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Fair Value Of Financial Instruments
9 Months Ended
Sep. 30, 2011
Fair Value Of Financial Instruments [Abstract] 
Fair Value Disclosures [Text Block]
FAIR VALUE OF FINANCIAL INSTRUMENTS
We estimate the fair value of our financial instruments based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the specific asset or liability.
In most cases, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base fair values on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.
We base the estimated fair value of mortgage loans on discounted cash flows, utilizing the market rate of interest for similar loans in effect at the valuation date.
The estimated fair value of policy loans is equivalent to carrying value. We do not make policy loans for amounts in excess of the cash surrender value of the related policy. In all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies or by the policyholders’ account balance for non-traditional policies.
Our other long-term investments consist primarily of holdings in limited liability partnership funds that are valued by the various fund managers and are recorded on the equity method of accounting. In management’s opinion, these values represent fair value.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.
We calculate the fair value of the liabilities for all of our annuity products based upon the estimated value of the business, using current market rates and forecast assumptions and risk-adjusted discount rates, when relevant observable market data does not exist.

A summary of the carrying value and estimated fair value of our financial instruments at September 30, 2011 and December 31, 2010 is as follows:
 
September 30, 2011
 
December 31, 2010
(In Thousands)
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Held-to-maturity fixed maturities
$
5,380

 
$
5,330

 
$
6,422

 
$
6,364

Available-for-sale fixed maturities
2,670,784

 
2,670,784

 
2,278,429

 
2,278,429

Equity securities
144,483

 
144,483

 
149,706

 
149,706

Trading securities
13,916

 
13,916

 
12,886

 
12,886

Mortgage loans
5,321

 
4,876

 
7,658

 
6,497

Policy loans
7,191

 
7,191

 
7,875

 
7,875

Other long-term investments
19,342

 
19,342

 
20,041

 
20,041

Short-term investments
1,500

 
1,500

 
1,100

 
1,100

Cash and cash equivalents
154,477

 
154,477

 
180,057

 
180,057

Accrued investment income
31,819

 
31,819

 
28,977

 
28,977

Liabilities

 

 

 

Policy reserves

 

 

 

Annuity (accumulations) (1)
$
1,074,161

 
$
990,516

 
$
965,932

 
$
948,920

Annuity (benefit payments)
118,484

 
93,714

 
102,511

 
86,874

(1) Annuity accumulations represent deferred annuity contracts which are currently earning interest.
Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., 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 financial instrument.
Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.
Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.
Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.
Transfers between levels, if any, are recorded as of the beginning of the reporting period.
To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years experience and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.
We validate the prices obtained from pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. In our opinion, the pricing obtained at September 30, 2011 was reasonable.
In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors’ pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable current accounting guidance on fair value measurements.
We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed.

The following tables present the categorization for our financial instruments measured at fair value on a recurring basis at September 30, 2011 and December 31, 2010:





(In Thousands)
 
 
Fair Value Measurements
Description
September 30, 2011
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. government and government-sponsored enterprises
 
 
 
 
 
 
 
U.S. Treasury
$
41,122

 
$

 
$
41,122

 
$

Agency
99,502

 

 
99,502

 

States, municipalities and political subdivisions
 
 
 
 
 
 
 
General obligations
 
 
 
 
 
 
 
North central - East
133,784

 

 
133,784

 

North central - West
83,568

 

 
83,568

 

Northeast
40,484

 

 
40,484

 

South
113,372

 

 
113,372

 

West
72,912

 

 
72,912

 

Special revenue
 
 
 
 
 
 
 
North central - East
74,104

 

 
73,164

 
940

North central - West
54,513

 

 
54,513

 

Northeast
14,588

 

 
14,588

 

South
103,592

 

 
103,592

 

West
58,033

 

 
58,033

 

Foreign bonds
 
 
 
 
 
 
 
Canadian
72,639

 

 
72,639

 

Other foreign
142,881

 

 
141,766

 
1,115

Public utilities

 

 

 

Electric
239,032

 

 
239,032

 

Gas distribution
19,086

 

 
19,086

 

Other
10,935

 

 
10,935

 

Corporate bonds

 

 

 

Oil and gas
201,915

 

 
201,915

 

Chemicals
58,313

 

 
58,313

 

Basic resources
24,084

 

 
24,084

 

Construction and materials
20,614

 

 
20,614

 

Industrial goods and services
180,814

 

 
177,917

 
2,897

Auto and parts
17,085

 

 
17,085

 

Food and beverage
67,321

 

 
65,889

 
1,432

Personal and household goods
69,815

 

 
67,366

 
2,449

Health care
108,040

 

 
108,040

 

Retail
54,436

 

 
54,436

 

Media
41,852

 

 
41,852

 

Travel and leisure
2,772

 

 
2,772

 

Telecommunications
47,452

 

 
47,452

 

Banks
133,397

 

 
126,166

 
7,231

Insurance
29,686

 

 
29,686

 

Real estate
23,092

 

 
15,266

 
7,826

Financial services
99,645

 

 
98,682

 
963

Technology
31,255

 

 
31,255

 

Collateralized mortgage obligations
 
 
 
 
 
 
 
Government
39,797

 

 
39,797

 

Other
242

 

 
242

 

Mortgage-backed securities
38,007

 

 
38,007

 

Asset-backed securities
6,597

 

 
6,282

 
315

Redeemable preferred stocks
406

 
405

 
1

 

Total Available-For-Sale Fixed Maturities
$
2,670,784

 
$
405

 
$
2,645,211

 
$
25,168

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
 
 
 
 
 
 
 
Electric
$
11,124

 
$
11,124

 
$

 
$

Gas distribution
722

 
722

 

 

Other
85

 
85

 

 

Corporate
 
 
 
 
 
 
 
Oil and gas
12,481

 
12,481

 

 

Chemicals
3,918

 
3,918

 

 

Industrial goods and services
19,543

 
19,543

 

 

Autos and parts
575

 
575

 

 

Food and beverage
5,688

 
5,688

 

 

Personal and household goods
9,041

 
9,041

 

 

Health care
14,598

 
14,598

 

 

Retail
2,900

 
2,900

 

 

Media
110

 
110

 

 

Telecommunications
5,749

 
5,749

 

 

Banks
38,549

 
33,742

 

 
4,807

Insurance
11,525

 
11,525

 

 

Real estate
969

 
969

 

 

Financial services
386

 
386

 

 

Technology
3,330

 
3,330

 

 

Nonredeemable preferred stocks
3,190

 
2,933

 
257

 

Total Available-for-Sale Equity Securities
$
144,483

 
$
139,419

 
$
257

 
$
4,807

Total Available-for-Sale Securities
$
2,815,267

 
$
139,824

 
$
2,645,468

 
$
29,975

TRADING
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Foreign bonds


 


 


 


Canadian
1,555

 

 
1,555

 

Other foreign
1,357

 

 
1,357

 

Corporate
 
 
 
 
 
 
 
Basic resources
1,519

 

 
1,519

 

Food and beverage
1,051

 

 
1,051

 

Health care
1,429

 

 
1,429

 

Banks
2,187

 

 
2,187

 

Insurance
451

 

 
451

 

Financial services
385

 

 
385

 

Technology
1,419

 

 
1,419

 

Redeemable preferred stocks
2,563

 
1,177

 
1,386

 

Total Trading Securities
$
13,916

 
$
1,177

 
$
12,739

 
$

Short-Term Investments
$
1,500

 
$
1,500

 
$

 
$

Money Market Accounts
$
69,433

 
$
69,433

 
$

 
$

Total
$
2,900,116

 
$
211,934

 
$
2,658,207

 
$
29,975

(In Thousands)
 
 
Fair Value Measurements
Description
December 31, 2010
 
Level 1
 
Level 2
 
Level 3
AVAILABLE-FOR-SALE
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
U.S. government and government-sponsored enterprises
 
 
 
 
 
 
 
U.S. Treasury
$
39,076

 
$

 
$
39,076

 
$

Agency
103,131

 

 
103,131

 

States, municipalities and political subdivisions


 


 


 


General obligations


 


 


 


North central - East
127,770

 

 
127,770

 

North central - West
81,132

 

 
81,132

 

Northeast
29,525

 

 
29,525

 

South
99,297

 

 
99,297

 

West
56,053

 

 
56,053

 

Special revenue


 


 


 


North central - East
61,093

 

 
60,092

 
1,001

North central - West
40,305

 

 
40,305

 

Northeast
4,743

 

 
4,743

 

South
74,747

 

 
74,747

 

West
44,545

 

 
44,545

 

Foreign bonds

 

 

 

Canadian
72,923

 

 
72,923

 

Other foreign
89,754

 

 
88,639

 
1,115

Public utilities

 

 

 

Electric
225,324

 

 
225,289

 
35

Gas distribution
22,185

 

 
22,185

 

Other
21,580

 

 
21,580

 

Corporate bonds

 

 

 

Oil and gas
185,436

 

 
185,436

 

Chemicals
54,971

 

 
54,971

 

Basic resources
7,427

 

 
7,427

 

Construction and materials
20,258

 

 
20,258

 

Industrial goods and services
155,058

 

 
152,161

 
2,897

Auto and parts
18,384

 

 
18,384

 

Food and beverage
74,033

 

 
72,551

 
1,482

Personal and household goods
69,387

 

 
66,884

 
2,503

Health care
83,342

 

 
83,342

 

Retail
43,960

 

 
43,960

 

Media
33,254

 

 
33,254

 

Travel and leisure
5,866

 

 
5,866

 

Telecommunications
36,984

 

 
36,984

 

Banks
121,634

 

 
114,111

 
7,523

Insurance
26,467

 

 
26,467

 

Real estate
21,737

 

 
13,764

 
7,973

Financial services
83,455

 

 
82,354

 
1,101

Technology
16,688

 

 
16,688

 

Collateralized mortgage obligations
19,577

 

 
19,577

 

Mortgage-backed securities
2

 

 
2

 

Asset-backed securities
7,326

 

 
7,326

 

Total Available-For-Sale Fixed Maturities
$
2,278,429

 
$

 
$
2,252,799

 
$
25,630

Equity securities
 
 
 
 
 
 
 
Common stocks
 
 
 
 
 
 
 
Public utilities
 
 
 
 
 
 
 
Electric
$
10,390

 
$
10,390

 
$

 
$

Gas distribution
676

 
676

 

 

Corporate
 
 
 
 
 
 
 
Oil and gas
13,134

 
13,134

 

 

Chemicals
6,079

 
6,079

 

 

Industrial goods and services
23,297

 
23,297

 

 

Auto and parts
794

 
794

 

 

Food and beverage
4,474

 
4,474

 

 

Personal and household goods
8,603

 
8,603

 

 

Health care
12,548

 
12,548

 

 

Retail
728

 
728

 

 

Travel and leisure
1

 
1

 

 

Telecommunications
5,814

 
5,783

 
31

 

Banks
43,760

 
42,225

 

 
1,535

Insurance
14,408

 
14,408

 

 

Real estate
1,020

 
1,020

 

 

Financial services
559

 
559

 

 

Technology
2,031

 
2,031

 

 

Nonredeemable preferred stocks
1,390

 
1,158

 
232

 

Total Available-for-Sale Equity Securities
$
149,706

 
$
147,908

 
$
263

 
$
1,535

Total Available-for-Sale Securities
$
2,428,135

 
$
147,908

 
$
2,253,062

 
$
27,165

TRADING
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
Bonds
 
 
 
 
 
 
 
Foreign bonds
$
2,283


$


$
2,283


$

Corporate bonds
 
 
 
 
 
 
 
Oil and gas
2,843

 

 
2,843

 

Health care
1,917

 

 
1,917

 

Banks
1,198

 

 
1,198

 

Financial services
384

 

 
384

 

Technology
1,394

 

 
1,394

 

Redeemable preferred stocks
2,867

 
1,476

 
1,391

 

Total Trading Securities
$
12,886

 
$
1,476

 
$
11,410

 
$

Short-Term Investments
$
1,100

 
$
1,100

 
$

 
$

Money Market Accounts
$
34,384

 
$
34,384

 
$

 
$

Total
$
2,476,505

 
$
184,868

 
$
2,264,472

 
$
27,165

The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.
The fair value of securities that are categorized as Level 2 is determined by management after reviewing market prices obtained from independent pricing services and brokers. Such estimated fair values do not necessarily represent the values for which these securities could have been sold at the reporting date. Our independent pricing services and brokers obtain prices from reputable pricing vendors in the marketplace. They continually monitor and review the external pricing sources, while actively participating to resolve any pricing issues that may arise.
For the nine-month period ended September 30, 2011, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases (and disposals) made during the period, which were made from funds held in our money market accounts, and the change in unrealized gains on both fixed maturities and equity securities. There were no significant transfers of securities between Level 1 and Level 2 during the period.
Securities that may be categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities and certain other securities that were determined to be other-than-temporarily impaired in a prior period and for which an active market does not currently exist.
The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities.
The fair value of our Level 3 impaired securities was determined primarily based upon management’s assumptions regarding the timing and amount of future cash inflows. If a security has been written down or the issuer is in bankruptcy, management relies in part on outside opinions from rating agencies, our lien position on the security, general economic conditions and management’s expertise to determine fair value. We have the ability and the positive intent to hold securities until such time that we are able to recover all or a portion of our original investment. If a security does not have a market value at the balance sheet date, management will estimate the security’s fair value based on other securities in the market. Management will continue to monitor securities after the balance sheet date to confirm that their estimated fair value is reasonable.

The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended September 30, 2011:
(In Thousands)
States, municipalities and political subdivisions
 
Foreign bonds
 
Corporate bonds
 
Asset-backed securities
 
Equities
 
Total
Balance at July 1, 2011
$
940

 
$
1,115

 
$
5,856

 
$
315

 
$
4,807

 
$
13,033

Realized gains (1)

 

 

 

 

 

Unrealized gains (1)

 

 
233

 

 

 
233

Amortization

 

 

 

 

 

Purchases

 

 
6

 

 

 
6

Disposals

 

 
(253
)
 

 

 
(253
)
Transfers in

 

 
16,956

 

 

 
16,956

Transfers out  

 

 

 

 

 

Balance at September 30, 2011
$
940

 
$
1,115

 
$
22,798

 
$
315

 
$
4,807

 
$
29,975

(1) Realized gains are recorded as a component of current operations whereas unrealized gains are recorded as a component of comprehensive income.
The securities reported as “transfers in” relate to securities where an updated market value was not available and the securities were transferred from either Level 1 or 2 to Level 3. The reported “disposals” relate to the receipt of principal on calls or sinking fund bonds, in accordance with the indentures.

The following table provides a summary of the changes in fair value of our Level 3 securities for the nine-month period ended September 30, 2011:
(In Thousands)
States, municipalities and political subdivisions
 
Foreign bonds
 
Public utilities
 
Corporate bonds
 
Asset-backed securities
 
Equities
 
Total
Balance at January 1, 2011
$
1,001

 
$
1,115

 
$
35

 
$
23,479

 
$

 
$
1,535

 
$
27,165

Realized gains (1)

 

 

 

 
12

 

 
12

Unrealized gains (1)

 

 
(2
)
 
183

 
1

 

 
182

Amortization

 

 

 

 
(15
)
 

 
(15
)
Purchases

 

 

 
6

 
1,436

 
3,272

 
4,714

Disposals
(61
)
 

 
(33
)
 
(670
)
 
(1,119
)
 

 
(1,883
)
Transfers in

 

 

 
16,956

 

 

 
16,956

Transfers out

 

 

 
(17,156
)
 

 

 
(17,156
)
Balance at September 30, 2011
$
940

 
$
1,115

 
$

 
$
22,798

 
$
315

 
$
4,807

 
$
29,975

(1) Realized gains are recorded as a component of current operations whereas unrealized gains are recorded as a component of comprehensive income.
The equity securities reported as “purchases” primarily relate to our acquisition of Mercer Insurance Group. As a part of the acquisition financing, we purchased securities in the Federal Home Loan Bank of Des Moines, as a requirement to obtain membership and secure the loan we had with them. These securities were classified as Level 3 as we had no observable market price at September 30, 2011. The reported “disposals” relate to the receipt of principal on calls or sinking fund bonds, in accordance with the indentures.
The securities reported as “transfers in” relate to securities where an updated market value was not available and the securities were transferred from either Level 1 or 2 to Level 3. The securities reported as “transfers out” relate to securities where an updated market value was available and the securities were transferred from Level 3 to either Level 1 or 2.