Note 4. Investments

9 Months Ended

Sep. 30, 2012

Notes

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 (in thousands):

		September 30, 2012
				GROSS		GROSS
		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
		COST		GAINS		LOSSES		VALUE
FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities	$	340,519	$	11,747	$	(725)	$	351,541
CMOs - residential (1)		20,220		6,845		(143)		26,922
CMOs - commercial		975		-		(415)		560
U.S. Government obligations		16,728		553		(2)		17,279
Agency MBS - residential (2)		414		36		-		450
GSEs (3)		49,162		1,038		(30)		50,170
States and political subdivisions		280,082		10,201		(621)		289,662
Total fixed maturities	$	708,100	$	30,420	$	(1,936)	$	736,584

EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stocks	$	3,963	$	388	$	(55)	$	4,296
Preferred stock - perpetual		15,361		442		(3)		15,800
Preferred stock - with maturities		6,323		1,674		-		7,997
Total equity securities	$	25,647	$	2,504	$	(58)	$	28,093

		December 31, 2011
				GROSS		GROSS
		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
		COST		GAINS		LOSSES		VALUE
FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities	$	319,343	$	5,873	$	(2,076)	$	323,140
CMOs - residential (1)		33,119		5,200		(1,544)		36,775
CMOs - commercial		1,448		-		(910)		538
U.S. Government obligations		164,807		1,775		-		166,582
Agency MBS - residential (2)		539		46		-		585
GSEs (3)		59,633		379		(161)		59,851
States and political subdivisions		250,361		5,692		(651)		255,402
Total fixed maturities	$	829,250	$	18,965	$	(5,342)	$	842,873

EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stocks	$	6,537	$	311	$	(149)	$	6,699
Preferred stock - perpetual		21,767		422		(451)		21,738
Preferred stock - with maturities		8,051		1,136		(83)		9,104
Total equity securities	$	36,355	$	1,869	$	(683)	$	37,541

(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.

The unrealized gains (losses) on certain available-for-sale securities (residential CMO’s and certain preferred stocks with maturities) at September 30, 2012 and December 31, 2011 include $1,560,000 and $2,625,000, respectively, of the accumulated non-credit related component of other-than-temporary impairment losses, pretax, that were recognized in other comprehensive income.

The amortized cost and fair value of fixed maturities available-for-sale at September 30, 2012, by contractual maturity, are shown below (in thousands). 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.

		September 30, 2012
					% OF
		AMORTIZED		FAIR	TOTAL FAIR
		COST		VALUE	VALUE
Due in one year or less	$	5,164	$	5,254	0.7%
Due after one year through five years		123,053		126,407	17.2%
Due after five years through ten years		214,055		220,422	29.9%
Due after ten years		295,056		306,397	41.6%
		637,328		658,480	89.4%
CMO and MBS:
15 year		32,053		38,539	5.2%
20 year		483		497	0.1%
30 year		38,236		39,068	5.3%
Total fixed maturities	$	708,100	$	736,584	100.0%

The following tables summarize, for all available-for-sale securities in an unrealized loss position at September 30, 2012 and December 31, 2011, respectively, the aggregate fair value and gross unrealized loss by length of time those securities that have continuously been in an unrealized loss position:

		September 30, 2012
		Less than 12 Months				12 Months or Longer				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses
Corporate securities	$	26,265	$	367	$	14,223	$	358	$	40,488	$	725
CMOs - residential		9		29		1,868		114		1,877		143
CMO's - commercial		-		-		560		415		560		415
U.S. Government obligations		3,765		2		-		-		3,765		2
Agency MBS - residential		-		-		-		-		-		-
GSEs		5,817		22		419		8		6,236		30
States and political
subdivisions		30,877		323		22,993		298		53,870		621
Total fixed maturities		66,733		743		40,063		1,193		106,796		1,936
Common stocks		861		55		-		-		861		55
Preferred stocks - perpetual		908		3		-		-		908		3
Total temporarily
impaired securities	$	68,502	$	801	$	40,063	$	1,193	$	108,565	$	1,994

		December 31, 2011
		Less than 12 Months				12 Months or Longer				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses
Corporate securities	$	128,820	$	1,989	$	9,451	$	87	$	138,271	$	2,076
CMOs - residential		1,396		176		14,597		1,368		15,993		1,544
CMOs - commercial		-		-		538		910		538		910
Agency MBS (2) residential		-		-		-		-		-		-
GSEs		15,134		131		2,367		30		17,501		161
States and political subdivisions		43,978		291		20,929		360		64,907		651
Total fixed maturities		189,328		2,587		47,882		2,755		237,210		5,342
Common stocks		1,724		149		-		-		1,724		149
Preferred stocks-perpetual		-		-		4,968		451		4,968		451
Preferred stocks-with maturities		1,644		83		-		-		1,644		83
Total temporarily impaired
securities	$	192,696	$	2,819	$	52,850	$	3,206	$	245,546	$	6,025

At September 30, 2012 and December 31, 2011, a total of 29 and 58 available-for-sale securities, respectively, were in a continuous unrealized loss position for less than 12 months. At September 30, 2012 and December 31, 2011 a total of 23 and 30 available-for-sale securities, respectively, were in a continuous unrealized loss position for 12 months or longer. 

Substantially all of the unrealized losses on fixed maturities available-for-sale at September 30, 2012 and December 31, 2011 relate to investment grade securities and are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase. 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, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2012.

At September 30, 2012, the Company had $13,569,000 invested in whole loan CMOs backed by Alt-A mortgages. Of this amount, 20.5% were in CMOs that originated in 2005 or earlier and 79.5% 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 Statement of Comprehensive Income. 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 that are available-for-sale 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.

For the three-month and nine-month periods ended September 30, 2012, the Company recorded other-than-temporary impairments in earnings of $0 and $704,000, respectively, consisting of credit losses recorded as a result of expected cash flows on certain debt securities less than their amortized cost. For the three-month and nine-month periods ended September 30, 2011, the Company recorded other-than-temporary impairments in earnings of $107,000 and $575,000, respectively, consisting of credit losses recorded as a result of expected cash flows of certain debt securities less than their amortized cost. The Company recognized $0  and $288,000 of non-credit related other-than-temporary impairment losses, pre-tax, in other comprehensive income for the three and nine months ended September 30, 2012, respectively, and recognized $278,000 of non-credit related other-than-temporary impairment losses, pre-tax, in other comprehensive income for both the three months and nine months ended September 30, 2011.

Credit losses were recognized on certain impaired fixed maturities and preferred stocks with maturities, for which each security also had an impairment loss recognized in other comprehensive income. The rollforward of these credit losses were as follows (in thousands):

		2012		2011
Balance at beginning of year	$	2,555	$	1,763
Credit losses during the period for which an other-
than-temporary loss was not previously recognized		473		107
Additional credit losses for which an other-than-temporary
loss was previously recognized		148		-
Securities sold		(1,200)		(86)
Balance at end of period	$	1,976	$	1,784

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.