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Note 5. Fair Value Disclosures

6 Months Ended

Jun. 30, 2014

Note 5. Fair Value Disclosures

Note 5. 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 and municipal tax credit strips. 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):

		June 30, 2014
		Level 1			Level 2		Level 3		Total

FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-		$	208,642	$	-	$	208,642
CMOs - residential		-			3,347		-		3,347
CMOs - commercial		-			-		906		906
US Government obligations		-			25,491		-		25,491
Agency MBS - residential		-			76		-		76
GSEs		-			19,672		-		19,672
States and political subdivisions		-			248,285		2,379		250,664
Foreign government obligations		-			58,731		-		58,731
Redeemable preferred stocks		4,198			-		-		4,198
Total fixed maturities		4,198			564,244		3,285		571,727

Equity securities available-for-sale:
Common stocks		8,848			-		-		8,848
Nonredeemable preferred stocks		4,114			-		-		4,114
Total equity securities		12,962			-		-		12,962

Trading securities - equities		11,600			-		-		11,600
Total trading securities		11,600			-		-		11,600

Total Financial Assets	$	28,760		$	564,244	$	3,285	$	596,289

FINANCIAL LIABILITIES:
Interest rate swap	$	-		$	166	$	-	$	166

		December 31, 2013
		Level 1			Level 2		Level 3		Total

FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-		$	209,260	$	-	$	209,260
CMOs - residential		-			2,457		-		2,457
CMOs - commercial		-			-		593		593
US Government obligations		-			15,861		-		15,861
Agency MBS - residential		-			83		-		83
GSEs		-			28,148		-		28,148
States and political subdivisions		-			247,262		2,441		249,703
Foreign government obligations		-			32,350		-		32,350
Redeemable preferred stocks		3,832			-		-		3,832
Total fixed maturities		3,832			535,421		3,034		542,287

Equity securities available-for-sale:
Common stocks		7,775			-		-		7,775
Nonredeemable preferred stocks		4,028			-		-		4,028
Total equity securities		11,803			-		-		11,803

Trading securities - equities		7,125			-		-		7,125
Total trading securities		7,125			-		-		7,125

Total Financial Assets	$	22,760		$	535,421	$	3,034	$	561,215

FINANCIAL LIABILITIES:
Interest rate swap	$	-		$	204	$	-	$	204

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. 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.

There were no securities transferred between Level 1, Level 2 or Level 3 in 2014 or 2013. The following table presents the changes in fair value of our Level 3 financial instruments for the periods indicated (in thousands):

				Three Months Ended June 30, 2014
						States and
				CMOs		Political
				Commercial		Subdivisions		Total

Beginning balance			$	869	$	2,410	$	3,279

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)				37		(15)		22

Repayments and amortization of fixed maturities				-		(16)		(16)

Balance at end of period			$	906	$	2,379	$	3,285

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

Beginning balance	$	9,755	$	576	$	2,529	$	12,860

Gains (losses) included in earnings:
Net realized investment gains		3,145		-		-		3,145

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		(2,957)		(5)		(19)		(2,981)

Sales of securities		(5,286)		-		-		(5,286)
Repayments and amortization of fixed maturities		(287)		-		(9)		(296)

Balance at end of period	$	4,370	$	571	$	2,501	$	7,442

				Six Months Ended June 30, 2014
						States and
				CMOs		Political
				Commercial		Subdivisions		Total

Beginning balance			$	593	$	2,441	$	3,034

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)				313		(31)		282

Repayments and amortization of fixed maturities				-		(31)		(31)

Balance at end of period			$	906	$	2,379	$	3,285

		Six Months Ended June 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		4,635		-		-		4,635

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		(4,249)		1		(42)		(4,290)

Sales of securities		(9,320)		-		-		(9,320)
Repayments and amortization of fixed maturities		(749)		-		(15)		(764)

Balance at end of period	$	4,370	$	571	$	2,501	$	7,442

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, for the periods indicated (in thousands):

		June 30, 2014					December 31, 2013
		Level 2					Level 2
		Fair			Carrying		Fair			Carrying
		Value			Value		Value			Value

FINANCIAL ASSETS:
Policy loans	$	13,852		$	11,062	$	14,177		$	11,328

FINANCIAL LIABILITIES:
Funds on deposit	$	234,812		$	234,863	$	274,773		$	274,826
Debt and junior subordinated
debt securities	$	44,146		$	44,146	$	44,146		$	44,146

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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