Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2012

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

Note 3 - Fair Value of Financial Instruments

The Company is required under GAAP to disclose estimated fair values for certain financial and non-financial assets and liabilities. Fair values of the Company’s insurance contracts other than annuity contracts are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between knowledgeable, unrelated and willing market participants on the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company categorizes its financial and non-financial assets and liabilities into a three-level hierarchy based on the priority of the inputs to the valuation technique. The three levels of inputs that may be used to measure fair value are:

Level 1	Unadjusted quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include fixed maturity and equity securities (both common stock and preferred stock) that are traded in an active exchange market, as well as U.S. Treasury securities.
Level 2	Unadjusted observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for the assets or liabilities. Level 2 assets and liabilities include fixed maturity securities with quoted prices that are traded less frequently than exchange-traded instruments. This category generally includes certain U.S. Government and agency mortgage-backed securities, non-agency structured securities, corporate fixed maturity securities and preferred stocks.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private debt and equity investments.

When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. As a result, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). Net transfers into or out of Level 3 are reported as having occurred at the end of the reporting period in which the transfers were determined.

The following discussion describes the valuation methodologies used for financial assets and financial liabilities measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. The use of different methodologies, assumptions and inputs may have a material effect on the estimated fair values of the Company’s securities holdings. Care should be exercised in deriving conclusions about the Company’s business, its value or financial position based on the fair value information of financial and nonfinancial assets and liabilities presented below.

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial asset or financial liability, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial asset or financial liability. The disclosed fair values do not reflect any premium or discount that could result from offering for sale at one time an entire holding of a particular financial asset or financial liability. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.

Investments

For fixed maturity securities, each month the Company obtains prices from its investment managers and custodian bank. Fair values for the Company’s fixed maturity securities are based primarily on prices provided by its investment managers as well as its custodian bank for certain securities. The prices from the custodian bank are compared to prices from the investment managers. Differences in prices between the sources that the Company considers significant are researched and the Company utilizes the price that it considers most representative of an exit price. Both the investment managers and the custodian bank use a variety of independent, nationally recognized pricing sources to determine market valuations. Each designate specific pricing services or indexes for each sector of the market based upon the provider’s expertise. Typical inputs used by these pricing sources include, but are not limited to, reported trades, benchmark yield curves, benchmarking of like securities, sector groupings, matrix pricing, issuer spreads, bids, offers, and/or estimated cash flows and prepayment speeds.

When the pricing sources cannot provide fair value determinations, the Company obtains non-binding price quotes from broker-dealers. The broker-dealers’ valuation methodology is sometimes matrix-based, using indicative evaluation measures and adjustments for specific security characteristics and market sentiment. The market inputs utilized in the evaluation measures and adjustments include: benchmark yield curves, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each market input depends on the market sector and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.

The Company analyzes price and market valuations received to verify reasonableness, to understand the key assumptions used and their sources, to conclude the prices obtained are appropriate, and to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on this evaluation and investment class analysis, each security is classified into Level 1, 2, or 3. The Company has in place certain control processes to determine the reasonableness of the financial asset fair values. These processes are designed to ensure the values received are accurately recorded and that the data inputs and valuation techniques utilized are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis, the Company assesses the reasonableness of individual security values received from pricing sources that vary from certain thresholds. Historically, the control processes have not resulted in adjustments to the valuations provided by pricing sources. The Company’s fixed maturity securities portfolio is primarily publicly traded, which allows for a high percentage of the portfolio to be priced through pricing services. Approximately 89% of the portfolio, based on fair value, was priced through pricing services or index priced as of September 30, 2012. The remainder of the portfolio was priced by broker-dealers or pricing models. When non-binding broker-dealer quotes could be corroborated by comparison to other vendor quotes, pricing models or analysis utilizing observable inputs, the securities were generally classified as Level 2. There were no significant changes to the valuation process in the first nine months of 2012.

Fair values of equity securities have been determined by the Company from observable market quotations, when available. When a public quotation is not available, equity securities are valued by using non-binding broker quotes or through the use of pricing models or analysis that is based on observable market information such as interest rates, credit spreads and liquidity. The underlying source data for calculating the matrix of credit spreads relative to the U.S. Treasury curve are nationally recognized indices. These inputs are based on assumptions deemed appropriate given the circumstances and are believed to be consistent with what other market participants would use when pricing such securities. There were no significant changes to the valuation process in the first nine months of 2012.

Short-term and other investments are comprised of short-term fixed income securities, policy loans, limited liability company interests and mortgage loans. For short-term fixed income securities, because of the nature of these assets, carrying amounts generally approximate fair values, which have been determined from public quotations, when available. The fair value of policy loans is based on estimates using discounted cash flow analysis and current interest rates being offered for new loans. The fair value of limited liability company interests is measured at net asset value. The fair value of mortgage loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities.

Separate Account (Variable Annuity) Assets

Separate Account (variable annuity) assets are carried at fair value and represent variable annuity contractholder funds invested in various mutual funds. Fair values of these assets are based on public quotations. Investment performance related to these assets is fully offset by corresponding amounts credited to contractholders with the liability reflected within Separate Account (variable annuity) liabilities. Separate Account liabilities are equal to the estimated fair value of Separate Account assets.

Fixed Annuity Contract Liabilities and Policyholder Account Balances on Interest-sensitive Life Contracts

The fair values of fixed annuity contract liabilities and policyholder account balances on interest-sensitive life contracts are equal to the discounted estimated future cash flows (using the Company’s current interest rates for similar products including consideration of minimum guaranteed interest rates). The Company carries these financial liabilities at cost.

Other Policyholder Funds

Other policyholder funds are liabilities related to supplementary contracts without life contingencies and dividend accumulations, which represent deposits that do not have defined maturities. Other policyholder funds are carried at cost, which management believes is a reasonable estimate of fair value due to the relatively short duration of these deposits, based on the Company’s past experience.

Short-term Debt

Short-term debt is carried at amortized cost, which management believes is a reasonable estimate of fair value due to the liquidity and short duration of these instruments.

Long-term Debt

The Company carries long-term debt at amortized cost. The fair value of long-term debt is estimated based on unadjusted quoted market prices of identical publicly traded issues.

Financial Instruments Measured and Carried at Fair Value

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis as of September 30, 2012 and December 31, 2011. At September 30, 2012, Level 3 invested assets below comprised approximately 3.0% of the Company’s total investment portfolio fair value.

					Fair Value Measurements at
	Carrying		Fair		Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
September 30, 2012
Financial Assets
Investments
Fixed maturities
U.S. government and federally sponsored agency obligations
Mortgage-backed securities	$	626,897	$	626,897	$	—	$	626,897	$	—
Other		463,578		463,578		25,841		437,737		—
Municipal bonds		1,559,209		1,559,209		—		1,546,912		12,297
Foreign government bonds		56,973		56,973		—		56,973		—
Corporate bonds		2,444,175		2,444,175		12,830		2,345,528		85,817
Other mortgage-backed securities		631,220		631,220		—		597,332		33,888
Total fixed maturities		5,782,052		5,782,052		38,671		5,611,379		132,002
Equity securities		39,211		39,211		25,595		13,276		340
Short-term investments		167,903		167,903		167,903		—		—
Other investments (1)		52,516		52,516		—		—		52,516
Totals		6,041,682		6,041,682		232,169		5,624,655		184,858
Separate Account (variable annuity) assets		1,405,693		1,405,693		—		1,405,693		—
Financial Liabilities		—		—		—		—		—
December 31, 2011
Financial Assets
Investments
Fixed maturities
U.S. government and federally sponsored agency obligations
Mortgage-backed securities	$	603,812	$	603,812	$	—	$	603,812	$	—
Other		603,741		603,741		64,444		539,297		—
Municipal bonds		1,413,118		1,413,118		—		1,413,118		—
Foreign government bonds		49,624		49,624		—		49,624		—
Corporate bonds		2,156,544		2,156,544		25,486		2,042,802		88,256
Other mortgage-backed securities		594,993		594,993		—		590,461		4,532
Total fixed maturities		5,421,832		5,421,832		89,930		5,239,114		92,788
Equity securities		26,774		26,774		9,036		17,353		385
Short-term investments		100,442		100,442		97,929		2,513		—
Other investments (1)		—		—		—		—		—
Totals		5,549,048		5,549,048		196,895		5,258,980		93,173
Separate Account (variable annuity) assets		1,273,764		1,273,764		—		1,273,764		—
Financial Liabilities		—		—		—		—		—

(1) Portion of the Other Investments amount reported in the Consolidated Balance Sheet which is measured and carried at fair value on a recurring basis.

The Company did not have any transfers between Levels 1 and 2 during the nine months ended September 30, 2012. The following tables present reconciliations for the three and nine months ended September 30, 2012 and 2011 for all Level 3 assets measured at fair value on a recurring basis.

	Municipal Bonds		Corporate Bonds			Other Mortgage- Backed Securities			Total Fixed Maturities			Equity Securities			Other Investments			Total
Financial Assets
Beginning balance, July 1, 2012	$	—	$	56,459		$	12,911		$	69,370		$	385		$	52,308		$	122,063
Transfers into Level 3 (1)		12,297		29,558			21,044			62,899			—			—			62,899
Transfers out of Level 3 (1)		—		—			—			—			—			—			—
Total gains or losses
Net realized gains (losses) included in net income		—		—			(2	)		(2	)		—			2,284			2,282
Net unrealized gains (losses) included in other comprehensive income		—		(31	)		95			64			(45	)		—			19
Purchases		—		—			—			—			—			—			—
Issuances		—		—			—			—			—			—			—
Sales		—		—			—			—			—			—			—
Settlements		—		—			—			—			—			—			—
Paydowns, maturities and distributions		—		(169	)		(160	)		(329	)		—			(2,076	)		(2,405	)
Ending balance, September 30, 2012	$	12,297	$	85,817		$	33,888		$	132,002		$	340		$	52,516		$	184,858
Beginning balance, January 1, 2012	$	—	$	88,256		$	4,532		$	92,788		$	385		$	—		$	93,173
Transfers into Level 3 (1)		12,297		47,798			29,548			89,643			—			—			89,643
Transfers out of Level 3 (1)		—		(50,707	)		—			(50,707	)		—			—			(50,707	)
Total gains or losses
Net realized gains (losses) included in net income		—		—			(2	)		(2	)		—			4,592			4,590
Net unrealized gains (losses) included in other comprehensive income		—		915			260			1,175			(45	)		—			1,130
Purchases		—		—			—			—			—			50,000			50,000
Issuances		—		—			—			—			—			—			—
Sales		—		—			—			—			—			—			—
Settlements		—		—			—			—			—			—			—
Paydowns, maturities and distributions		—		(445	)		(450	)		(895	)		—			(2,076	)		(2,971	)
Ending balance, September 30, 2012	$	12,297	$	85,817		$	33,888		$	132,002		$	340		$	52,516		$	184,858

(1) Transfers into and out of Level 3 during the periods ended September 30, 2012 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels as of the ending date of the reporting period.

	Corporate Bonds			Other Mortgage- Backed Securities			Total Fixed Maturities			Equity Securities			Total
Financial Assets
Beginning balance, July 1, 2011	$	49,285		$	824		$	50,109		$	384		$	50,493
Transfers into Level 3 (1)		15,098			1,921			17,019			—			17,019
Transfers out of Level 3 (1)		—			—			—			—			—
Total gains or losses
Net realized gains (losses) included in net income		—			—			—			—			—
Net unrealized gains (losses) included in other comprehensive income		3,388			6			3,394			—			3,394
Purchases		—			—			—			—			—
Issuances		—			—			—			—			—
Sales		—			—			—			—			—
Settlements		—			—			—			—			—
Paydowns and maturities		(261	)		(60	)		(321	)		—			(321	)
Ending balance, September 30, 2011	$	67,510		$	2,691		$	70,201		$	384		$	70,585
Beginning balance, January 1, 2011	$	45,244		$	945		$	46,189		$	396		$	46,585
Transfers into Level 3 (1)		32,487			1,921			34,408			—			34,408
Transfers out of Level 3 (1)		(13,725	)		—			(13,725	)		—			(13,725	)
Total gains or losses
Net realized gains (losses) included in net income		—			—			—			—			—
Net unrealized gains (losses) included in other comprehensive income		4,233			20			4,253			(12	)		4,241
Purchases		—			—			—			—			—
Issuances		—			—			—			—			—
Sales		—			—			—			—			—
Settlements		—			—			—			—			—
Paydowns and maturities		(729	)		(195	)		(924	)		—			(924	)
Ending balance, September 30, 2011	$	67,510		$	2,691		$	70,201		$	384		$	70,585

(1) Transfers into and out of Level 3 during the periods ended September 30, 2011 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers in and transfers out as of the ending date of the reporting period.

At September 30, 2012 and 2011, there were $4,590 and $0, respectively, of net realized gains included in earnings that were attributable to changes in the fair value of Level 3 assets still held.

Financial Instruments Disclosed, But Not Carried, at Fair Value

The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities at September 30, 2012 and December 31, 2011.

	Carrying		Fair		Fair Value Measurements at Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
September 30, 2012
Financial Assets
Investments
Other investments (1)	$	133,085	$	137,207	$	—	$	—	$	137,207
Financial Liabilities
Fixed annuity contract liabilities		3,170,489		2,906,201		—		—		2,906,201
Policyholder account balances on interest-sensitive life contracts		78,901		75,981		—		—		75,981
Other policyholder funds		107,235		107,235		—		—		107,235
Short-term debt		38,000		38,000		—		38,000		—
Long-term debt		199,793		218,875		218,875		—		—
December 31, 2011
Financial Assets
Investments
Other investments (1)	$	128,460	$	132,522	$	—	$	—	$	132,522
Financial Liabilities
Fixed annuity contract liabilities		2,945,107		2,699,295		—		—		2,699,295
Policyholder account balances on interest-sensitive life contracts		79,305		76,370		—		—		76,370
Other policyholder funds		114,530		114,530		—		—		114,530
Short-term debt		38,000		38,000		—		38,000		—
Long-term debt		199,744		214,218		214,218		—		—

(1) Portion of the Other Investments amount reported in the Consolidated Balance Sheet which is not carried at fair value, primarily policy loans.