13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company determined the fair value of its financial instruments based on the fair value hierarchy established in FASB guidance referenced in the Fair Value Measurements and Disclosures Topic which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has adopted the provisions from the FASB guidance that is referenced in the Fair Value Measurements and Disclosures Topic for non-financial assets and liabilities (such as property and equipment, goodwill, and other intangible assets) that are required to be measured at fair value on a periodic basis. The effect on the Company’s periodic fair value measurements for non-financial assets and liabilities was not material.

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: Unadjusted quoted prices for identical assets or liabilities in an active market.

· Level 2: Quoted prices in markets that are not active or significant inputs that are observable either directly or indirectly. Level 2 inputs include the following:

a) Quoted prices for similar assets or liabilities in active markets

b) Quoted prices for identical or similar assets or liabilities in non-active markets

c) Inputs other than quoted market prices that are observable

d) Inputs that are derived principally from or corroborated by observable market data through correlation or other means.

· Level 3: Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2013:

	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	1,463,989	$	38	$	1,464,027
Commercial mortgage-backed securities	—		911,607		—		911,607
Other asset-backed securities	—		328,393		548,771		877,164
U.S. government-related securities	1,063,584		149,852		—		1,213,436
State, municipalities, and political subdivisions	—		1,296,046		4,275		1,300,321
Other government-related securities	—		41,128		—		41,128
Corporate bonds	107		19,526,553		187,488		19,714,148
Total fixed maturity securities - available-for-sale	1,063,691		23,717,568		740,572		25,521,831

Fixed maturity securities - trading
Residential mortgage-backed securities	—		308,356		—		308,356
Commercial mortgage-backed securities	—		169,046		—		169,046
Other asset-backed securities	—		90,726		170,967		261,693
U.S. government-related securities	198,717		5,147		—		203,864
State, municipalities, and political subdivisions	—		262,036		—		262,036
Other government-related securities	—		57,525		—		57,525
Corporate bonds	—		1,515,167		5,092		1,520,259
Total fixed maturity securities - trading	198,717		2,408,003		176,059		2,782,779
Total fixed maturity securities	1,262,408		26,125,571		916,631		28,304,610
Equity securities	311,637		43,341		65,527		420,505
Other long-term investments (1)	58,567		54,600		83,005		196,172
Short-term investments	212,816		2,300		—		215,116
Total investments	1,845,428		26,225,812		1,065,163		29,136,403
Cash	229,747		—		—		229,747
Assets related to separate accounts
Variable annuity	11,921,925		—		—		11,921,925
Variable universal life	663,380		—		—		663,380
Total assets measured at fair value on a recurring basis	$	14,660,480	$	26,225,812	$	1,065,163	$	41,951,455

Liabilities:
Annuity account balances(2)	$	—	$	—	$	110,590	$	110,590
Other liabilities (1)	11,304		185,443		230,723		427,470
Total liabilities measured at fair value on a recurring basis	$	11,304	$	185,443	$	341,313	$	538,060

(1)Includes certain freestanding and embedded derivatives.

(2)Represents liabilities related to fixed indexed annuities.

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2012:

	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	1,839,326	$	4	$	1,839,330
Commercial mortgage-backed securities	—		869,823		—		869,823
Other asset-backed securities	—		378,870		596,143		975,013
U.S. government-related securities	909,988		258,458		—		1,168,446
State, municipalities, and political subdivisions	—		1,439,378		4,275		1,443,653
Other government-related securities	—		80,767		20,011		100,778
Corporate bonds	207		20,197,528		167,892		20,365,627
Total fixed maturity securities - available-for-sale	910,195		25,064,150		788,325		26,762,670

Fixed maturity securities - trading
Residential mortgage-backed securities	—		357,803		—		357,803
Commercial mortgage-backed securities	—		171,073		—		171,073
Other asset-backed securities	—		87,395		70,535		157,930
U.S. government-related securities	304,704		1,169		—		305,873
State, municipalities, and political subdivisions	—		278,898		—		278,898
Other government-related securities	—		63,444		—		63,444
Corporate bonds	—		1,672,172		115		1,672,287
Total fixed maturity securities - trading	304,704		2,631,954		70,650		3,007,308
Total fixed maturity securities	1,214,899		27,696,104		858,975		29,769,978
Equity securities	273,072		35,116		65,527		373,715
Other long-term investments (1)	23,639		58,134		48,655		130,428
Short-term investments	214,295		2,492		—		216,787
Total investments	1,725,905		27,791,846		973,157		30,490,908
Cash	269,582		—		—		269,582
Other assets	—		—		—		—
Assets related to separate accounts
Variable annuity	9,601,417		—		—		9,601,417
Variable universal life	562,817		—		—		562,817
Total assets measured at fair value on a recurring basis	$	12,159,721	$	27,791,846	$	973,157	$	40,924,724

Liabilities:
Annuity account balances (2)	$	—	$	—	$	129,468	$	129,468
Other liabilities (1)	19,187		27,250		611,437		657,874
Total liabilities measured at fair value on a recurring basis	$	19,187	$	27,250	$	740,905	$	787,342

(1) Includes certain freestanding and embedded derivatives.

(2) Represents liabilities related to fixed indexed annuities.

Determination of fair values

The valuation methodologies used to determine the fair values of assets and liabilities reflect market participant assumptions and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market prices, where available. The Company also determines certain fair values based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s credit standing, liquidity, and where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments as listed in the above table.

The fair value of fixed maturity, short-term, and equity securities is determined by management after considering one of three primary sources of information: third party pricing services, non-binding independent broker quotations, or pricing matrices. Security pricing is applied using a ‘‘waterfall’’ approach whereby publicly available prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for non-binding prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these three pricing methods include, but are not limited to: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. Third party pricing services price over 90% of the Company’s available-for-sale and trading fixed maturity securities. Based on the typical trading volumes and the lack of quoted market prices for available-for-sale and trading fixed maturities, third party pricing services derive the majority of security prices from observable market inputs such as recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information outlined above. If there are no recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Certain securities are priced via independent non-binding broker quotations, which are considered to have no significant unobservable inputs. When using non-binding independent broker quotations, the Company obtains one quote per security, typically from the broker from which we purchased the security. A pricing matrix is used to price securities for which the Company is unable to obtain or effectively rely on either a price from a third party pricing service or an independent broker quotation.

The pricing matrix used by the Company begins with current spread levels to determine the market price for the security. The credit spreads, assigned by brokers, incorporate the issuer’s credit rating, liquidity discounts, weighted-average of contracted cash flows, risk premium, if warranted, due to the issuer’s industry, and the security’s time to maturity. The Company uses credit ratings provided by nationally recognized rating agencies.

For securities that are priced via non-binding independent broker quotations, the Company assesses whether prices received from independent brokers represent a reasonable estimate of fair value through an analysis using internal and external cash flow models developed based on spreads and, when available, market indices. The Company uses a market-based cash flow analysis to validate the reasonableness of prices received from independent brokers. These analytics, which are updated daily, incorporate various metrics (yield curves, credit spreads, prepayment rates, etc.) to determine the valuation of such holdings. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly. The Company did not adjust any quotes or prices received from brokers during the nine months ended September 30, 2013.

The Company has analyzed the third party pricing services’ valuation methodologies and related inputs and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs that is in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. Based on this evaluation and investment class analysis, each price was classified into Level 1, 2, or 3. Most prices provided by third party pricing services are classified into Level 2 because the significant inputs used in pricing the securities are market observable and the observable inputs are corroborated by the Company. Since the matrix pricing of certain fixed maturities includes significant non-observable inputs, they are classified as Level 3.

Asset-Backed Securities

This category mainly consists of residential mortgage-backed securities, commercial mortgage-backed securities, and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”). As of September 30, 2013, the Company held $3.3 billion of ABS classified as Level 2. These securities are priced from information provided by a third party pricing service and independent broker quotes. The third party pricing services and brokers mainly value securities using both a market and income approach to valuation. As part of this valuation process they consider the following characteristics of the item being measured to be relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, and 7) credit ratings of the securities.

After reviewing these characteristics of the ABS, the third party pricing service and brokers use certain inputs to determine the value of the security. For ABS classified as Level 2, the valuation would consist of predominantly market observable inputs such as, but not limited to: 1) monthly principal and interest payments on the underlying assets, 2) average life of the security, 3) prepayment speeds, 4) credit spreads, 5) treasury and swap yield curves, and 6) discount margin.

As of September 30, 2013, the Company held $719.8 million of Level 3 ABS, which included $548.8 million of other asset-backed securities classified as available-for-sale and $171.0 million of other asset-backed securities classified as trading. These securities are predominantly ARS whose underlying collateral is at least 97% guaranteed by the FFELP. As a result of the ARS market collapse during 2008, the Company prices its ARS using an income approach valuation model. As part of the valuation process the Company reviews the following characteristics of the ARS in determining the relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, 7) credit ratings of the securities, 8) liquidity premium, and 9) paydown rate.

Corporate bonds, U.S. Government-related securities, States, municipals, and political subdivisions, and Other government related securities

As of September 30, 2013, the Company classified approximately $22.9 billion of corporate bonds, U.S. government-related securities, states, municipals, and political subdivisions, and other government-related securities as Level 2. The fair value of the Level 2 bonds and securities is predominantly priced by broker quotes and a third party pricing service. The Company has reviewed the valuation techniques of the brokers and third party pricing service and has determined that such techniques used Level 2 market observable inputs. The following characteristics of the bonds and securities are considered to be the primary relevant inputs to the valuation: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) seniority, and 4) credit ratings.

The brokers and third party pricing service utilize valuation models that consist of a hybrid income and market approach to valuation. The pricing models utilize the following inputs: 1) principal and interest payments, 2) treasury yield curve, 3) credit spreads from new issue and secondary trading markets, 4) dealer quotes with adjustments for issues with early redemption features, 5) liquidity premiums present on private placements, and 6) discount margins from dealers in the new issue market.

As of September 30, 2013, the Company classified approximately $196.9 million of bonds and securities as Level 3 valuations. Level 3 bonds and securities primarily represent investments in illiquid bonds for which no price is readily available. To determine a price, the Company uses a discounted cash flow model with both observable and unobservable inputs. These inputs are entered into an industry standard pricing model to determine the final price of the security. These inputs include: 1) principal and interest payments, 2) coupon rate, 3) sector and issuer level spread over treasury, 4) underlying collateral, 5) credit ratings, 6) maturity, 7) embedded options, 8) recent new issuance, 9) comparative bond analysis, and 10) an illiquidity premium.

Equities

As of September 30, 2013, the Company held approximately $108.9 million of equity securities classified as Level 2 and Level 3. Of this total, $64.6 million represents Federal Home Loan Bank (“FHLB”) stock. The Company believes that the cost of the FHLB stock approximates fair value. The remainder of these equity securities is primarily made up of holdings we have obtained through bankruptcy proceedings or debt restructurings.

Other long-term investments and Other liabilities

Other long-term investments and other liabilities consist entirely of free-standing and embedded derivative financial instruments. Refer to Note 14, Derivative Financial Instruments for additional information related to derivatives. Derivative financial instruments are valued using exchange prices, independent broker quotations, or pricing valuation models, which utilize market data inputs. Excluding embedded derivatives, as of September 30, 2013, 72.6% of derivatives based upon notional values were priced using exchange prices or independent broker quotations. The remaining derivatives were priced by pricing valuation models, which predominantly utilize observable market data inputs. Inputs used to value derivatives include, but are not limited to, interest swap rates, credit spreads, interest rate and equity market volatility indices, equity index levels, and treasury rates. The Company performs monthly analysis on derivative valuations that includes both quantitative and qualitative analyses.

Derivative instruments classified as Level 1 generally include futures and puts, which are traded on active exchange markets.

Derivative instruments classified as Level 2 primarily include interest rate and inflation swaps, puts, and swaptions. These derivative valuations are determined using independent broker quotations, which are corroborated with observable market inputs.

Derivative instruments classified as Level 3 were embedded derivatives and include at least one significant non-observable input. A derivative instrument containing Level 1 and Level 2 inputs will be classified as a Level 3 financial instrument in its entirety if it has at least one significant Level 3 input.

The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instruments may not be classified within the same fair value hierarchy level as the associated assets and liabilities. Therefore, the changes in fair value on derivatives reported in Level 3 may not reflect the offsetting impact of the changes in fair value of the associated assets and liabilities.

The embedded derivatives are carried at fair value in “other long-term investments” and “other liabilities” on the Company’s consolidated balance sheet. The changes in fair value are recorded in earnings as “Realized investment gains (losses) — Derivative financial instruments”. Refer to Note 14, Derivative Financial Instruments for more information related to each embedded derivatives gains and losses.

The fair value of the guaranteed minimum withdrawal benefits (“GMWB”) embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using multiple risk neutral stochastic equity scenarios and policyholder behavior assumptions. The risk neutral scenarios are generated using the current swap curve and projected equity volatilities and correlations. The projected equity volatilities are based on a blend of historical volatility and near-term equity market implied volatilities. The equity correlations are based on historical price observations. For policyholder behavior assumptions, expected lapse and utilization assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the National Association of Insurance Commissioners 1994 Variable Annuity MGDB Mortality Table for company experience, with attained age factors varying from 49% - 80%. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR plus a credit spread (to represent the Company’s non-performance risk). As a result of using significant unobservable inputs, the GMWB embedded derivative is categorized as Level 3. These assumptions are reviewed on a quarterly basis.

The fair value of the FIA embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using current index values and volatility, the hedge budget used to price the product, and policyholder assumptions (both elective and non-elective). For policyholder behavior assumptions, expected lapse and withdrawal assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the 1994 Variable Annuity MGDB mortality table modified for company experience, with attained age factors varying from 49% - 80%. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR up to one year and constant maturity treasury rates plus a credit spread (to represent the Company’s non-performance risk) thereafter. Policyholder assumptions are reviewed on an annual basis. As a result of using significant unobservable inputs, the FIA embedded derivative is categorized as Level 3.

The Company has assumed and ceded certain blocks of policies under modified coinsurance agreements in which the investment results of the underlying portfolios inure directly to the reinsurers. As a result, these agreements contain embedded derivatives that are reported at fair value. Changes in their fair value are reported in earnings. The investments supporting these agreements are designated as “trading securities”; therefore changes in their fair value are also reported in earnings. The fair value of the embedded derivative is the difference between the policy liabilities (net of policy loans) of $2.6 billion and the fair value of the trading securities of $2.9 billion. As a result, changes in the fair value of the embedded derivatives are largely offset by the changes in fair value of the related investments and each are reported in earnings. The fair value of the embedded derivative is considered a Level 3 valuation due to the unobservable nature of the policy liabilities.

Certain of the Company’s subsidiaries have entered into interest support, a yearly renewable term (“YRT”) premium support, and portfolio maintenance agreements with PLC. These agreements meet the definition of a derivative and are accounted for at fair value and are considered Level 3 valuations. The fair value of these derivatives as of September 30, 2013 was $2.4 million and is included in Other long-term investments. For information regarding realized gains on these derivatives please refer to Note 14, Derivative Financial Instruments.

The Interest Support Agreement provides that PLC will make payments to Golden Gate II if actual investment income on certain of Golden Gate II’s asset portfolios falls below a calculated investment income amount as defined in the Interest Support Agreement. The calculated investment income amount is a level of investment income deemed to be sufficient to support certain of Golden Gate II’s obligations under a reinsurance agreement with the Company, dated July 1, 2007. The derivative is valued using an internal valuation model that assumes a conservative projection of investment income under an adverse interest rate scenario and the probability that the expectation falls below the calculated investment income amount. This derivative had a fair value of zero as of September 30, 2013. The assessment of required payments from PLC under the Interest Support Agreement occurs annually.

The YRT Premium support agreement provides that PLC will make payments to Golden Gate II in the event that YRT premium rates increase. The derivative is valued using an internal valuation model. The valuation model is a probability weighted discounted cash flow model. The value is primarily a function of the likelihood and severity of future YRT premium increases. The fair value of this derivative as of September 30, 2013 was $2.0 million.

The portfolio maintenance agreements provide that PLC will make payments to Golden Gate V and WCL in the event of other-than-temporary impairments on investments that exceed defined thresholds. The derivatives are valued using an internal discounted cash flow model. The significant unobservable inputs are the projected probability and severity of credit losses used to project future cash flows on the investment portfolios. The fair value of the portfolio maintenance agreements as of September 30, 2013, was approximately $0.4 million.

The Funds Withheld derivative results from a reinsurance agreement with Shades Creek where the economic performance of certain hedging instruments held by the Company is ceded to Shades Creek. The value of the Funds Withheld derivative is directly tied to the value of the hedging instruments held in the funds withheld account. The hedging instruments predominantly consist of derivative instruments the fair values of which are classified as a Level 2 measurement; as such, the fair value of the Funds Withheld derivative has been classified as a Level 2 measurement. The fair value of the Funds Withheld derivative as of September 30, 2013, was a liability of $49.0 million.

Annuity account balances

The Company records certain of its FIA reserves at fair value. The fair value is considered a Level 3 valuation. The FIA valuation model calculates the present value of future benefit cash flows less the projected future profits to quantify the net liability that is held as a reserve. This calculation is done using multiple risk neutral stochastic equity scenarios. The cash flows are discounted using LIBOR plus a credit spread. Best estimate assumptions are used for partial withdrawals, lapses, expenses and asset earned rate with a risk margin applied to each. These assumptions are reviewed at least annually as a part of the formal unlocking process. If an event were to occur within a quarter that would make the assumptions unreasonable, the assumptions would be reviewed within the quarter.

The discount rate for the fixed indexed annuities is based on an upward sloping rate curve which is updated each quarter. The discount rates for September 30, 2013, ranged from a one month rate of 0.36%, a 5 year rate of 2.44%, and a 30 year rate of 4.97%. A credit spread component is also included in the calculation to accommodate non-performance risk.

Separate Accounts

Separate account assets are invested in open-ended mutual funds and are included in Level 1.

Valuation of Level 3 Financial Instruments

The following table presents the valuation method for material financial instruments included in Level 3, as well as the unobservable inputs used in the valuation of those financial instruments:

	Fair Value
	As of		Valuation	Unobservable	Range
	September 30, 2013		Technique	Input	(Weighted Average)
	(Dollars In Thousands)
Assets:
Other asset-backed securities	$	548,771	Discounted cash flow	Liquidity premium	0.69% - 1.32% (0.80%)
				Paydown rate	8.37% - 17.50% (12.45%)
Corporate bonds	192,580		Discounted cash flow	Spread over treasury	0.32% - 6.75% (2.89%)
Embedded derivatives -	77,835		Actuarial cash flow	Mortality	49% to 80% of 1994 MGDB table
GMWB(1)			model	Lapse	0% - 24%, depending on product/duration/funded status of guarantee
				Utilization	97% - 103%
				Nonperformance risk	0.19% - 1.31%
Liabilities:
Annuity account balances(2)	$	110,590	Actuarial cash flow	Asset earned rate	5.37%
			model	Expenses	$88 - $102 per policy
				Withdrawal rate	2.20%
				Mortality	49% to 80% of 1994 MGDB table
				Lapse	2.2% - 33.0%, depending on duration/surrender charge period
				Return on assets	1.50% - 1.85% depending on surrender charge period
				Nonperformance risk	0.19% - 1.31%
Embedded derivative - FIA	9,199		Actuarial cash flow	Expenses	$83 - $97 per policy
			model	Withdrawal rate	1.1% - 4.5% depending on duration and tax qualification
				Mortality	49% - 80% of 1994 MGDB table
				Lapse	2.5% - 40.0%, depending on duration/surrender charge period
				Nonperformance risk	0.19% - 1.31%

(1)The fair value for the GMWB embedded derivative is presented as a net asset for the purposes of this chart. Excludes modified coinsurance agreements.

(2)Represents account balance liabilities related to fixed indexed annuities.

The chart above excludes Level 3 financial instruments that are valued using broker quotes and those which book value approximates fair value.

The Company has considered all reasonably available quantitative inputs as of September 30, 2013, but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $171.0 million of financial instruments, all asset backed securities, being classified as Level 3 as of September 30, 2013.

In certain cases the Company has determined that book value materially approximates fair value. As of September 30, 2013, the Company held $69.8 million of financial instruments where book value approximates fair value. Of the $69.8 million, $65.5 million represents equity securities, which are predominantly FHLB stock, and $4.3 million of other fixed maturity securities.

The following table presents the valuation method for material financial instruments included in Level 3, as well as the unobservable inputs used in the valuation of those financial instruments:

	Fair Value
	As of		Valuation	Unobservable	Range
	December 31, 2012		Technique	Input	(Weighted Average)
	(Dollars In Thousands)
Assets:
Other asset-backed securities	$	596,143	Discounted cash flow	Liquidity premium	0.72% - 1.68% (1.29%)
				Paydown rate	8.51% - 18.10% (11.40%)
Other government-related securities	20,011		Discounted cash flow	Spread over treasury	(0.30%)
Corporate bonds	168,007		Discounted cash flow	Spread over treasury	0.92% - 7.75% (3.34%)
Liabilities:
Embedded derivatives - GMWB(1)	$	169,041	Actuarial cash flow model	Mortality	57% of 1994 MGDB table
				Lapse	0% - 24%, depending on product/duration/funded status of guarantee
				Utilization	93% - 100%
				Nonperformance risk	0.09% - 1.34%
Annuity account balances(2)	129,468		Actuarial cash flow model	Asset earned rate	5.81%
				Expenses	$ 88 - $108 per policy
				Withdrawal rate	2.20%
				Mortality	57% of 1994 MGDB table
				Lapse	2.2% - 45.0%, depending on duration/surrender charge period
				Return on assets	1.50% - 1.85% depending on surrender charge period
				Nonperformance risk	0.09% - 1.34%

(1)The fair value for the GMWB embedded derivative is presented as a net liability for the purposes of this chart. Excludes modified coinsurance agreements.

(2)Represents account balance liabilities related to fixed indexed annuities.

The chart above excludes Level 3 financial instruments that are valued using broker quotes and those which book value approximates fair value.

The valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company which resulted in $70.5 million of financial instruments being classified as Level 3 as of December 31, 2012.

In certain cases the Company has determined that book value materially approximates fair value. As of December 31, 2012, the Company held $69.8 million of financial instruments where book value approximates fair value. Of the $69.8 million, $65.5 million represents equity securities, which are predominantly FHLB stock, and $4.3 million of other fixed maturity securities.

The asset-backed securities classified as Level 3 are predominantly ARS. A change in the paydown rate (the projected annual rate of principal reduction) of the ARS can significantly impact the fair value of these securities. A decrease in the paydown rate would increase the projected weighted average life of the ARS and increase the sensitivity of the ARS’ fair value to changes in interest rates. An increase in the liquidity premium would result in a decrease in the fair value of the securities, while a decrease in the liquidity premium would increase the fair value of these securities.

The fair value of corporate bonds classified as Level 3 is sensitive to changes in the interest rate spread over the corresponding U.S. Treasury rate. This spread represents a risk premium that is impacted by company specific and market factors. An increase in the spread can be caused by a perceived increase in credit risk of a specific issuer and/or an increase in the overall market risk premium associated with similar securities. The fair values of corporate bonds are sensitive to changes in spread. When holding the treasury rate constant, the fair value of corporate bonds increases when spreads decrease, and decreases when spreads increases.

The GMWB liability is sensitive to changes in the discount rate which includes the Company’s nonperformance risk, volatility, lapse, and mortality assumptions. The volatility assumption is an observable input as it is based on market inputs. The Company’s nonperformance risk, lapse, and mortality are unobservable. An increase in the three unobservable assumptions would result in a decrease in the liability and conversely, if there is a decrease in the assumptions the liability would increase. The liability is also dependent on the assumed policyholder utilization of the GMWB where an increase in assumed utilization would result in an increase in the liability and conversely, if there is a decrease in the assumption, the liability would decrease.

The fair value of the FIA account balance liability is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the FIA account balance liability is sensitive to the asset earned rate and required return on assets. The value of the liability increases with an increase in required return on assets and decreases with an increase in the asset earned rate and conversely, the value of the liability decreases with a decrease in required return on assets and an increase in the asset earned rate.

The fair value of the FIA embedded derivative is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the FIA embedded derivative is sensitive to non-performance risk. The value of the liability increases with decreases in the discount rate and non-performance risk and decreases with increases in the discount rate and non-performance risk. The value of the liability increases with increases in equity returns and the liability decreases with a decrease in equity returns.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended September 30, 2013, for which the Company has used significant unobservable inputs (Level 3):


																															Total
																															Gains (losses)
			Total					Total																							included in
			Realized and Unrealized					Realized and Unrealized																							Earnings
			Gains					Losses																							related to
					Included in						Included in																				Instruments
					Other						Other												Transfers								still held at
	Beginning		Included in		Comprehensive			Included in			Comprehensive												in/out of						Ending		the Reporting
	Balance		Earnings		Income			Earnings			Income			Purchases		Sales			Issuances		Settlements		Level 3			Other			Balance		Date
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	14,062	$	—	$	1,310		$	—		$	—		$	—	$	(12	)	$	—	$	—	$	(15,333	)	$	11		$	38	$	—
Commercial mortgage-backed securities	—		—		—			—			—			—		—			—		—		—			—			—		—
Other asset-backed securities	576,396		—		52			—			(26,969		)	11,769		(12,085		)	—		—		—			(392		)	548,771		—
U.S. government-related securities	—		—		—			—			—			—		—			—		—		—			—			—		—
States, municipals, and political subdivisions	4,275		—		—			—			—			—		—			—		—		—			—			4,275		—
Other government-related securities	20,000		—		1			—			—			—		(20,000		)	—		—		—			(1		)	—		—
Corporate bonds	194,895		—		1,662			—			(3,513		)	11,002		(13,558		)	—		—		(3,385		)	385			187,488		—
Total fixed maturity securities - available-for-sale	809,628		—		3,025			—			(30,482		)	22,771		(45,655		)	—		—		(18,718		)	3			740,572		—
Fixed maturity securities - trading
Residential mortgage-backed securities	1,582		—		—			(1		)	—			—		(72		)	—		—		(1,494		)	(15		)	—		—
Commercial mortgage-backed securities	—		—		—			—			—			—		—			—		—		—			—			—		—
Other asset-backed securities	168,851		3,167		—			(1,080		)	—			16,394		(16,568		)	—		—		—			203			170,967		1,596
U.S. government-related securities	—		—		—			—			—			—		—			—		—		—			—			—		—
States, municipals and political subdivisions	3,500		—		—			(123		)	—			—		—			—		—		(3,377		)	—			—		—
Other government-related securities	—		—		—			—			—			—		—			—		—		—			—			—		—
Corporate bonds	5,092		—		—			(4		)	—			—		—			—		—		—			4			5,092		(4		)
Total fixed maturity securities - trading	179,025		3,167		—			(1,208		)	—			16,394		(16,640		)	—		—		(4,871		)	192			176,059		1,592
Total fixed maturity securities	988,653		3,167		3,025			(1,208		)	(30,482		)	39,165		(62,295		)	—		—		(23,589		)	195			916,631		1,592
Equity securities	65,527		—		—			—			—			—		—			—		—		—			—			65,527		—
Other long-term investments(1)	47,838		36,917		(1,750		)	—			—			—		—			—		—		—			—			83,005		35,167
Short-term investments	—		—		—			—			—			—		—			—		—		—			—			—		—
Total investments	1,102,018		40,084		1,275			(1,208		)	(30,482		)	39,165		(62,295		)	—		—		(23,589		)	195			1,065,163		36,759
Total assets measured at fair value on a recurring basis	$	1,102,018	$	40,084	$	1,275		$	(1,208	)	$	(30,482	)	$	39,165	$	(62,295	)	$	—	$	—	$	(23,589	)	$	195		$	1,065,163	$	36,759

Liabilities:
Annuity account balances(2)	$	114,614	$	—	$	(2,472	)	$	—		$	—		$	—	$	—		$	46	$	6,542	—			$	—		$	110,590	$	—
Other liabilities(1)	256,776		39,109		(13,056		)	—			—			—		—			—		—		—			—			230,723		26,053
Total liabilities measured at fair value on a recurring basis	$	371,390	$	39,109	$	(15,528	)	$	—		$	—		$	—	$	—		$	46	$	6,542	$	—		$	—		$	341,313	$	26,053

(1)Represents certain freestanding and embedded derivatives.

(2)Represents liabilities related to fixed indexed annuities.

For the three months ended September 30, 2013, $1.3 million of securities were transferred into Level 3. This amount was transferred from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous periods, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of September 30, 2013.

For the three months ended September 30, 2013, there were $24.9 million of securities transferred out of Level 3. This amount was transferred to Level 2. These transfers resulted from securities that were priced using significant unobservable inputs in previous periods, but are now priced by independent pricing services or brokers, using no significant unobservable inputs as of September 30, 2013.

For the three months ended September 30, 2013, there were no transfers from Level 2 to Level 1.

For the three months ended September 30, 2013, there were no transfers from Level 1.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended September 30, 2012, for which the Company has used significant unobservable inputs (Level 3):


																														Total
																														Gains (losses)
			Total				Total																							included in
			Realized and Unrealized				Realized and Unrealized																							Earnings
			Gains				Losses																							related to
					Included in					Included in																				Instruments
					Other					Other												Transfers								still held at
	Beginning		Included in		Comprehensive		Included in			Comprehensive												in/out of						Ending		the Reporting
	Balance		Earnings		Income		Earnings			Income			Purchases		Sales			Issuances		Settlements		Level 3			Other			Balance		Date
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	4	$	—	$	—	$	—		$	—		$	—	$	—		$	—	$	—	$	—		$	—		$	4	$	—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Other asset-backed securities	584,641		45		11,462		—			(1,157		)	—		(5,200		)	—		—		—			(153		)	589,638		—
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—			—			—		—
States, municipals, and political subdivisions	4,275		—		—		—			—			—		—			—		—		—			—			4,275		—
Other government-related securities	20,020		—				—			(11		)	—		—			—		—		—			(4		)	20,005		—
Corporate bonds	172,145		—		5,349		—			(221		)	—		(2,090		)	—		—		(26,802		)	122			148,503		—
Total fixed maturity securities - available-for-sale	781,085		45		16,811		—			(1,389		)	—		(7,290		)	—		—		(26,802		)	(35		)	762,425		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Other asset-backed securities	65,059		2,972		—		(148		)	—			7,208		(1,442		)	—		—		—			413			74,062		2,823
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—			—			—		—
States, municipals and political subdivisions	—		—		—		—			—			—		—			—		—		—			—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Corporate bonds	114		1		—		—			—			—		—			—		—					—			115		2
Total fixed maturity securities - trading	65,173		2,973		—		(148		)	—			7,208		(1,442		)	—		—		—			413			74,177		2,825
Total fixed maturity securities	846,258		3,018		16,811		(148		)	(1,389		)	7,208		(8,732		)	—		—		(26,802		)	378			836,602		2,825
Equity securities	69,795		8		—		—			(147		)	—		(4,295		)	—		—		—			—			65,361		—
Other long-term investments(1)	25,315		20,278		—		(34		)	—			—		—			—		—		—			—			45,559		20,244
Short-term investments	—		—		—		—			—			—		—			—		—		—			—			—		—
Total investments	941,368		23,304		16,811		(182		)	(1,536		)	7,208		(13,027		)	—		—		(26,802		)	378			947,522		23,069
Total assets measured at fair value on a recurring basis	$	941,368	$	23,304	$	16,811	$	(182	)	$	(1,536	)	$	7,208	$	(13,027	)	$	—	$	—	$	(26,802	)	$	378		$	947,522	$	23,069

Liabilities:
Annuity account balances(2)	$	134,597	$	—	$	—	$	(5,766	)	$	—		$	—	$	—		$	217	$	6,011	$	—		$	—		$	134,569	$	—
Other liabilities(1)	516,587		11,016		—		(112,779		)	—			—		—			—		—		—			—			618,350		(101,763		)
Total liabilities measured at fair value on a recurring basis	$	651,184	$	11,016	$	—	$	(118,545	)	$	—		$	—	$	—		$	217	$	6,011	$	—		$	—		$	752,919	$	(101,763	)

(1)Represents certain freestanding and embedded derivatives.

(2)Represents liabilities related to fixed indexed annuities.

For the three months ended September 30, 2012, there were no securities transferred into Level 3.

For the three months ended September 30, 2012, $26.8 million of securities were transferred out of Level 3. This amount was transferred into Level 2. These transfers resulted from securities priced by independent pricing services or brokers as of September 30, 2012 that were previously priced internally using significant unobservable inputs where market observable inputs were not available.

For the three months ended September 30, 2012, there were no transfers from Level 2 to Level 1.

For the three months ended September 30, 2012, there were no transfers out of Level 1.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the nine months ended September 30, 2013, for which the Company has used significant unobservable inputs (Level 3):


																															Total
																															Gains (losses)
			Total					Total																							included in
			Realized and Unrealized					Realized and Unrealized																							Earnings
			Gains					Losses																							related to
					Included in						Included in																				Instruments
					Other						Other												Transfers								still held at
	Beginning		Included in		Comprehensive			Included in			Comprehensive												in/out of						Ending		the Reporting
	Balance		Earnings		Income			Earnings			Income			Purchases		Sales			Issuances		Settlements		Level 3			Other			Balance		Date
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	4	$	—	$	1,310		$	—		$	(337	)	$	14,349	$	(12	)	$	—	$	—	$	(15,287	)	$	11		$	38	$	—
Commercial mortgage-backed securities	—		—		—			—			—			—		—			—		—		—			—			—		—
Other asset-backed securities	596,143		—		43,808			—			(54,517		)	24,931		(62,471		)	—		—		1,227			(350		)	548,771		—
U.S. government-related securities	—		—		—			—			—			—		—			—		—		—			—			—		—
States, municipals, and political subdivisions	4,275		—		—			—			—			—		—			—		—		—			—			4,275		—
Other government-related securities	20,011		—		2			—			(3		)	—		(20,000		)	—		—		—			(10		)	—		—
Corporate bonds	167,892		116		2,673			—			(13,559		)	29,277		(58,742		)	—		—		58,945			886			187,488		—
Total fixed maturity securities - available-for-sale	788,325		116		47,793			—			(68,416		)	68,557		(141,225		)	—		—		44,885			537			740,572		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—			(1		)	—			1,582		(72		)	—		—		(1,494		)	(15		)	—		—
Commercial mortgage-backed securities	—		—		—			—			—			—		—			—		—		—			—			—		—
Other asset-backed securities	70,535		7,964		—			(3,949		)	—			122,224		(29,344		)	—		—		2,210			1,327			170,967		4,814
U.S. government-related securities	—		—		—			—			—			—		—			—		—		—			—			—		—
States, municipals and political subdivisions	—		—		—			(123		)	—			3,500		—			—		—		(3,377		)	—			—		—
Other government-related securities	—		—		—			—			—			—		—			—		—		—			—			—		—
Corporate bonds	115		1		—			(27		)	—			—		(17		)	—		—		5,013			7			5,092		(4		)
Total fixed maturity securities - trading	70,650		7,965		—			(4,100		)	—			127,306		(29,433		)	—		—		2,352			1,319			176,059		4,810
Total fixed maturity securities	858,975		8,081		47,793			(4,100		)	(68,416		)	195,863		(170,658		)	—		—		47,237			1,856			916,631		4,810
Equity securities	65,527		—		—			—			—			—		—			—		—		—			—			65,527		—
Other long-term investments(1)	48,655		84,176		(15,733		)	—			—			—		—			—		—		—			(34,093		)	83,005		68,443
Short-term investments	—		—		—			—			—			—		—			—		—		—			—			—		—
Total investments	973,157		92,257		32,060			(4,100		)	(68,416		)	195,863		(170,658		)	—		—		47,237			(32,237		)	1,065,163		73,253
Total assets measured at fair value on a recurring basis	$	973,157	$	92,257	$	32,060		$	(4,100	)	$	(68,416	)	$	195,863	$	(170,658	)	$	—	$	—	$	47,237		$	(32,237	)	$	1,065,163	$	73,253

Liabilities:
Annuity account balances(2)	$	129,468	$	—	$	(6,159	)	$	—		$	—		$	—	$	—		$	247	$	25,284	$	—		$	—		$	110,590	$	—
Other liabilities(1)	611,437		277,319		(31,110		)	—			—			—		—			—		—		—			134,505			230,723		246,209
Total liabilities measured at fair value on a recurring basis	$	740,905	$	277,319	$	(37,269	)	$	—		$	—		$	—	$	—		$	247	$	25,284	$	—		$	134,505		$	341,313	$	246,209

(1)Represents certain freestanding and embedded derivatives.

(2)Represents liabilities related to fixed indexed annuities.

For the nine months ended September 30, 2013, $72.1 million of securities were transferred into Level 3. This amount was transferred from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous periods, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of September 30, 2013. All transfers are recognized as of the end of the period.

For the nine months ended September 30, 2013, there were $24.9 million of securities transferred out of Level 3. This amount was transferred to Level 2. These transfers resulted from securities that were priced using significant unobservable inputs in previous periods, but are now priced by independent pricing services or brokers, using no significant unobservable inputs as of September 30, 2013.

For the nine months ended September 30, 2013, there were no transfers from Level 2 to Level 1.

For the nine months ended September 30, 2013, there were no transfers out of Level 1.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the nine months ended September 30, 2012, for which the Company has used significant unobservable inputs (Level 3):


																													Total
																													Gains (losses)
			Total				Total																						included in
			Realized and Unrealized				Realized and Unrealized																						Earnings
			Gains				Losses																						related to
					Included in					Included in																			Instruments
					Other					Other												Transfers							still held at
	Beginning		Included in		Comprehensive		Included in			Comprehensive												in/out of					Ending		the Reporting
	Balance		Earnings		Income		Earnings			Income			Purchases		Sales			Issuances		Settlements		Level 3		Other			Balance		Date
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	7	$	—	$	—	$	—		$	—		$	—	$	(3	)	$	—	$	—	$	—	$	—		$	4	$	—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	614,813		339		15,981		—			(22,055		)	—		(19,050		)	—		—		—		(390		)	589,638		—
U.S. government-related securities	15,000		—		—		—			(1		)	—		(15,000		)	—		—		—		1			—		—
States, municipals, and political subdivisions	—		—		—		—			—			4,275		—			—		—		—		—			4,275		—
Other government-related securities	—		—		18		—			(27		)	20,023		—			—		—		—		(9		)	20,005		—
Corporate bonds	119,565		—		7,198		—			(2,131		)	4		(4,185		)	—		—		27,810		242			148,503		—
Total fixed maturity securities - available-for-sale	749,385		339		23,197		—			(24,214		)	24,302		(38,238		)	—		—		27,810		(156		)	762,425		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	28,343		3,450		—		(905		)	—			48,255		(6,516		)	—		—		—		1,435			74,062		2,545
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
States, municipals and political subdivisions	—		—		—		—			—			—		—			—		—		—		—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	—		1		—		—			—			1		—			—		—		113		—			115		10
Total fixed maturity securities - trading	28,343		3,451		—		(905		)	—			48,256		(6,516		)	—		—		113		1,435			74,177		2,555
Total fixed maturity securities	777,728		3,790		23,197		(905		)	(24,214		)	72,558		(44,754		)	—		—		27,923		1,279			836,602		2,555
Equity securities	70,080		8		661		—			(1,097		)	4		(4,295		)	—		—		—		—			65,361		—
Other long-term investments(1)	19,103		33,951		—		(7,495		)	—			—		—			—		—		—		—			45,559		26,456
Short-term investments	—		—		—		—			—			—		—			—		—		—		—			—		—
Total investments	866,911		37,749		23,858		(8,400		)	(25,311		)	72,562		(49,049		)	—		—		27,923		1,279			947,522		29,011
Total assets measured at fair value on a recurring basis	$	866,911	$	37,749	$	23,858	$	(8,400	)	$	(25,311	)	$	72,562	$	(49,049	)	$	—	$	—	$	27,923	$	1,279		$	947,522	$	29,011

Liabilities:
Annuity account balances(2)	$	136,462	$	—	$	—	$	(9,983	)	$	—		$	—	$	—		$	645	$	12,521	$	—	$	—		$	134,569	$	—
Other liabilities(1)	437,613		67,565		—		(248,302		)	—			—		—			—		—		—		—			618,350		(180,737		)
Total liabilities measured at fair value on a recurring basis	$	574,075	$	67,565	$	—	$	(258,285	)	$	—		$	—	$	—		$	645	$	12,521	$	—	$	—		$	752,919	$	(180,737	)

(1)Represents certain freestanding and embedded derivatives.

(2)Represents liabilities related to fixed indexed annuities.

For the nine months ended September 30, 2012, $54.7 million of securities were transferred into Level 3. This amount was transferred from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous periods, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of September 30, 2012. All transfers are recognized as of the end of the period.

For the nine months ended September 30, 2012, $26.8 million of securities were transferred out of Level 3. This amount was transferred into Level 2. These transfers resulted from securities priced by independent pricing services or brokers as of September 30, 2012 that were priced internally using significant unobservable inputs where market observable inputs were not available during previous periods.

For the nine months ended September 30, 2012, there were no transfers from Level 2 to Level 1.

For the nine months ended September 30, 2012, there were no transfers out of Level 1.

Total realized and unrealized gains (losses) on Level 3 assets and liabilities are primarily reported in either realized investment gains (losses) within the consolidated statements of income (loss) or other comprehensive income (loss) within shareowners’ equity based on the appropriate accounting treatment for the item.

Purchases, sales, issuances, and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily relates to purchases and sales of fixed maturity securities and issuances and settlements of fixed indexed annuities.

The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur.

The amount of total gains (losses) for assets and liabilities still held as of the reporting date primarily represents changes in fair value of trading securities and certain derivatives that exist as of the reporting date and the change in fair value of fixed indexed annuities.

Estimated Fair Value of Financial Instruments

The carrying amounts and estimated fair values of the Company’s financial instruments as of the periods shown below are as follows:

		As of
		September 30, 2013				December 31, 2012
	Fair Value	Carrying				Carrying
	Level	Amounts		Fair Values		Amounts		Fair Values
		(Dollars In Thousands)
Assets:
Mortgage loans on real estate	3	$	4,794,924	$	5,287,854	$	4,948,625	$	5,723,579
Policy loans	3	856,333		856,333		865,391		865,391
Fixed maturities, held-to-maturity(1)	3	350,000		341,797		300,000		319,163

Liabilities:
Stable value product account balances	3	$	2,531,262	$	2,535,865	$	2,510,559	$	2,534,094
Annuity account balances	3	10,431,938		10,074,996		10,658,463		10,525,702

Debt:
Non-recourse funding obligations(2)	3	$	1,491,900	$	1,392,932	$	1,446,900	$	1,357,290

Except as noted below, fair values were estimated using quoted market prices.

(1) Security purchased from unconsolidated subsidiary, Red Mountain LLC.

(2) Of this carrying amount $350 million, fair value of $325.1 million, as of September 30, 2013, and $300 million, fair value of $297.6 million, as of December 31, 2012, relates to non-recourse funding obligations issued by Golden Gate V.

Fair Value Measurements

Mortgage loans on real estate

The Company estimates the fair value of mortgage loans using an internally developed model. This model includes inputs derived by the Company based on assumed discount rates relative to the Company’s current mortgage loan lending rate and an expected cash flow analysis based on a review of the mortgage loan terms. The model also contains the Company’s determined representative risk adjustment assumptions related to credit and liquidity risks.

Policy loans

The Company believes the fair value of policy loans approximates book value. Policy loans are funds provided to policy holders in return for a claim on the policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the fair value of policy loans approximates carrying value.

Fixed maturities, held-to-maturity

The Company estimates the fair value of its fixed maturity, held-to-maturity securities using internal discounted cash flow models. The discount rates used in the model were based on a current market yield for similar financial instruments.

Stable value product and Annuity account balances

The Company estimates the fair value of stable value product account balances and annuity account balances using models based on discounted expected cash flows. The discount rates used in the models were based on a current market rate for similar financial instruments.

Non-recourse funding obligations

The Company estimates the fair value of its non-recourse funding obligations using internal discounted cash flow models. The discount rates used in the model were based on a current market yield for similar financial instruments.