Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

(7) Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  We hold available-for-sale fixed maturity securities and equity securities, which are carried at fair value.

Fair value measurements are generally based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information.  We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories:

· Level 1 - Quoted prices for identical instruments in active markets.

· Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or whose significant value drivers are observable.

· Level 3 - Instruments whose significant value drivers are unobservable.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities and actively traded mutual fund investments.

Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes.  These models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments.  All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace.  Financial instruments in this category primarily include corporate fixed maturity securities, U.S. Government-sponsored enterprise securities, municipal securities and certain mortgage and asset-backed securities.

Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information.  This category consists of two private placement mortgage-backed securities where we cannot corroborate the significant valuation inputs with market observable data.

The following tables set forth our assets and liabilities that are measured at fair value on a recurring basis as of the dates indicated.

	September 30, 2011
Available-for-sale investments	Level 1		Level 2		Level 3		Total Fair Value
	(In thousands)
Financial assets:
Fixed maturities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	13,895		209,334		-		223,229
Corporate		-		183,961		-		183,961
Municipal bonds		-		147,017		-		147,017
Mortgage-backed		-		9,442		476		9,918
Foreign governments		-		144		-		144
Total fixed maturities		13,895		549,898		476		564,269
Equity securities:
Stock mutual funds		19,411		-		-		19,411
Bond mutual funds		23,932		-		-		23,932
Common stock		27		-		-		27
Preferred stock		1,996		-		-		1,996
Total equity securities		45,366		-		-		45,366
Total financial assets	$	59,261		549,898		476		609,635
Financial liabilities:
Warrants outstanding	$	-		133		-		133

	December 31, 2010
Available-for-sale investments	Level 1		Level 2		Level 3		Total Fair Value
	(In thousands)
Financial assets:
Fixed maturities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	12,825		284,955		-		297,780
Corporate		-		161,298		-		161,298
Municipal bonds		-		101,719		-		101,719
Mortgage-backed		-		14,289		519		14,808
Foreign governments		-		132		-		132
Total fixed maturities		12,825		562,393		519		575,737
Equity securities:
Stock mutual funds		20,478		-		-		20,478
Common stock		46		-		-		46
Preferred stock		2,780		-		-		2,780
Total equity securities		23,304		-		-		23,304
Total financial assets	$	36,129		562,393		519		599,041
Financial liabilities:
Warrants outstanding	$	-		1,587		-		1,587

Financial Instruments Valuation

Fixed maturity securities, available-for-sale.  At September 30, 2011, our fixed maturity securities, valued using a third-party pricing source, totaled $549.9 million for Level 2 assets and comprised 90.2% of total reported fair value of our financial assets.  Fair values for Level 3 assets are based upon unadjusted broker quotes that are non-binding.  The Level 1 and Level 2 valuations are reviewed and updated quarterly through random testing by comparisons to separate pricing models, other third party pricing services, and back tested to recent trades.  For the nine months ended September 30, 2011, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received.

Equity securities, available-for-sale.  Our available-for-sale equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices.

Warrants outstanding.  Our outstanding warrants are classified as Level 2 liabilities as their fair values are based upon industry standard models that consider various observable inputs.

The following table presents additional information about fixed maturity securities measured at fair value on a recurring basis that are classified as Level 3 assets and for which we have utilized significant unobservable  inputs to determine fair value.

	September 30,
	2011
	(In thousands)
Balance at beginning of period	$	519
Total realized and unrealized losses:
Included in net income		-
Included in other comprehensive income		7
Principal paydowns		(50	)
Transfer in and (out) of Level 3		-
Balance at end of period	$	476

We review 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.  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.

Financial Instruments not Carried at Fair Value

Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instruments.  The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions.

The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows:

	September 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In thousands)
Financial assets:
Fixed maturities, held-to-maturity	$	131,820		133,951		80,232		79,103
Mortgage loans		1,453		1,392		1,489		1,433
Policy loans		38,075		38,075		35,585		35,585
Cash and cash equivalents		64,425		64,425		49,723		49,723
Financial liabilities:
Annuities		45,891		46,024		42,096		38,619

Fair values for fixed income securities are based on quoted market prices.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other assumptions, including a discount rate and estimates of future cash flows.

Mortgage loans are secured principally by residential and commercial properties.  Weighted average interest rates for these loans were approximately 6.7% per year as of September 30, 2011 and December 31, 2010, with maturities ranging from one to thirty years.  Fair value was estimated using a discount rate of 6.25% applied to current cash flows projected.

Policy loans had a weighted average annual interest rate of 7.7% as of both September 30, 2011 and December 31, 2010, and no specified maturity dates.  The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets.  These loans typically carry an interest rate that is at or above the crediting rate applied to the related policy and contract reserves.  Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable.  Therefore, the fair value of policy loans approximates the carrying value.

The fair value of the Company's liabilities under annuity contract policies was estimated at September 30, 2011, using discounted cash flows with an interest rate of 3.2%, which is based upon the 10-year treasury rate reduced for a non-performance risk adjustment.  The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.