Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2015

Note 3 - Fair Value of Financial Instruments

The Company is required under GAAP to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the Company’s insurance contracts other than annuity contracts are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.

Information regarding the three-level hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at a point in time is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, specifically in “Note 3 — Fair Value of Financial Instruments”.

Financial Instruments Measured and Carried at Fair Value

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. At March 31, 2015, these Level 3 invested assets comprised 2.1% of the Company’s total investment portfolio fair value.

					Fair Value Measurements at
	Carrying		Fair		Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
March 31, 2015
Financial Assets
Investments
Fixed maturities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities	$	541,360	$	541,360	$	-	$	541,360	$	-
Other, including
U.S. Treasury securities		576,469		576,469		17,995		558,474		-
Municipal bonds		1,685,086		1,685,086		-		1,671,201		13,885
Foreign government bonds		65,081		65,081		-		65,081		-
Corporate bonds		2,841,062		2,841,062		10,369		2,758,415		72,278
Other mortgage-backed securities		1,356,741		1,356,741		-		1,284,147		72,594
Total fixed maturities		7,065,799		7,065,799		28,364		6,878,678		158,757
Equity securities		105,066		105,066		90,347		14,713		6
Short-term investments		181,004		181,004		181,004		-		-
Other investments		12,412		12,412		-		12,412		-
Totals		7,364,281		7,364,281		299,715		6,905,803		158,763
Separate Account
(variable annuity) assets (1)		1,865,240		1,865,240		1,865,240		-		-
Financial Liabilities
Other policyholder funds,
embedded derivatives		22,040		22,040		-		-		22,040

December 31, 2014
Financial Assets
Investments
Fixed maturities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities	$	535,726	$	535,726	$	-	$	535,726	$	-
Other, including
U.S. Treasury securities		538,199		538,199		17,857		520,342		-
Municipal bonds		1,647,822		1,647,822		-		1,634,194		13,628
Foreign government bonds		59,536		59,536		-		59,536		-
Corporate bonds		2,834,749		2,834,749		10,524		2,749,508		74,717
Other mortgage-backed securities		1,277,058		1,277,058		-		1,194,109		82,949
Total fixed maturities		6,893,090		6,893,090		28,381		6,693,415		171,294
Equity securities		110,655		110,655		92,140		18,509		6
Short-term investments		142,039		142,039		142,039		-		-
Other investments		12,458		12,458		-		12,458		-
Totals		7,158,242		7,158,242		262,560		6,724,382		171,300
Separate Account
(variable annuity) assets (1)		1,813,557		1,813,557		1,813,557		-		-
Financial Liabilities
Other policyholder funds,
embedded derivatives		20,049		20,049		-		-		20,049

___________________________

(1)	Separate Account (variable annuity) liabilities are set equal to Separate Account (variable annuity) assets.

The Company did not have any transfers between Levels 1 and 2 during the three months ended March 31, 2015. The following table presents reconciliations for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis.

																							Financial
		Financial Assets																					Liabilities(1)
	Municipal Bonds				Corporate Bonds				Other Mortgage- Backed Securities				Total Fixed Maturities				Equity Securities			Total

Beginning balance, January 1, 2015		$	13,628			$	74,717			$	82,949			$	171,294			$	6	$	171,300		$	20,049
Transfers into Level 3 (2)			-				1,895				461				2,356				-		2,356			-
Transfers out of Level 3 (2)			-				-				(9,664	)			(9,664	)			-		(9,664	)		-
Total gains or losses
Net realized gains (losses)
included in net income			-				-				-				-				-		-			(439	)
Net unrealized gains (losses)
included in other
comprehensive income			380				352				3				735				-		735			-
Purchases			-				-				-				-				-		-			-
Issuances			-				-				-				-				-		-			2,964
Sales			-				-				-				-				-		-			-
Settlements			-				-				-				-				-		-			-
Paydowns, maturities
and distributions			(123	)			(4,686	)			(1,155	)			(5,964	)			-		(5,964	)		(534	)
Ending balance, March 31, 2015		$	13,885			$	72,278			$	72,594			$	158,757			$	6	$	158,763		$	22,040

Beginning balance, January 1, 2014		$	2,694			$	60,826			$	46,009			$	109,529			$	6	$	109,535		$	-
Transfers into Level 3 (2)			10,055				-				7,109				17,164				-		17,164			-
Transfers out of Level 3 (2)			-				-				(519	)			(519	)			-		(519	)		-
Total gains or losses
Net realized gains (losses)
included in net income			-				-				-				-				-		-			12
Net unrealized gains (losses)
included in other
comprehensive income			98				1,014				184				1,296				-		1,296			-
Purchases			-				-				-				-				-		-			-
Issuances			-				-				-				-				-		-			2,735
Sales			-				-				-				-				-		-			-
Settlements			-				-				-				-				-		-			-
Paydowns, maturities
and distributions			(68	)			(1,636	)			(232	)			(1,936	)			-		(1,936	)		-
Ending balance, March 31, 2014		$	12,779			$	60,204			$	52,551			$	125,534			$	6	$	125,540		$	2,747

________________________________

(1)

Represents embedded derivatives, all related to the Company’s fixed indexed annuity (“FIA”) products, reported in Other Policyholder Funds in the Company’s Consolidated Balance Sheets.

(2)

Transfers into and out of Level 3 during the three months ended March 31, 2015 and 2014 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined.

At March 31, 2015 and 2014, there were no realized gains or losses included in earnings that were attributable to changes in the fair value of Level 3 assets still held. For the three months ended March 31, 2015 and 2014, realized gains/(losses) of $439 and $(12), respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held.

The valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets classified as Level 3 are subject to the control processes as described in “Note 3 — Fair Value of Financial Instruments — Investments” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Generally, valuation for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as fixed maturities.

The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturities and equity securities included in Level 3 generally relate to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.

Financial Instruments Not Carried at Fair Value; Disclosure Required

The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities.

					Fair Value Measurements at
	Carrying		Fair		Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
March 31, 2015
Financial Assets
Investments
Other investments	$	145,574	$	149,965	$	-	$	-	$	149,965
Financial Liabilities
Fixed annuity contract liabilities		3,847,694		3,762,743		-		-		3,762,743
Policyholder account balances on
interest-sensitive life contracts		77,051		81,079		-		-		81,079
Other policyholder funds		585,582		585,582		-		500,111		85,471
Short-term debt		38,000		38,000		-		38,000		-
Long-term debt		199,955		207,315		207,315		-		-
Other liabilities, repurchase
agreement obligations		-		-		-		-		-

December 31, 2014
Financial Assets
Investments
Other investments	$	145,409	$	149,792	$	-	$	-	$	149,792
Financial Liabilities
Fixed annuity contract liabilities		3,774,457		3,691,123		-		-		3,691,123
Policyholder account balances on
interest-sensitive life contracts		77,415		81,461		-		-		81,461
Other policyholder funds		586,689		586,689		-		500,080		86,609
Short-term debt		38,000		38,000		-		38,000		-
Long-term debt		199,939		209,495		209,495		-		-
Other liabilities, repurchase
agreement obligations		-		-		-		-		-

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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