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Fair Value of Financial Instruments (Notes) | 9 Months Ended
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Sep. 30, 2016
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | (4) Fair Value of Financial Instruments Fair value is the price that would be received upon the sale of an asset in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We classify and disclose all invested assets carried at fair value in one of the following three categories:
| • | Level 1. Quoted prices for identical instruments in active markets. Level 1 primarily consists of financial instruments whose value is based on quoted market prices in active markets, such as exchange-traded common stocks and actively traded mutual fund investments;
| • | Level 2. Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. Various inputs are considered in deriving the fair value of the underlying financial instrument, including interest rate, credit spread, and foreign exchange rates. All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include: certain public and private corporate fixed-maturity and equity securities; government or agency securities; certain mortgage- and asset-backed securities and bifurcated conversion options; and
| • | Level 3. Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Level 3 consists of financial instruments whose fair value is estimated based on industry-standard pricing methodologies and models using significant inputs not based on, nor corroborated by, readily available market information. Valuations for this category primarily consist of non-binding broker quotes. Financial instruments in this category primarily include less liquid fixed-maturity corporate securities, mortgage-and asset-backed securities.
As of each reporting period, all assets and liabilities recorded at fair value are classified in their entirety based on the lowest level of input (Level 3 being the lowest) that is significant to the fair value measurement. Significant levels of estimation and judgment are required to determine the fair value of certain of our investments. The factors influencing these estimations and judgments are subject to change in subsequent reporting periods. The estimated fair value and hierarchy classifications for assets and liabilities that are measured at fair value on a recurring basis were as follows:
|  | September 30, 2016 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
|  | (In thousands) |
Fair value assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies |  | $ | - |  |  | $ | 16,061 |  |  | $ | - |  |  | $ | 16,061 |
Foreign government |  |  | - |  |  |  | 131,730 |  |  |  | - |  |  |  | 131,730 |
States and political subdivisions |  |  | - |  |  |  | 46,459 |  |  |  | - |  |  |  | 46,459 |
Corporates |  |  | 3,374 |  |  |  | 1,317,982 |  |  |  | 1,724 |  |  |  | 1,323,080 |
Residential mortgage-backed securities |  |  | - |  |  |  | 83,984 |  |  |  | 1,294 |  |  |  | 85,278 |
Commercial mortgage-backed securities |  |  | - |  |  |  | 108,775 |  |  |  | - |  |  |  | 108,775 |
Other asset-backed securities |  |  | - |  |  |  | 46,321 |  |  |  | 3,470 |  |  |  | 49,791 |
Total fixed-maturity securities |  |  | 3,374 |  |  |  | 1,751,312 |  |  |  | 6,488 |  |  |  | 1,761,174 |
Equity securities |  |  | 41,821 |  |  |  | 5,644 |  |  |  | 74 |  |  |  | 47,539 |
Trading securities |  |  | - |  |  |  | 12,259 |  |  |  | - |  |  |  | 12,259 |
Separate accounts |  |  | - |  |  |  | 2,347,816 |  |  |  | - |  |  |  | 2,347,816 |
Total fair value assets |  | $ | 45,195 |  |  | $ | 4,117,031 |  |  | $ | 6,562 |  |  | $ | 4,168,788 |
Fair value liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Separate accounts |  | $ | - |  |  | $ | 2,347,816 |  |  | $ | - |  |  | $ | 2,347,816 |
Total fair value liabilities |  | $ | - |  |  | $ | 2,347,816 |  |  | $ | - |  |  | $ | 2,347,816 |
|  | December 31, 2015 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
|  | (In thousands) |
Fair value assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies |  | $ | - |  |  | $ | 20,659 |  |  | $ | - |  |  | $ | 20,659 |
Foreign government |  |  | - |  |  |  | 120,216 |  |  |  | - |  |  |  | 120,216 |
States and political subdivisions |  |  | - |  |  |  | 40,565 |  |  |  | - |  |  |  | 40,565 |
Corporates |  |  | 2,146 |  |  |  | 1,299,613 |  |  |  | 3 |  |  |  | 1,301,762 |
Residential mortgage-backed securities |  |  | - |  |  |  | 100,493 |  |  |  | 732 |  |  |  | 101,225 |
Commercial mortgage-backed securities |  |  | - |  |  |  | 99,986 |  |  |  | - |  |  |  | 99,986 |
Other asset-backed securities |  |  | - |  |  |  | 47,046 |  |  |  | - |  |  |  | 47,046 |
Total fixed-maturity securities |  |  | 2,146 |  |  |  | 1,728,578 |  |  |  | 735 |  |  |  | 1,731,459 |
Equity securities |  |  | 41,341 |  |  |  | 6,450 |  |  |  | 48 |  |  |  | 47,839 |
Trading securities |  |  | - |  |  |  | 5,358 |  |  |  | - |  |  |  | 5,358 |
Separate accounts |  |  | - |  |  |  | 2,063,899 |  |  |  | - |  |  |  | 2,063,899 |
Total fair value assets |  | $ | 43,487 |  |  | $ | 3,804,285 |  |  | $ | 783 |  |  | $ | 3,848,555 |
Fair value liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Separate accounts |  | $ | - |  |  | $ | 2,063,899 |  |  | $ | - |  |  | $ | 2,063,899 |
Total fair value liabilities |  | $ | - |  |  | $ | 2,063,899 |  |  | $ | - |  |  | $ | 2,063,899 |
In assessing fair value of our investments, we use a third-party pricing service for approximately 95% of our securities that are measured at fair value on a recurring basis. The remaining securities are primarily thinly traded securities such as private placements and are valued using models based on observable inputs on public corporate spreads having similar characteristics (e.g., sector, average life and quality rating) and liquidity and yield based on quality rating, average life and treasury yields. All observable data inputs are corroborated by independent third-party data. In the absence of sufficient observable inputs, we utilize non-binding broker quotes, which are reflected in our Level 3 classification as we are unable to evaluate the valuation technique(s) or significant inputs used to develop the quotes. Therefore, we do not internally develop the quantitative unobservable inputs used in measuring the fair value of Level 3 investments. However, we do corroborate pricing information provided by our third-party pricing servicing by performing a review of selected securities. Our review activities include obtaining detailed information about the assumptions, inputs and methodologies used in pricing the security; documenting this information; and corroborating it by comparison to independently obtained prices and or independently developed pricing methodologies. Furthermore, we perform internal reasonableness assessments on fair value determinations within our portfolio throughout the quarter and at quarter-end, including pricing variance analyses and comparisons to alternative pricing sources and benchmark returns. If a fair value appears unusual relative to these assessments, we will re-examine the inputs and may challenge a fair value assessment made by the pricing service. If there is a known pricing error, we will request a reassessment by the pricing service. If the pricing service is unable to perform the reassessment on a timely basis, we will determine the appropriate price by requesting a reassessment from an alternative pricing service or other qualified source as necessary. We do not adjust quotes or prices except in a rare circumstance to resolve a known error. Because many fixed-maturity securities do not trade on a daily basis, third party pricing services generally determine fair value using industry-standard methodologies, which vary by asset class. For corporates, governments, and agency securities, these methodologies include developing prices by incorporating available market information such as U.S. Treasury curves, benchmarking of similar securities including new issues, sector groupings, quotes from market participants and matrix pricing. Observable information is compiled and integrates relevant credit information, perceived market movements and sector news. Additionally, security prices are periodically back-tested to validate and/or refine models as conditions warrant. Market indicators and industry and economic events are also monitored as triggers to obtain additional data. For certain structured securities (such as mortgage-and asset-backed securities) with limited trading activity, third-party pricing services generally use industry-standard pricing methodologies that incorporate market information, such as index prices, or discounting expected future cash flows based on underlying collateral, and quotes from market participants, to estimate fair value. If these measures are not deemed observable for a particular security, the security will be classified as Level 3 in the fair value hierarchy. Where specific market information is unavailable for certain securities, pricing models produce estimates of fair value primarily using Level 2 inputs along with certain Level 3 inputs. These models include matrix pricing. The pricing matrix uses current treasury rates and credit spreads received from third-party sources to estimate fair value. The credit spreads incorporate the issuer’s industry- or issuer-specific credit characteristics and the security’s time to maturity, if warranted. Remaining unpriced securities are valued using an estimate of fair value based on indicative market prices that include significant unobservable inputs not based on, nor corroborated by, market information, including the utilization of non-binding broker quotes. The roll-forward of the Level 3 assets measured at fair value on a recurring basis was as follows:
|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2016 |  |  | 2015 |  |  | 2016 |  |  | 2015 |
|  | (In thousands) |
Level 3 assets, beginning of period |  | $ | 717 |  |  | $ | 862 |  |  | $ | 783 |  |  | $ | 1,165 |
Net unrealized gains (losses) included in other comprehensive income |  |  | 12 |  |  |  | 2 |  |  |  | 17 |  |  |  | (4 | )
Realized gains (losses) and accretion (amortization) recognized in earnings, including OTTI |  |  | 1 |  |  |  | - |  |  |  | 6 |  |  |  | - |
Purchases(1) |  |  | 4,183 |  |  |  | - |  |  |  | 4,183 |  |  |  | - |
Sales |  |  | - |  |  |  | - |  |  |  | (3 | ) |  |  | - |
Settlements |  |  | (25 | ) |  |  | (35 | ) |  |  | (98 | ) |  |  | (111 | )
Transfers into Level 3 |  |  | 1,675 |  |  |  | - |  |  |  | 1,676 |  |  |  | 2 |
Transfers out of Level 3 |  |  | (1 | ) |  |  | (2 | ) |  |  | (2 | ) |  |  | (225 | )
Level 3 assets, end of period |  | $ | 6,562 |  |  | $ | 827 |  |  | $ | 6,562 |  |  | $ | 827 |
(1) | During the three and nine months ended September 30, 2016, purchases of Level 3 assets primarily consisted of newly issued fixed maturity securities in the third quarter for which observable inputs, most notably quoted prices, used to derive valuations are not yet readily available.
We obtain independent pricing quotes based on observable inputs as of the end of the reporting period for all securities in Level 2. Those inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, quoted prices for similar instruments in markets that are not active, and other relevant data. We monitor these inputs for market indicators, industry and economic events. We recognize transfers into new levels and out of previous levels as of the end of the reporting period, including interim reporting periods, as applicable. There were no material transfers between Level 1 and Level 2 or between Level 1 and Level 3 during the three and nine months ended September 30, 2016. There were no material transfers between Level 1 and Level 2 or between Level 1 and Level 3 during the three months ended September 30, 2015. During the nine months ended September 30, 2015, we transferred a $1.0 million equity security from Level 1 to Level 2 as it was not consistently trading in an active market. There were no material transfers between Level 1 and Level 3 during the nine months ended September 30, 2015. The table below is a summary of the estimated fair value for financial instruments.
|  | September 30, 2016 |  |  | December 31, 2015 |
|  | Carrying value |  |  | Estimated fair value |  |  | Carrying value |  |  | Estimated fair value |
|  | (In thousands) |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity securities (available-for-sale) |  | $ | 1,761,174 |  |  | $ | 1,761,174 |  |  | $ | 1,731,459 |  |  | $ | 1,731,459 |
Fixed-maturity security (held-to-maturity) |  |  | 454,000 |  |  |  | 500,823 |  |  |  | 365,220 |  |  |  | 371,742 |
Equity securities |  |  | 47,539 |  |  |  | 47,539 |  |  |  | 47,839 |  |  |  | 47,839 |
Trading securities |  |  | 12,259 |  |  |  | 12,259 |  |  |  | 5,358 |  |  |  | 5,358 |
Policy loans |  |  | 30,801 |  |  |  | 30,801 |  |  |  | 28,627 |  |  |  | 28,627 |
Deposit asset underlying 10% coinsurance agreement |  |  | 198,275 |  |  |  | 198,275 |  |  |  | 181,889 |  |  |  | 181,889 |
Separate accounts |  |  | 2,347,816 |  |  |  | 2,347,816 |  |  |  | 2,063,899 |  |  |  | 2,063,899 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Notes payable(1) |  | $ | 372,827 |  |  | $ | 410,296 |  |  | $ | 372,552 |  |  | $ | 398,649 |
Surplus note(1) |  |  | 453,247 |  |  |  | 498,256 |  |  |  | 364,424 |  |  |  | 371,498 |
Separate accounts |  |  | 2,347,816 |  |  |  | 2,347,816 |  |  |  | 2,063,899 |  |  |  | 2,063,899 |
(1) | Carrying value amounts shown are net of issuance costs.
The fair values of financial instruments presented above are estimates of the fair values at a specific point in time using various sources and methods, including market quotations and a complex matrix system that takes into account issuer sector, quality, and spreads in the current marketplace. Recurring fair value measurements. Estimated fair values of investments in available-for-sale fixed-maturity securities are principally a function of current spreads and interest rates that are corroborated by independent third-party data. Therefore, the fair values presented are indicative of amounts we could realize or settle at the respective balance sheet date. We do not necessarily intend to dispose of or liquidate such instruments prior to maturity. Trading securities, which primarily consist of fixed-maturity securities, are carried at fair value. Equity securities, including common and nonredeemable preferred stocks, are carried at fair value. Segregated funds in separate accounts are carried at the underlying value of the variable insurance contracts, which is fair value. Nonrecurring fair value measurements. The estimated fair value of the held-to-maturity fixed-maturity security, which is classified as a Level 3 fair value measurement, is derived using the credit spread on similarly rated debt securities and the hypothetical spread of the security’s credit enhancement feature. Policy loans, which are categorized as Level 3 fair value measurements, are carried at the unpaid principal balances. The fair value of policy loans approximate the unpaid principal balances as the timing of repayment is uncertain and the loans are collateralized by the amount of the policy. The deposit asset underlying a 10% coinsurance agreement represents the value of the assets necessary to back the economic reserves held in support of the reinsurance agreement. The carrying value of this deposit asset approximates fair value, which is categorized as Level 3 in the fair value hierarchy. Notes payable represent our publicly-traded senior notes and are valued as a Level 2 fair value measurement using the quoted market price for our notes. The estimated fair value of the Surplus Note is derived by using an assumed credit spread we would expect if Vidalia Re was a credit-rated entity and the hypothetical spread of the Surplus Note’s subordinated structure. The Surplus Note is classified as a Level 3 fair value measurement. The carrying amounts for cash and cash equivalents, receivables, accrued investment income, accounts payable, cash collateral and payables for security transactions approximate their fair values due to the short-term nature of these instruments. Consequently, such financial instruments are not included in the above table.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=66048111&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13433-108611 + Details
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