Note 5. Fair Value Disclosures

12 Months Ended

Dec. 31, 2016

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 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 municipal tax credit strips and, in 2015, also include CMO securities backed by commercial 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.

Contingent liabilities:

At December 31, 2015, contingent liabilities classified in Level 3 include; (i) a contingent liability assumed in connection with an acquisition (see Note 7) related to an earn-out agreement whereby significant unobservable inputs were based on projected income; and (ii) a contingent liability recognized in connection with the deconsolidation of a former subsidiary and joint venture transaction (see Note 7) whereby significant unobservable inputs were 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, 2016
		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	187,695	$	-	$	187,695
CMOs - residential		-		5,913		-		5,913
US Government obligations		-		43,109		-		43,109
Agency MBS - residential		-		23		-		23
GSEs		-		9,880		-		9,880
States and political subdivisions		-		184,778		2,033		186,811
Foreign government obligations		-		4,954		-		4,954
Redeemable preferred stocks		11,102		-		-		11,102
Total fixed maturities		11,102		436,352		2,033		449,487
Equity securities available-for-sale:
Common stocks		1,790		-		-		1,790
Nonredeemable preferred stocks		3,543		-		-		3,543
Total equity securities		5,333		-		-		5,333
Trading securities - equities		592		-		-		592
Total trading securities		592		-		-		592
Total Financial Assets	$	17,027	$	436,352	$	2,033	$	455,412

		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

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 2016 or 2015. 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, 2014	$	953	$	2,314	$	3,267	$	-	$	-
Assumed in acquisition		-		-		-		1,000		1,000
Increases (decreases) recognized 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
Increases (decreases) recognized in earnings:
Net investment income		-		-		-		(1,038)		(1,038)
Net realized investment gains		141		-		141		-		-
Other income		-		-		-		88		88
Gains (losses) included in other
comprehensive income (loss):
Net unrealized gains (losses)		(296)		(40)		(336)		-		-
Payment of contingent liability		-		-		-		(700)		(700)
Repayments and amortization of
fixed maturities		(74)		(106)		(180)		-		-
Sales		(966)		-		(966)		-		-
Balance at December 31, 2016	$	-	$	2,033	$	2,033	$	-	$	-

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

		December 31, 2016						December 31, 2015
		Level 1		Level 2				Level 1		Level 2
		Fair		Fair		Carrying		Fair		Fair		Carrying
		Value		Value		Value		Value		Value		Value
FINANCIAL ASSETS:
Short-term investments	$	6,912	$	-	$	6,912	$	50	$	-	$	50
FINANCIAL LIABILITIES:
Funds on deposit	$	-	$	146,098	$	145,749	$	-	$	173,625	$	173,350
Debt and junior subordinated
debt securities	$	-	$	-	$	-	$	-	$	43,283	$	43,335

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)              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.

(B)                          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.