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 the required 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:



	June 30, 2014
	Total		Level 1	Level 2	Level 3
	(In thousands)

Debt securities, available for sale	$	2,782,949	—	2,782,949	—
Equity securities, available for sale	16,501		15,083	1,418	—
Derivatives, index options	146,514		—	—	146,514

Total assets	$	2,945,964	15,083	2,784,367	146,514

Policyholder account balances (a)	$	163,770	—		163,770
Other liabilities (b)	7,658		—	—	7,658

Total liabilities	$	171,428	—	—	171,428

During the three and six months ended June 30, 2014, the Company had no transfers into or out of Levels 1, 2 or 3.



	December 31, 2013
	Total		Level 1	Level 2	Level 3
	(In thousands)

Debt securities, available for sale	$	2,636,666	—	2,636,666	—
Equity securities, available for sale	14,878		13,802	1,076	—
Derivatives, index options	169,314		—	—	169,314

Total assets	$	2,820,858	13,802	2,637,742	169,314

Policyholder account balances (a)	$	187,399	—	—	187,399
Other liabilities (b)	5,939		—	—	5,939

Total liabilities	$	193,338	—	—	193,338

(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:



	June 30, 2014
	Total			Level 1		Level 2		Level 3
	(In thousands)

Debt securities, available for sale:
Priced by third-party vendors	$	2,782,949		—		2,782,949		—
Priced internally	—			—		—		—
Subtotal	2,782,949			—		2,782,949		—

Equity securities, available for sale:
Priced by third-party vendors	16,501			15,083		1,418		—
Priced internally	—			—		—		—
Subtotal	16,501			15,083		1,418		—

Derivatives, index options:
Priced by third-party vendors	146,514			—		—		146,514
Priced internally	—			—		—		—
Subtotal	146,514			—		—		146,514

Total	$	2,945,964		15,083		2,784,367		146,514

Percent of total	100.0		%	0.5	%	94.5	%	5.0	%



	December 31, 2013
	Total			Level 1		Level 2		Level 3
	(In thousands)

Debt securities, available for sale:
Priced by third-party vendors	$	2,636,666		—		2,636,666		—
Priced internally	—			—		—		—
Subtotal	2,636,666			—		2,636,666		—

Equity securities, available for sale:
Priced by third-party vendors	14,878			13,802		1,076		—
Priced internally	—			—		—		—
Subtotal	14,878			13,802		1,076		—

Derivatives, index options:
Priced by third-party vendors	169,314			—		—		169,314
Priced internally	—			—		—		—
Subtotal	169,314			—		—		169,314

Total	$	2,820,858		13,802		2,637,742		169,314

Percent of total	100.0		%	0.5	%	93.5	%	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 June 30, 2014
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)

Balance at April 1, 2014	$	—	—	134,916		134,916		160,536
Total realized and unrealized gains (losses):
Included in net income	—		—	45,251		45,251		44,779
Included in other comprehensive income	—		—			—		—
Purchases, sales, issuances and settlements, net				(33,653	)	(33,653	)	(33,887	)
Transfers into (out of) Level 3	—		—			—		—

Balance at end of period	$	—	—	146,514		146,514		171,428

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	$	—	—	43,313		43,313		1,006



	For the Three Months ended June 30, 2013
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options	Total Assets	Other Liabilities
	(In thousands)

Balance at April 1, 2013	$	—	—	—	—	4,073
Total realized and unrealized gains (losses):
Included in net income	—		—	—	—	1,484
Included in other comprehensive income	—		—	—	—	—
Purchases, sales, issuances and settlements, net	—		—	—	—	(1,187	)
Transfers into (out of) Level 3	—		—	—	—	—

Balance at end of period	$	—	—	—	—	4,370

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	$	—	—	—	—	2,190



	Six Months Ended June 30, 2014
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)

Beginning balance, January 1, 2014	$	—	—	169,314		169,314		193,338
Total realized and unrealized gains (losses):
Included in net income	—		—	45,799		45,799		47,430
Included in other comprehensive income	—		—	—		—		—
Purchases, sales, issuances and settlements, net	—		—	(68,599	)	(68,599	)	(69,340	)
Transfers into (out of) Level 3	—		—	—		—		—

Balance at end of period	$	—	—	146,514		146,514		171,428

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	$	—	—	44,200		44,200		3,091



	Six Months Ended June 30, 2013
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options	Total Assets	Other Liabilities
	(In thousands)

Beginning balance, January 1, 2013	$	—	—	—	—	2,718
Total realized and unrealized gains (losses):
Included in net income	—		—	—	—	2,966
Included in other comprehensive income	—		—	—	—	—
Purchases, sales, issuances and settlements, net	—		—	—	—	(1,314	)
Transfers into (out of) Level 3	—		—	—	—	—

Balance at end of period	$	—	—	—	—	4,370

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	$	—	—	—	—	3,742

The following tables show the quantitative information about the Company's level 3 assets and liabilities.



	June 30, 2014
	Fair Value		Valuation Technique	Unobservable Input
	(In thousands)

Derivatives, index options	$	146,514	Broker prices	Implied volatility
				Inputs from broker proprietary models

Total assets	$	146,514

Policyholder account balances	$	163,770	Deterministic cash flow model	Projected option cost
Other liabilities	7,658		Black Scholes	Expected term
				Forfeiture assumptions

Total liabilities	$	171,428



	December 31, 2013
	Fair Value		Valuation Technique	Unobservable Input
	(In thousands)

Derivatives, index options	$	169,314	Broker prices	Implied volatility
				Inputs from broker proprietary models

Total assets	$	169,314

Policyholder account balances	$	187,399	Deterministic cash flow model	Projected option cost
Other liabilities	5,939		Black Scholes	Expected term
				Forfeiture assumptions

Total liabilities	$	193,338

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



	June 30, 2014
				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	$	6,641,083	6,979,345	—	6,979,345	—
Securities available for sale	2,799,450		2,799,450	15,083	2,784,367	—

Cash and short-term investments	133,506		133,506	133,506	—	—
Mortgage loans	152,208		158,893	—	—	158,893
Policy loans	64,988		64,988	—	—	64,988
Other loans	2,705		2,855	—	—	2,855
Derivatives, index options	146,514		146,514	—	—	146,514
Life interest in Libbie Shearn Moody Trust	—		12,775	—	—	12,775

LIABILITIES
Deferred annuity contracts	$	7,402,701	7,038,029	—	—	7,038,029
Immediate annuity and supplemental contracts	447,040		471,381	—	—	471,381



	December 31, 2013
				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	$	6,510,320	6,656,144	—	6,656,144	—
Securities available for sale	2,651,544		2,651,544	13,802	2,637,742	—

Cash and short-term investments	120,859		120,859	120,859	—	—
Mortgage loans	132,765		138,159	—	—	138,159
Policy loans	65,969		65,969	—	—	65,969
Other loans	2,986		3,143	—	—	3,143
Derivatives, index options	169,314		169,314	—	—	169,314
Life interest in Libbie Shearn Moody Trust	—		12,775	—	—	12,775

LIABILITIES
Deferred annuity contracts	$	7,288,861	6,941,902	—	—	6,941,902
Immediate annuity and supplemental contracts	463,276		483,690	—	—	483,690

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.