FAIR VALUE OF FINANCIAL INSTRUMENTS

We estimate the fair value of our financial instruments based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the specific asset or liability.

In most cases, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base fair values on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.

We base the estimated fair value of mortgage loans on discounted cash flows, utilizing the market rate of interest for similar loans in effect at the valuation date.

The estimated fair value of policy loans is equivalent to carrying value. We do not make policy loans for amounts in excess of the cash surrender value of the related policy. In all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies or by the policyholders’ account balance for non-traditional policies.

Our other long-term investments consist primarily of holdings in limited liability partnership funds that are valued by the various fund managers and are recorded on the equity method of accounting. In management’s opinion, these values represent fair value.

For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

We calculate the fair value of the liabilities for all of our annuity products based upon the estimated value of the business, using current market rates and forecast assumptions and risk-adjusted discount rates, when relevant observable market data does not exist.

A summary of the carrying value and estimated fair value of our financial instruments at June 30, 2011 and December 31, 2010 is as follows:



	June 30, 2011				December 31, 2010
(In Thousands)	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments
Held-to-maturity fixed maturities	$	5,699	$	5,664	$	6,422	$	6,364
Available-for-sale fixed maturities	2,644,475		2,644,475		2,278,429		2,278,429
Equity securities	166,315		166,315		149,706		149,706
Trading securities	15,058		15,058		12,886		12,886
Mortgage loans	7,273		6,423		7,658		6,497
Policy loans	7,328		7,328		7,875		7,875
Other long-term investments	20,647		20,647		20,041		20,041
Short-term investments	1,500		1,500		1,100		1,100
Cash and cash equivalents	177,414		177,414		180,057		180,057
Accrued investment income	32,211		32,211		28,977		28,977
Liabilities
Policy reserves
Annuity (accumulations) ⁽¹⁾	$	1,003,859	$	962,819	$	965,932	$	948,920
Annuity (benefit payments)	110,213		90,359		102,511		86,874

(1) Annuity accumulations represent deferred annuity contracts which are currently earning interest.

Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.

Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:


•	Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.


•	Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.


•	Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.

Transfers between levels, if any, are recorded as of the beginning of the reporting period.

To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years experience and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.

We validate the prices obtained from pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. In our opinion, the pricing obtained at June 30, 2011 was reasonable.

In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors’ pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable current accounting guidance on fair value measurements.

We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed.

The following tables present the categorization for our financial instruments measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010:



(In Thousands)			Fair Value Measurements
Description	June 30, 2011		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. government and government-sponsored enterprises
U.S. Treasury	$	41,263	$	—	$	41,263	$	—
Agency	106,959		—		106,959		—
States, municipalities and political subdivisions
General obligations
North central - East	131,659		—		131,659		—
North central - West	80,435		—		80,435		—
Northeast	41,295		—		41,295		—
South	112,871		—		112,871		—
West	71,839		—		71,839		—
Special revenue
North central - East	73,451		—		72,511		940
North central - West	54,064		—		54,064		—
Northeast	14,375		—		14,375		—
South	100,186		—		100,186		—
West	58,891		—		58,891		—
Foreign bonds
Canadian	67,006		—		67,006		—
Other foreign	102,965		—		101,850		1,115
Public utilities
Electric	229,974		—		229,974		—
Oil and gas	28,908		—		28,908		—
Other	9,387		—		9,387		—
Corporate bonds
Oil and gas	185,980		—		185,980		—
Chemicals	69,190		—		69,190		—
Basic resources	18,991		—		18,991		—
Construction and materials	21,146		—		21,146		—
Industrial goods and services	169,838		—		169,838		—
Auto and parts	13,250		—		13,250		—
Food and beverage	76,123		—		76,123		—
Personal and household goods	67,123		—		64,674		2,449
Health care	115,708		—		115,708		—
Retail	52,055		—		52,055		—
Media	42,120		—		42,120		—
Travel and leisure	5,829		—		5,829		—
Telecommunications	44,094		—		44,094		—
Utilities	11,119				11,119		—
Banks	148,370		—		148,370		—
Insurance	29,957		—		29,957		—
Real estate	24,341		—		20,934		3,407
Financial services	112,922		—		112,922		—
Technology	30,835		—		30,835		—
Collateralized mortgage obligations
Government	32,691		—		32,691		—
Other	304		—		304		—



Mortgage-backed securities	39,676		—		39,676		—
Asset-backed securities	6,876		—		6,561		315
Redeemable preferred stocks	409		—		409		—
Total Available-For-Sale Fixed Maturities	$	2,644,475	$	—	$	2,636,249	$	8,226
Equity securities
Common stocks
Public utilities
Electric	$	10,865	$	10,865	$	—	$	—
Oil and gas	2,932		2,932		—		—
Other	80		80		—		—
Corporate
Oil and gas	12,220		12,220		—		—
Chemicals	6,383		6,383		—		—
Industrial goods and services	24,530		24,530		—		—
Autos and parts	878		878		—		—
Food and beverage	5,985		5,985		—		—
Personal and household goods	10,586		10,586		—		—
Health care	14,843		14,843		—		—
Retail	3,037		3,037		—		—
Media	144		144		—		—
Telecommunications	6,137		6,137		—		—
Utilities	1,640		1,640		—		—
Banks	44,501		39,694		—		4,807
Insurance	13,226		13,226		—		—
Real estate	1,132		1,132		—		—
Financial services	541		541		—		—
Technology	3,083		3,083		—		—
Nonredeemable preferred stocks	3,572		1,853		1,719		—
Total Available-for-Sale Equity Securities	$	166,315	$	159,789	$	1,719	$	4,807
Total Available-for-Sale Securities	$	2,810,790	$	159,789	$	2,637,968	$	13,033
TRADING
Fixed maturities
Bonds
Foreign bonds
Canadian	1,566		—		1,566		—
Other foreign	1,372		—		1,372		—
Corporate
Basic resources	1,347		—		1,347		—
Food and beverage	1,098		—		1,098		—
Health care	1,952		—		1,952		—
Utilities	1,447		—		1,447		—
Banks	2,383		—		2,383		—
Insurance	495		—		495		—
Real estate	431		—		431		—
Redeemable preferred stocks	2,967		—		2,967		—
Total Trading Securities	$	15,058	$	—	$	15,058	$	—
Short-Term Investments	$	1,500	$	1,500	$	—	$	—
Money Market Accounts	$	83,099	$	83,099	$	—	$	—
Total	$	2,910,447	$	244,388	$	2,653,026	$	13,033



(In Thousands)			Fair Value Measurements
Description	December 31, 2010		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. government and government- sponsored enterprises
U.S. Treasury	$	39,076	$	—	$	39,076	$	—
Agency	103,131		—		103,131		—
States, municipalities and political subdivisions
General obligations
North central - East	127,770		—		127,770		—
North central - West	81,132		—		81,132		—
Northeast	29,525		—		29,525		—
South	99,297		—		99,297		—
West	56,053		—		56,053		—
Special revenue
North central - East	61,093		—		60,092		1,001
North central - West	40,305		—		40,305		—
Northeast	4,743		—		4,743		—
South	74,747		—		74,747		—
West	44,545		—		44,545		—
Foreign bonds
Canadian	72,923		—		72,923		—
Other foreign	89,754		—		88,639		1,115
Public utilities
Electric	218,707		—		218,672		35
Oil and gas	55,284		—		55,284		—
Corporate bonds
Oil and gas	157,511		—		157,511		—
Chemicals	61,343		—		61,343		—
Basic resources	8,625		—		8,625		—
Construction and materials	20,258		—		20,258		—
Industrial goods and services	148,130		—		145,233		2,897
Auto and parts	14,456		—		14,456		—
Food and beverage	74,033		—		72,551		1,482
Personal and household goods	68,189		—		65,686		2,503
Health care	83,342		—		83,342		—
Retail	43,960		—		43,960		—
Media	35,062		—		35,062		—
Travel and leisure	5,866		—		5,866		—
Telecommunications	35,174		—		35,174		—
Utilities	14,141		—		14,141		—
Banks	121,634		—		114,111		7,523
Insurance	26,467		—		26,467		—
Real estate	21,737		—		13,764		7,973
Financial services	96,823		—		95,722		1,101
Technology	16,688		—		16,688		—
Collateralized mortgage obligations	19,577		—		19,577		—
Mortgage-backed securities	2		—		2		—
Asset-backed securities	7,326		—		7,326		—
Total Available-For-Sale Fixed Maturities	$	2,278,429	$	—	$	2,252,799	$	25,630



Equity securities
Common stocks
Public utilities
Electric	$	10,084	$	10,084	$	—	$	—
Oil and gas	2,674		2,674		—		—
Corporate
Oil and gas	11,138		11,138		—		—
Chemicals	6,079		6,079		—		—
Industrial goods and services	23,297		23,297		—		—
Auto and parts	1,626		1,626		—		—
Food and beverage	4,474		4,474		—		—
Personal and household goods	7,770		7,770		—		—
Health care	12,547		12,547		—		—
Retail	728		728		—		—
Travel and leisure	1		1		—		—
Telecommunications	5,288		5,257		31		—
Utilities	1,147		1,147		—		—
Banks	44,053		42,518		—		1,535
Insurance	14,408		14,408		—		—
Real estate	1,546		1,546		—		—
Financial services	267		267		—		—
Technology	1,189		1,189		—		—
Nonredeemable preferred stocks	1,390		1,158		232		—
Total Available-for-Sale Equity Securities	$	149,706	$	147,908	$	263	$	1,535
Total Available-for-Sale Securities	$	2,428,135	$	147,908	$	2,253,062	$	27,165
TRADING
Fixed maturities
Bonds
Foreign bonds	$	2,283	$	—	$	2,283	$	—
Corporate bonds
Oil and gas	2,843		—		2,843		—
Health care	1,917		—		1,917		—
Utilities	1,394		—		1,394		—
Banks	1,198		—		1,198		—
Financial services	384		—		384		—
Redeemable preferred stocks	2,867		1,476		1,391		—
Total Trading Securities	$	12,886	$	1,476	$	11,410	$	—
Short-Term Investments	$	1,100	$	1,100	$	—	$	—
Money Market Accounts	$	34,384	$	34,384	$	—	$	—
Total	$	2,476,505	$	184,868	$	2,264,472	$	27,165

The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.

The fair value of securities that are categorized as Level 2 is determined by management after reviewing market prices obtained from independent pricing services and brokers. Such estimated fair values do not necessarily represent the values for which these securities could have been sold at the reporting date. Our independent pricing services and brokers obtain prices from reputable pricing vendors in the marketplace. They continually monitor and review the external pricing sources, while actively participating to resolve any pricing issues that may arise.

For the six-month period ended June 30, 2011, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases (and disposals) made during the period, which were made from funds held in our money market accounts, and the change in unrealized gains on both fixed maturities and equity securities. There were no significant transfers of securities in or out of Level 1 or Level 2 during the period.

Securities that may be categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities and certain other securities that were determined to be other-than-temporarily impaired in a prior period and for which an active market does not currently exist.

The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities.

The fair value of our Level 3 impaired securities was determined primarily based upon management’s assumptions regarding the timing and amount of future cash inflows. If a security has been written down or the issuer is in bankruptcy, management relies in part on outside opinions from rating agencies, our lien position on the security, general economic conditions and management’s expertise to determine fair value. We have the ability and the positive intent to hold securities until such time that we are able to recover all or a portion of our original investment. If a security does not have a market at the balance sheet date, management will estimate the security’s fair value based on other securities in the market. Management will continue to monitor securities after the balance sheet date to confirm that their estimated fair value is reasonable.

The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended June 30, 2011:



(In Thousands)	States, municipalities and political subdivisions			Foreign bonds		Corporate bonds			Asset-backed securities			Equities		Total
Balance at April 1, 2011	$	1,000		$	1,115	$	22,742		$	1,423		$	4,803	$	31,083
Realized gains ⁽¹⁾	—			—		—			12			—		12
Unrealized gains ⁽¹⁾	—			—		415			1			—		416
Amortization	—			—		—			(15		)	—		(15		)
Purchases	—			—		—			13			4		17
Disposals	(60		)	—		(145		)	(1,119		)	—		(1,324		)
Transfers in	—			—		—			—			—		—
Transfers out	—			—		(17,156		)	—			—		(17,156		)
Balance at June 30, 2011	$	940		$	1,115	$	5,856		$	315		$	4,807	$	13,033

(1) Realized gains are recorded as a component of current operations whereas unrealized gains are recorded as a component of comprehensive income.

The securities reported as “transfers out” relate to securities where an updated market value was available and the securities were transferred from Level 3 to either Level 1 or 2. The reported “disposals” relate to the receipt of principal on calls or sinking fund bonds, in accordance with the indentures.

The following table provides a summary of the changes in fair value of our Level 3 securities for the six-month period ended June 30, 2011:



(In Thousands)	States, municipalities and political subdivisions			Foreign bonds		Public utilities			Corporate bonds			Asset-backed securities			Equities		Total
Balance at January 1, 2011	$	1,001		$	1,115	$	35		$	23,479		$	—		$	1,535	$	27,165
Realized gains ⁽¹⁾	—			—		—			—			12			—		12
Unrealized gains (losses) ⁽¹⁾	—			—		(2		)	(50		)	1			—		(51		)
Amortization	—			—		—			—			(15		)	—		(15		)
Purchases	—			—		—			—			1,436			3,272		4,708
Disposals	(61		)	—		(33		)	(417		)	(1,119		)	—		(1,630		)
Transfers in	—			—		—			—			—			—		—
Transfers out	—			—		—			(17,156		)	—			—		(17,156		)
Balance at June 30, 2011	$	940		$	1,115	$	—		$	5,856		$	315		$	4,807	$	13,033

(1) Realized gains are recorded as a component of current operations whereas unrealized gains (losses) are recorded as a component of comprehensive income.

The equity securities reported as “purchases” relate to our acquisition of Mercer Insurance Group. As a part of the acquisition financing, we purchased securities in the Federal Home Loan Bank of Des Moines, as a requirement to obtain membership and secure the loan. These securities were classified as Level 3 as we had no observable market price at June 30, 2011.