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:



	March 31, 2015
	Total		Level 1	Level 2	Level 3
	(In thousands)

Debt securities, available for sale	$	2,837,075	—	2,837,075	—
Equity securities, available for sale	17,615		17,059	556	—
Derivatives, index options	95,987		—	—	95,987

Total assets	$	2,950,677	17,059	2,837,631	95,987

Policyholder account balances (a)	$	111,627	—		111,627
Other liabilities (b)	8,360		—	—	8,360

Total liabilities	$	119,987	—	—	119,987

During the three months ended March 31, 2015, the Company had no transfers into or out of Levels 1, 2 or 3.



	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

(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, 2015
	Total			Level 1		Level 2		Level 3
	(In thousands)

Debt securities, available for sale:
Priced by third-party vendors	$	2,837,075		—		2,837,075		—
Priced internally	—			—		—		—
Subtotal	2,837,075			—		2,837,075		—

Equity securities, available for sale:
Priced by third-party vendors	17,615			17,059		556		—
Priced internally	—			—		—		—
Subtotal	17,615			17,059		556		—

Derivatives, index options:
Priced by third-party vendors	95,987			—		—		95,987
Priced internally	—			—		—		—
Subtotal	95,987			—		—		95,987

Total	$	2,950,677		17,059		2,837,631		95,987

Percent of total	100.0		%	0.6	%	96.1	%	3.3	%



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

Debt securities, 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 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, 2015
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)

Balance at January 1, 2015	$	—	—	114,287		114,287		142,492
Total realized and unrealized gains (losses):
Included in net income	—		—	(8,287	)	(8,287	)	(12,383	)
Included in other comprehensive income	—		—	—		—		—
Purchases, sales, issuances and settlements, net:
Purchases	—		—	18,456		18,456		18,456
Sales	—		—	—		—		—
Issuances	—		—	—		—		—
Settlements	—		—	(28,469	)	(28,469	)	(28,578	)
Transfers into (out of) Level 3	—		—	—		—		—

Balance at end of period	$	—	—	95,987		95,987		119,987

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	$	—	—	(6,843	)	(6,843	)	—
Benefits and expenses	—		—	—		—		(787	)

Total	$	—	—	(6,843	)	(6,843	)	(787	)



	For the Three Months ended March 31, 2014
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)

Balance at January 1, 2014	$	—	—	169,314		169,314		193,338
Total realized and unrealized gains (losses):
Included in net income	—		—	548		548		2,651
Included in other comprehensive income	—		—	—		—		—
Purchases, sales, issuances and settlements, net:
Purchases	—		—	15,337		15,337		15,337
Sales	—		—	—		—		—
Issuances	—		—	—		—		—
Settlements	—		—	(50,283	)	(50,283	)	(50,790	)
Transfers into (out of) Level 3	—		—	—		—		—

Balance at end of period	$	—	—	134,916		134,916		160,536

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	$	—	—	2,821		2,821		—
Benefits and expenses	—		—	—		—		1,667

Total	$	—	—	2,821		2,821		1,667

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



	March 31, 2015
	Fair Value		Valuation Technique	Unobservable Input
	(In thousands)

Derivatives, index options	$	95,987	Broker prices	Implied volatility
				Inputs from broker proprietary models

Total assets	$	95,987

Policyholder account balances	$	111,627	Deterministic cash flow model	Projected option cost
Other liabilities	8,360		Black-Scholes model	Expected term
				Forfeiture assumptions

Total liabilities	$	119,987



	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 model	Expected term
				Forfeiture assumptions

Total liabilities	$	142,492

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 the 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:



	March 31, 2015
				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	$	7,042,233	7,470,133	—	7,470,133	—
Securities available for sale	2,854,690		2,854,690	17,059	2,837,631	—

Cash and cash equivalents	71,104		71,104	71,104	—	—
Mortgage loans	143,918		150,600	—	—	150,600
Policy loans	63,877		117,948	—	—	117,948
Other loans	2,592		2,792	—	—	2,792
Derivatives, index options	95,987		95,987	—	—	95,987
Short-term investments	14,989		14,989	—	14,989	—
Life interest in Trust	—		12,775	—	—	12,775

LIABILITIES
Deferred annuity contracts	$	7,546,484	7,160,752	—	—	7,160,752
Immediate annuity and supplemental contracts	444,216		477,219	—	—	477,219



	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 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

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.