Fair Value Measurements
 3 Months Ended
Mar. 31, 2013
Disclosure Schedule Of Fair Value Of Assets And Liabilities Measured On Recurring Basis [Abstract]  
Fair Value Measurements
Fair Value Measurements
Under GAAP, fair value represents the price that would be received to sell an asset (exit price) or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.
The Company categorizes its financial assets and liabilities measured at fair value in three levels, based on the inputs and assumptions used to determine the fair value. These levels are as follows:
Level 1 - Valuations are based upon quoted prices for identical instruments traded in active markets.
Level 2 - Valuations are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Valuations are obtained from third-party pricing services or inputs that are observable or derived principally from or corroborated by observable market data.
Level 3 - Valuations are generated from techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company's assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models, spread-based models, and similar techniques, using the best information available in the circumstances.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value but for which fair value is disclosed.
Assets
Securities Available for Sale
Fixed maturity and equity securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon unadjusted quoted prices, if available, except as described in the subsequent paragraphs.
Cash and Short-Term Financial Assets
Short-term financial assets include cash and other short-term investments. Cash is categorized as Level 1. Other short-term assets are invested in institutional money market funds. These assets are categorized as Level 2, as the valuation is based upon the net asset value (NAV) of the fund. There are no restrictions on withdrawal of these funds.
Loans
The Company does not record loans at fair value. As such, valuation techniques discussed herein for loans are primarily for estimating fair value for purpose of disclosure.
Fair values of mortgage loans on real estate properties are calculated by discounting contractual cash flows, using discount rates based on current industry pricing or the Company’s estimate of an appropriate risk-adjusted discount rate for loans of similar size, type, remaining maturity, likelihood of prepayment, and repricing characteristics. Mortgage loans are categorized as Level 3 in the fair value hierarchy.
The Company also has loans made to policyholders. These loans cannot exceed the cash surrender value of the policy. Carrying value of policy loans approximates fair value. Policy loans are categorized as Level 3.
Separate Accounts
The separate account assets and liabilities, which are equal, are recorded at fair value based upon NAV. They are categorized as Level 2 in the fair value hierarchy, as the fair value is based upon the NAV of the fund.
Liabilities
Investment-Type Liabilities Included in Policyholder Account Balances and Other Policyholder Funds
Fair values for liabilities under investment-type insurance contracts are based upon account value. The fair values of investment-type insurance contracts included with policyholder account balances for fixed deferred annuities are estimated to be their cash surrender values. The fair values of supplementary contracts without life contingencies are estimated to be the present value of payments at a market yield. The fair values of deposits with no stated maturity are estimated to be the amount payable on demand at the measurement date. These liabilities are categorized as Level 3.
Guaranteed Minimum Withdrawal Benefits (GMWB)
The Company offers a GMWB rider that can be added to new or existing variable annuity contracts. The rider provides an enhanced withdrawal benefit that guarantees a stream of income payments to an owner or annuitant, regardless of the contract account value. Fair value for GMWB rider contracts is a Level 3 valuation, as it is based on models which utilize significant unobservable inputs. These models require actuarial and financial market assumptions, which reflect the assumptions market participants would use in pricing the contract, including adjustments for volatility, risk, and issuer non-performance.
Notes Payable
Fair values for short-term notes payable approximate their carrying value. The carrying amount is a reasonable estimate of the fair value because of the relatively short time between the origination of the loan and its expected repayment.

Determination of Fair Value
The determination of the fair value of the Company's fixed maturity and equity securities is the responsibility of the Company's investment accounting group. The determination of the value of the Company's liabilities that are reported at fair value in the financial statements is the responsibility of the Company's valuation actuary group. Each of these groups manage and create the policies and processes used to determine the respective fair values. The results of the process are reviewed by the Principal Accounting Officer, the Chief Financial Officer, and other management, as necessary. The results are made known to the Company's Disclosure Committee and any significant policy or process changes are discussed with the Company's Audit Committee. Please refer to Note 5. Fair Value Measurements of the Company's 2012 Form 10-K for additional information on these responsibilities.
The Company utilizes external independent third-party pricing services to determine the majority of its fair values on investment securities available for sale. At March 31, 2013, approximately 96% of the carrying value of these investments was from external pricing services, 2% was from brokers, and 2% was derived from internal matrices and calculations. At December 31, 2012, approximately 96% of the carrying value of these investments was from external pricing services, 2% was from brokers, and 2% was derived from internal matrices and calculations. In the event that the primary pricing service does not provide a price, the Company utilizes the price provided by a second pricing service. The Company reviews prices received from service providers for reasonableness and unusual fluctuations but generally accepts the price identified from the primary pricing service. In the event a price is not available from either third-party pricing service, the Company pursues external pricing from brokers. Generally, the Company pursues and utilizes only one broker quote per security. In doing so, the Company solicits only brokers which have previously demonstrated knowledge and experience of the subject security. If a broker price is not available, the Company determines a fair value through various valuation techniques that may include discounted cash flows, spread-based models, or similar techniques, depending upon the specific security to be priced. These techniques are primarily applied to private placement securities. The Company utilizes available market information, wherever possible, to identify inputs into the fair value determination, primarily including prices and spreads on comparable securities. At March 31, 2013, the Company obtained prices for six securities from brokers and internally determined the prices for 19 securities. At December 31, 2012, the Company obtained prices for five securities from brokers and internally determined the prices for 19 securities.
Each quarter, the Company evaluates the prices received from third-party security pricing services and independent brokers to ensure that the prices represent a reasonable estimate of the fair value within the macro-economic environment, sector factors, and overall pricing trends and expectations. The Company corroborates and validates the primary pricing sources through a variety of procedures that include but are not limited to comparison to additional independent third-party pricing services or brokers, where possible; a review of third-party pricing service methodologies; back testing; in-depth specific analytics on randomly selected issues; and comparison of prices to actual trades for specific securities where observable data exists. In addition, the Company analyzes the primary third-party pricing service's methodologies and related inputs and also evaluates the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy. Finally, the Company also performs additional evaluations when individual prices fall outside tolerance levels when comparing prices received from third-party pricing services. At March 31, 2013, the Company had minimal occurrences where it used a price other than identified in its pricing policy, and the impact was not material to the consolidated financial statements.
Fair value measurements for assets and liabilities where there exists limited or no observable market data are calculated using the Company’s own estimates and are categorized as Level 3. These estimates are based on current interest rates, credit spreads, liquidity premium or discount, the economic and competitive environment, unique characteristics of the asset or liability, and other pertinent factors. Therefore, these estimates cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any valuation technique. Further, changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.
The Company’s own estimates of fair value of fixed maturity and equity securities may be derived in a number of ways, including but not limited to: 1) pricing provided by brokers, where the price indicates reliability as to value; 2) fair values of comparable securities, incorporating a spread adjustment for maturity differences, collateralization, credit quality, liquidity, and other items, if applicable; 3) discounted cash flow models and margin spreads; 4) bond yield curves; 5) observable market prices and exchange transaction information not provided by external pricing services; and 6) statement values provided to the Company by fund managers.
 Categories Reported at Fair Value
The following tables present categories reported at fair value on a recurring basis.
 
 
March 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of
U.S. Government
$
12,645

 
$
117,305

 
$
2,776

 
$
132,726

Federal agencies 1
—

 
24,971

 
—

 
24,971

Federal agency issued residential
     mortgage-backed securities 1
—

 
83,873

 
—

 
83,873

Subtotal
12,645

 
226,149

 
2,776

 
241,570

Corporate obligations:
 
 
 
 
 
 
 
Industrial
—

 
543,019

 
2,427

 
545,446

Energy
—

 
213,995

 
2,378

 
216,373

Communications and technology
—

 
219,296

 
—

 
219,296

Financial
—

 
296,731

 
11,085

 
307,816

Consumer
—

 
517,081

 
16,122

 
533,203

Public utilities
—

 
282,780

 
35

 
282,815

Subtotal
—

 
2,072,902

 
32,047

 
2,104,949

Corporate private-labeled residential
mortgage-backed securities
—

 
142,044

 
—

 
142,044

Municipal securities
—

 
163,198

 
3,730

 
166,928

Other
—

 
91,724

 
5,720

 
97,444

Redeemable preferred stocks
8,160

 
3,168

 
—

 
11,328

Fixed maturity securities
20,805

 
2,699,185

 
44,273

 
2,764,263

Equity securities
1,242

 
24,228

 
—

 
25,470

Total
$
22,047

 
$
2,723,413

 
$
44,273

 
$
2,789,733

 
 
 
 
 
 
 
 
Percent of total
1
%
 
97
%
 
2
%
 
100
%
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Other policyholder funds
 
 
 
 
 
 
 
Guaranteed minimum withdrawal benefits
$
—

 
$
—

 
$
(2,345
)
 
$
(2,345
)
Total
$
—

 
$
—

 
$
(2,345
)
 
$
(2,345
)
 
1 
Federal agency securities are not backed by the full faith and credit of the U.S. Government.
 

December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
U.S. Treasury securities and
     obligations of U.S. Government
$
12,698

 
$
120,544

 
$
2,809

 
$
136,051

Federal agencies 1
—

 
26,069

 
—

 
26,069

Federal agency issued residential
     mortgage-backed securities 1
—

 
91,985

 
—

 
91,985

Subtotal
12,698

 
238,598

 
2,809

 
254,105

Corporate obligations:
 
 
 
 
 
 
 
Industrial
—

 
542,561

 
3,322

 
545,883

Energy
—

 
208,887

 
2,362

 
211,249

Communications and technology
—

 
221,600

 
—

 
221,600

Financial
—

 
302,690

 
11,184

 
313,874

Consumer
—

 
509,953

 
16,285

 
526,238

Public utilities
—

 
286,127

 
—

 
286,127

Subtotal
—

 
2,071,818

 
33,153

 
2,104,971

Corporate private-labeled residential
mortgage-backed securities
—

 
148,131

 
—

 
148,131

Municipal securities
—

 
163,661

 
4,323

 
167,984

Other
—

 
98,896

 
5,848

 
104,744

Redeemable preferred stocks
8,206

 
—

 
—

 
8,206

Fixed maturity securities
20,904

 
2,721,104

 
46,133

 
2,788,141

Equity securities
1,336

 
17,470

 
1,255

 
20,061

Total
$
22,240

 
$
2,738,574

 
$
47,388

 
$
2,808,202

 
 
 
 
 
 
 
 
Percent of total
1
%
 
97
%
 
2
%
 
100
%
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Other policyholder funds
 
 
 
 
 
 
 
Guaranteed minimum withdrawal
benefits
$
—

 
$
—

 
$
(1,080
)
 
$
(1,080
)
Total
$
—

 
$
—

 
$
(1,080
)
 
$
(1,080
)
 
1 
Federal agency securities are not backed by the full faith and credit of the U.S. Government.
The following tables present the fair value of fixed maturity and equity securities available for sale by pricing source and fair value hierarchy level.

March 31, 2013

Level 1
 
Level 2
 
Level 3
 
Total
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
Priced from external pricing services
$
20,805

 
$
2,654,884

 
$
—

 
$
2,675,689

Priced from independent broker quotations
—

 
44,301

 
—

 
44,301

Priced from internal matrices and calculations
—

 
—

 
44,273

 
44,273

Subtotal
20,805

 
2,699,185

 
44,273

 
2,764,263

Equity securities available for sale:
 
 
 
 
 
 
 
Priced from external pricing services
1,242

 
13,780

 
—

 
15,022

Priced from independent broker quotations
—

 
—

 
—

 
—

Priced from internal matrices and calculations
—

 
10,448

 
—

 
10,448

Subtotal
1,242

 
24,228

 
—

 
25,470

Total
$
22,047

 
$
2,723,413

 
$
44,273

 
$
2,789,733

Percent of total
1
%
 
97
%
 
2
%
 
100
%




December 31, 2012

Level 1
 
Level 2
 
Level 3
 
Total
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
Priced from external pricing services
$
20,904

 
$
2,676,943

 
$
—

 
$
2,697,847

Priced from independent broker quotations
—

 
44,161

 
—

 
44,161

Priced from internal matrices and calculations
—

 
—

 
46,133

 
46,133

Subtotal
20,904

 
2,721,104

 
46,133

 
2,788,141

Equity securities available for sale:
 
 
 
 
 
 
 
Priced from external pricing services
1,336

 
7,254

 
—

 
8,590

Priced from independent broker quotations
—

 
—

 
—

 
—

Priced from internal matrices and calculations
—

 
10,216

 
1,255

 
11,471

Subtotal
1,336

 
17,470

 
1,255

 
20,061

Total
$
22,240

 
$
2,738,574

 
$
47,388

 
$
2,808,202

Percent of total
1
%
 
97
%
 
2
%
 
100
%

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the first quarter ended March 31, 2013 and year ended December 31, 2012 are summarized below:
 

Quarter Ended March 31, 2013

Assets
 
Liabilities

Fixed maturity
securities available
for sale
 
Equity securities
available
for sale
 
Total
 
GMWB
Beginning balance
$
46,133

 
$
1,255

 
$
47,388

 
$
(1,080
)
Included in earnings
3

 
641

 
644

 
(1,423
)
Included in other comprehensive income
(232
)
 
(627
)
 
(859
)
 
—

Purchases, issuances, sales and other dispositions:
 
 
 
 
 
 
 
Purchases
—

 
—

 
—

 
—

Issuances
—

 
—

 
—

 
316

Sales
—

 
—

 
—

 
—

Other dispositions
(1,747
)
 
(1,269
)
 
(3,016
)
 
(158
)
Transfers into Level 3
116

 
—

 
116

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

Ending balance
$
44,273

 
$
—

 
$
44,273

 
$
(2,345
)
 
 
 
 
 
 
 
 
Net unrealized gains
$
(232
)
 
$
(627
)
 
$
(859
)
 
 

 
 
Year Ended December 31, 2012
 
Assets
 
Liabilities
 
Fixed maturity
securities available
for sale
 
Equity securities
available
for sale
 
Total
 
GMWB
Beginning balance
$
43,759

 
$
1,123

 
$
44,882

 
$
(187
)
Included in earnings
109

 
—

 
109

 
(1,228
)
Included in other comprehensive income
(160
)
 
132

 
(28
)
 
—

Purchases, issuances, sales and other dispositions:
 
 
 
 
 
 
 
Purchases
—

 
—

 
—

 
—

Issuances
—

 
—

 
—

 
1,592

Sales
—

 
—

 
—

 
—

Other dispositions
(5,406
)
 
—

 
(5,406
)
 
(1,257
)
Transfers into Level 3
7,831

 
—

 
7,831

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

Ending balance
$
46,133

 
$
1,255

 
$
47,388

 
$
(1,080
)
 
 
 
 
 
 
 
 
Net unrealized gains
$
(172
)
 
$
132

 
$
(40
)
 
 

The Company did not exclude any realized or unrealized gains or losses on items transferred into Level 3 in any of the periods presented. Depending upon the availability of Level 1 or Level 2 pricing, specific securities may transfer into or out of Level 3. The Company did not have any transfers between Level 1 and Level 2 during the first quarters ended March 31, 2013 and 2012.
The following table presents quantitative information about material Level 3 fair value measurements as of March 31, 2013.
 
Fair Value
 
Valuation
Technique
 
Unobservable
Inputs
 
Range (in basis points)
 
Weighted
Average
of Range
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
$
44,273

 
Market comparable
 
Spread adjustment
 
69-313
 
168



The Company's primary category of Level 3 fair values is fixed maturity securities, totaling $44.3 million as of March 31, 2013. These assets are valued using comparable security valuations through the unobservable input of estimated discount spreads. Specifically, the Company reviews the values and discount spreads on similar securities for which such information is observable in the market. Estimates of increased discount spreads are then determined based upon the characteristics of the securities being evaluated. The Company estimates that an increased spread of 10 basis points on each of the Level 3 securities would reduce the reported fair value by $0.2 million as of March 31, 2013.
Other assets and liabilities categorized as Level 3 for purposes of fair value determination are not material to the Company's financial statements, and the sensitivities of such valuations to unobservable inputs are also believed to not be material.
The table below is a summary of fair value estimates at March 31, 2013 and December 31, 2012 for financial instruments. The Company has not included assets and liabilities that are not financial instruments in this disclosure. The total of the fair value calculations presented below do not represent, and should not be construed to represent, the underlying value to the Company.

March 31, 2013
 
December 31, 2012

Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Fixed maturity securities available for sale
$
2,764,263

 
$
2,764,263

 
$
2,788,141

 
$
2,788,141

Equity securities available for sale
25,470

 
25,470

 
20,061

 
20,061

Mortgage loans
675,106

 
727,152

 
674,034

 
722,098

Policy loans
75,809

 
75,809

 
77,133

 
77,133

Cash and short-term financial assets
22,264

 
22,264

 
31,928

 
31,928

Separate account assets
360,497

 
360,497

 
340,093

 
340,093

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Individual and group annuities
$
1,109,207

 
$
1,088,265

 
$
1,130,032

 
$
1,108,987

Supplementary contracts without
life contingencies
53,604

 
52,661

 
54,321

 
53,389

Separate account liabilities
360,497

 
360,497

 
340,093

 
340,093

Other policyholder funds - GMWB
2,345

 
2,345

 
(1,080
)
 
(1,080
)