 
—

 
—

 
135,000

Long-term debt
 
302,172

 
332,385

 
—

 
332,385

 
—

 
 
 
 
 
 
 
 
 
 
 
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

 
—