Fair Value | Fair Values The carrying and estimated fair values of our financial instruments are as follows: Fair Values and Carrying Values September 30, 2015 December 31, 2014 Carrying Value Fair Value Carrying Value Fair Value (Dollars in thousands) Assets Fixed maturities - available for sale $ 6,720,128 $ 6,720,128 $ 6,700,698 $ 6,700,698 Equity securities - available for sale 120,543 120,543 112,623 112,623 Mortgage loans 694,069 739,554 629,296 667,913 Policy loans 185,353 234,651 182,502 230,070 Other investments 988 988 3,558 3,558 Cash, cash equivalents and short-term investments 49,951 49,951 125,217 125,217 Reinsurance recoverable 2,820 2,820 3,562 3,562 Assets held in separate accounts 617,172 617,172 683,033 683,033 Fair Values and Carrying Values (continued) September 30, 2015 December 31, 2014 Carrying Value Fair Value Carrying Value Fair Value (Dollars in thousands) Liabilities Future policy benefits $ 3,715,477 $ 3,663,602 $ 3,563,558 $ 3,666,960 Supplemental contracts without life contingencies 342,260 305,842 341,955 329,651 Advance premiums and other deposits 247,887 247,887 239,700 239,700 Long-term debt 97,000 69,394 97,000 69,772 Other liabilities 60 60 173 173 Liabilities related to separate accounts 617,172 612,301 683,033 677,040 Fair value is based on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As not all financial instruments are actively traded, various valuation methods may be used to estimate fair value. These methods rely on observable market data and where observable market data is not available, the best information available. Significant judgment may be required to interpret the data and select the assumptions used in the valuation estimates, particularly when observable market data is not available. In the discussion that follows, we have ranked our financial instruments by the level of judgment used in the determination of the fair values presented above. The levels are defined as follows: • Level 1 - Fair values are based on unadjusted quoted prices in active markets for identical assets or liabilities. • Level 2 - Fair values are based on inputs, other than quoted prices from active markets, that are observable for the asset or liability, either directly or indirectly. • Level 3 - Fair values are based on significant unobservable inputs for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. From time to time there may be movements between levels as inputs become more or less observable, which may depend on several factors including the activity of the market for the specific security, the activity of the market for similar securities, the level of risk spreads and the source from which we obtain the information. Transfers into or out of any level are measured as of the beginning of the period. The following methods and assumptions were used in estimating the fair value of our financial instruments: Fixed maturities: Level 1 fixed maturities consist of U.S. Treasury issues that are actively traded, allowing us to use current market prices as an estimate of their fair value. Level 2 fixed maturities consist of corporate, mortgage- and asset-backed, United States Government agencies, state and municipal and private placement corporate securities with observable market data, and in some circumstances recent trade activity. When quoted prices of identical assets in active markets are not available, our first priority is to obtain prices from third party pricing vendors. We have regular interaction with these vendors to ensure we understand their pricing methodologies and to confirm they are utilizing observable market information. Their methodologies vary by asset class and include inputs such as estimated cash flows, benchmark yields, reported trades, credit quality, industry events and economic events. Fixed maturities with validated prices from pricing services, which includes the majority of our public fixed maturities in all asset classes, are generally reflected in Level 2. Also included in Level 2 are private placement corporate bonds where quoted market prices are not available, for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used. In the matrix approach, securities are grouped into pricing categories that vary by sector, rating and average life. Each pricing category is assigned a risk spread based on studies of observable public market data. The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread. Level 3 fixed maturities include corporate, mortgage- and asset-backed, United States Government agencies and private placement corporate securities for which there is little or no current market data available. We use external pricing sources, or if prices are not available we will estimate fair value internally. Fair values of private corporate investments in Level 3 are determined by reference to the public market, private transactions or valuations for comparable companies or assets in the relevant asset class when such amounts are available. For other securities where an exit price based on relevant observable inputs is not obtained, the fair value is determined using a matrix calculation. Fair values estimated through the use of matrix pricing methods rely on an estimate of credit spreads to a risk-free U.S. Treasury yield. Selecting the credit spread requires judgment based on an understanding of the security and may include a market liquidity premium. Our selection of comparable companies as well as the level of spread requires significant judgment. Increases in spreads used in our matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security. We obtain fixed maturity fair values from a variety of external independent pricing services, including brokers, with access to observable data including recent trade information, if available. In certain circumstances in which an external price is not available for a Level 3 security, we will internally estimate its fair value. Our process for evaluation and selection of the fair values includes: • We follow a “pricing waterfall” policy, which establishes the pricing source preference for a particular security or security type. The order of preference is based on our evaluation of the valuation methods used, the source's knowledge of the instrument and the reliability of the prices we have received from the source in the past. Our valuation policy dictates that fair values are initially sought from third party pricing services. If our review of the prices received from our preferred source indicates an inaccurate price, we will use an alternative source within the waterfall and document the decision. In the event that fair values are not available from one of our external pricing services or upon review of the fair values provided it is determined that they may not be reflective of market conditions, those securities are submitted to brokers familiar with the security to obtain non-binding price quotes. Broker quotes tend to be used in limited circumstances such as for newly issued, private placement corporate bonds and other instruments that are not widely traded. For those securities for which an externally provided fair value is not available, we use cash flow modeling techniques to estimate fair value. • We evaluate third party pricing source estimation methodologies to assess whether they will provide a fair value which approximates a market exit price. • We perform an overall analysis of portfolio fair value movement against general movements in interest rates and spreads. • We compare period-to-period price trends to detect unexpected price fluctuation based on our knowledge of the market and the particular instrument. As fluctuations are noted, we will perform further research which may include discussions with the original pricing source or other external sources to ensure we are in agreement with the valuation. • We compare prices between different pricing sources for unusual disparity. • We meet at least quarterly with our Investment Committee, the group that oversees our valuation process, to discuss valuation practices and observations during the pricing process. Equity securities: Level 1 equity securities consist of listed common stocks and mutual funds that are actively traded, allowing us to use current market prices as an estimate of their fair value. Level 2 equity securities consist of common stock issued by the Federal Home Loan Bank of Des Moines (FHLB), with estimated fair value based on the current redemption value of the shares and non-redeemable preferred stock. Estimated fair value is obtained from external pricing sources using a matrix pricing approach. Level 3 equity securities consist of non-redeemable preferred stock for which no active market exists, and fair value estimates for these securities is based on the values of comparable securities which are actively traded. Increases in spreads used in our matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security. In the case where external pricing services are used for certain Level 1 and Level 2 equity securities, our review process is consistent with the process used to determine the fair value of fixed maturities discussed above. Mortgage loans: Mortgage loans are not measured at fair value on a recurring basis. Mortgage loans are a Level 3 measurement as there is no current market for the loans. The fair value of our mortgage loans is estimated internally using a matrix pricing approach. Along with specific loan terms, two key management assumptions are required including the risk rating of the loan (our current rating system is A-highest quality, B-moderate quality, C-low quality, W-watch or F-foreclosure) and estimated spreads for new loans over the U.S. Treasury yield curve. Spreads are updated quarterly and loans are reviewed and rated annually with quarterly adjustments should significant changes occur. Our determination of each loan's risk rating as well as selection of the credit spread requires significant judgment. A higher risk rating, as well as an increase in spreads, would result in a decrease in discounted cash flows used, and accordingly the fair value of the loan. Policy loans: Policy loans are not measured at fair value on a recurring basis. Policy loans are a Level 3 measurement as there is no current market since they are specifically tied to the underlying insurance policy. The loans are relatively risk free as they cannot exceed the cash surrender value of the insurance policy. Fair values are estimated by discounting expected cash flows using a risk-free interest rate based on the U.S. Treasury curve. An increase in the risk-free interest rate would result in a decrease in discounted cash flows used, and accordingly the fair value of the loan. Other investments: Level 2 other investments include call options with fair values based on counterparty market prices adjusted for a credit component of the counterparty, net of collateral received. Cash, cash equivalents and short-term investments: Level 1 cash, cash equivalents and short-term investments are highly liquid instruments for which historical cost approximates fair value. Reinsurance recoverable: Level 2 reinsurance recoverable includes embedded derivatives in our modified coinsurance contracts under which we cede or assume business. Fair values of these embedded derivatives are based on the difference between the fair value and the cost basis of the underlying fixed maturities, which are valued consistent with the discussion of fixed maturities above. Assets held in separate accounts: Level 1 assets held in separate accounts consist of mutual funds that are actively traded, allowing us to use current market prices as an estimate of their fair value. Future policy benefits, supplemental contracts without life contingencies and advance premiums and other deposits : Level 3 policy-related financial instruments of investment-type contracts are those not involving significant mortality or morbidity risks. No active market exists for these contracts and they are not measured at fair value on a recurring basis. Fair values for our insurance contracts, other than investment-type contracts, are not required to be disclosed. Fair values for our investment-type contracts with expected maturities, including deferred annuities, funding agreements and supplementary contracts, are determined using discounted cash flow valuation techniques based on current interest rates adjusted to reflect our credit risk and an additional provision for adverse deviation. For certain deposit liabilities with no defined maturities and no surrender charges, including pension-related deposit administration funds, advance premiums and other deposits, fair value is the account value or amount payable on demand. Significant judgment is required in selecting the assumptions used to estimate the fair values of these financial instruments. For contracts with known maturities, increases in current rates will result in a decrease in discounted cash flows and a decrease in the estimated fair value of the policy obligation. Certain annuity contracts include embedded derivatives and are measured at fair value on a recurring basis. These embedded derivatives are a Level 3 measurement. The fair value of the embedded derivatives is based on the discounted excess of projected account values (including a risk margin) over projected guaranteed account values. The key unobservable inputs required in the projection of future values which require management judgment include the risk margin as well as the credit risk of our company. Should the risk margin increase or the credit risk decrease, the discounted cash flows and the estimated fair value of the obligation will increase. Long-term debt: Long-term debt is not measured at fair value on a recurring basis. Long-term debt is a Level 3 measurement. The fair value of our outstanding debt is estimated using a discounted cash flow method based on the market's assessment or our current incremental borrowing rate for similar types of borrowing arrangements adjusted, as needed, to reflect our credit risk. Our selection of the credit spread requires significant judgment. A decrease in the spread will increase the estimated fair value of the outstanding debt. Other liabilities: Level 2 other liabilities include the embedded derivatives in our modified coinsurance contracts under which we cede business. Fair values for the embedded derivatives are based on the difference between the fair value and the cost basis of the underlying fixed maturities. Liabilities related to separate accounts: Separate account liabilities are not measured at fair value on a recurring basis. Level 3 separate account liabilities' fair value is based on the cash surrender value of the underlying contract, which is the cost we would incur to extinguish the liability. Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels September 30, 2015 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total (Dollars in thousands) Assets Corporate securities $ — $ 3,565,630 $ 50,710 $ 3,616,340 Residential mortgage-backed securities — 469,521 5,964 475,485 Commercial mortgage-backed securities — 469,014 90,146 559,160 Other asset-backed securities — 521,067 58,046 579,113 United States Government and agencies 14,559 21,132 9,009 44,700 State, municipal and other governments — 1,445,330 — 1,445,330 Non-redeemable preferred stocks — 82,579 7,784 90,363 Common stocks 4,492 25,688 — 30,180 Other investments — 988 — 988 Cash, cash equivalents and short-term investments 49,951 — — 49,951 Reinsurance recoverable — 2,820 — 2,820 Assets held in separate accounts 617,172 — — 617,172 Total assets $ 686,174 $ 6,603,769 $ 221,659 $ 7,511,602 Liabilities Future policy benefits - index annuity embedded derivatives $ — $ — $ 8,441 $ 8,441 Other liabilities — 60 — 60 Total liabilities $ — $ 60 $ 8,441 $ 8,501 Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels December 31, 2014 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total (Dollars in thousands) Assets Corporate securities $ — $ 3,602,667 $ 64,239 $ 3,666,906 Residential mortgage-backed securities — 491,534 — 491,534 Commercial mortgage-backed securities — 452,804 77,891 530,695 Other asset-backed securities — 405,120 116,141 521,261 United States Government and agencies 15,170 18,569 9,065 42,804 State, municipal and other governments — 1,447,498 — 1,447,498 Non-redeemable preferred stocks — 76,987 8,054 85,041 Common stocks 3,501 24,081 — 27,582 Other investments — 3,558 — 3,558 Cash, cash equivalents and short-term investments 125,217 — — 125,217 Reinsurance recoverable — 3,562 — 3,562 Assets held in separate accounts 683,033 — — 683,033 Total assets $ 826,921 $ 6,526,380 $ 275,390 $ 7,628,691 Liabilities Future policy benefits - index annuity embedded derivatives $ — $ — $ 8,681 $ 8,681 Other liabilities — 173 — 173 Total liabilities $ — $ 173 $ 8,681 $ 8,854 Level 3 Fixed Maturities by Valuation Source - Recurring Basis September 30, 2015 Third-party vendors Priced Total (Dollars in thousands) Corporate securities $ 17,240 $ 33,470 $ 50,710 Residential mortgage-backed securities 5,964 — 5,964 Commercial mortgage-backed securities 90,146 — 90,146 Other asset-backed securities 37,586 20,460 58,046 United States Government and agencies — 9,009 9,009 Total $ 150,936 $ 62,939 $ 213,875 Percent of total 70.6 % 29.4 % 100.0 % December 31, 2014 Third-party vendors Priced internally Total (Dollars in thousands) Corporate securities $ 40,095 $ 24,144 $ 64,239 Commercial mortgage-backed securities 77,891 — 77,891 Other asset-backed securities 95,271 20,870 116,141 United States Government and agencies — 9,065 9,065 Total $ 213,257 $ 54,079 $ 267,336 Percent of total 79.8 % 20.2 % 100.0 % Quantitative Information about Level 3 Fair Value Measurements - Recurring Basis September 30, 2015 Fair Value Valuation Technique Unobservable Input Range (Weighted Average) (Dollars in thousands) Assets Corporate securities $ 38,214 Discounted cash flow Credit spread 1.00% - 12.50% (7.68%) Commercial mortgage-backed 73,084 Discounted cash flow Credit spread 1.50% - 4.65% (3.12%) Other asset-backed securities 13,846 Discounted cash flow Credit spread 1.21% - 7.70% (5.59%) United States Government and agencies 9,009 Discounted cash flow Credit spread 2.02% (2.02%) Non-redeemable preferred stocks 7,784 Discounted cash flow Credit spread 4.23% (4.23%) Total Assets $ 141,937 Liabilities Future policy benefits - index annuity embedded derivatives $ 8,441 Discounted cash flow Credit risk Risk margin 0.85% - 2.15% (1.45%) 0.15% - 0.40% (0.25%) December 31, 2014 Fair Value Valuation Technique Unobservable Input Range (Weighted Average) (Dollars in thousands) Assets Corporate securities $ 41,491 Discounted cash flow Credit spread 0.95% - 6.80% (4.92%) Commercial mortgage-backed 77,891 Discounted cash flow Credit spread 1.75% - 4.00% (2.89%) Other asset-backed securities 26,937 Discounted cash flow Credit spread 0.96% - 6.17% (4.31%) United States Government and agencies 9,065 Discounted cash flow Credit spread 1.80% (1.80%) Non-redeemable preferred stocks 8,054 Discounted cash flow Credit spread 3.34% (3.34%) Total Assets $ 163,438 Liabilities Future policy benefits - index annuity embedded derivatives $ 8,681 Discounted cash flow Credit risk 0.70% - 1.70% (1.10%) The tables above exclude certain securities for which the fair value was based on non-binding broker quotes where we could not reasonably obtain the quantitative unobservable inputs. Level 3 Financial Instruments Changes in Fair Value - Recurring Basis September 30, 2015 Realized and unrealized gains (losses), net Balance, December 31, 2014 Purchases Disposals Included in net income Included in other compre-hensive income Transfers into Level 3 (1) Transfers out of Level 3 (1) Amort-ization included in net income Balance, September 30, 2015 (Dollars in thousands) Assets Corporate securities $ 64,239 $ 12,993 $ (16,061 ) $ — $ (4,321 ) $ 18,451 $ (25,174 ) $ 583 $ 50,710 Residential mortgage-backed securities — 19,353 — — 273 — (13,667 ) 5 5,964 Commercial mortgage-backed securities 77,891 17,286 (688 ) — (2,088 ) — (2,334 ) 79 90,146 Other asset-backed securities 116,141 46,216 (5,225 ) — (324 ) — (98,759 ) (3 ) 58,046 United States Government and agencies 9,065 — — — (61 ) — — 5 9,009 Non-redeemable preferred stocks 8,054 — — — (270 ) — — — 7,784 Total Assets $ 275,390 $ 95,848 $ (21,974 ) $ — $ (6,791 ) $ 18,451 $ (139,934 ) $ 669 $ 221,659 Liabilities Future policy benefits - index annuity embedded derivatives $ 8,681 $ 3,219 $ (713 ) $ (2,746 ) $ — $ — $ — $ — $ 8,441 Total Liabilities $ 8,681 $ 3,219 $ (713 ) $ (2,746 ) $ — $ — $ — $ — $ 8,441 Level 3 Financial Instruments Changes in Fair Value - Recurring Basis September 30, 2014 Realized and unrealized gains (losses), net Balance, December 31, 2013 Purchases Disposals Included in net income Included in other compre-hensive income Transfers into Level 3 (1) Transfers out of Level 3 (1) Amort-ization included in net income Balance, September 30, 2014 (Dollars in thousands) Assets Corporate securities $ 81,994 $ 262 $ (12,957 ) $ (273 ) $ (171 ) $ 13,624 $ (14,960 ) $ (25 ) $ 67,494 Commercial mortgage-backed securities 71,712 2,920 (558 ) — 4,669 — (4,820 ) 71 73,994 Other asset-backed securities 85,835 44,671 (13,730 ) — (32 ) 1,974 (15,477 ) 1,087 104,328 United States Government and agencies 8,044 — — — 121 — — 5 8,170 Non-redeemable preferred stocks 7,795 — — — 352 — — — 8,147 Total Assets $ 255,380 $ 47,853 $ (27,245 ) $ (273 ) $ 4,939 $ 15,598 $ (35,257 ) $ 1,138 $ 262,133 Liabilities Future policy benefits - index annuity embedded derivatives $ 286 $ 6,000 $ (344 ) $ (286 ) $ — $ — $ — $ — $ 5,656 Total Liabilities $ 286 $ 6,000 $ (344 ) $ (286 ) $ — $ — $ — $ — $ 5,656 (1) Transfers into Level 3 represent assets previously priced using an external pricing service with access to observable inputs no longer available and therefore, were priced using non-binding broker quotes. Transfers out of Level 3 include those assets that we are now able to obtain pricing from a third party pricing vendor that uses observable inputs. The fair values of newly issued securities often require additional estimation until a market is created, generally within a few months after issuance. Once a market is created, as was the case for the majority of the security transfers out of the Level 3 category above, Level 2 valuation sources become available. There were no transfers between Level 1 and Level 2 during the periods presented above. Valuation of our Financial Instruments Not Reported at Fair Value by Hierarchy Levels September 30, 2015 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total (Dollars in thousands) Assets Mortgage loans $ — $ — $ 739,554 $ 739,554 Policy loans — — 234,651 234,651 Total assets $ — $ — $ 974,205 $ 974,205 Liabilities Future policy benefits $ — $ — $ 3,655,161 $ 3,655,161 Supplemental contracts without life contingencies — — 305,842 305,842 Advance premiums and other deposits — — 247,887 247,887 Long-term debt — — 69,394 69,394 Liabilities related to separate accounts — — 612,301 612,301 Total liabilities $ — $ — $ 4,890,585 $ 4,890,585 Valuation of our Financial Instruments Not Reported at Fair Value by Hierarchy Levels December 31, 2014 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total (Dollars in thousands) Assets Mortgage loans $ — $ — $ 667,913 $ 667,913 Policy loans — — 230,070 230,070 Total assets $ — $ — $ 897,983 $ 897,983 Liabilities Future policy benefits $ — $ — $ 3,658,279 $ 3,658,279 Supplemental contracts without life contingencies — — 329,651 329,651 Advance premiums and other deposits — — 239,700 239,700 Long-term debt — — 69,772 69,772 Liabilities related to separate accounts — — 677,040 677,040 Total liabilities $ — $ — $ 4,974,442 $ 4,974,442 Level 3 Financial Instruments Measured at Fair Value on a Nonrecurring Basis Certain assets are measured at fair value on a nonrecurring basis, generally mortgage loans or real estate which have been deemed to be impaired during the reporting period. On May 22, 2015, one real estate property was impaired to fair value totaling $1.0 million which resulted in an impairment charge of $0.2 million . There were no mortgage loans or real estate impaired to fair value during the nine months ended September 30, 2014. |