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Note 6. Fair Value Disclosures

9 Months Ended

Sep. 30, 2013

Note 6. Fair Value Disclosures

Note 6. Fair Value Disclosures

For all financial and non-financial assets and liabilities accounted for at fair value on a recurring basis, the Company utilizes valuation techniques based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market expectations. These two types of inputs create the following fair value hierarchy:

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 are observable or whose significant value drivers are observable.

Level 3 - Instruments where significant value drivers are unobservable.

The following section describes the valuation methodologies we use to measure different assets at fair value.

Investments in fixed maturities and equity securities:

Available-for-sale securities included in Level 1 are equities with quoted market prices. Level 2 is primarily comprised of our portfolio of government securities, agency mortgage-backed securities, corporate fixed income securities, collateralized mortgage obligations, municipals, GSEs and certain preferred stocks that were priced with observable market inputs. Level 3 securities consist primarily of CMO securities backed by Alt-A mortgages. For these securities, we use industry-standard pricing methodologies, including discounted cash flow models, whose inputs are based on management’s assumptions and available market information. Significant unobservable inputs used in the fair value measurement of CMO’s are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for loss severity and a directionally opposite change in the assumption used for prepayment rates. Further we retain independent pricing vendors to assist in valuing certain instruments.

Trading securities:

Trading securities included in Level 1 are equity securities with quoted market prices.

Interest rate swap:

The financial liability included in Level 2 consists of an interest rate swap on IHC debt. It is valued using market observable inputs including market price, interest rate, and volatility within a Black Scholes model.

The following tables present our financial assets and liabilities measured at fair value on a recurring basis for the periods indicated (in thousands):

		September 30, 2013
		Level 1			Level 2		Level 3		Total

FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-		$	211,661	$	-	$	211,661
CMOs - residential		-			2,503		1,549		4,052
CMOs - commercial		-			-		572		572
US Government obligations		-			19,559		-		19,559
Agency MBS - residential		-			105		-		105
GSEs		-			31,405		-		31,405
States and political subdivisions		-			244,275		2,473		246,748
Foreign governments		-			28,788		-		28,788
Redeemable preferred stocks		3,817			-		-		3,817
Total fixed maturities		3,817			538,296		4,594		546,707

Equity securities available-for-sale:
Nonredeemable preferred stocks		5,605			-		-		5,605
Total equity securities		5,605			-		-		5,605

Trading securities - equities		6,394			-		-		6,394
Total trading securities		6,394			-		-		6,394

Total Financial Assets	$	15,816		$	538,296	$	4,594	$	558,706

FINANCIAL LIABILITIES:
Interest rate swap	$	-		$	221	$	-	$	221

		December 31, 2012
		Level 1			Level 2		Level 3		Total

FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-		$	353,823	$	-	$	353,823
CMOs - residential		-			6,041		14,053		20,094
CMOs - commercial		-			-		570		570
US Government obligations		-			18,866		-		18,866
Agency MBS - residential		-			428		-		428
GSEs		-			49,606		-		49,606
States and political subdivisions		-			265,667		2,558		268,225
Redeemable preferred stocks		7,990			-		-		7,990
Total fixed maturities		7,990			694,431		17,181		719,602

Equity securities available-for-sale:
Nonredeemable preferred stocks		15,598			-		-		15,598
Total equity securities		15,598			-		-		15,598

Trading securities - equities		7,016			-		-		7,016
Total trading securities		7,016			-		-		7,016

Total Financial Assets	$	30,604		$	694,431	$	17,181	$	742,216

FINANCIAL LIABILITIES:
Interest rate swap	$	-		$	363	$	-	$	363

It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period.

At September 30, 2013, there were no transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy. No securities were transferred out of Level 2 and into the Level 3 category at September 30, 2013. The Company does not transfer out of Level 3 and into Level 2 until such time as observable inputs become available and reliable or the range of available independent prices narrow. No securities were transferred out of the Level 3 category in 2013 or 2012. The changes in the carrying value of Level 3 assets and liabilities, for the periods indicated, are summarized as follows (in thousands):

		Three Months Ended September 30, 2013
		CMOs				States and
						Political
		Residential		Commercial		Subdivisions		Total

Beginning balance	$	4,370	$	571	$	2,501	$	7,442

Gains (losses) included in earnings:
Net realized investment gains		1,882		-		-		1,882

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		(2,140)		1		(18)		(2,157)

Sales of securities		(2,343)		-		-		(2,343)
Repayments and amortization of fixed maturities		(220)		-		(10)		(230)

Balance at end of period	$	1,549	$	572	$	2,473	$	4,594

		Three Months Ended September 30, 2012
		CMOs				States and
						Political
		Residential		Commercial		Subdivisions		Total

Beginning balance	$	12,969	$	551	$	2,614	$	16,134

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		1,906		9		(30)		1,885

Repayments and amortization of fixed maturities		(733)		-		3		(730)

Balance at end of period	$	14,142	$	560	$	2,587	$	17,289

		Nine Months Ended September 30, 2013
		CMOs				States and
						Political
		Residential		Commercial		Subdivisions		Total

Beginning balance	$	14,053	$	570	$	2,558	$	17,181

Gains (losses) included in earnings:
Net realized investment gains		6,517		-		-		6,517

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		(6,389)		2		(60)		(6,447)

Sales of securities		(11,663)		-		-		(11,663)
Repayments and amortization of fixed maturities		(969)		-		(25)		(994)

Balance at end of period	$	1,549	$	572	$	2,473	$	4,594

		Nine Months Ended September 30, 2012
		CMOs				States and
						Political
		Residential		Commercial		Subdivisions		Total

Beginning balance	$	22,127	$	538	$	-	$	22,665

Purchases of securities		-		-		2,135		2,135

Gains(losses) included in earnings:
Net realized investment losses		(1,212)		-		-		(1,212)
Other-than-temporary impairments		(231)		(473)		-		(704)

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		2,976		495		424		3,895

Sales of securities		(7,087)		-		-		(7,087)
Repayments and amortization of fixed maturities		(2,431)		-		28		(2,403)

Balance at end of period	$	14,142	$	560	$	2,587	$	17,289

The following table provides carrying values, fair values and classification in the fair value hierarchy of the Company’s financial instruments, for the periods indicated, that are not carried at fair value but are subject to fair value disclosure requirements (in thousands):

		September 30, 2013					December 31, 2012
		Level 2					Level 2
		Fair			Carrying		Fair			Carrying
		Value			Value		Value			Value

FINANCIAL ASSETS:
Policy loans	$	14,462		$	11,182	$	28,748		$	22,165

FINANCIAL LIABILITIES:
Funds on deposit	$	277,327		$	276,379	$	279,125		$	278,084
Debt and junior subordinated
debt securities	$	44,146		$	44,146	$	46,146		$	46,146

The following methods and assumptions were used to estimate the fair value of the financial instruments that are not carried at fair value in the Condensed Consolidated Financial Statements:

(A) Policy Loans

The fair value of policy loans included in Level 2 of the fair value hierarchy is estimated by projecting aggregate loan cash flows to the end of the expected lifetime period of the life insurance business at the average policy loan rates, and discounting them at a current market interest rate.

(B) Funds on Deposit

The Company has two types of funds on deposit. The first type is credited with a current market interest rate, resulting in a fair value which approximates the carrying amount. The second type carries fixed interest rates which are higher than current market interest rates. The fair value of these deposits was estimated by discounting the payments using current market interest rates. The Company's universal life policies are also credited with current market interest rates, resulting in a fair value which approximates the carrying amount. Both types of funds on deposit are included in Level 2 of the fair value hierarchy.

(C) Debt

The fair value of debt with variable interest rates approximates its carrying amount and is included in Level 2 of the fair value hierarchy.

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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