Note 6. Fair Value Measurements

12 Months Ended

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

		December 31, 2013
		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	34,567	$	-	$	34,567
Foreign government		-		2,519		-		2,519
CMO - residential		-		1,152		-		1,152
CMO – commercial		-		-		237		237
States, municipalities and political
subdivisions		-		22,083		-		22,083
U.S. government		-		6,811		-		6,811
GSE		-		422		-		422
MBS - residential		-		83		-		83
Redeemable preferred stocks		348		-		-		348
Total fixed maturities		348		67,637		237		68,222
Equity securities available-for-sale:
Nonredeemable preferred stocks		988		-		-		988
Total equity securities		988		-		-		988
Trading securities:
Common Stock		859		-		-		859
Total trading securities		859		-		-		859
Total financial assets	$	2,195	$	67,637	$	237	$	70,069

		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 - residential		-		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.   For the year ending December 31, 2013, 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 2013.  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 during 2013.  Two securities were sold out of the Level 3 category in 2012.  The changes in the carrying value of Level 3 assets and liabilities for the years ended December 31, 2013 and 2012 are summarized as follows (in thousands):

		CMOs
		Residential		Commercial		Total
Balance, December 31, 2011	$	864	$	215	$	1,079
Repayments of fixed maturities		(94)		-		(94)
Net realized investment losses		(41)		-		(41)
Sales of securities		(432)		-		(432)
Other-than-temporary
Impairment losses		-		(189)		(189)
Net unrealized gain
included in accumulated
other comprehensive loss		111		202		313
Balance, December 31, 2012	$	408	$	228	$	636
Repayments of fixed maturities		(9)		-		(9)
Net realized investment gains		225		-		225
Sales of securities		(415)		-		(415)
Other-than-temporary
Impairment losses		-		-		-
Net unrealized gain (loss)
included in accumulated
other comprehensive loss		(209)		9		(200)
Balance, December 31, 2013	$	-	$	237	$	237