FAIR VALUES OF FINANCIAL INSTRUMENTS

For financial instruments, the FASB provides guidance which defines fair value, establishes a framework for measuring fair value under GAAP, and requires additional disclosures about fair value measurements. In compliance with this GAAP guidance, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (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 instrument.

Financial assets and liabilities recorded at fair value on the Condensed Consolidated Balance Sheets are categorized as follows:

Level 1: Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. These generally provide the most reliable evidence and are used to measure fair value whenever available. The Company's Level 1 assets are equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.

Level 2: Fair value is based upon significant inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable for substantially the full term of the asset or liability through corroboration with observable market data as of the reporting date. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, model-derived valuations whose inputs are observable or whose significant value drivers are observable and other observable inputs. The Company’s Level 2 assets include fixed maturity debt securities (corporate and private bonds, government or agency securities, asset-backed and mortgage-backed securities), and preferred stock. Valuations are generally obtained from third party pricing services for identical or comparable assets or determined through use of valuation methodologies using observable market inputs.

Level 3: Fair value is based on significant unobservable inputs which reflect the entity’s or third party pricing service’s assumptions about the assumptions market participants would use in pricing an asset or liability. The Company’s Level 3 assets are over-the-counter derivative contracts and the Company’s Level 3 liabilities consist of share-based compensation obligations and certain product-related embedded derivatives. Valuations are estimated based on non-binding broker prices or internally developed valuation models or methodologies, discounted cash flow models and other similar techniques.

The following tables set forth the Company’s assets and liabilities that are measured at fair value on a recurring basis as of the date indicated:



	September 30, 2017
	Total		Level 1	Level 2	Level 3
	(In thousands)

Debt securities, available for sale	$	3,025,627	—	3,025,627	—
Equity securities, available for sale	19,976		19,976	—	—
Derivatives, index options	163,536		—	—	163,536

Total assets	$	3,209,139	19,976	3,025,627	163,536

Policyholder account balances (a)	$	175,221	—	—	175,221
Other liabilities (b)	16,641		—	—	16,641

Total liabilities	$	191,862	—	—	191,862

During the three and nine months ended September 30, 2017, the Company had no transfers into or out of Levels 1, 2 or 3.



	December 31, 2016
	Total		Level 1	Level 2	Level 3
	(In thousands)

Debt securities, available for sale	$	3,042,050	—	3,042,050	—
Equity securities, available for sale	18,313		18,313	—	—
Derivatives, index options	120,644		—	—	120,644

Total assets	$	3,181,007	18,313	3,042,050	120,644

Policyholder account balances (a)	$	122,666	—	—	122,666
Other liabilities (b)	12,027		—	—	12,027

Total liabilities	$	134,693	—	—	134,693

(a) Represents the fair value of certain product-related embedded derivatives that were recorded at fair value.

(b) Represents the liability for share-based compensation.

The following tables present, by pricing source and fair value hierarchy level, the Company’s assets that are measured at fair value on a recurring basis:



	September 30, 2017
	Total			Level 1		Level 2		Level 3
	(In thousands)

Debt securities, available for sale:
Priced by third-party vendors	$	3,025,627		—		3,025,627		—
Priced internally	—			—		—		—
Subtotal	3,025,627			—		3,025,627		—

Equity securities, available for sale:
Priced by third-party vendors	19,976			19,976		—		—
Priced internally	—			—		—		—
Subtotal	19,976			19,976		—		—

Derivatives, index options:
Priced by third-party vendors	163,536			—		—		163,536
Priced internally	—			—		—		—
Subtotal	163,536			—		—		163,536

Total	$	3,209,139		19,976		3,025,627		163,536

Percent of total	100.0		%	0.6	%	94.3	%	5.1	%



	December 31, 2016
	Total			Level 1		Level 2		Level 3
	(In thousands)

Debt securities, available for sale:
Priced by third-party vendors	$	3,042,050		—		3,042,050		—
Priced internally	—			—		—		—
Subtotal	3,042,050			—		3,042,050		—

Equity securities, available for sale:
Priced by third-party vendors	18,313			18,313		—		—
Priced internally	—			—		—		—
Subtotal	18,313			18,313		—		—

Derivatives, index options:
Priced by third-party vendors	120,644			—		—		120,644
Priced internally	—			—		—		—
Subtotal	120,644			—		—		120,644

Total	$	3,181,007		18,313		3,042,050		120,644

Percent of total	100.0		%	0.6	%	95.6	%	3.8	%

The following tables provide additional information about fair value measurements for which significant unobservable (Level 3) inputs were utilized to determine fair value.



	For the Three Months Ended September 30, 2017
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)

Balance at July 1, 2017	$	—	—	149,341		149,341		173,356
Total realized and unrealized gains (losses):
Included in net income	—		—	45,130		45,130		48,927
Purchases, sales, issuances and settlements, net:
Purchases	—		—	19,847		19,847		19,847
Sales	—		—	—		—		—
Issuances	—		—	—		—		531
Settlements	—		—	(50,782	)	(50,782	)	(50,799	)
Transfers into (out of) Level 3	—		—	—		—		—

Balance at end of period	$	—	—	163,536		163,536		191,862

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period:
Net investment income	$	—	—	16,436		16,436		—
Benefits and expenses	—		—	—		—		17,195

Total	$	—	—	16,436		16,436		17,195



	For the Three Months ended September 30, 2016
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)

Balance at July 1, 2016	$	—	—	63,319		63,319		81,056
Total realized and unrealized gains (losses):
Included in net income	—		—	19,113		19,113		13,492
Purchases, sales, issuances and settlements, net:
Purchases	—		—	18,848		18,848		18,848
Sales	—		—	—		—		—
Issuances	—		—	—		—		388
Settlements	—		—	(11,183	)	(11,183	)	(11,255	)
Transfers into (out of) Level 3	—		—	—		—		—

Balance at end of period	$	—	—	90,097		90,097		102,529

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period:
Net investment income	$	—	—	23,851		23,851		—
Benefits and expenses	—		—	—		—		25,150

Total	$	—	—	23,851		23,851		25,150



	Nine Months Ended September 30, 2017
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)

Beginning balance, January 1, 2017	$	—	—	120,644		120,644		134,693
Total realized and unrealized gains (losses):
Included in net income	—		—	138,552		138,552		152,569
Purchases, sales, issuances and settlements, net:
Purchases	—		—	55,226		55,226		55,226
Sales	—		—	—		—
Issuances	—		—	—		—		1,275
Settlements	—		—	(150,886	)	(150,886	)	(151,901	)
Transfers into (out of) Level 3	—		—	—		—		—

Balance at end of period	$	—	—	163,536		163,536		191,862

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period:
Net investment income	$	—	—	83,540		83,540		—
Other operating expenses	—		—	—		—		87,894

Total	$	—	—	83,540		83,540		87,894



	Nine Months Ended September 30, 2016
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)

Beginning balance, January 1, 2016	$	—	—	38,409		38,409		66,028
Total realized and unrealized gains (losses):
Included in net income	—		—	8,307		8,307		(7,691	)
Purchases, sales, issuances and settlements, net:
Purchases	—		—	56,387		56,387		56,387
Sales	—		—	—		—		—
Issuances	—		—	—		—		921
Settlements	—		—	(13,006	)	(13,006	)	(13,116	)
Transfers into (out of) Level 3	—		—	—		—		—

Balance at end of period	$	—	—	90,097		90,097		102,529

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period:
Net investment income	$	—	—	15,628		15,628		—
Other operating expenses	—		—	—		—		13,582

Total	$	—	—	15,628		15,628		13,582

The following table presents the valuation method for financial assets and liabilities categorized as level 3, as well as the unobservable inputs used in the valuation of those financial instruments:



	September 30, 2017
	Fair Value		Valuation Technique	Unobservable Input
	(In thousands)

Derivatives, index options	$	163,536	Broker prices	Implied volatility
				Inputs from broker proprietary models

Total assets	$	163,536

Policyholder account balances	$	175,221	Deterministic cash flow model	Projected option cost
Other liabilities	16,641		Black-Scholes model	Expected term
				Forfeiture assumptions

Total liabilities	$	191,862



	December 31, 2016
	Fair Value		Valuation Technique	Unobservable Input
	(In thousands)

Derivatives, index options	$	120,644	Broker prices	Implied volatility
				Inputs from broker proprietary models

Total assets	$	120,644

Policyholder account balances	$	122,666	Deterministic cash flow model	Projected option cost
Other liabilities	12,027		Black-Scholes model	Expected term
				Forfeiture assumptions

Total liabilities	$	134,693

Realized gains (losses) on debt and equity securities are reported in the Condensed Consolidated Statements of Earnings as net investment gains (losses) with liabilities reported as expenses. Unrealized gains (losses) on available for sale debt and equity securities are reported as other comprehensive income (loss) within the stockholders' equity section of the Condensed Consolidated Balance Sheet.

The fair value hierarchy classifications are reviewed each reporting period. Reclassification of certain financial assets and liabilities may result based on changes in the observability of valuation attributes. Reclassifications are reported as transfers into and out of Level 3 at the beginning fair value for the reporting period in which the changes occur.

The carrying amounts and fair values of the Company's financial instruments are as follows:



	September 30, 2017
				Fair Value Hierarchy Level
	Carrying Values		Fair Values	Level 1	Level 2	Level 3
	(In thousands)
ASSETS
Investments in debt and equity securities:
Securities held to maturity	$	7,264,995	7,498,922	—	7,498,922	—
Securities available for sale	3,045,603		3,045,603	19,976	3,025,627	—

Cash and cash equivalents	170,560		170,560	170,560	—	—
Mortgage loans	188,623		189,739	—	—	189,739
Policy loans	57,466		102,536	—	—	102,536
Other loans	9,786		10,091	—	—	10,091
Derivatives, index options	163,536		163,536	—	—	163,536
Short-term investments	—		—	—	—	—
Life interest in Trust	7,550		12,775	—	—	12,775

LIABILITIES
Deferred annuity contracts	$	7,806,058	7,418,285	—	—	7,418,285
Immediate annuity and supplemental contracts	439,440		469,348	—	—	469,348



	December 31, 2016
				Fair Value Hierarchy Level
	Carrying Values		Fair Values	Level 1	Level 2	Level 3
	(In thousands)
ASSETS
Investments in debt and equity securities:
Securities held to maturity	$	7,159,259	7,337,611	—	7,337,611	—
Securities available for sale	3,060,363		3,060,363	18,313	3,042,050	—

Cash and cash equivalents	51,247		51,247	51,247	—	—
Mortgage loans	174,534		176,890	—	—	176,890
Policy loans	58,699		101,092	—	—	101,092
Other loans	14,343		14,898	—	—	14,898
Derivatives, index options	120,644		120,644	—	—	120,644
Life interest in Trust	7,550		12,775	—	—	12,775

LIABILITIES
Deferred annuity contracts	$	7,739,337	7,367,851	—	—	7,367,851
Immediate annuity and supplemental contracts	443,226		470,414	—	—	470,414

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.