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Note 4. Fair Value Disclosures

12 Months Ended

Dec. 31, 2015

Note 4. 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 and liabilities 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.

Contingent liabilities:

Contingent liabilities classified in Level 3 include; (i) a contingent liability assumed in connection with an acquisition (see Note 6) related to an earn-out agreement whereby significant unobservable inputs are based on projected income; and (ii) a contingent liability recognized in connection with the deconsolidation of a former subsidiary and a newly formed joint venture transaction (see Note 6) whereby significant unobservable inputs are based on projected cash flows.

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

		December 31, 2015
		Level 1		Level 2		Level 3		Total

FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	166,846	$	-	$	166,846
CMOs - residential		-		3,056		-		3,056
CMOs - commercial		-		-		1,195		1,195
US Government obligations		-		44,794		-		44,794
Agency MBS - residential		-		35		-		35
GSEs		-		11,562		-		11,562
States and political subdivisions		-		192,487		2,179		194,666
Foreign government obligations		-		2,324		-		2,324
Redeemable preferred stocks		4,123		-		-		4,123
Total fixed maturities		4,123		421,104		3,374		428,601

Equity securities available-for-sale:
Common stocks		4,784		-		-		4,784
Nonredeemable preferred stocks		3,642		-		-		3,642
Total equity securities		8,426		-		-		8,426

Trading securities - equities		1,259		-		-		1,259
Total trading securities		1,259		-		-		1,259

Total Financial Assets	$	13,808	$	421,104	$	3,374	$	438,286

FINANCIAL LIABILITIES:
Interest rate swap	$	-	$	11	$	-	$	11
Contingent liabilities		-		-		1,650		1,650
Total Financial Liabilities	$	-	$	11	$	1,650	$	1,661

		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
Total Financial Liabilities	$	-	$	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 2015 or 2014. The following table presents the changes in fair value of our Level 3 financial instruments for the periods indicated (in thousands):

		Financial Assets:						Financial Liabilities
				States and		Total				Total
		CMOs		Political		Level 3		Contingent		Level 3
		Commercial		Subdivisions		Assets		Liabilities		Liabilities

Balance at December 31, 2013	$	593	$	2,441	$	3,034	$	-	$	-

Gains (losses) included in other
comprehensive income (loss):
Net unrealized gains (losses)		360		(58)		302		-		-

Repayments and amortization of
fixed maturities		-		(69)		(69)		-		-

Balance at December 31, 2014		953		2,314		3,267		-		-

Assumed in acquisition		-		-		-		1,000		1,000

Gains (losses) included in earnings:
Gain on sale of subsidiary to
joint venture		-		-		-		1,501		1,501
Net investment income		-		-		-		(736)		(736)
Other income		-		-		-		(115)		(115)

Gains (losses) included in other
comprehensive income (loss):
Net unrealized gains (losses)		318		(47)		271		-		-

Repayments and amortization of
fixed maturities		(76)		(88)		(164)		-		-

Balance at December 31, 2015	$	1,195	$	2,179	$	3,374	$	1,650	$	1,650

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):

		December 31, 2015				December 31, 2014
		Level 2				Level 2
		Fair		Carrying		Fair		Carrying
		Value		Value		Value		Value

FINANCIAL ASSETS:
Policy loans	$	38	$	38	$	13,356	$	10,667

FINANCIAL LIABILITIES:
Funds on deposit	$	173,625	$	173,350	$	187,213	$	186,782
Debt and junior subordinated
debt securities	$	43,283	$	43,335	$	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 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.

- Definition

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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