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

Debt securities, available for sale	$	2,823,553	—	2,823,553	—
Equity securities, available for sale	17,036		16,533	503	—
Derivatives, index options	72,527		—	—	72,527

Total assets	$	2,913,116	16,533	2,824,056	72,527

Policyholder account balances (a)	$	88,109	—	—	88,109
Other liabilities (b)	7,259		—	—	7,259

Total liabilities	$	95,368	—	—	95,368

During the three and six months ended June 30, 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:



	June 30, 2015
	Total			Level 1		Level 2		Level 3
	(In thousands)

Debt securities, available for sale:
Priced by third-party vendors	$	2,823,553		—		2,823,553		—
Priced internally	—			—		—		—
Subtotal	2,823,553			—		2,823,553		—

Equity securities, available for sale:
Priced by third-party vendors	17,036			16,533		503		—
Priced internally	—			—		—		—
Subtotal	17,036			16,533		503		—

Derivatives, index options:
Priced by third-party vendors	72,527			—		—		72,527
Priced internally	—			—		—		—
Subtotal	72,527			—		—		72,527

Total	$	2,913,116		16,533		2,824,056		72,527

Percent of total	100.0		%	0.6	%	96.9	%	2.5	%



	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 June 30, 2015
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)

Balance at April 1, 2015	$	—	—	95,987		95,987		119,987
Total realized and unrealized gains (losses):
Included in net income	—		—	(8,782	)	(8,782	)	(9,653	)
Included in other comprehensive income	—		—	—		—		—
Purchases, sales, issuances and settlements, net:
Purchases	—		—	21,473		21,473		21,473
Sales	—		—	—		—		—
Issuances	—		—	—		—		—
Settlements	—		—	(36,151	)	(36,151	)	(36,439	)
Transfers into (out of) Level 3	—		—	—		—		—

Balance at end of period	$	—	—	72,527		72,527		95,368

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	$	—	—	(11,922	)	(11,922	)	—
Benefits and expenses	—		—	—		—		(813	)

Total	$	—	—	(11,922	)	(11,922	)	(813	)



	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:
Purchases	—		—	18,232		18,232		18,232
Sales	—		—	—		—		—
Issuances	—		—	—		—		—
Settlements	—		—	(51,885	)	(51,885	)	(52,119	)
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:
Net investment income	$	—	—	43,313		43,313		—
Benefits and expenses	—		—	—		—		1,006

Total	$	—	—	43,313		43,313		1,006



	Six Months Ended June 30, 2015
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)

Beginning balance, January 1, 2015	$	—	—	114,287		114,287		142,492
Total realized and unrealized gains (losses):
Included in net income	—		—	(17,069	)	(17,069	)	(22,036	)
Included in other comprehensive income	—		—	—		—		—
Purchases, sales, issuances and settlements, net:
Purchases	—		—	39,929		39,929		39,929
Sales	—		—	—		—		—
Issuances	—		—	—		—		—
Settlements	—		—	(64,620	)	(64,620	)	(65,017	)
Transfers into (out of) Level 3	—		—	—		—		—

Balance at end of period	$	—	—	72,527		72,527		95,368

Amount of total gains (losses) for the period included in net income attributable to the change in unrealized gains (losses) relating to assets still held at end of period:
Net investment income	$	—	—	(17,830	)	(17,830	)	—
Other operating expenses	—		—	—		—		(1,600	)

Total	$	—	—	(17,830	)	(17,830	)	(1,600	)



	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:
Purchases	—		—	33,569		33,569		33,569
Sales	—		—	—		—		—
Issuances	—		—	—		—		—
Settlements	—		—	(102,168	)	(102,168	)	(102,909	)
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:
Net investment income	$	—	—	44,200		44,200		—
Other operating expenses	—		—	—		—		3,091

Total	$	—	—	44,200		44,200		3,091

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



	June 30, 2015
	Fair Value		Valuation Technique	Unobservable Input
	(In thousands)

Derivatives, index options	$	72,527	Broker prices	Implied volatility
				Inputs from broker proprietary models

Total assets	$	72,527

Policyholder account balances	$	88,109	Deterministic cash flow model	Projected option cost
Other liabilities	7,259		Black-Scholes model	Expected term
				Forfeiture assumptions

Total liabilities	$	95,368



	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:



	June 30, 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	$	7,121,439	7,370,596	—	7,370,596	—
Securities available for sale	2,840,589		2,840,589	16,533	2,824,056	—

Cash and cash equivalents	71,710		71,710	71,710	—	—
Mortgage loans	132,261		137,917	—	—	137,917
Policy loans	61,933		107,914	—	—	107,914
Other loans	2,598		2,773	—	—	2,773
Derivatives, index options	72,527		72,527	—	—	72,527
Short-term investments	—		—	—	—	—
Life interest in Trust	—		12,775	—	—	12,775

LIABILITIES
Deferred annuity contracts	$	7,597,966	7,215,118	—	—	7,215,118
Immediate annuity and supplemental contracts	439,889		467,034	—	—	467,034



	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.