Note 6. Fair Value Measurements

6 Months Ended

Jun. 30, 2016

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.

The following tables present our financial assets and liabilities measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015 (in thousands):

		June 30, 2016
		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	102,825	$	-	$	102,825
Foreign government		-		4,418		-		4,418
CMO – residential		-		150		-		150
States, municipalities and political
subdivisions		-		48,848		-		48,848
U.S. government		-		40,240		-		40,240
GSE		-		23		-		23
MBS – residential		-		30		-		30
Redeemable preferred stocks		5,173		-		-		5,173
Total fixed maturities		5,173		196,534		-		201,707
Equity securities available-for-sale:
Nonredeemable preferred stocks		2,608		-		-		2,608
Total equity securities		2,608		-		-		2,608
Total Financial Assets	$	7,781	$	196,534	$	-	$	204,315

FINANCIAL LIABILITIES:
Contingent liability	$	-	$	-	$	885	$	885

		December 31, 2015
		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	36,386	$	-	$	36,386
Foreign government		-		1,089		-		1,089
CMO – residential		-		189		-		189
CMO – commercial		-		-		478		478
States, municipalities and political
subdivisions		-		37,649		-		37,649
U.S. government		-		7,734		-		7,734
GSE		-		999		-		999
MBS – residential		-		35		-		35
Redeemable preferred stocks		374		-		-		374
Total fixed maturities		374		84,081		478		84,933
Equity securities available-for-sale:
Nonredeemable preferred stocks		2,594		-		-		2,594
Total equity securities		2,594		-		-		2,594
Total Financial Assets	$	2,968	$	84,081	$	478	$	87,527

FINANCIAL LIABILITIES:
Contingent liability	$	-	$	-	$	885	$	885

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

		June 30, 2016				December 31, 2015
		Level 2				Level 2
		Fair		Carrying		Fair		Carrying
		Value		Value		Value		Value
FINANCIAL LIABILITIES:
Debt	$	1,979	$	2,025	$	3,137	$	3,189

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:

Debt

The fair value of debt with fixed interest rates approximates its carrying amount and is included in Level 2 of the fair value hierarchy.

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 six months ending June 30, 2016, 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 during the six months ended June 30, 2016 or 2015.  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 the six months ended June 30, 2016 or 2015.  The changes in the carrying value of Level 3 assets and liabilities for the six months ended June 30, 2016 and 2015 are summarized as follows (in thousands):

		Three Months Ended June 30, 2016
		Financial Assets				Financial Liabilities
				Total				Total
		CMOs		Level 3		Contingent		Level 3
		Commercial		Assets		Liability		Liabilities
Balance, beginning of period	$	-	$	-	$	885	$	885
Gains (losses) included in earnings:
Net realized investment gains (losses)		-		-		-		-
Sales of securities		-		-		-		-
Repayments and amortization of fixed maturities		-		-		-		-
Net unrealized gain included in accumulated other
comprehensive income (loss)		-		-		-		-
Balance, end of period	$	-	$	-	$	885	$	885

		Three Months Ended
		June 30, 2015
		Financial Assets
				Total
		CMOs		Level 3
		Commercial		Assets
Balance, beginning of period	$	406	$	406
Net unrealized gain included
in accumulated other
comprehensive income (loss)		87		87
Balance, end of period	$	493	$	493

		Six Months Ended June 30, 2016
		Financial Assets				Financial Liabilities
				Total				Total
		CMOs		Level 3		Contingent		Level 3
		Commercial		Assets		Liability		Liabilities
Balance, beginning of period	$	478	$	478	$	885	$	885
Gains (losses) included in earnings:
Net realized investment gains (losses)		141		141		-		-
Sales of securities		(471)		(471)		-		-
Repayments and amortization of fixed maturities		(30)		(30)		-		-
Net unrealized gain included in accumulated other
comprehensive income (loss)		(118)		(118)		-		-
Balance, end of period	$	-	$	-	$	885	$	885

		Six Months Ended
		June 30, 2015
		Financial Assets
				Total
		CMOs		Level 3
		Commercial		Assets
Balance, beginning of period	$	381	$	381
Net unrealized gain included
in accumulated other
comprehensive income (loss)		112		112
Balance, end of period	$	493	$	493