| Fair Value of Financial Instruments | 6. Fair Value of Financial Instruments Assets by Hierarchy Level Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands): June 30, 2018 Fair Value Measurement Using: Total Level 1 Level 2 Level 3 Assets Fixed maturity securities U.S. Government and government agencies $ 14,811 $ 4,899 $ 9,912 $ — States, municipalities and political subdivisions 370,973 — 370,564 409 Residential mortgage-backed securities 91,122 — 78,855 12,267 Commercial mortgage-backed securities 38,958 — 16,907 22,051 Asset-backed securities 146,395 — 13,651 132,744 Corporate and other 586,994 2,081 517,621 67,292 Total fixed maturity securities 1,249,253 6,980 1,007,510 234,763 Equity securities Common stocks 9,329 8,846 — 483 Perpetual preferred stocks 70,228 7,474 38,389 24,365 Total equity securities 79,557 16,320 38,389 24,848 Derivatives 280 — — 280 Total assets accounted for at fair value $ 1,329,090 $ 23,300 $ 1,045,899 $ 259,891 Liabilities Warrant liability $ 3,316 $ — $ — $ 3,316 Other 907 — — 907 Total liabilities accounted for at fair value $ 4,223 $ — $ — $ 4,223 December 31, 2017 Fair Value Measurement Using: Total Level 1 Level 2 Level 3 Assets Fixed maturity securities U.S. Government and government agencies $ 15,722 $ 5,094 $ 10,628 $ — States, municipalities and political subdivisions 395,450 — 389,439 6,011 Foreign government 5,998 — 5,998 — Residential mortgage-backed securities 104,895 — 90,283 14,612 Commercial mortgage-backed securities 30,405 — 18,248 12,157 Asset-backed securities 147,926 — 14,184 133,742 Corporate and other 640,230 2,098 611,844 26,288 Total fixed maturity securities 1,340,626 7,192 1,140,624 192,810 Equity securities Common stocks 4,928 4,771 — 157 Perpetual preferred stocks 42,572 7,665 28,470 6,437 Total equity securities 47,500 12,436 28,470 6,594 Derivatives 260 — — 260 Total assets accounted for at fair value $ 1,388,386 $ 19,628 $ 1,169,094 $ 199,664 Liabilities Warrant liability $ 3,826 $ — $ — $ 3,826 Other 944 — — 944 Total liabilities accounted for at fair value $ 4,770 $ — $ — $ 4,770 The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting period in which the changes occur. The Company transferred $5.1 million of equity securities between Level 1 and Level 2 during the six months ended June 30, 2018 , reflecting the level of market activity in these instruments. There were no transfers between Level 1 and Level 2 during the three and six months ended June 30, 2017 . Availability of secondary market activity and consistency of pricing from third-party sources impacts the Company's ability to classify securities as Level 2 or Level 3. The Company’s assessment resulted in a net transfer into Level 3 of $12.3 million primarily related to structured securities during the six months ended June 30, 2018 . The Company’s assessment resulted in a net transfer out of Level 3 of $79.5 million primarily related to structured securities during the six months ended June 30, 2017. The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring basis are summarized below: Fixed Maturity Securities. The fair values of the Company’s publicly-traded fixed maturity securities are generally based on prices obtained from independent pricing services. Prices from pricing services are sourced from multiple vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. In some cases, the Company receives prices from multiple pricing services for each security, but ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. If the Company ultimately concludes that pricing information received from the independent pricing service is not reflective of market activity, non-binding broker quotes are used, if available. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information from the pricing service or broker with an internally developed valuation, however, this occurs infrequently. Internally developed valuations or non-binding broker quotes are also used to determine fair value in circumstances where vendor pricing is not available. These estimates may use significant unobservable inputs, which reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset. Pricing service overrides, internally developed valuations and non-binding broker quotes are generally based on significant unobservable inputs and are reflected as Level 3 in the valuation hierarchy. The inputs used in the valuation of corporate and government securities include, but are not limited to, standard market observable inputs which are derived from, or corroborated by, market observable data including market yield curve, duration, call provisions, observable prices and spreads for similar publicly traded or privately traded issues that incorporate the credit quality and industry sector of the issuer. For structured securities, valuation is based primarily on matrix pricing or other similar techniques using standard market inputs including spreads for actively traded securities, spreads off benchmark yields, expected prepayment speeds and volumes, current and forecasted loss severity, rating, weighted average coupon, weighted average maturity, average delinquency rates, geographic region, debt-service coverage ratios and issuance-specific information including, but not limited to: collateral type, payment terms of the underlying assets, payment priority within the tranche, structure of the security, deal performance and vintage of loans. When observable inputs are not available, the market standard valuation techniques for determining the estimated fair value of certain types of securities that trade infrequently, and therefore have little or no price transparency, rely on inputs that are significant to the estimated fair value but that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs are sometimes based in large part on management judgment or estimation, and cannot be supported by reference to market activity. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and are believed to be consistent with what other market participants would use when pricing such securities. The fair values of private placement securities are primarily determined using a discounted cash flow model. In certain cases, these models primarily use observable inputs with a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions, taking into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Generally, these securities have been reflected within Level 3. For certain private fixed maturities, the discounted cash flow model may also incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the security. To the extent management determines that such unobservable inputs are not significant to the price of a security, a Level 2 classification is made. Otherwise, a Level 3 classification is used. Equity Securities. The balance consists principally of common and preferred stock of publicly and privately traded companies. The fair values of publicly traded equity securities are primarily based on quoted market prices in active markets and are classified within Level 1 in the fair value hierarchy. The fair values of preferred equity securities, for which quoted market prices are not readily available, are based on prices obtained from independent pricing services and these securities are generally classified within Level 2 in the fair value hierarchy. The fair value of common stock of privately held companies was determined using unobservable market inputs, including volatility and underlying security values and was classified as Level 3. Cash Equivalents. The balance consists of money market instruments, which are generally valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. Various time deposits carried as cash equivalents are not measured at estimated fair value and, therefore, are excluded from the tables presented. Derivatives. The balance consists of common stock purchase warrants and call options. The fair values of the call options are primarily based on quoted market prices in active markets and are classified within Level 1 in the fair value hierarchy. Depending on the terms, the common stock warrants were valued using either Black-Scholes analysis or Monte Carlo Simulation. Fair value was determined using unobservable market inputs, including volatility and underlying security values. As such, the common stock purchase warrants were classified as Level 3. Warrant Liability. The balance represents warrants issued in connection with the acquisition of the Insurance business and recorded within other liabilities on the Condensed Consolidated Balance Sheets. Fair value was determined using the Monte Carlo Simulation because the adjustments for exercise price and warrant shares represent path dependent features; the exercise price from comparable periods needs to be known to determine whether a subsequent sale of shares occurs at a price that is lower than the current exercise price. The analysis entails a Geometric Brownian Motion based simulation of 100 unique price paths of the Company's stock for each combination of assumptions. Fair value was determined using unobservable market inputs, including volatility, and a range of assumptions regarding a possibility of an equity capital raise each year and the expected size of future equity capital raises. The present value of a given simulated scenario was based on intrinsic value at expiration discounted to the valuation date, taking into account any adjustments to the exercise price or warrant shares issuable. The average present value across all 100 independent price paths represents the estimate of fair value for each combination of assumptions. Therefore, the warrant liability was classified as Level 3. Level 3 Measurements and Transfers The following tables summarize changes to the Company’s financial instruments carried at fair value and classified within Level 3 of the fair value hierarchy for the three and six months ended June 30, 2018 and 2017 , respectively (in thousands): Total realized/unrealized gains (losses) included in Balance at March 31, 2018 Net earnings (loss) Other comp. income (loss) Purchases and issuances Sales and settlements Transfer to Level 3 Transfer out of Level 3 Balance at June 30, 2018 Assets Fixed maturity securities States, municipalities and political subdivisions $ 6,427 $ (1 ) $ (8 ) $ — $ — $ — $ (6,009 ) $ 409 Residential mortgage-backed securities 7,249 32 282 — (826 ) 5,530 — 12,267 Commercial mortgage-backed securities 17,751 (39 ) (166 ) 4,524 (19 ) — — 22,051 Asset-backed securities 137,888 460 (1,768 ) 18,500 (19,402 ) — (2,934 ) 132,744 Corporate and other 37,595 20 (858 ) 23,876 (2,528 ) 9,187 — 67,292 Total fixed maturity securities 206,910 472 (2,518 ) 46,900 (22,775 ) 14,717 (8,943 ) 234,763 Equity securities Common stocks 606 (123 ) — — — — — 483 Perpetual preferred stocks 23,910 455 — — — — — 24,365 Total equity securities 24,516 332 — — — — — 24,848 Derivatives 270 10 — — — — — 280 Total financial assets $ 231,696 $ 814 $ (2,518 ) $ 46,900 $ (22,775 ) $ 14,717 $ (8,943 ) $ 259,891 Total realized/unrealized (gains) losses included in Balance at March 31, 2018 Net (earnings) loss Other comp. (income) loss Purchases and issuances Sales and settlements Transfer to Level 3 Transfer out of Level 3 Balance at June 30, 2018 Liabilities Warrant liability $ 2,828 $ 488 $ — $ — $ — $ — $ — $ 3,316 Other 1,233 (326 ) — — — — — 907 Total financial liabilities $ 4,061 $ 162 $ — $ — $ — $ — $ — $ 4,223 Total realized/unrealized gains (losses) included in Balance at December 31, 2017 Net earnings (loss) Other comp. income (loss) Purchases and issuances Sales and settlements Transfer to Level 3 Transfer out of Level 3 Balance at June 30, 2018 Assets Fixed maturity securities States, municipalities and political subdivisions $ 6,011 $ — $ (132 ) $ 121 $ — $ 418 $ (6,009 ) $ 409 Residential mortgage-backed securities 14,612 124 619 — (5,267 ) 5,530 (3,351 ) 12,267 Commercial mortgage-backed securities 12,157 (79 ) (264 ) 10,276 (39 ) — — 22,051 Asset-backed securities 133,742 1,158 (3,276 ) 68,000 (63,946 ) — (2,934 ) 132,744 Corporate and other 26,288 45 (870 ) 29,014 (2,895 ) 15,710 — 67,292 Total fixed maturity securities 192,810 1,248 (3,923 ) 107,411 (72,147 ) 21,658 (12,294 ) 234,763 Equity securities Common stocks 157 (123 ) — — — 449 — 483 Perpetual preferred stocks 6,437 455 — 14,943 — 2,530 — 24,365 Total equity securities 6,594 332 — 14,943 — 2,979 — 24,848 Derivatives 260 20 — — — — — 280 Total financial assets $ 199,664 $ 1,600 $ (3,923 ) $ 122,354 $ (72,147 ) $ 24,637 $ (12,294 ) $ 259,891 Total realized/unrealized (gains) losses included in Balance at December 31, 2017 Net (earnings) loss Other comp. (income) loss Purchases and issuances Sales and settlements Transfer to Level 3 Transfer out of Level 3 Balance at June 30, 2018 Liabilities Warrant liability $ 3,826 $ (510 ) $ — $ — $ — $ — $ — $ 3,316 Other 944 (37 ) — — — — — 907 Total financial liabilities $ 4,770 $ (547 ) $ — $ — $ — $ — $ — $ 4,223 Total realized/unrealized gains (losses) included in Balance at March 31, 2017 Net earnings (loss) Other comp. income (loss) Purchases and issuances Sales and settlements Transfer to Level 3 Transfer out of Level 3 Balance at June 30, 2017 Assets Fixed maturity securities U.S. Government and government agencies $ 15 $ — $ — $ — $ — $ — $ (15 ) $ — States, municipalities and political subdivisions 6,598 (111 ) (840 ) 227 — 1,636 — 7,510 Residential mortgage-backed securities 53,737 (148 ) (9 ) 3,417 (3,804 ) 2,163 (36,871 ) 18,485 Commercial mortgage-backed securities 35,973 (119 ) 92 — (2,752 ) — (29,440 ) 3,754 Asset-backed securities 87,160 (23 ) 1,990 53,546 (11,341 ) — (11,734 ) 119,598 Corporate and other 26,720 (55 ) (1,769 ) 4,933 (4,098 ) 1,312 (6,504 ) 20,539 Total fixed maturity securities 210,203 (456 ) (536 ) 62,123 (21,995 ) 5,111 (84,564 ) 169,886 Equity securities Common stocks 3,531 (2,842 ) 1,401 — — — — 2,090 Total equity securities 3,531 (2,842 ) 1,401 — — — — 2,090 Derivatives 3,694 (1,539 ) — — — — — 2,155 Total financial assets $ 217,428 $ (4,837 ) $ 865 $ 62,123 $ (21,995 ) $ 5,111 $ (84,564 ) $ 174,131 Total realized/unrealized (gains) losses included in Balance at March 31, 2017 Net (earnings) loss Other comp. (income) loss Purchases and issuances Sales and settlements Transfer to Level 3 Transfer out of Level 3 Balance at June 30, 2017 Liabilities Warrant liability $ 4,223 $ (132 ) $ — $ — $ — $ — $ — $ 4,091 Contingent liability 11,642 88 — — — — — 11,730 Other 675 367 — — — — — 1,042 Total financial liabilities $ 16,540 $ 323 $ — $ — $ — $ — $ — $ 16,863 Total realized/unrealized gains (losses) included in Balance at December 31, 2016 Net earnings (loss) Other comp. income (loss) Purchases and issuances Sales and settlements Transfer to Level 3 Transfer out of Level 3 Balance at June 30, 2017 Assets Fixed maturity securities U.S. Government and government agencies $ 32 $ — $ — $ — $ (17 ) $ — $ (15 ) $ — States, municipalities and political subdivisions 5,690 — (43 ) 227 — 1,636 — 7,510 Residential mortgage-backed securities 55,954 (743 ) 879 3,465 (6,362 ) 2,163 (36,871 ) 18,485 Commercial mortgage-backed securities 43,018 115 75 — (10,014 ) — (29,440 ) 3,754 Asset-backed securities 73,217 1,051 307 81,271 (24,514 ) — (11,734 ) 119,598 Corporate and other 20,366 (3,322 ) 4,872 7,933 (4,118 ) 1,312 (6,504 ) 20,539 Total fixed maturity securities 198,277 (2,899 ) 6,090 92,896 (45,025 ) 5,111 (84,564 ) 169,886 Equity securities Common stocks 4,575 (2,842 ) 357 — — — — 2,090 Total equity securities 4,575 (2,842 ) 357 — — — — 2,090 Derivatives 3,813 (1,658 ) — — — — — 2,155 Total financial assets $ 206,665 $ (7,399 ) $ 6,447 $ 92,896 $ (45,025 ) $ 5,111 $ (84,564 ) $ 174,131 Total realized/unrealized (gains) losses included in Balance at December 31, 2016 Net (earnings) loss Other comp. (income) loss Purchases and issuances Sales and settlements Transfer to Level 3 Transfer out of Level 3 Balance at June 30, 2017 Liabilities Warrant liability $ 4,058 $ 33 $ — $ — $ — $ — $ — $ 4,091 Contingent liability 11,411 319 — — — — — 11,730 Other 816 226 — — — — — 1,042 Total financial liabilities $ 16,285 $ 578 $ — $ — $ — $ — $ — $ 16,863 Internally developed fair values of Level 3 assets represent less than 1% of the Company’s total assets. Any justifiable changes in unobservable inputs used to determine internally developed fair values would not have a material impact on the Company’s financial position. Fair Value of Financial Instruments Not Measured at Fair Value The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments, which were not measured at fair value on a recurring basis. The table excludes carrying amounts for cash, accounts receivable, costs and recognized earnings in excess of billings, accounts payable, accrued expenses, billings in excess of costs and recognized earnings, and other current assets and liabilities approximate fair value due to relatively short periods to maturity (in thousands): June 30, 2018 Fair Value Measurement Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 Assets Mortgage loans $ 69,890 $ 69,890 $ — $ — $ 69,890 Policy loans 17,768 17,768 — 17,768 — Other invested assets 1,600 1,600 — — 1,600 Total assets not accounted for at fair value $ 89,258 $ 89,258 $ — $ 17,768 $ 71,490 Liabilities Annuity benefits accumulated (1) $ 237,373 $ 237,373 $ — $ — $ 237,373 Debt obligations (2) 624,326 631,626 — 631,626 — Total liabilities not accounted for at fair value $ 861,699 $ 868,999 $ — $ 631,626 $ 237,373 December 31, 2017 Fair Value Measurement Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 Assets Mortgage loans $ 52,109 $ 52,110 $ — $ — $ 52,110 Policy loans 17,944 17,944 — 17,944 — Other invested assets 2,906 3,757 — — 3,757 Total assets not accounted for at fair value $ 72,959 $ 73,811 $ — $ 17,944 $ 55,867 Liabilities Annuity benefits accumulated (1) $ 243,156 $ 240,361 $ — $ — $ 240,361 Debt obligations (2) 544,211 552,413 — 552,413 — Total liabilities not accounted for at fair value $ 787,367 $ 792,774 $ — $ 552,413 $ 240,361 (1) Excludes life contingent annuities in the payout phase. (2) Excludes certain lease obligations accounted for under ASC 840, Leases . Mortgage Loans on Real Estate. The fair value of mortgage loans on real estate is estimated by discounting cash flows, both principal and interest, using current interest rates for mortgage loans with similar credit ratings and similar remaining maturities. As such, inputs include current treasury yields and spreads, which are based on the credit rating and average life of the loan, corresponding to the market spreads. The valuation of mortgage loans on real estate is considered Level 3 in the fair value hierarchy. Policy Loans. The policy loans are reported at the unpaid principal balance and carry a fixed interest rate. The Company determined that the carrying value approximates fair value because (i) policy loans present no credit risk as the amount of the loan cannot exceed the obligation due upon the death of the insured or surrender of the underlying policy; (ii) there is no active market for policy loans (i.e., there is no commonly available exit price to determine the fair value of policy loans in the open market); (iii) policy loans are intricately linked to the underlying policy liability and, in many cases, policy loan balances are recovered through offsetting the loan balance against the benefits paid under the policy; and (iv) policy loans can be repaid by policyholders at any time, and this prepayment uncertainty reduces the potential impact of a difference between amortized cost (carrying value) and fair value. The valuation of policy loans is considered Level 2 in the fair value hierarchy. Annuity Benefits Accumulated. The fair value of annuity benefits was determined using the surrender values of the annuities and classified as Level 3. Long-term Obligations. The fair value of the Company’s long-term obligations was determined using Bloomberg Valuation Service BVAL. The methodology combines direct market observations from contributed sources with quantitative pricing models to generate evaluated prices and classified as Level 2. |
