Note 3 - Fair Value of Financial Instruments

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

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

Financial Instruments Measured and Carried at Fair Value

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. At September 30, 2015, these Level 3 invested assets comprised 2.5% of the Company’s total investment portfolio fair value.

					Fair Value Measurements at
	Carrying		Fair		Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
September 30, 2015
Financial Assets
Investments
Fixed maturities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	523,680	$	523,680	$	-	$	523,680	$	-
Other, including
U.S. Treasury securities		598,745		598,745		14,829		583,916		-
Municipal bonds		1,712,409		1,712,409		-		1,681,398		31,011
Foreign government bonds		66,443		66,443		-		66,443		-
Corporate bonds		2,769,637		2,769,637		10,267		2,689,122		70,248
Other mortgage-backed securities		1,407,828		1,407,828		-		1,323,742		84,086
Total fixed maturities		7,078,742		7,078,742		25,096		6,868,301		185,345
Equity securities		96,065		96,065		82,404		13,655		6
Short-term investments		102,717		102,717		100,277		2,440		-
Other investments		11,135		11,135		-		11,135		-
Totals		7,288,659		7,288,659		207,777		6,895,531		185,351
Separate Account (variable annuity) assets (1)		1,741,977		1,741,977		1,741,977		-		-
Financial Liabilities
Other policyholder funds, embedded derivatives		31,755		31,755		-		-		31,755

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

(1)

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

The Company did not have any transfers between Levels 1 and 2 during the nine months ended September 30, 2015. The following tables present reconciliations for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis.

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

Beginning balance, July 1, 2015		$	29,669			$	72,724			$	84,700			$	187,093			$	6			$	187,099			$	26,719
Transfers into Level 3 (2)			-				-				505				505				-				505				-
Transfers out of Level 3 (2)			-				-				-				-				-				-				-
Total gains or losses
Net realized gains (losses) included in net income related to financial assets			-				(164	)			-				(164	)			1				(163	)			-
Net realized (gains) losses included in net income related to financial liabilities			-				-				-				-				-				-				(1,328	)
Net unrealized gains (losses) included in other comprehensive income			1,464				326				167				1,957				-				1,957				-
Purchases			-				-				-				-				-				-				-
Issuances			-				-				-				-				-				-				6,899
Sales			-				-				-				-				(1	)			(1	)			-
Settlements			-				-				-				-				-				-				-
Paydowns, maturities and distributions			(122	)			(2,638	)			(1,286	)			(4,046	)			-				(4,046	)			(535	)
Ending balance, September 30, 2015		$	31,011			$	70,248			$	84,086			$	185,345			$	6			$	185,351			$	31,755

Beginning balance, January 1, 2015		$	13,628			$	74,717			$	82,949			$	171,294			$	6			$	171,300			$	20,049
Transfers into Level 3 (2)			16,326				5,729				15,685				37,740				-				37,740				-
Transfers out of Level 3 (2)			-				(1,350	)			(9,664	)			(11,014	)			-				(11,014	)			-
Total gains or losses
Net realized gains (losses) included in net income related to financial assets			-				1,087				-				1,087				1				1,088				-
Net realized (gains) losses included in net income related to financial liabilities			-				-				-				-				-				-				(1,795	)
Net unrealized gains (losses) included in other comprehensive income			1,359				(758	)			(268	)			333				-				333				-
Purchases			-				-				-				-				-				-				-
Issuances			-				-				-				-				-				-				14,811
Sales			-				(476	)			-				(476	)			(1	)			(477	)			-
Settlements			-				-				-				-				-				-				-
Paydowns, maturities and distributions			(302	)			(8,701	)			(4,616	)			(13,619	)			-				(13,619	)			(1,310	)
Ending balance, September 30, 2015		$	31,011			$	70,248			$	84,086			$	185,345			$	6			$	185,351			$	31,755

(1)

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

(2)

Transfers into and out of Level 3 during the three and nine months ended September 30, 2015 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined.

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

Beginning balance, July 1, 2014		$	13,054			$	73,926			$	52,522			$	139,502			$	6		$	139,508			$	6,915
Transfers into Level 3 (2)			-				-				35,000				35,000				-			35,000				-
Transfers out of Level 3 (2)			-				(3,510	)			-				(3,510	)			-			(3,510	)			-
Total gains or losses
Net realized gains (losses) included in net income related to financial assets			-				-				-				-				-			-				-
Net realized (gains) losses included in net income related to financial liabilities			-				-				-				-				-			-				70
Net unrealized gains (losses) included in other comprehensive income			212				(180	)			(137	)			(105	)			-			(105	)			-
Purchases			-				-				-				-				-			-				-
Issuances			-				-				-				-				-			-				6,179
Sales			-				-				-				-				-			-				-
Settlements			-				-				-				-				-			-				-
Paydowns, maturities and distributions			(123	)			(4,580	)			(143	)			(4,846	)			-			(4,846	)			(82	)
Ending balance, September 30, 2014		$	13,143			$	65,656			$	87,242			$	166,041			$	6		$	166,047			$	13,082

Beginning balance, January 1, 2014		$	2,694			$	60,826			$	46,009			$	109,529			$	6		$	109,535			$	-
Transfers into Level 3 (2)			10,056				12,452				42,109				64,617				-			64,617				-
Transfers out of Level 3 (2)			-				(3,510	)			(519	)			(4,029	)			-			(4,029	)			-
Total gains or losses
Net realized gains (losses) included in net income related to financial assets			-				-				(26	)			(26	)			-			(26	)			-
Net realized (gains) losses included in net income related to financial liabilities			-				-				-				-				-			-				139
Net unrealized gains (losses) included in other comprehensive income			646				2,380				155				3,181				-			3,181				-
Purchases			-				-				-				-				-			-				-
Issuances			-				-				-				-				-			-				13,035
Sales			-				-				-				-				-			-				-
Settlements			-				-				-				-				-			-				-
Paydowns, maturities and distributions			(253	)			(6,492	)			(486	)			(7,231	)			-			(7,231	)			(92	)
Ending balance, September 30, 2014		$	13,143			$	65,656			$	87,242			$	166,041			$	6		$	166,047			$	13,082

(1)

Represents embedded derivatives, all related to the Company’s FIA products, reported in Other Policyholder Funds in the Company’s Consolidated Balance Sheets.

(2)

Transfers into and out of Level 3 during the three and nine months ended September 30, 2014 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined.

At September 30, 2015 and 2014, there were no realized gains or losses included in earnings that were attributable to changes in the fair value of Level 3 assets still held. For the three and nine months ended September 30, 2015, realized gains/(losses) of $1,328 and $1,795, respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held; for the three and nine months ended September 30, 2014, the respective amounts were $(70) and $(139).

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

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

Financial Instruments Not Carried at Fair Value; Disclosure Required

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

					Fair Value Measurements at
	Carrying		Fair		Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
September 30, 2015
Financial Assets
Investments
Other investments	$	147,435	$	151,866	$	-	$	-	$	151,866
Financial Liabilities
Fixed annuity contract liabilities		4,016,360		3,927,685		-		-		3,927,685
Policyholder account balances on interest-sensitive life contracts		77,068		81,096		-		-		81,096
Other policyholder funds		580,895		580,895		-		500,084		80,811
Short-term debt		113,000		113,000		-		113,000		-
Long-term debt		124,979		128,718		128,718		-		-

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