Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2020

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

The Company is required 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.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between knowledgeable, unrelated and willing market participants on the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company categorizes its financial and nonfinancial assets and liabilities into a three-level hierarchy based on the priority of the inputs to the valuation technique. The three levels of inputs that may be used to measure fair value are:

Level 1

Unadjusted quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include fixed maturity and equity securities (both common stock and preferred stock) that are traded in an active exchange market, as well as U.S. Treasury securities.

Level 2

Unadjusted observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for the assets or liabilities. Level 2 assets and liabilities include fixed maturity securities (1) with quoted prices that are traded less frequently than exchange-traded instruments or (2) values based on discounted cash flows with observable inputs. This category generally includes certain U.S. Government and agency mortgage-backed securities, non-agency structured securities, corporate fixed maturity securities, preferred stocks, derivatives and embedded derivatives.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, certain discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation and for which the significant inputs are unobservable. This category generally includes certain private debt and equity investments, as well as embedded derivatives.

When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. As a result, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). Net transfers into or out of each of the three levels are reported as having occurred at the end of the reporting period in which the transfers were determined.

The following discussion describes the valuation methodologies used for financial assets and financial liabilities measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount and timing of expected future cash flows. The use of different methodologies, assumptions and inputs may have a material effect on the estimated fair values of the Company's investment holdings. Care is exercised in deriving conclusions about the Company's business, its value or financial position based on the fair value information of financial assets and liabilities presented below.

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial asset or financial liability, including estimates of both the timing and amount of expected future cash flows and the credit standing of the issuer. In some cases, fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial asset or financial liability. The disclosed fair values do not reflect any premium or discount that could result from offering for sale at one time an entire holding of a particular financial asset or financial liability. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.

Investments

The fair value of a fixed maturity security is the estimated amount at which the security could be exchanged in an orderly transaction between knowledgeable, unrelated and willing parties. The Company utilizes its investment managers and its custodian bank to obtain fair value prices from independent third-party valuation service providers, broker-dealer quotes, and model prices. Each month, the Company obtains fair value prices from its investment managers and custodian bank, each of which use a variety of independent, nationally recognized pricing sources to determine market valuations for fixed maturity securities. Differences in prices between the sources that the Company considers significant are researched and the Company utilizes the price that it considers most representative of an exit price. Typical inputs used by these pricing sources include, but are not limited to, reported trades, bids, offers, benchmark yield curves, benchmarking of like securities, rating designations, sector groupings, issuer spreads and/or estimated cash flows, prepayment and default speeds, among others. The Company's fixed maturity securities portfolio is primarily publicly traded, which allows for a high percentage of the portfolio to be priced through pricing services. Approximately 91.9% and 94.1% of the portfolio, based on fair value, was priced through pricing services or index priced as of December 31, 2020 and 2019, respectively. The remainder of the portfolio was priced by broker-dealers or pricing models. When non-binding broker-dealer quotes can be corroborated by comparison to other vendor quotes, pricing models or analyses, the securities are generally classified as Level 2, otherwise they are classified as Level 3. There were no significant changes to the valuation process during 2020.

The valuation of hard-to-value fixed maturity securities (generally 100 -150 securities) is more subjective because the markets are less liquid and there is a lack of observable market-based inputs. This may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur. When the pricing sources cannot provide fair value determinations, the investment managers and custodian bank obtain non-binding price quotes from broker-dealers. For those securities where the investment manager cannot obtain broker-dealer quotes, they will model the security, generally using anticipated cash flows of the underlying collateral. Broker-dealers' valuation methodologies as well as investment managers’ modeling

methodologies are sometimes matrix-based, using indicative evaluation measures and adjustments for specific security characteristics and market sentiment. The selection of the market inputs and assumptions used to estimate the fair value of hard-to-value fixed maturity securities requires judgment and includes: benchmark yield, liquidity premium, estimated cash flows, prepayment and default speeds, spreads, weighted average life, and credit rating. The extent of the use of each market input depends on the market sector and market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.

The Company gains assurance that its portfolio of fixed maturity securities including hard-to-value fixed maturity securities is appropriately valued through the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. The Company’s processes and controls are designed to ensure (1) the valuation methodologies are appropriate and consistently applied, (2) the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and (3) the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or broker-dealers to other third-party valuation sources for selected securities.

To determine the fair value of equity securities, the Company utilizes its investment managers and its custodian bank to obtain fair value prices from independent third-party valuation service providers. Each month, the Company obtains fair value prices from its investment managers and custodian bank, each of which use a variety of independent, nationally recognized pricing sources to determine market valuations for equity securities.

Policy loans and mortgage loans as well as certain alternative investments which are accounted for using the equity method of accounting are excluded from the fair value hierarchy.

In summary, the following financial assets and financial liabilities are carried at fair value:

Financial assets

•Fixed maturity securities including hard-to-value fixed maturity securities, as described above.

•Equity securities, as described above.

•Short-term fixed maturity securities — Because of the nature of these assets, carrying amounts generally approximate fair values.

•Derivatives, all call options — Fair values are based on the amount of cash expected to be received to settle each derivative on the reporting date. These amounts are obtained from each of the counterparties using industry accepted valuation models and observable inputs. Significant inputs include contractual terms, underlying index prices, market volatilities, interest rates and dividend yields.

•FHLB membership and activity stocks — Fair value is based on redemption value, which is equal to par value.

Financial liabilities

•The fair value of derivatives embedded in IUL contracts is set equal to the fair value of the outstanding call options.

•The fair value of derivatives embedded in FIA contracts is determined using the option budget method for each premium received (i.e., the option budget method is used as the future account growth rate). With this method, future excess cash flows (defined as benefits in excess of required non-forfeiture benefits) are discounted at the risk-free rate and adjusted for non-performance, to determine the fair value of the embedded derivatives.

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. At December 31, 2020, Level 3 investments comprised approximately 5.3% of the Company's total investment portfolio at fair value.

($ in thousands)	Carrying		Fair		Fair Value Measurements at Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
December 31, 2020
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	684,838	$	684,838	$	—	$	673,764	$	11,074
Other, including U.S. Treasury securities	433,153		433,153		18,350		414,803		—
Municipal bonds	1,827,497		1,827,497		—		1,767,907		59,590
Foreign government bonds	45,054		45,054		—		45,054		—
Corporate bonds	2,122,898		2,122,898		14,876		1,952,206		155,816
Other asset-backed securities	1,231,850		1,231,850		—		1,103,567		128,283
Total fixed maturity securities	6,345,290		6,345,290		33,226		5,957,301		354,763
Equity securities	121,653		121,653		39,235		82,115		303
Short-term investments	141,770		141,770		137,679		4,091		—
Other investments	36,258		36,258		—		36,258		—
Totals	$	6,644,971	$	6,644,971	$	210,140	$	6,079,765	$	355,066
Separate Account (variable annuity) assets (1)	$	2,891,423	$	2,891,423	$	2,891,423	$	—	$	—
Financial Liabilities
Investment contract and life policy reserves, embedded derivatives	$	2,474	$	2,474	$	—	$	2,474	$	—
Other policyholder funds, embedded derivatives	$	104,488	$	104,488	$	—	$	—	$	104,488
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 life 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) assets represent contractholder funds invested in various actively traded mutual funds that have daily quoted net asset values that are readily determinable for identical assets that the Company can access. Separate Account (variable annuity) liabilities are equal to the estimated fair value of Separate Account (variable annuity) assets.

Changes in Level 3 Fair Value Measurements

The Company did not have any transfers between Levels 1 and 2 during 2020 and 2019. The following tables present 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 and Asset- 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)	80,686		83,621		104,263		268,570		234		268,804		—
Transfers out of Level 3 (3)	(69,074)		(36,620)		(84,679)		(190,373)		—		(190,373)		—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—		—		(239)		(239)		(38)		(277)		—
Net investment (gains) losses included in net income related to financial liabilities	—		—		—		—		—		—		11,499
Net unrealized investment gains (losses) included in OCI	4,252		1,427		(10,471)		(4,792)		—		(4,792)		—
Purchases	—		6,875		1,890		8,765		—		8,765		—
Issuances	—		—		—		—		—		—		8,373
Sales	—		—		1,214		1,214		—		1,214		—
Settlements	—		—		—		—		—		—		—
Paydowns, maturities and distributions	(565)		(3,439)		(19,449)		(23,453)		—		(23,453)		(9,117)
Ending balance, December 31, 2020	$	59,590	$	155,816	$	139,357	$	354,763	$	303	$	355,066	$	104,488
Beginning balance, January 1, 2019	$	47,531	$	80,742	$	120,211	$	248,484	$	5	$	248,489	$	78,700
Transfers into Level 3 (3)	—		33,475		56,766		90,241		65		90,306		—
Transfers out of Level 3 (3)	—		(7,698)		(2,568)		(10,266)		—		(10,266)		—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—		—		(1,105)		(1,105)		38		(1,067)		—
Net investment (gains) losses included in net income related to financial liabilities	—		—		—		—		—		—		12,636
Net unrealized investment gains (losses) included in OCI	474		4,461		6,100		11,035		—		11,035		—
Purchases	—		2,483		—		2,483		—		2,483		—
Issuances	—		—		—		—		—		—		10,039
Sales	—		—		(607)		(607)		(1)		(608)		—
Settlements	—		—		—		—		—		—		—
Paydowns, maturities and distributions	(3,714)		(9,511)		(31,969)		(45,194)		—		(45,194)		(7,642)
Ending balance, December 31, 2019	$	44,291	$	103,952	$	146,828	$	295,071	$	107	$	295,178	$	93,733

(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 asset-backed securities.

(3)    Transfers into and out of Level 3 during the years ended December 31, 2020 and 2019 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 out of the levels as having occurred at the end of the reporting period in which the transfers were determined.

At December 31, 2020, the Company had a $0.3 million net investment loss on Level 3 financial assets. At December 31, 2019 the Company had a $1.1 million net investment loss on Level 3 financial assets. For the years ended December 31, 2020 and 2019, net investment losses of $11.5 million and $12.6 million, respectively, were included in net income that were attributable to the changes in the fair value of Level 3 financial liabilities still held.

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 December 31, 2020		Valuation Technique(s)	Unobservable Inputs	Range (Weighted Average) and Single Point Best Estimate (1)
Municipal bonds	$	59,590	discounted cash flow	I spread (2)	307 - 391 bps
Corporate bonds	155,816		discounted cash flow	N spread (3)	272 - 553 bps
			market comparable	option adjusted spread	12.54%
Other asset-backed securities	128,283		vendor price	haircut	3.00% - 5.00%
			discounted cash flow	constant prepayment rate	20.00%
			discounted cash flow	T spread (4)	235 - 800 bps
			discounted cash flow	PDI interest margin (5)	7.13%
			discounted cash flow	SBL interest margin (6)	4.50%
Government mortgage-backed securities	11,074		vendor price	haircut	3.00% - 5.00%
Equity securities	303		Black-Scholes	equity value	low - 31.00%; high - 41.00%

($ in thousands)
Financial Liabilities	Fair Value at December 31, 2020		Valuation Technique(s)	Unobservable Inputs	Range (Weighted Average) and Single Point Best Estimate (1)
Derivatives embedded in fixed indexed annuity products	$	104,488	discounted cash flow	lapse rate	5.30%
				mortality multiplier (7)	63.00%
				option budget	0.90% - 2.50%
				non-performance adjustment (8)	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)    "PDI" stands for private debt investment.

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

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

(8)    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 previously described in this Note. 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 amount, fair value and fair value hierarchy of these financial assets and financial liabilities.

($ in thousands)	Carrying		Fair		Fair Value Measurements at Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
December 31, 2020
Financial Assets
Investments
Other investments	$	168,296	$	172,073	$	—	$	—	$	172,073
Deposit asset on reinsurance	2,420,926		3,030,589		—		—		3,030,589
Financial Liabilities
Investment contract and policy reserves, fixed annuity contracts	4,847,648		4,963,318		—		—		4,963,318
Investment contract and life policy reserves, account values on life contracts	98,719		108,360		—		—		108,360
Other policyholder funds	646,809		646,809		—		590,692		56,117
Short-term debt	135,000		135,000		—		—		135,000
Long-term debt	302,323		331,136		—		331,136		—
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 life 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		—

Other Investments

Other investments includes policy loans and mortgage loans. For policy loans, fair value is based on estimates using discounted cash flow analysis and current interest rates being offered for new loans. For mortgage loans, fair value is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and similar remaining maturities.

Deposit Asset on Reinsurance

The fair value of the deposit asset on reinsurance is estimated by discounting the future cash flows that are expected to arise out of the annuity reinsurance transaction. The treasury yield curve, plus an assumed credit spread, is used to determine the appropriate discount rate.

Investment Contract and Policy Reserves

The fair values of fixed annuity contract liabilities and policyholder account balances on life contracts are equal to the discounted estimated future cash flows (using the Company's current interest rates for similar products including consideration of minimum guaranteed interest rates). The Company carries these financial liabilities at cost.

Also, included in investment contract and policy reserves are embedded derivatives related to the Company's IUL products which are carried at fair value. See Note 4 for further information.

Other Policyholder Funds

Other policyholder funds are liabilities related to supplementary contracts without life contingencies and dividend accumulations, as well as balances outstanding under funding agreements with the FHLB and embedded derivatives related to the FIA products. Except for embedded derivatives, each of these components is carried at cost, which management believes is a reasonable estimate of fair value due to the relatively short duration of these items, based on the Company's past experience.

The fair value of the embedded derivatives related to FIA products is estimated at each reporting date by (1) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (2) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for the Company's nonperformance risk related to those liabilities. The projections of policy contract values are based on the Company's best estimate assumptions for future contract growth and decrements. The assumptions for future contract growth include the expected index credits which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options that will be purchased in the future to fund index credits beyond the next contract anniversary. Projections of minimum guaranteed contract values include the same best estimate assumptions for contract decrements used to project policy contract values.

Short-term Debt

The Company carries short-term debt at amortized cost which approximates fair value.

Long-term Debt

The Company carries long-term debt at amortized cost. The fair value of long-term debt is estimated based on unadjusted quoted market prices of the Company's securities or unadjusted market prices based on similar publicly traded issues when trading activity for the Company's securities is not sufficient to provide a market price.