Note 6. Fair Value Measurements

3 Months Ended

Mar. 31, 2013

Notes

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 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 March 31, 2013 and December 31, 2012, respectively (in thousands):

		March 31, 2013
		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	35,499	$	-	$	35,499
Foreign securities		-		3,318		-		3,318
CMO - residential		-		579		-		579
CMO – commercial		-		-		230		230
States, municipalities and political
subdivisions		-		13,393		-		13,393
U.S. Government		-		6,908		-		6,908
GSE		-		625		-		625
MBS - residential		-		138		-		138
Redeemable preferred stocks		365		-		-		365
Total fixed maturities		365		60,460		230		61,055
Equity securities available-for-sale:
Nonredeemable preferred stocks		1,042		-		-		1,042
Total equity securities		1,042		-		-		1,042
Trading securities:
Common Stock		918		-		-		918
Total trading securities		918		-		-		918
Total financial assets	$	2,325	$	60,460	$	230	$	63,015

		December 31, 2012
		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	33,786	$	-	$	33,786
CMO - residential		-		656		408		1,064
CMO – commercial		-		-		228		228
States, municipalities and political
subdivisions		-		10,007		-		10,007
U.S. Government		-		6,433		-		6,433
GSE		-		6,292		-		6,292
MBS		-		163		-		163
Redeemable preferred stocks		356		-		-		356
Total fixed maturities		356		57,337		636		58,329
Equity securities available-for-sale:
Nonredeemable preferred stocks		2,507		-		-		2,507
Total equity securities		2,507		-		-		2,507
Trading securities:
Common stock		1,056		-		-		1,056
Total trading securities		1,056		-		-		1,056
Total financial assets	$	3,919	$	57,337	$	636	$	61,892

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.

 At March 31, 2013 and 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 at March 31, 2013 or 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 three months ended March 31, 2013 or 2012.  The changes in the carrying value of Level 3 assets and liabilities for the three months ended March 31, 2013 and 2012 are summarized as follows (in thousands):

		March 31, 2013
		CMOs
		Residential		Commercial		Total
Balance, beginning of period	$	408	$	228	$	636
Sales of securities		(415)		-		(415)
Repayments of fixed maturities		(9)		-		(9)
Net realized
investment gains		225		-		225
Net unrealized gain (loss)
included in accumulated
other comprehensive income		(209)		2		(207)
Balance, end of period	$	-	$	230	$	230

		March 31, 2012
		CMOs
		Residential		Commercial		Total
Balance, beginning of period	$	864	$	215	$	1,079
Sales of securities		(432)		-		(432)
Repayments of fixed maturities		(39)		-		(39)
Net realized
investment losses		(41)		-		(41)
Net unrealized gain (loss)
included in accumulated
other comprehensive income		45		(2)		43
Balance, end of period	$	397	$	213	$	610