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, 2015, 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, 2016, these Level 3 invested assets comprised 2.8% 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, 2016
Financial Assets
Investments
Fixed maturities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities	$	472,156	$	472,156		$	-		$	468,694		$	3,462
Other, including
U.S. Treasury securities		488,127		488,127			13,894			474,233			-
Municipal bonds		1,778,741		1,778,741			-			1,733,575			45,166
Foreign government bonds		79,839		79,839			-			79,839			-
Corporate bonds		2,953,338		2,953,338			7,341			2,868,376			77,621
Other mortgage-backed securities		1,721,852		1,721,852			-			1,623,165			98,687
Total fixed maturities		7,494,053		7,494,053			21,235			7,247,882			224,936
Equity securities		137,640		137,640			110,398			27,236			6
Short-term investments		214,206		214,206			213,450			756			-
Other investments		16,034		16,034			-			16,034			-
Totals		7,861,933		7,861,933			345,083			7,291,908			224,942
Financial Liabilities
Investment contract and life policy
reserves, embedded derivatives		80		80			-			80			-
Other policyholder funds,
embedded derivatives		55,179		55,179			-			-			55,179

December 31, 2015
Financial Assets
Investments
Fixed maturities
U.S. Government and federally
sponsored agency obligations:
Mortgage-backed securities	$	504,414	$	504,414		$	-		$	504,414		$	-
Other, including
U.S. Treasury securities		546,111		546,111			14,258			531,853			-
Municipal bonds		1,708,943		1,708,943			-			1,678,564			30,379
Foreign government bonds		73,617		73,617			-			73,617			-
Corporate bonds		2,779,415		2,779,415			10,195			2,701,645			67,575
Other mortgage-backed securities		1,478,840		1,478,840			-			1,403,374			75,466
Total fixed maturities		7,091,340		7,091,340			24,453			6,893,467			173,420
Equity securities		99,797		99,797			86,088			13,703			6
Short-term investments		174,152		174,152			169,764			4,388			-
Other investments		14,001		14,001			-			14,001			-
Totals		7,379,290		7,379,290			280,305			6,925,559			173,426
Financial Liabilities
Investment contract and life policy
reserves, embedded derivatives		14		14			-			14			-
Other policyholder funds,
embedded derivatives		39,021		39,021			-			-			39,021

The Company did not have any transfers between Levels 1 and 2 during the nine months ended September 30, 2016. The following table presents reconciliations for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis.

																							Financial
	Financial Assets																						Liabilities(1)
	Municipal Bonds			Corporate Bonds				Mortgage- Backed Securities(2)				Total Fixed Maturities				Equity Securities			Total

Beginning balance, July 1, 2016	$	47,647			$	73,408			$	96,581			$	217,636			$	6		$	217,642			$	47,706
Transfers into Level 3 (3)		-				10,375				7,655				18,030				-			18,030				-
Transfers out of Level 3 (3)		-				(5,967	)			(788	)			(6,755	)			-			(6,755	)			-
Total gains or losses
Net realized gains (losses)
included in net income
related to financial assets		-				1				(56	)			(55	)			-			(55	)			-
Net realized (gains) losses
included in net income
related to financial liabilities		-				-				-				-				-			-				68
Net unrealized gains (losses)
included in other
comprehensive income		(2,361	)			1,292				3,951				2,882				-			2,882				-
Purchases		-				-				-				-				-			-				-
Issuances		-				-				-				-				-			-				6,710
Sales		-				-				-				-				-			-				-
Settlements		-				-				-				-				-			-				-
Paydowns, maturities
and distributions		(120	)			(1,488	)			(5,194	)			(6,802	)			-			(6,802	)			695
Ending balance, September 30, 2016	$	45,166			$	77,621			$	102,149			$	224,936			$	6		$	224,942			$	55,179

Beginning balance, January 1, 2016	$	30,379			$	67,575			$	75,466			$	173,420			$	6		$	173,426			$	39,021
Transfers into Level 3 (3)		14,751				21,451				32,281				68,483				-			68,483				-
Transfers out of Level 3 (3)		-				(5,967	)			(788	)			(6,755	)			-			(6,755	)			-
Total gains or losses
Net realized gains (losses)
included in net income
related to financial assets		-				(656	)			(56	)			(712	)			-			(712	)			-
Net realized (gains) losses
included in net income
related to financial liabilities		-				-				-				-				-			-				2,066
Net unrealized gains (losses)
included in other
comprehensive income		420				3,073				4,173				7,666				-			7,666				-
Purchases		-				-				-				-				-			-				-
Issuances		-				-				-				-				-			-				15,194
Sales		-				-				-				-				-			-				-
Settlements		-				-				-				-				-			-				-
Paydowns, maturities
and distributions		(384	)			(7,855	)			(8,927	)			(17,166	)			-			(17,166	)			(1,102	)
Ending balance, September 30, 2016	$	45,166			$	77,621			$	102,149			$	224,936			$	6		$	224,942			$	55,179

(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)

Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities.

(3)

Transfers into and out of Level 3 during the three and nine months ended September 30, 2016 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, 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.

At September 30, 2016 and 2015, 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, 2016, realized gains/(losses) of ($68) and ($2,066), 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, 2015, the respective amounts were $1,328 and $1,795.

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, 2015. Generally, valuation techniques 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 those used for 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 relates 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, 2016
Financial Assets
Investments
Other investments		$	150,661		$	155,183		$	-		$	-		$	155,183
Financial Liabilities
Investment contract and life policy
reserves, fixed annuity contracts			4,308,100			4,179,033			-			-			4,179,033
Investment contract and life policy
reserves, account values on life contracts			78,741			82,642			-			-			82,642
Other policyholder funds			651,205			651,205			-			575,247			75,958
Long-term debt			247,146			267,634			267,634			-			-

December 31, 2015
Financial Assets
Investments
Other investments		$	148,759		$	153,228		$	-		$	-		$	153,228
Financial Liabilities
Investment contract and life policy
reserves, fixed annuity contracts			4,072,102			4,049,840			-			-			4,049,840
Investment contract and life policy
reserves, account values on life contracts			77,429			81,360			-			-			81,360
Other policyholder funds			653,631			653,631			-			575,104			78,527
Long-term debt			246,975			252,700			252,700			-			-