FAIR VALUES OF FINANCIAL INSTRUMENTS

Effective January 1, 2008, the Company adopted FASB 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 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 table sets forth the Company’s assets and liabilities that are measured at fair value on a recurring basis as of the date indicated.



	December 31, 2014
	Total		Level 1	Level 2	Level 3
	(In thousands)
Debt securities, available for sale	$	2,711,377	—	2,711,377	—
Equity securities, available for sale	17,303		16,862	441	—
Derivatives, index options	114,287		—	—	114,287

Total assets	$	2,842,967	16,862	2,711,818	114,287

Policyholder account balances (a)	$	133,236	—		133,236
Other liabilities (b)	9,256		—	—	9,256

Total liabilities	$	142,492	—	—	142,492



	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 table provides additional information about fair value measurements for which significant unobservable (Level 3) inputs were utilized to determine fair value.



	Twelve Months Ended December 31, 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	—		—	68,616		68,616		73,851
Included in other comprehensive income (loss)	—		—	—		—		—
Purchases, sales, issuances and settlements, net:
Purchases	—		—	73,937		73,937		73,937
Sales	—		—	—		—		—
Issuances	—		—	—		—		—
Settlements	—		—	(197,580	)	(197,580	)	(198,634	)
Transfers into (out of) Level 3	—		—	—		—		—

Balance at end of period	$	—	—	114,287		114,287		142,492

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	$	—	—	40,350		40,350		—
Benefits and expenses	—		—	—		—		44,722

Total	$	—	—	40,350		40,350		44,722



	Twelve Months Ended December 31, 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	—		—	—	—	5,725
Included in other comprehensive income (loss)	—		—	—	—	—
Purchases, sales, issuances and settlements, net:
Purchases	—		—	—	—	—
Sales	—		—	—	—	—
Issuances	—		—	—	—	—
Settlements	—		—	—	—	(2,504	)
Transfers into (out of) Level 3	—		—	169,314	169,314	187,399

Balance at end of period	$	—	—	169,314	169,314	193,338

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	$	—	—	107,897	107,897	5,725
Benefits and expenses	—		—	—	—	—

Total	$	—	—	107,897	107,897	5,725

During the year ended December 31, 2013, the Company transferred its index option holdings from level 2 to level 3. Although these securities contain significant inputs which are directly or indirectly observable, the pricing of these derivative instruments involves judgment regarding assumptions market participants would use. Consequently, the Company determined that these assets did not meet the criteria for Level 2 classification. The Company correspondingly transferred the policyholder account balance liability with the associated embedded derivatives from level 2 to level 3. The following tables show the quantitative information about the Company's level 3 assets and liabilities.



	December 31, 2014
	Fair Value		Valuation Technique	Unobservable Input
	(In thousands)

Derivatives, index options	$	114,287	Broker prices	Implied volatility
				Inputs from broker proprietary models

Total assets	$	114,287

Policyholder account balances	$	133,236	Deterministic cash flow model	Projected option cost
Other liabilities	9,256		Black Scholes	Expected term
				Forfeiture assumptions

Total liabilities	$	142,492



	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 Level 3 assets are reported in the consolidated statements of earnings as net investment gains (losses) with liabilities reported as expenses. Unrealized gains (losses) on debt and equity securities are reported as other comprehensive income (loss) within stockholders’ equity.

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.

GAAP defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. Fair value is based on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each measurement date. GAAP also establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a variety of factors including the type of instrument and the characteristics of instruments. Financial instruments with readily available active quoted prices or those for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measures.

The following methods and assumptions were used in estimating the fair value of financial instruments and liabilities during the periods presented in the consolidated financial statements.

Fixed maturity securities. Fair values for investments in debt securities available for sale are based on quoted market prices, where available. For securities not actively traded, fair values are estimated using values obtained from various independent pricing services with any adjustments based upon observable data. In the cases where prices are unavailable for these sources, values are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments.

Equity securities. Fair values for equity securities are based upon quoted market prices, where available. For equity securities that are not actively traded, estimated values are based on values of comparable issues or audited financial statements of the issuer.

Cash and cash equivalents. The carrying amounts reported in the balance sheet for these instruments approximate their fair values due to the relatively short time between the purchase of the instrument and its expected repayment or maturity.

Mortgage and other loans. The fair values of performing mortgage and other loans are estimated by discounting scheduled cash flows through the scheduled maturities of the loans, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Fair values for significant nonperforming loans are based on recent internal or external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.

Policy Loans. Policy loans with fixed interest rates are classified within Level 3. The estimated fair values for these loans are determined using a discounted cash flow model applied to groups of similar policy loans determined by the nature of the underlying insurance liabilities. Cash flow estimates are developed by applying a weighted-average interest rate to the outstanding principal balance of the respective group of policy loans and an estimated average maturity. These cash flows are discounted using current risk-free interest rates with no adjustment for borrower credit risk as these loans are collateralized by the cash surrender value of the underlying insurance policy.

Derivatives. Fair values for index (call) options are based on counterparty market prices. The counterparties use market standard valuation methodologies incorporating market inputs for volatility and risk free interest rates in arriving at a fair value for each option contract. Prices are monitored for reasonableness by the Company using analytical tools. There are no performance obligations related to the call options purchased to hedge the Company’s fixed-index life and annuity policy liabilities.

Life interest in Libbie Shearn Moody Trust. The fair value of the life interest was estimated based on assumptions as to future distributions from the Trust over the life expectancy of Mr. Robert L. Moody, Chairman of the Board and Chief Executive Officer. These estimated cash flows were discounted at a rate consistent with uncertainties relating to the amount and timing of future cash distributions subject to the maximum amount to be received from insurance proceeds in the event of Mr. Moody's death. The carrying value or cost basis of the life interest asset was amortized ratably over the expected life of Mr. Moody.

Annuity and supplemental contracts. Fair values for the Company's insurance contracts other than annuity contracts are not required to be disclosed. This includes the Company's traditional and universal life products. Fair values for immediate annuities without mortality features are based on the discounted future estimated cash flows using current market interest rates for similar maturities. Fair values for deferred annuities, including fixed-indexed annuities, are determined using estimated projected future cash flows discounted at the rate that would be required to transfer the liability in an orderly transaction. The fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance and annuity contracts.

The Company utilizes independent third-party pricing services to determine the majority of its fair values of investment securities. The independent pricing services provide quoted market prices when available or otherwise incorporate a variety of observable market data in their valuation techniques including reported trading prices, broker-dealer quotes, bids and offers, benchmark securities, benchmark yields, credit ratings, and other reference data. The Company reviews prices received from service providers for unusual fluctuations to ensure that the prices represent a reasonable estimate of fair value but generally accepts the price identified from the primary pricing service.

When quoted market prices in active markets are unavailable, the Company determines fair values using various valuation techniques and models based on a range of observable market inputs including pricing models, quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, prepayment speeds, default rates and discounted cash flow. In most cases, these estimates are determined based on independent third party valuation information, and the amounts are disclosed in Level 2 of the fair value hierarchy. Generally, the Company obtains a single price or quote per instrument from independent third parties to assist in establishing the fair value of these investments.

Fair value measurements for investment securities where there exists limited or no observable data are calculated using the Company’s own estimates based on current interest rates, credit spreads, liquidity premium or discount, the economic and competitive environment, unique characteristics of the security and other pertinent factors. These estimates are derived a number of ways including, but not limited to, pricing provided by brokers where the price indicates reliability as to value, fair values of comparable securities incorporating a spread adjustment (for maturity differences, credit quality, liquidity, collateralization), discounted cash flow models and margin spreads, bond yield curves, and observable market prices and exchange transaction information not provided by external pricing services. The resulting prices may not be realized in an actual sale or immediate settlement and there may be inherent weaknesses in any calculation technique. In addition, changes in underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

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



	December 31, 2014
	Total			Level 1		Level 2		Level 3
	(In thousands)

Fixed maturities, available for sale:
Priced by third-party vendors	$	2,711,377		—		2,711,377		—
Priced internally	—			—		—		—
Subtotal	2,711,377			—		2,711,377		—

Equity securities, available for sale:
Priced by third-party vendors	17,303			16,862		441		—
Priced internally	—			—		—		—
Subtotal	17,303			16,862		441		—

Derivatives, index options:
Priced by third-party vendors	114,287			—		—		114,287
Priced internally	—			—		—		—
Subtotal	114,287			—		—		114,287

Total	$	2,842,967		16,862		2,711,818		114,287

Percent of total	100.0		%	0.6	%	95.4	%	4.0	%

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



	December 31, 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	$	6,841,543	7,175,443	—	7,175,443	—
Securities available for sale	2,728,680		2,728,680	16,862	2,711,818	—

Cash and cash equivalents	277,078		277,078	277,078	—	—
Mortgage loans	149,503		156,548	—	—	156,548
Policy loans	63,645		111,040	—	—	111,040
Other loans	2,171		2,300	—	—	2,300
Derivatives, index options	114,287		114,287	—	—	114,287
Life interest in Libbie Shearn Moody Trust	—		12,775	—	—	12,775

LIABILITIES
Deferred annuity contracts	$	7,546,504	7,178,535	—	—	7,178,535
Immediate annuity and supplemental contracts	446,458		474,843	—	—	474,843



	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 cash equivalents	120,859		120,859	120,859	—	—
Mortgage loans	132,765		138,159	—	—	138,159
Policy loans	65,969		98,010	—	—	98,010
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.