Note 4 Investments, Debt and Equity Securities

3 Months Ended

Sep. 30, 2011

Investments, Debt and Equity Securities

Note 4 Investments

Note  4.                       Investments

The cost (amortized cost with respect to certain fixed maturities), gross unrealized gains, gross unrealized losses and fair value of investment securities are as follows:

				September 30, 2011
						GROSS		GROSS
				AMORTIZED		UNREALIZED		UNREALIZED		FAIR
				COST		GAINS		LOSSES		VALUE
				(In thousands)
FIXED MATURITIES
	AVAILABLE-FOR-SALE:
	Corporate securities		$	352,043	$	8,376	$	(2,400)	$	358,019
	CMOs- residential (1)			38,865		5,502		(2,143)		42,224
	CMOs - commercial			1,448		-		(904)		544
	U.S. Government obligations			12,464		701		-		13,165
	Agency MBS - residential (2)			8,754		368		-		9,122
	GSEs (3)			74,393		1,313		(228)		75,478
	States and political subdivisions			318,219		7,254		(1,259)		324,214
		Total fixed maturities	$	806,186	$	23,514	$	(6,934)	$	822,766
EQUITY SECURITIES
	AVAILABLE-FOR-SALE:
	Common stocks		$	8,258	$	16	$	(783)	$	7,491
	Preferred stock - perpetuals			19,513		244		(311)		19,446
	Preferred stock - with maturities			15,527		1,285		(191)		16,621
		Total equity securities	$	43,298	$	1,545	$	(1,285)	$	43,558

				December 31, 2010
						GROSS		GROSS
				AMORTIZED		UNREALIZED		UNREALIZED		FAIR
				COST		GAINS		LOSSES		VALUE
				(In thousands)
FIXED MATURITIES
	AVAILABLE-FOR-SALE:
	Corporate securities		$	272,061	$	3,595	$	(3,661)	$	271,995
	CMOs - residential (1)			58,829		6,662		(1,847)		63,644
	CMOs - commercial			1,447		-		(639)		808
	U.S. Government obligations			16,617		351		-		16,968
	Agency MBS - residential (2)			10,069		206		(51)		10,224
	GSEs (3)			70,199		510		(182)		70,527
	States and political subdivisions			365,578		2,070		(8,158)		359,490
		Total fixed maturities	$	794,800	$	13,394	$	(14,538)	$	793,656
EQUITY SECURITIES
	AVAILABLE-FOR-SALE:
	Common stocks		$	4,600	$	167	$	(98)	$	4,669
	Preferred stock - perpetuals			31,530		1,065		(315)		32,280
	Preferred stock - with maturities			9,790		1,334		-		11,124
		Total equity securities	$	45,920	$	2,566	$	(413)	$	48,073

(1)         Collateralized mortgage obligations (“CMOs”).

(2)         Mortgage-backed securities (“MBS”).

(3)         Government-sponsored enterprises (“GSEs”) which are the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and Federal Home Loan Banks. GSEs are private enterprises established and chartered by the Federal Government.

Unrealized gains (losses) on certain available-for-sale securities (a residential CMO and certain preferred stocks with maturities) include $1,954,000 and $1,763,000 at September 30, 2011 and December 31, 2010, respectively, related to the non-credit related component of other-than-temporary impairment losses, pre-tax, recognized in accumulated other comprehensive income.

The amortized cost and fair value of fixed maturities at September 30, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The average life of mortgage-backed securities is affected by prepayments on the underlying loans and, therefore, is materially shorter than the original stated maturity.

						% OF
			AMORTIZED		FAIR	TOTAL FAIR
			COST		VALUE	VALUE
			(In thousands)
Due in one year or less		$	5,090	$	5,126	.6%
Due after one year through five years			175,516		178,490	21.7%
Due after five years through ten years			199,599		205,660	25.0%
Due after ten years			308,805		312,788	38.0%
			689,010		702,064	85.3%
CMO and MBS
	15 year		60,352		63,469	7.7%
	20 year		860		869	.1%
	30 year		55,964		56,364	6.9%
		$	806,186	$	822,766	100.0%

The following tables summarize, for all securities in an unrealized loss position at September 30, 2011 and December 31, 2010, respectively, the aggregate fair value and gross unrealized loss by length of time those securities that have continuously been in an unrealized loss position:

					Less than 12 Months				12 Months or Longer				Total
					Fair		Unrealized		Fair		Unrealized		Fair			Unrealized
September 30, 2011					Value		Losses		Value		Losses		Value			Losses
					(In thousands)
Corporate securities				$	86,733	$	2,369	$	6,086	$	31	$	92,819	$	2,400
CMOs - residential					10,643		462		7,534		1,681		18,177		2,143
CMO's - commercial					-		-		544		904		544		904
GSEs					36,966		152		3,787		76		40,753		228
States and political
		subdivisions			49,200		622		37,383		637		86,583		1,259
Total fixed maturities					183,542		3,605		55,334		3,329		238,876		6,934
Common stocks					6,964		783		-		-		6,964		783
Preferred stocks-perpetual					7,350		38		5,641		273		12,991		311
Preferred stocks with
			maturities		7,513		191		-		-		7,513		191
Total temporarily
	impaired securities			$	205,369	$	4,617	$	60,975	$	3,602	$	266,344	$	8,219

				Less than 12 Months				12 Months or Longer				Total
				Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2010				Value		Losses		Value		Losses		Value		Losses
				(In thousands)
Corporate securities			$	103,247	$	3,404	$	12,253	$	257	$	115,500	$	3,661
CMOs - residential				12,494		476		16,979		1,371		29,473		1,847
CMOs - commercial				-		-		808		639		808		639
Agency MBS - residential				5,085		51		-		-		5,085		51
GSEs				32,481		170		1,389		12		33,870		182
States and political
		subdivisions		195,589		5,292		37,655		2,866		233,244		8,158
Total fixed maturities				348,896		9,393		69,084		5,145		417,980		14,538
Common stocks				999		98		-		-		999		98
Preferred stocks-perpetual				14,845		315		-		-		14,845		315
Total temporarily
	impaired securities		$	364,740	$	9,806	$	69,084	$	5,145	$	433,824	$	14,951

At September 30, 2011 and December 31, 2010, a total of 57 and 117 fixed maturities, respectively, and 20 and 13 equity securities, respectively, were in a continuous unrealized loss position for less than 12 months. At September 30, 2011 and December 31, 2010 a total of 23 and 27 fixed maturities, respectively, and 1 and nil equity securities, respectively, had continuous unrealized losses for 12 months or longer. 

Substantially all of the unrealized losses on fixed maturities at September 30, 2011 and December 31, 2010 relate to investment grade securities and are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase. The unrealized loss on corporate securities and state and political subdivisions are due to wider spreads. Spreads have widened as investors shifted funds to US Treasuries in response to the current market turmoil.  With the exception of the securities for which an other-than-temporary impairment was recorded in other comprehensive income, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2011 because the Company does not intend to sell, nor is it more likely than not that the Company will have to sell, such investments before recovery of their amortized cost bases, which may be maturity.

At September 30, 2011, the Company had $20,672,000 invested in whole loan CMOs backed by Alt-A mortgages. Of this amount, 45.0% were in CMOs that originated in 2005 or earlier and 55.0% were in CMOs that originated in 2006. The unrealized losses on all other CMO’s relate to prime rate CMO’s and are primarily attributed to general disruptions in the credit market subsequent to purchase. The Company’s mortgage security portfolio has no exposure to sub-prime mortgages.

Other-Than-Temporary Impairment Evaluations

The Company reviews its investment securities regularly and determines whether other-than- temporary impairments have occurred. The factors considered by management in its regular review to identify and recognize other-than-temporary impairment losses on fixed maturities include, but are not limited to:  the length of time and extent to which the fair value has been less than cost; the Company's intent to sell, or be required to sell, the debt security before the anticipated recovery of its remaining amortized cost basis; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; subordinated credit support; whether the issuer of a debt security has remained current on principal and interest payments; current expected cash flows; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions including the effect of changes in market interest rates. If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value at the balance sheet date would be recognized by a charge to total other-than-temporary impairment losses in the Condensed Consolidated Statement of Operations.  If a decline in fair value of a debt security is judged by management to be other-than-temporary and; (i) the Company does not intend to sell the security; and (ii) it is not more likely than not that it will be required to sell the security prior to recovery of the security’s amortized cost, the Company assesses whether the present value of the cash flows to be collected from the security is less than its amortized cost basis. To the extent that the present value of the cash flows generated by a debt security is less than the amortized cost basis, a credit loss exists. For any such security, the impairment is bifurcated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized by a charge to total other-than-temporary impairment losses in the Condensed Consolidated Statement of Operations, establishing a new cost basis for the security. The amount of the other-than-temporary impairment related to all other factors is recognized in other comprehensive income in the Condensed Consolidated Balance Sheet. It is reasonably possible that further declines in estimated fair values of such investments, or changes in assumptions or estimates of anticipated recoveries and/or cash flows, may cause further other-than-temporary impairments in the near term, which could be significant.

In assessing corporate debt securities for other-than-temporary impairment, the Company evaluates the ability of the issuer to meet its debt obligations and the value of the company or specific collateral securing the debt position. For mortgage-backed securities where loan level data is not available, the Company uses a cash flow model based on the collateral characteristics. Assumptions about loss severity and defaults used in the model are primarily based on actual losses experienced and defaults in the collateral pool. Prepayment speeds, both actual and estimated, are also considered. The cash flows generated by the collateral securing these securities are then determined with these default, loss severity and prepayment assumptions. These collateral cash flows are then utilized, along with consideration for the issue’s position in the overall structure, to determine the cash flows associated with the mortgage-backed security held by the Company. In addition, the Company evaluates other asset-backed securities for other-than-temporary impairment by examining similar characteristics referenced above for mortgage-backed securities.  The Company evaluates U.S. Treasury securities and obligations of U.S. Government corporations, U.S. Government agencies, and obligations of states and political subdivisions for other-than-temporary impairment by examining the terms and collateral of the security.

Equity securities may experience other-than-temporary impairment in the future based on the prospects for full recovery in value in a reasonable period of time and the Company’s ability and intent to hold the security to recovery. If a decline in fair value is judged by management to be other-than-temporary or management does not have the intent or ability to hold a security, a loss is recognized by a charge to total other-than-temporary impairment losses in the Condensed Consolidated Statement of Operations. For the purpose of other-than-temporary impairment evaluations, preferred stocks with maturities are treated in a manner similar to debt securities. Declines in the creditworthiness of the issuer of debt securities with both debt and equity-like features requires the use of the equity model in analyzing the security for other-than-temporary impairment.

Subsequent increases and decreases, if not an other-than-temporary impairment, in the fair value of available-for-sale securities that were previously impaired, are included in other comprehensive income in the Condensed Consolidated Balance Sheet.

Based on management’s review of the portfolio, which considered these factors, the Company recognized the following losses for other-than-temporary impairments in the Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2011 and 2010 (in thousands):

			Three Months Ended				Nine Months Ended
			September 30,				September 30,
			2011		2010		2011		2010
Other-than-temporary impairments:
	Fixed maturities	$	107	$	132	$	575	$	2,797

For the three-month and nine-month periods ended September 30, 2011, other-than-temporary impairment losses on fixed maturities recognized in earnings of $107,000 and $575,000, respectively, consist of credit losses recorded as a result of expected cash flows of certain debt securities less than the debt securities’ amortized cost. The Company also recognized $278,000 of other-than-temporary losses on fixed maturities as a result of factors other than credit losses, in other comprehensive income, for the three-month and nine-month periods ended September 30, 2011. For the three-month and nine-month periods ended September 30, 2010, $132,000 and $2,065,000, respectively, are credit losses resulting from expected cash flows of debt securities less than the debt securities’ amortized cost. The nine-month period ended September 30, 2010 also includes losses of $732,000 recognized as a result of the Company’s intent to sell certain municipal debt securities prior to the recovery of their amortized cost bases.  No losses for other-than-temporary impairments were recognized in other comprehensive income during the three months or nine months ended September 30, 2010.

For the nine months ended September 30, 2011 and 2010, cumulative credit losses for other-than-temporary impairments recorded on securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income were as follows (in thousands):

		2011		2010
Balance at beginning of year	$	1,763	$	2,394
Credit portion of other-than-temporary
impairment losses recognized during period		107		-
Securities sold		(86)		(631)
Balance at end of period	$	1,784	$	1,763

Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation of the current imbalance in liquidity that exists in the marketplace, a continuation or worsening of the current economic recession, or additional declines in real estate values may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods and the Company may incur additional write-downs.