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). 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:



	March 31, 2018
	Total		Level 1	Level 2	Level 3
	(In thousands)

Debt securities, available for sale	$	3,084,789	—	3,084,789	—
Equity securities	18,173		18,173	—	—
Derivatives, index options	116,356		—	—	116,356

Total assets	$	3,219,318	18,173	3,084,789	116,356

Policyholder account balances (a)	$	134,293	—	—	134,293
Other liabilities (b)	13,209		—	—	13,209

Total liabilities	$	147,502	—	—	147,502

During the three months ended March 31, 2018, the Company had no transfers into or out of Levels 1, 2 or 3.



	December 31, 2017
	Total		Level 1	Level 2	Level 3
	(In thousands)

Debt securities, available for sale	$	3,041,131	—	3,041,131	—
Equity securities, available for sale	18,478		18,478	—	—
Derivatives, index options	194,731		—	—	194,731

Total assets	$	3,254,340	18,478	3,041,131	194,731

Policyholder account balances (a)	$	211,159	—	—	211,159
Other liabilities (b)	15,242		—	—	15,242

Total liabilities	$	226,401	—	—	226,401

(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:



	March 31, 2018
	Total			Level 1		Level 2		Level 3
	(In thousands)

Debt securities, available for sale:
Priced by third-party vendors	$	3,084,789		—		3,084,789		—
Priced internally	—			—		—		—
Subtotal	3,084,789			—		3,084,789		—

Equity securities:
Priced by third-party vendors	18,173			18,173		—		—
Priced internally	—			—		—		—
Subtotal	18,173			18,173		—		—

Derivatives, index options:
Priced by third-party vendors	116,356			—		—		116,356
Priced internally	—			—		—		—
Subtotal	116,356			—		—		116,356

Total	$	3,219,318		18,173		3,084,789		116,356

Percent of total	100.0		%	0.6	%	95.8	%	3.6	%



	December 31, 2017
	Total			Level 1		Level 2		Level 3
	(In thousands)

Debt securities, available for sale:
Priced by third-party vendors	$	3,041,131		—		3,041,131		—
Priced internally	—			—		—		—
Subtotal	3,041,131			—		3,041,131		—

Equity securities, available for sale:
Priced by third-party vendors	18,478			18,478		—		—
Priced internally	—			—		—		—
Subtotal	18,478			18,478		—		—

Derivatives, index options:
Priced by third-party vendors	194,731			—		—		194,731
Priced internally	—			—		—		—
Subtotal	194,731			—		—		194,731

Total	$	3,254,340		18,478		3,041,131		194,731

Percent of total	100.0		%	0.6	%	93.4	%	6.0	%

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 March 31, 2018
	Debt Securities, Available for Sale		Equity Securities	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)

Balance at January 1, 2018	$	—	—	194,731		194,731		226,401
Total realized and unrealized gains (losses):
Included in net income	—		—	(44,394	)	(44,394	)	(43,428	)
Purchases, sales, issuances and settlements, net:
Purchases	—		—	22,376		22,376		22,376
Sales	—		—	—		—		—
Issuances	—		—	—		—		—
Settlements	—		—	(56,357	)	(56,357	)	(57,847	)
Transfers into (out of) Level 3	—		—	—		—		—

Balance at end of period	$	—	—	116,356		116,356		147,502

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	$	—	—	(44,337	)	(44,337	)	—
Benefits and expenses	—		—	—		—		(44,880	)

Total	$	—	—	(44,337	)	(44,337	)	(44,880	)



	For the Three Months ended March 31, 2017
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)

Balance at January 1, 2017	$	—	—	120,644		120,644		134,693
Total realized and unrealized gains (losses):
Included in net income	—		—	61,206		61,206		64,174
Purchases, sales, issuances and settlements, net:
Purchases	—		—	16,442		16,442		16,442
Sales	—		—	—		—		—
Issuances	—		—	—		—		230
Settlements	—		—	(48,444	)	(48,444	)	(48,531	)
Transfers into (out of) Level 3	—		—	—		—		—

Balance at end of period	$	—	—	149,848		149,848		167,008

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	$	—	—	54,545		54,545		—
Benefits and expenses	—		—	—		—		55,095

Total	$	—	—	54,545		54,545		55,095

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:



	March 31, 2018
	Fair Value		Valuation Technique	Unobservable Input
	(In thousands)

Derivatives, index options	$	116,356	Broker prices	Implied volatility
				Inputs from broker proprietary models

Total assets	$	116,356

Policyholder account balances	$	134,293	Deterministic cash flow model	Projected option cost
Other liabilities	13,209		Black-Scholes model	Expected term
				Forfeiture assumptions

Total liabilities	$	147,502



	December 31, 2017
	Fair Value		Valuation Technique	Unobservable Input
	(In thousands)

Derivatives, index options	$	194,731	Broker prices	Implied volatility
				Inputs from broker proprietary models

Total assets	$	194,731

Policyholder account balances	$	211,159	Deterministic cash flow model	Projected option cost
Other liabilities	15,242		Black-Scholes model	Expected term
				Forfeiture assumptions

Total liabilities	$	226,401

Realized gains (losses) on debt 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 securities are reported as other comprehensive income (loss) within the stockholders' equity section of the Condensed Consolidated Balance Sheet.

Effective January 1, 2018, the change in fair value of equity securities is reported in the Condensed Consolidated Statement of Earnings as net investment income.

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:



	March 31, 2018
				Fair Value Hierarchy Level
	Carrying Values		Fair Values	Level 1	Level 2	Level 3
	(In thousands)
ASSETS
Debt securities held to maturity	$	7,280,200	7,302,034	—	7,299,770	2,264
Debt securities available for sale	3,084,789		3,084,789	—	3,084,789	—

Cash and cash equivalents	82,924		82,924	82,924	—	—
Mortgage loans	204,948		205,533	—	—	205,533
Policy loans	55,515		94,128	—	—	94,128
Other loans	5,533		5,688	—	—	5,688
Derivatives, index options	116,356		116,356	—	—	116,356
Equity securities	18,173		18,173	18,173	—	—
Short-term investments	—		—	—	—	—
Life interest in Trust	8,676		12,775	—	—	12,775

LIABILITIES
Deferred annuity contracts	$	7,758,838	7,252,309	—	—	7,252,309
Immediate annuity and supplemental contracts	423,056		430,398	—	—	430,398



	December 31, 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	$	7,247,024	7,434,104	—	7,431,810	2,294
Securities available for sale	3,059,609		3,059,609	18,478	3,041,131	—

Cash and cash equivalents	217,624		217,624	217,624	—	—
Mortgage loans	208,249		208,815	—	—	208,815
Policy loans	56,405		100,230	—	—	100,230
Other loans	5,431		5,603	—	—	5,603
Derivatives, index options	194,731		194,731	—	—	194,731
Life interest in Trust	8,676		12,775	—	—	12,775

LIABILITIES
Deferred annuity contracts	$	7,865,786	7,338,637	—	—	7,338,637
Immediate annuity and supplemental contracts	430,494		443,437	—	—	443,437

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.