Note 6. Fair Value Measurements

3 Months Ended

Sep. 30, 2012

Note 6. Fair Value Measurements:

Note 6. Fair Value Measurements

6.             Fair Value Measurements

For all financial and non-financial instruments 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 financial instruments at fair value.

Investments in fixed maturities and equity securities

Available-for-sale securities included in Level 1 are equity securities with quoted market prices.  Level 2 is primarily comprised of our portfolio of corporate fixed income securities, government agency mortgage-backed securities, government sponsored enterprises, certain CMO securities, municipals and certain preferred stocks that were priced with observable market inputs.  Level 3 securities consist primarily of CMO securities backed by Alt-A 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.

The following tables present our financial assets measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011, respectively (in thousands):

		September 30, 2012
		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	31,666	$	-	$	31,666
CMO - residential		-		2,426		397		2,823
CMO – commercial		-		-		224		224
States, municipalities and political
subdivisions		-		11,923		-		11,923
U.S. Government		-		6,714		-		6,714
GSE		-		6,470		-		6,470
MBS - residential		-		175		-		175
Total fixed maturities		-		59,374		621		59,995
Equity securities available-for-sale:
Preferred stock with maturities		343		-		-		343
Preferred stock without maturities		2,855		-		-		2,855
Total equity securities		3,198		-		-		3,198
Trading securities:
Common Stock		797		-		-		797
Preferred stock without maturities		45		-		-		45
Total trading securities		842		-		-		842
Total financial assets	$	4,040	$	59,374	$	621	$	64,035

		December 31, 2011
		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	30,475	$	-	$	30,475
CMO - residential		-		1,024		864		1,888
CMO – commercial		-		-		215		215
States, municipalities and political
subdivisions		-		9,367		-		9,367
U.S. Government		-		6,291		-		6,291
GSE		-		8,983		-		8,983
MBS		-		212		-		212
Total fixed maturities		-		56,352		1,079		57,431
Equity securities available-for-sale:
Common stock		851		-		-		851
Preferred stock with maturities		308		-		-		308
Preferred stock without maturities		3,072		-		-		3,072
Total equity securities		4,231		-		-		4,231
Total financial assets	$	4,231	$	56,352	$	1,079	$	61,662

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.

 For the three months and nine months ending September 30, 2012, there were no transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy.  No securities were transferred out of the Level 2 and into the Level 3 category as a result of limited or inactive markets during the first three months of 2012.  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.  No securities were transferred out of the Level 3 category in the first nine months of 2012.  The changes in the carrying value of Level 3 assets and liabilities for the three months and nine months ended September 30, 2012 are summarized as follows (in thousands):

		Three Months Ended						Nine Months Ended
		September 30, 2012						September 30, 2012
		CMOs						CMOs
		Residential		Commercial		Total		Residential		Commercial		Total
Balance, beginning of period	$	391	$	220	$	611	$	864	$	215	$	1,079
Sales of securities		-		-		-		(432)		-		(432)
Repayments of fixed maturities		(21)		-		(21)		(77)		-		(77)
Net realized
investment losses		-		-		-		(41)		-		(41)
Other-than-temporary
impairment losses		-		-		-		-		(189)		(189)
Net unrealized gain (loss)
included in accumulated
other comprehensive loss		27		4		31		83		198		281
Balance, end of period	$	397	$	224	$	621	$	397	$	224	$	621