Note 5. Fair Value Disclosures

6 Months Ended

Jun. 30, 2015

Notes

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, foreign government obligations, collateralized mortgage obligations, municipals and GSEs that were priced with observable market inputs. Level 3 securities consist primarily of CMO securities backed by commercial mortgages 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, 2015
		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	163,353	$	-	$	163,353
CMOs - residential		-		3,370		-		3,370
CMOs - commercial		-		-		1,233		1,233
US Government obligations		-		222,158		-		222,158
Agency MBS - residential		-		52		-		52
GSEs		-		12,040		-		12,040
States and political subdivisions		-		197,714		2,248		199,962
Foreign government obligations		-		1,856		-		1,856
Redeemable preferred stocks		4,232		-		-		4,232
Total fixed maturities		4,232		600,543		3,481		608,256
Equity securities available-for-sale:
Common stocks		4,891		-		-		4,891
Nonredeemable preferred stocks		4,160		-		-		4,160
Total equity securities		9,051		-		-		9,051
Trading securities - equities		9,242		-		-		9,242
Total trading securities		9,242		-		-		9,242
Total Financial Assets	$	22,525	$	600,543	$	3,481	$	626,549
FINANCIAL LIABILITIES:
Interest rate swap	$	-	$	55	$	-	$	55

		December 31, 2014
		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	261,924	$	-	$	261,924
CMOs – residential		-		5,106		-		5,106
CMOs – commercial		-		-		953		953
US Government obligations		-		22,892		-		22,892
Agency MBS - residential		-		69		-		69
GSEs		-		14,656		-		14,656
States and political subdivisions		-		237,067		2,314		239,381
Foreign government		-		34,700		-		34,700
Redeemable preferred stocks		4,199		-		-		4,199
Total fixed maturities		4,199		576,414		3,267		583,880
Equity securities available-for-sale:
Common stocks		9,757		-		-		9,757
Nonredeemable preferred stocks		4,138		-		-		4,138
Total equity securities		13,895		-		-		13,895
Trading securities - equities		11,095		-		-		11,095
Total trading securities		11,095		-		-		11,095
Total Financial Assets	$	29,189	$	576,414	$	3,267	$	608,870
FINANCIAL LIABILITIES:
Interest rate swap	$	-	$	83	$	-	$	83

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.

The Company did not transfer any securities between Level 1, Level 2 or Level 3 in either 2015 or 2014. 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, 2015
				States and
		CMOs		Political
		Commercial		Subdivisions		Total
Beginning balance	$	1,016	$	2,281	$	3,297
Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		217		(12)		205
Repayments and amortization of fixed maturities		-		(21)		(21)
Balance at end of period	$	1,233	$	2,248	$	3,481

		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

		Six Months Ended June 30, 2015
				States and
		CMOs		Political
		Commercial		Subdivisions		Total
Beginning balance	$	953	$	2,314	$	3,267
Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		280		(25)		255
Repayments and amortization of fixed maturities		-		(41)		(41)
Balance at end of period	$	1,233	$	2,248	$	3,481

		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

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, 2015				December 31, 2014
		Level 2				Level 2
		Fair		Carrying		Fair		Carrying
		Value		Value		Value		Value
FINANCIAL ASSETS:
Policy loans	$	13,139	$	10,492	$	13,356	$	10,667
FINANCIAL LIABILITIES:
Funds on deposit	$	181,719	$	181,307	$	187,213	$	186,782
Debt and junior subordinated
debt securities	$	46,472	$	46,472	$	42,146	$	42,146

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