20. 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.

In the first quarter of 2012, the Company adopted ASU No. 2011-04—Fair Value Measurement—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRSs. The amendments in this Update resulted in modification of certain disclosures regarding fair value measurements, but did not result in a material change to the Company's fair value methodology or measurements and had no impact to the Company's financial position or results of operations.

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 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		259,955		—		1,169,943
State, municipalities, and political subdivisions		—		1,439,378		4,335		1,443,713
Other government-related securities		—		80,767		20,011		100,778
Corporate bonds		207		20,213,952		167,892		20,382,051

Total fixed maturity securities—available-for-sale		910,195		25,082,071		788,385		26,780,651

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		27,714,025		859,035		29,787,959
Equity securities		307,252		35,116		69,418		411,786
Other long-term investments⁽¹⁾		23,639		58,134		31,591		113,364
Short-term investments		215,320		2,492		—		217,812

Total investments		1,761,110		27,809,767		960,044		30,530,921
Cash		368,801		—		—		368,801
Other assets		8,239		—		—		8,239
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	$	12,302,384	$	27,809,767	$	960,044	$	41,072,195

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 equity 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, 2011:

	Level 1		Level 2		Level 3		Total

	(Dollars In Thousands)
Assets:
Fixed maturity securities—available-for-sale
Residential mortgage-backed securities	$	—	$	2,342,123	$	7	$	2,342,130
Commercial mortgage-backed securities		—		551,559		—		551,559
Other asset-backed securities		—		298,216		614,813		913,029
U.S. government-related securities		664,506		536,173		15,000		1,215,679
State, municipalities, and political subdivisions		—		1,327,713		69		1,327,782
Other government-related securities		—		93,017		—		93,017
Corporate bonds		204		18,460,480		119,601		18,580,285

Total fixed maturity securities—available-for-sale		664,710		23,609,281		749,490		25,023,481

Fixed maturity securities—trading
Residential mortgage-backed securities		—		313,963		—		313,963
Commercial mortgage-backed securities		—		190,247		—		190,247
Other asset-backed securities		—		29,585		28,343		57,928
U.S. government-related securities		555,601		255		—		555,856
State, municipalities, and political subdivisions		—		229,032		—		229,032
Other government-related securities		—		44,845		—		44,845
Corporate bonds		—		1,568,094		—		1,568,094

Total fixed maturity securities—trading		555,601		2,376,021		28,343		2,959,965

Total fixed maturity securities		1,220,311		25,985,302		777,833		27,983,446
Equity securities		243,336		11,310		80,586		335,232
Other long-term investments⁽¹⁾		27,757		7,785		12,703		48,245
Short-term investments		101,489		—		—		101,489

Total investments		1,592,893		26,004,397		871,122		28,468,412
Cash		267,298		—		—		267,298
Other assets		6,960		—		—		6,960
Assets related to separate accounts
Variable annuity		6,741,959		—		—		6,741,959
Variable universal life		502,617		—		—		502,617

Total assets measured at fair value on a recurring basis	$	9,111,727	$	26,004,397	$	871,122	$	35,987,246

Liabilities:
Annuity account balances⁽²⁾	$	—	$	—	$	136,462	$	136,462
Other liabilities⁽¹⁾		2,727		15,370		437,613		455,710

Total liabilities measured at fair value on a recurring basis	$	2,727	$	15,370	$	574,075	$	592,172

⁽¹⁾: Includes certain freestanding and embedded derivatives.
⁽²⁾: Represents liabilities related to equity 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 year ended December 31, 2012.

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 debt securities 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 December 31, 2012, the Company held $3.7 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 December 31, 2012, the Company held $666.7 million of Level 3 ABS, which included $70.5 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 December 31, 2012, the Company classified approximately $24.0 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 December 31, 2012, the Company classified approximately $192.4 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 December 31, 2012, the Company held approximately $104.5 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 21, 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 December 31, 2012, 97.1% 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, credit default swaps, 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 guaranteed minimum withdrawal benefits ("GMWB") embedded derivative is 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 21, Derivative Financial Instruments for more information related to GMWB embedded derivative gains and losses. The fair value of the 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 that is consistent with 57% of the National Association of Insurance Commissioners 1994 Variable Annuity GMDB Mortality Table. 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 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 $3.1 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.

Annuity account balances

The Company records its equity indexed annuities ("EIA") at fair value. The fair value is considered a Level 3 valuation. The EIA 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 equity indexed annuities is based on an upward sloping rate curve which is updated each quarter. The discount rates for December 31, 2012, ranged from a one month rate of 0.30%, a 5 year rate of 1.96%, and a 30 year rate of 4.14%. 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 December 31, 2012		Valuation Technique	Unobservable Input	Range (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 GMDB 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 GMDB 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. Excludes modified coinsurance arrangements.
⁽²⁾: Represents liabilities related to equity 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 $71.1 million of financial instruments being classified as Level 3 as of December 31, 2012. Of the $71.1 million, $70.5 million are other asset backed securities and $0.6 million are equity securities.

In certain cases the Company has determined that book value materially approximates fair value. As of December 31, 2012, the Company held $73.2 million of financial instruments where book value approximates fair value. Of the $73.2 million, $68.9 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 increase when spreads decrease.

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 EIA account balance liability is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the EIA 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 following table presents a reconciliation of the beginning and ending balances for fair value measurements for the year ended December 31, 2012, for which the Company has used significant unobservable inputs (Level 3):

																													Total Gains (losses) included in Earnings related to Instruments still held at the Reporting Date

			Total Realized and Unrealized Gains				Total Realized and Unrealized Losses
	Beginning Balance		Included in Earnings		Included in Other Comprehensive Income		Included in Earnings			Included in Other Comprehensive Income			Purchases		Sales			Issuances		Settlements		Transfers in/out of Level 3		Other			Ending Balance
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	7	$	—	$	—	$	—		$	—		$	—	$	(3	)	$	—	$	—	$	—	$	—		$	4	$	—
Commercial mortgage-backed		614,813		339		21,780		—			(22,587	)		—		(19,050	)		—		—		771		77			596,143		—
Other asset-backed securities		—		—		—		—			—			—		—			—		—		—		—			—		—
U.S. government-related securities		15,000		—		—		—			(2	)		—		(15,000	)		—		—		—		2			—		—
States, municipals, and political subdivisions		69		—		—		—			(1	)		4,275		(9	)		—		—		—		1			4,335		—
Other government-related securities		—		—		29		—			(27	)		20,024		—			—		—		—		(15	)		20,011		—
Corporate bonds		119,601		470		8,052		(4	)		(2,723	)		11,960		(9,854	)		—		—		40,060		330			167,892		—

Total fixed maturity securities— available-for-sale		749,490		809		29,861		(4	)		(25,340	)		36,259		(43,916	)		—		—		40,831		395			788,385		—
Fixed maturity securities—trading
Residential mortgage-backed		—		—		—		—			—			—		—			—		—		—		—			—		—
Commercial mortgage-backed securities		—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities		28,343		4,086		—		(2,306	)		—			48,255		(9,896	)		—		—		—		2,053			70,535		1,780
States, municipals and political subdivisions		—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds		—		2		—		—			—			1		—			—		—		112		—			115		10

Total fixed maturity securities—trading		28,343		4,088		—		(2,306	)		—			48,256		(9,896	)		—		—		112		2,053			70,650		1,790
Total fixed maturity securities		777,833		4,897		29,861		(2,310	)		(25,340	)		84,515		(53,812	)		—		—		40,943		2,448			859,035		1,790
Equity securities		80,586		8		826		—			(1,097	)		4		(4,295	)		—		—		—		(6,614	)		69,418		—
Other long-term investments⁽¹⁾		12,703		26,747		—		(7,859	)		—			—		—			—		—		—		—			31,591		18,888

Total investments		871,122		31,652		30,687		(10,169	)		(26,437	)		84,519		(58,107	)		—		—		40,943		(4,166	)		960,044		20,678

Total assets measured at fair value on a recurring basis	$	871,122	$	31,652	$	30,687	$	(10,169	)	$	(26,437	)	$	84,519	$	(58,107	)	$	—	$	—	$	40,943	$	(4,166	)	$	960,044	$	20,678

Liabilities:
Annuity account balances⁽²⁾	$	136,462	$	—	$	—	$	12,293		$	—		$	—	$	—		$	860	$	20,147	$	—	$	—		$	129,468	$	—
Other liabilities⁽¹⁾		437,613		86,523		—		(260,347	)		—			—		—			—		—		—		—			611,437		(173,824	)

Total liabilities measured at fair value on a recurring basis	$	574,075	$	86,523	$	—	$	(248,054	)	$	—		$	—	$	—		$	860	$	20,147	$	—	$	—		$	740,905	$	(173,824	)

⁽¹⁾: Represents certain freestanding and embedded derivatives.
⁽²⁾: Represents liabilities related to equity indexed annuities.

For the year ended December 31, 2012, $67.7 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 December 31, 2012.

For the year ended December 31, 2012, $26.8 million of securities were transferred out of Level 3. This amount was transferred to Level 2. These transfers resulted from securities that were previously valued using an internal model that utilized significant unobservable inputs but were valued internally or by independent pricing services or brokers, utilizing no significant unobservable inputs. All transfers are recognized as of the end of the reporting period.

For the year ended December 31, 2012, there were no transfers from Level 2 to Level 1.

For the year ended December 31, 2012, 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 year ended December 31, 2011, for which the Company has used significant unobservable inputs (Level 3):

																														Total Gains (losses) included in Earnings related to Instruments still held at the Reporting Date

			Total Realized and Unrealized Gains				Total Realized and Unrealized Losses
	Beginning Balance		Included in Earnings		Included in Other Comprehensive Income		Included in Earnings			Included in Other Comprehensive Income			Purchases		Sales			Issuances		Settlements		Transfers in/out of Level 3			Other			Ending Balance
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	20	$	—	$	12	$	(4	)	$	—		$	—	$	(12	)	$	—	$	—	$	(9	)	$	—		$	7	$	—
Commercial mortgage-backed securities		19,901		—		147		—			(719	)		—		(103	)		—		—		(19,224	)		(2	)		—		—
Other asset-backed securities		641,129		4,527		28,873		(8,661	)		(50,941	)		—		—			—		—		—			(114	)		614,813		—
U.S. government-related securities		15,109		—		—		—			(122	)		—		—			—		—		—			13			15,000		—
States, municipals, and political subdivisions		78		—		—		—			(1	)		—		(9	)		—		—		—			1			69		—
Other government-related securities		—		—		—		—			—			—		—			—		—		—			—			—		—
Corporate bonds		65,032		—		5,216		—			(1,689	)		40,000		(3,543	)		—		—		14,585			—			119,601		—

Total fixed maturity securities—available-for-sale		741,269		4,527		34,248		(8,665	)		(53,472	)		40,000		(3,667	)		—		—		(4,648	)		(102	)		749,490		—
Fixed maturity securities—trading
Residential mortgage-backed		—		—		—		—			—			—		—			—		—		—			—			—		—
Commercial mortgage-backed securities		—		—		—		—			—			—		—			—		—		—			—			—		—
Other asset-backed securities		59,925		1,213		—		(2,689	)		—			3,792		(40,292	)		—		—		4,002			2,392			28,343		(937	)
U.S. government-related securities		3,442		387		—		(476	)		—			—		(3,347	)		—		—		—			(6	)		—		—
Corporate bonds		—		611		—		(1,453	)		—			—		(37,292	)		—		—		38,039			95			—		—

Total fixed maturity securities—trading		63,367		2,211		—		(4,618	)		—			3,792		(80,931	)		—		—		42,041			2,481			28,343		(937	)
Total fixed maturity securities		804,636		6,738		34,248		(13,283	)		(53,472	)		43,792		(84,598	)		—		—		37,393			2,379			777,833		(937	)
Equity securities		77,098		49		555		—			(1,050	)		3,962		(49	)		—		—		21			—			80,586		—
Other long-term investments⁽¹⁾		25,065		—		—		(12,362	)		—			—		—			—		—		—			—			12,703		(12,362	)
Short-term investments		—		—		—		—			—			—		—			—		—		—			—			—		—

Total investments		906,799		6,787		34,803		(25,645	)		(54,522	)		47,754		(84,647	)		—		—		37,414			2,379			871,122		(13,299	)

Total assets measured at fair value on a recurring basis	$	906,799	$	6,787	$	34,803	$	(25,645	)	$	(54,522	)	$	47,754	$	(84,647	)	$	—	$	—	$	37,414		$	2,379		$	871,122	$	(13,299	)

Liabilities:
Annuity account balances⁽²⁾	$	143,264	$	—	$	—	$	(5,850	)	$	—		$	—	$	—		$	654	$	13,306	$	—		$	—		$	136,462	$	—
Other liabilities⁽¹⁾		190,529		—		—		(249,757	)		—			—		(2,673	)		—		—		—			—			437,613		(249,757	)

Total liabilities measured at fair value on a recurring basis	$	333,793	$	—	$	—	$	(255,607	)	$	—		$	—	$	(2,673	)	$	654	$	13,306	$	—		$	—		$	574,075	$	(249,757	)

⁽¹⁾: Represents certain freestanding and embedded derivatives.
⁽²⁾: Represents liabilities related to equity indexed annuities.

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 equity 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 asset transfers in the table(s) above primarily related to positions moved from Level 3 to Level 2 as the Company determined that certain inputs were observable.

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 equity 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 December 31,

	2012				2011
	Carrying Amounts		Fair Values		Carrying Amounts		Fair Values
	(Dollars In Thousands)
Assets:
Mortgage loans on real estate	$	4,950,201	$	5,725,382	$	5,353,481	$	6,251,902
Policy loans		865,391		865,391		879,819		879,819
Fixed maturities, held-to-maturity⁽¹⁾		300,000		319,163		—		—
Liabilities:
Stable value product account balances	$	2,510,559	$	2,534,094	$	2,769,510	$	2,855,614
Annuity account balances		10,658,463		10,525,702		10,946,848		10,767,892
Mortgage loan backed certificates		—		—		19,755		19,893
Debt:
Bank borrowings	$	50,000	$	50,000	$	170,000	$	170,000
Senior and Medium-Term Notes		1,350,000		1,584,438		1,350,000		1,494,346
Subordinated debt securities		540,593		556,524		524,743		525,483
Non-recourse funding obligations⁽²⁾		586,000		481,056		407,800		217,529

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 $300 million, fair value of $297.6 million, 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 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.

Debt

Bank borrowings

The Company believes the carrying value of its bank borrowings approximates fair value as the borrowings pay a floating interest rate plus a spread based on the rating of the Company's senior debt which the Company believes approximates a market interest rate.

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.