Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments [Text Block]

FAIR VALUE OF FINANCIAL INSTRUMENTS

We estimate the fair value of our financial instruments based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the specific asset or liability.

In most cases, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base fair values on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.

The fair value of our mortgage loans is determined by modeling performed by us based on the stated principal and coupon payments provided for in the loan agreement. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value, which is a Level 3 fair value measurement.

The estimated fair value of policy loans is equivalent to carrying value. We do not make policy loans for amounts in excess of the cash surrender value of the related policy. In all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies or by the policyholders’ account balance for non-traditional policies.

Our other long-term investments consist primarily of holdings in limited liability partnership funds that are valued by the various fund managers and are recorded on the equity method of accounting. In management’s opinion, these values represent fair value.

For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

Policy reserves are developed and recorded for deferred annuities, which is an interest-sensitive product, and income annuities. The fair value of the reserve liability for these annuity products is based upon an estimate of the discounted pretax cash flows that are forecast for the underlying business, which is a Level 3 fair value measurement. We base the discount rate on the current U.S. Treasury spot yield curve, which is then risk-adjusted for nonperformance risk and, for interest-sensitive business, market risk factors. The risk-adjusted discount rate is developed using interest rates that are available in the market and representative of the risks applicable to the underlying business.

The fair value of our debt approximates carrying value due to the variable interest rates and short-term nature of these financial instruments.

A summary of the carrying value and estimated fair value of our financial instruments at June 30, 2012 and December 31, 2011 is as follows:

	June 30, 2012				December 31, 2011
(In Thousands)	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments
Held-to-maturity fixed maturities	$	3,927	$	3,864	$	4,161	$	4,143
Available-for-sale fixed maturities	2,800,624		2,800,624		2,697,248		2,697,248
Trading securities	14,249		14,249		13,454		13,454
Equity securities	174,359		174,359		159,451		159,451
Mortgage loans	5,234		4,732		5,219		4,829
Policy loans	7,393		7,393		7,209		7,209
Other long-term investments	24,399		24,399		20,574		20,574
Short-term investments	1,100		1,100		1,100		1,100
Cash and cash equivalents	101,978		101,978		144,527		144,527
Accrued investment income	32,750		32,750		32,219		32,219
Liabilities
Policy reserves
Annuity (accumulations) (1)	$	1,114,522	$	1,008,607	$	1,074,661	$	999,534
Annuity (benefit payments)	144,274		98,579		133,921		94,465
Debt	45,000		45,000		45,000		45,000

(1) Annuity accumulations represent deferred annuity contracts that are currently earning interest.

Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.

Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:

• Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.

• Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.

• Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management’s own assumptions about the assumptions a market participant would use in pricing the financial instrument.

Transfers between levels, if any, are recorded as of the beginning of the reporting period.

To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years experience and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.

We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. In our opinion, the pricing obtained at June 30, 2012 was reasonable.

In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors’ pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.

We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed.

The following tables present the categorization for our financial instruments measured at fair value on a recurring basis in our Consolidated Balance Sheets at June 30, 2012 and December 31, 2011:

(In Thousands)			Fair Value Measurements
Description	June 30, 2012		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury	$	43,504	$	—	$	43,504	$	—
U.S. government agency	40,212		—		40,212		—
States, municipalities and political subdivisions	757,614		—		756,799		815
Foreign bonds	235,634		—		234,798		836
Public utilities	256,959		—		256,959		—
Corporate bonds
Energy	186,548		—		186,548		—
Industrials	319,785		—		316,887		2,898
Consumer goods and services	218,604		—		217,225		1,379
Health care	127,623		—		127,623		—
Technology, media and telecommunications	129,331		—		129,331		—
Financial services	308,110		—		295,888		12,222
Mortgage-backed securities	34,992		—		34,992		—
Collateralized mortgage obligations	135,858		—		135,858		—
Asset-backed securities	5,469		—		5,154		315
Redeemable preferred stocks	381		381		—		—
Total Available-For-Sale Fixed Maturities	$	2,800,624	$	381	$	2,781,778	$	18,465
Equity securities
Common stocks
Public utilities	$	15,011	$	15,011	$	—	$	—
Energy	11,773		11,773		—		—
Industrials	30,998		30,923		75		—
Consumer goods and services	17,961		17,961		—		—
Health care	18,043		18,043		—		—
Technology, media and telecommunications	11,055		11,055		—		—
Financial services	65,906		62,251		—		3,655
Nonredeemable preferred stocks	3,612		3,372		240		—
Total Available-for-Sale Equity Securities	$	174,359	$	170,389	$	315	$	3,655
Total Available-for-Sale Securities	$	2,974,983	$	170,770	$	2,782,093	$	22,120
TRADING
Bonds
Foreign bonds	$	2,801	$	—	$	2,801	$	—
Corporate bonds
Industrials	1,327		—		1,327		—

Consumer goods and services	1,563		—		1,563		—
Health care	1,814		—		1,814		—
Technology, media and telecommunications	2,387		—		2,387		—
Financial services	2,265		—		2,265		—
Redeemable preferred stocks	2,092		2,092		—		—
Total Trading Securities	$	14,249	$	2,092	$	12,157	$	—
Short-Term Investments	$	1,100	$	1,100	$	—	$	—
Money Market Accounts	$	38,414	$	38,414	$	—	$	—
Total Assets Measured at Fair Value	$	3,028,746	$	212,376	$	2,794,250	$	22,120

(In Thousands)			Fair Value Measurements
Description	December 31, 2011		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities
Bonds
U.S. Treasury	$	43,951	$	—	$	43,951	$	—
U.S. government agency	96,395		—		96,395		—
States, municipalities and political subdivisions	748,107		—		747,227		880
Foreign bonds	214,815		—		213,979		836
Public utilities	270,071		—		270,071		—
Corporate bonds
Energy	197,192		—		197,192		—
Industrials	295,677		—		292,780		2,897
Consumer goods and services	212,174		—		210,759		1,415
Health care	115,671		—		115,671		—
Technology, media and telecommunications	112,948		—		112,948		—
Financial services	265,301		—		249,328		15,973
Mortgage-backed securities	35,390		—		35,390		—
Collateralized mortgage obligations	82,851		—		82,851		—
Asset-backed securities	6,296		—		5,981		315
Redeemable preferred stocks	409		409		—		—
Total Available-For-Sale Fixed Maturities	$	2,697,248	$	409	$	2,674,523	$	22,316
Equity securities
Common stocks
Public utilities	$	14,735	$	14,735	$	—	$	—
Energy	12,210		12,210		—		—
Industrials	28,556		28,556		—		—
Consumer goods and services	18,564		18,564		—		—
Health care	15,988		15,988		—		—
Technology, media and telecommunications	10,018		10,018		—		—
Financial services	56,090		52,564		—		3,526
Nonredeemable preferred stocks	3,290		3,032		258		—
Total Available-for-Sale Equity Securities	$	159,451	$	155,667	$	258	$	3,526
Total Available-for-Sale Securities	$	2,856,699	$	156,076	$	2,674,781	$	25,842
TRADING
Bonds
Foreign bonds	$	2,906	$	—	$	2,906	$	—
Corporate bonds
Industrials	1,443		—		1,443		—
Consumer goods and services	1,059		—		1,059		—
Health care	1,450		—		1,450		—
Technology, media and telecommunications	1,458		—		1,458		—

Financial services	2,063		—		2,063		—
Redeemable preferred stocks	3,075		1,659		1,416		—
Total Trading Securities	$	13,454	$	1,659	$	11,795	$	—
Short-Term Investments	$	1,100	$	1,100	$	—	$	—
Money Market Accounts	$	62,899	$	62,899	$	—	$	—
Total Assets Measured at Fair Value	$	2,934,152	$	221,734	$	2,686,576	$	25,842

The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.

The fair value of securities that are categorized as Level 2 is determined by management after reviewing market prices obtained from independent pricing services and brokers. Such estimated fair values do not necessarily represent the values for which these securities could have been sold at the reporting date. Our independent pricing services and brokers obtain prices from reputable pricing vendors in the marketplace. They continually monitor and review the external pricing sources, while actively participating to resolve any pricing issues that may arise.

For the six-month period ended June 30, 2012, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases, which were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities. There were no significant transfers of securities between Level 1 and Level 2 during the period.

Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities and certain other securities that were determined to be other-than-temporarily impaired in a prior period and for which an active market does not currently exist.

The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. If pricing could not be obtained from these sources, which occurs on a limited basis, management performed an analysis of the contractual cash flows of the underlying security to estimate fair value.

The fair value of our Level 3 impaired securities was determined primarily based upon management’s assumptions regarding the timing and amount of future cash inflows. If a security has been written down or the issuer is in bankruptcy, management relies in part on outside opinions from rating agencies, our lien position on the security, general economic conditions and management’s expertise to determine fair value. We have the ability and the positive intent to hold securities until such time that we are able to recover all or a portion of our original investment. If there is no market for the impaired security at the balance sheet date, management will estimate the security’s fair value based on other securities in the market. Management will continue to monitor securities after the balance sheet date to confirm that their estimated fair value is reasonable.

The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended June 30, 2012:

(In Thousands)	States, municipalities and political subdivisions			Foreign bonds		Corporate bonds			Asset-backed securities		Equities		Total
Balance at March 31, 2012	$	880		$	836	$	20,075		$	315	$	3,476	$	25,582
Realized gains (1)	—			—		646			—		—		646
Unrealized losses (1)	—			—		(408		)	—		—		(408		)
Purchases	—			—		—			—		179		179
Disposals	(65		)	—		(3,814		)	—		—		(3,879		)
Balance at June 30, 2012	$	815		$	836	$	16,499		$	315	$	3,655	$	22,120

(1) Realized gains (losses) are recorded as a component of earnings whereas unrealized gains (losses) are recorded as a component of comprehensive income.

The reported disposals relate to receipt of principal on calls or sinking fund bonds, in accordance with the indentures, and a bond that was called by the issuer.

The following table provides a summary of the changes in fair value of our Level 3 securities for the six-month period ended June 30, 2012:

(In Thousands)	States, municipalities and political subdivisions			Foreign bonds		Corporate bonds			Asset-backed securities		Equities			Total
Balance at December 31, 2011	$	880		$	836	$	20,285		$	315	$	3,526		$	25,842
Realized gains (1)	—			—		646			—		—			646
Unrealized losses (1)	—			—		(368		)	—		—			(368		)
Purchases	—			—		—			—		179			179
Disposals	(65		)	—		(4,064		)	—		(50		)	(4,179		)
Balance at June 30, 2012	$	815		$	836	$	16,499		$	315	$	3,655		$	22,120

(1) Realized gains (losses) are recorded as a component of earnings whereas unrealized gains (losses) are recorded as a component of comprehensive income.

The reported disposals relate to the sale of an equity security and receipt of principal on calls or sinking fund bonds, in accordance with the indentures, and a bond that was called by the issuer.