| 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): September 30, 2018 Fair Value Measurement Using: Total Level 1 Level 2 Level 3 Assets Fixed maturity securities U.S. Government and government agencies $ 28,558 $ 9,155 $ 17,131 $ 2,272 States, municipalities and political subdivisions 416,390 — 415,998 392 Residential mortgage-backed securities 100,677 — 53,828 46,849 Commercial mortgage-backed securities 60,370 — 34,522 25,848 Asset-backed securities 285,799 — 46,191 239,608 Corporate and other 2,093,649 7,010 1,955,642 130,997 Total fixed maturity securities 2,985,443 16,165 2,523,312 445,966 Equity securities Common stocks 63,298 56,592 — 6,706 Perpetual preferred stocks 153,855 7,402 89,421 57,032 Total equity securities 217,153 63,994 89,421 63,738 Derivatives 290 — — 290 Total assets accounted for at fair value $ 3,202,886 $ 80,159 $ 2,612,733 $ 509,994 Liabilities Warrant liability $ 4,018 $ — $ — $ 4,018 Contingent liability 1,763 — — 1,763 Other 738 — — 738 Total liabilities accounted for at fair value $ 6,519 $ — $ — $ 6,519 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 at the beginning fair value for the reporting period in which the changes occur. 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 $31.2 million primarily related to structured securities during the nine months ended September 30, 2018 . The Company’s assessment resulted in a net transfer out of Level 3 of $57.0 million primarily related to structured securities during the nine months ended September 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. 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 nine months ended September 30, 2018 and 2017 , respectively (in thousands): Total realized/unrealized gains (losses) included in Balance at June 30, 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 September 30, 2018 Assets Fixed maturity securities U.S. Government and government agencies $ — $ (11 ) $ (2 ) $ 2,285 $ — $ — $ — $ 2,272 States, municipalities and political subdivisions 409 (1 ) (16 ) — — — — 392 Residential mortgage-backed securities 12,267 42 (373 ) 33,726 (1,375 ) 2,562 — 46,849 Commercial mortgage-backed securities 22,051 (39 ) 18 2,086 (63 ) 1,795 — 25,848 Asset-backed securities 132,744 (39 ) (665 ) 116,833 (9,265 ) — — 239,608 Corporate and other 67,292 162 (832 ) 65,019 (9,780 ) 9,136 — 130,997 Total fixed maturity securities 234,763 114 (1,870 ) 219,949 (20,483 ) 13,493 — 445,966 Equity securities Common stocks 483 1,784 — 100 — 4,339 — 6,706 Perpetual preferred stocks 24,365 (350 ) — 32,007 — 1,010 — 57,032 Total equity securities 24,848 1,434 — 32,107 — 5,349 — 63,738 Derivatives 280 10 — — — — — 290 Total financial assets $ 259,891 $ 1,558 $ (1,870 ) $ 252,056 $ (20,483 ) $ 18,842 $ — $ 509,994 Total realized/unrealized (gains) losses included in Balance at June 30, 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 September 30, 2018 Liabilities Warrant liability $ 3,316 $ (120 ) $ — $ 822 $ — $ — $ — $ 4,018 Contingent liability — — — 1,763 — — — 1,763 Other 907 (169 ) — — — — — 738 Total financial liabilities $ 4,223 $ (289 ) $ — $ 2,585 $ — $ — $ — $ 6,519 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 September 30, 2018 Assets Fixed maturity securities U.S. Government and government agencies $ — $ (11 ) $ (2 ) $ 2,285 $ — $ — $ — $ 2,272 States, municipalities and political subdivisions 6,011 (1 ) (148 ) 121 — 418 (6,009 ) 392 Residential mortgage-backed securities 14,612 166 246 33,726 (6,642 ) 8,092 (3,351 ) 46,849 Commercial mortgage-backed securities 12,157 (118 ) (246 ) 12,362 (102 ) 1,795 — 25,848 Asset-backed securities 133,742 1,119 (3,941 ) 184,833 (73,211 ) — (2,934 ) 239,608 Corporate and other 26,288 207 (1,702 ) 94,033 (12,675 ) 24,846 — 130,997 Total fixed maturity securities 192,810 1,362 (5,793 ) 327,360 (92,630 ) 35,151 (12,294 ) 445,966 Equity securities Common stocks 157 1,661 — 100 — 4,788 — 6,706 Perpetual preferred stocks 6,437 105 — 46,950 — 3,540 — 57,032 Total equity securities 6,594 1,766 — 47,050 — 8,328 — 63,738 Derivatives 260 30 — — — — — 290 Total financial assets $ 199,664 $ 3,158 $ (5,793 ) $ 374,410 $ (92,630 ) $ 43,479 $ (12,294 ) $ 509,994 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 September 30, 2018 Liabilities Warrant liability $ 3,826 $ (630 ) $ — $ 822 $ — $ — $ — $ 4,018 Contingent liability — — — 1,763 — — — 1,763 Other 944 (206 ) — — — — — 738 Total financial liabilities $ 4,770 $ (836 ) $ — $ 2,585 $ — $ — $ — $ 6,519 Total realized/unrealized gains (losses) included in Balance at June 30, 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 September 30, 2017 Assets Fixed maturity securities States, municipalities and political subdivisions $ 7,511 $ (3 ) $ (100 ) $ 116 $ — $ — $ (1,632 ) $ 5,892 Residential mortgage-backed securities 18,486 21 22 — (921 ) 1,041 (868 ) 17,781 Commercial mortgage-backed securities 3,754 (4 ) 1 — (69 ) 8,620 — 12,302 Asset-backed securities 119,598 97 572 15,780 (23,947 ) 1,065 — 113,165 Corporate and other 20,539 (5 ) (1,202 ) 4,310 (15 ) 9,294 (1,423 ) 31,498 Total fixed maturity securities 169,888 106 (707 ) 20,206 (24,952 ) 20,020 (3,923 ) 180,638 Equity securities Common stocks 2,090 — — — — 280 — 2,370 Perpetual preferred stocks — — — — 6,101 — 6,101 Total equity securities 2,090 — — — — 6,381 — 8,471 Derivatives 2,155 9 — — — — — 2,164 Total financial assets $ 174,133 $ 115 $ (707 ) $ 20,206 $ (24,952 ) $ 26,401 $ (3,923 ) $ 191,273 Total realized/unrealized (gains) losses included in Balance at June 30, 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 September 30, 2017 Liabilities Warrant liability $ 4,091 $ (1,000 ) $ — $ — $ — $ — $ — $ 3,091 Contingent liability 11,730 (6,321 ) — — — — — 5,409 Other 1,042 284 — — — — — 1,326 Total financial liabilities $ 16,863 $ (7,037 ) $ — $ — $ — $ — $ — $ 9,826 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 September 30, 2017 Assets Fixed maturity securities U.S. Government and government agencies $ 32 $ — $ — $ — $ (17 ) $ — $ (15 ) $ — States, municipalities and political subdivisions 5,690 (2 ) (144 ) 344 — 1,636 (1,632 ) 5,892 Residential mortgage-backed securities 55,954 (720 ) 901 3,465 (7,283 ) 3,203 (37,739 ) 17,781 Commercial mortgage-backed securities 43,018 111 76 — (10,083 ) 8,620 (29,440 ) 12,302 Asset-backed securities 73,217 1,147 880 97,051 (48,461 ) 1,065 (11,734 ) 113,165 Corporate and other 20,366 (3,329 ) 3,670 12,244 (4,133 ) 10,606 (7,926 ) 31,498 Total fixed maturity securities 198,277 (2,793 ) 5,383 113,104 (69,977 ) 25,130 (88,486 ) 180,638 Equity securities Common stocks 4,576 (2,842 ) 356 — — 280 — 2,370 Perpetual preferred stocks — — — — — 6,101 — 6,101 Total equity securities 4,576 (2,842 ) 356 — — 6,381 — 8,471 Derivatives 3,813 (1,649 ) — — — — — 2,164 Total financial assets $ 206,666 $ (7,284 ) $ 5,739 $ 113,104 $ (69,977 ) $ 31,511 $ (88,486 ) $ 191,273 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 September 30, 2017 Liabilities Warrant liability $ 4,058 $ (967 ) $ — $ — $ — $ — $ — $ 3,091 Contingent liability 11,411 (6,002 ) — — — — — 5,409 Other 816 510 — — — — — 1,326 Total financial liabilities $ 16,285 $ (6,459 ) $ — $ — $ — $ — $ — $ 9,826 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 and cash equivalents, accounts receivable, accounts payable and other current liabilities, and other assets and liabilities approximate fair value due to relatively short periods to maturity (in thousands): September 30, 2018 Fair Value Measurement Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 Assets Mortgage loans $ 87,308 $ — $ — $ — $ — Policy loans 20,324 20,324 — 20,324 — Other invested assets 1,600 1,600 — — 1,600 Total assets not accounted for at fair value $ 109,232 $ 21,924 $ — $ 20,324 $ 1,600 Liabilities Annuity benefits accumulated (1) $ 244,021 $ 241,688 $ — $ — $ 241,688 Debt obligations (2) 660,041 663,383 — 663,383 — Total liabilities not accounted for at fair value $ 904,062 $ 905,071 $ — $ 663,383 $ 241,688 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. |
