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.

When possible, 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 estimates of fair value on market prices obtained from independent pricing services and brokers or on valuation techniques 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. Our valuation techniques are discussed in more detail later in this section.

The fair value of our mortgage loans is determined by modeling performed by us based on the stated principal and coupon payments provided for in the loan agreement. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value, which is a Level 3 fair value measurement.

The fair value of our policy loans is equivalent to carrying value, which is a reasonable estimate of fair 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 our interests in limited liability partnerships that are recorded on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management’s opinion, these values represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund managers.

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.

Policy reserves are developed and recorded for deferred annuities, which is an interest-sensitive product, and income annuities. The fair value of the reserve liability for these annuity products is based upon an estimate of the discounted pretax cash flows that are forecast for the underlying business, which is a Level 3 fair value measurement. We base the discount rate on the current U.S. Treasury spot yield curve, which is then risk-adjusted for nonperformance risk and, for interest-sensitive business, market risk factors. The risk-adjusted discount rate is developed using interest rates that are available in the market and representative of the risks applicable to the underlying business.

A summary of the carrying value and estimated fair value of our financial instruments at March 31, 2014 and December 31, 2013 is as follows:



	March 31, 2014				December 31, 2013
	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments
Fixed maturities:
Held-to-maturity securities	$	656	$	644	$	669	$	656
Available-for-sale securities	2,805,723		2,805,723		2,751,256		2,751,256
Trading securities	16,095		16,095		9,940		9,940
Equity securities:
Available-for-sale securities	232,377		232,377		229,368		229,368
Trading securities	3,037		3,037		2,487		2,487
Mortgage loans	4,724		4,368		4,724		4,423
Policy loans	6,177		6,177		6,261		6,261
Other long-term investments	46,513		46,513		44,946		44,946
Short-term investments	800		800		800		800
Cash and cash equivalents	68,663		68,663		92,193		92,193
Liabilities
Policy reserves
Annuity (accumulations) ⁽¹⁾	$	954,214	$	920,038	$	941,636	$	925,832
Annuity (benefit payments)	142,900		94,163		140,276		94,805

(1) Annuity accumulations represent deferred annuity contracts that 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 independent 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 March 31, 2014 and December 31, 2013 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 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 in our Consolidated Balance Sheets at March 31, 2014 and December 31, 2013:



March 31, 2014			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury	$	32,755	$	—	$	32,755	$	—
U.S. government agency	308,680		—		308,680		—
States, municipalities and political subdivisions	727,596		—		726,898		698
Foreign bonds	163,739		—		163,739		—
Public utilities	215,676		—		215,676		—
Corporate bonds
Energy	160,162		—		160,162		—
Industrials	232,623		—		232,623		—
Consumer goods and services	175,741		—		174,322		1,419
Health care	85,541		—		85,541		—
Technology, media and telecommunications	121,261		—		121,261		—
Financial services	250,444		—		238,741		11,703
Mortgage-backed securities	21,105		—		21,105		—
Collateralized mortgage obligations	307,019		—		307,019		—
Asset-backed securities	3,381		—		1,468		1,913
Total Available-for-Sale Fixed Maturities	$	2,805,723	$	—	$	2,789,990	$	15,733
Equity securities
Common stocks
Public utilities	$	17,462	$	17,462	$	—	$	—
Energy	14,656		14,656		—		—
Industrials	45,449		45,430		19		—
Consumer goods and services	21,293		21,293		—		—
Health care	24,945		24,945		—		—
Technology, media and telecommunications	13,322		13,322		—		—
Financial services	90,277		86,322		64		3,891
Nonredeemable preferred stocks	4,973		1,763		3,210		—
Total Available-for-Sale Equity Securities	$	232,377	$	225,193	$	3,293	$	3,891
Total Available-for-Sale Securities	$	3,038,100	$	225,193	$	2,793,283	$	19,624
TRADING
Bonds
Foreign bonds	$	1,252	$	—	$	1,252	$	—
Corporate bonds
Industrials	1,559		—		1,559		—
Consumer goods and services	1,096		—		1,096		—
Health care	2,172		—		2,172		—



Technology, media and telecommunications	2,925		—		2,925		—
Financial services	3,493		—		3,493		—
Redeemable preferred stocks	3,598		3,598		—		—
Equity securities
Energy	544		544		—		—
Consumer goods and services	30		30		—		—
Health care	383		383		—		—
Technology, media and telecommunications	379		379		—		—
Nonredeemable preferred stocks	1,701		1,701		—		—
Total Trading Securities	$	19,132	$	6,635	$	12,497	$	—
Short-Term Investments	$	800	$	800	$	—	$	—
Money Market Accounts	$	16,259	$	16,259	$	—	$	—
Total Assets Measured at Fair Value	$	3,074,291	$	248,887	$	2,805,780	$	19,624



December 31, 2013			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury	$	33,895	$	—	$	33,895	$	—
U.S. government agency	269,583		—		269,583		—
States, municipalities and political subdivisions	713,907		—		713,209		698
Foreign bonds	172,856		—		172,856		—
Public utilities	218,576		—		218,576		—
Corporate bonds
Energy	161,010		—		161,010		—
Industrials	237,028		—		237,028		—
Consumer goods and services	167,914		—		166,460		1,454
Health care	92,946		—		92,946		—
Technology, media and telecommunications	120,966		—		120,966		—
Financial services	241,751		—		229,725		12,026
Mortgage-backed securities	22,066		—		22,066		—
Collateralized mortgage obligations	294,763		—		294,763		—
Asset-backed securities	3,995		—		1,966		2,029
Total Available-for-Sale Fixed Maturities	$	2,751,256	$	—	$	2,735,049	$	16,207
Equity securities
Common stocks
Public utilities	$	16,272	$	16,272	$	—	$	—
Energy	14,363		14,363		—		—
Industrials	46,099		46,083		16		—
Consumer goods and services	21,258		21,258		—		—
Health care	24,998		24,998		—		—
Technology, media and telecommunications	13,304		13,304		—		—
Financial services	88,262		84,419		62		3,781
Nonredeemable preferred stocks	4,812		1,714		3,098		—
Total Available-for-Sale Equity Securities	$	229,368	$	222,411	$	3,176	$	3,781
Total Available-for-Sale Securities	$	2,980,624	$	222,411	$	2,738,225	$	19,988
TRADING
Bonds
Foreign bonds	$	1,253	$	—	$	1,253	$	—
Corporate bonds
Industrials	1,122		—		1,122		—
Consumer goods and services	106		—		106		—
Health care	1,154		—		1,154		—
Technology, media and telecommunications	2,054		—		2,054		—
Financial services	1,866		—		1,866		—



Redeemable preferred stocks	2,385		2,385		—		—
Equity securities
Energy	563		563		—		—
Consumer goods and services	39		39		—		—
Health care	332		332		—		—
Nonredeemable preferred stocks	1,553		1,553		—		—
Total Trading Securities	$	12,427	$	4,872	$	7,555	$	—
Short-Term Investments	$	800	$	800	$	—	$	—
Money Market Accounts	$	37,811	$	37,811	$	—	$	—
Total Assets Measured at Fair Value	$	3,031,662	$	265,894	$	2,745,780	$	19,988

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 three-month period ended March 31, 2014, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities. There were no transfers of securities between Level 1 and Level 2 during the period.

Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities 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. If pricing cannot be obtained from these sources, which occurs on a limited basis, management will perform a cash flow analysis, using an appropriate risk-adjusted discount rate, on the underlying security to estimate fair value.

The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended March 31, 2014:



	States, municipalities and political subdivisions		Corporate bonds			Asset-backed securities			Equities			Total
Balance at January 1, 2014	$	698	$	13,480		$	2,029		$	3,781		$	19,988
Unrealized losses⁽¹⁾	—		(62		)	(5		)	—			(67		)
Purchases	—		—			—			144			144
Disposals	—		(296		)	(111		)	(34		)	(441		)
Balance at March 31, 2014	$	698	$	13,122		$	1,913		$	3,891		$	19,624

(1) Unrealized gains (losses) are recorded as a component of comprehensive income.

The fixed maturities reported as disposals relate to the receipt of principal on calls or sinking fund bonds, in accordance with the indentures. The reported transfers are the result of stale pricing due to a lack of current trading activity for the underlying securities.