2.	Fair Value

Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs are based on market data from independent sources, while unobservable inputs reflect the Company’s view of market assumptions in the absence of observable market information. All assets and liabilities that are carried at fair value are classified and disclosed in one of the following categories:


Level 1 -		Quoted prices in active markets for identical assets or liabilities.

Level 2 -		Quoted market prices for similar assets or liabilities in active markets; quoted prices by independent pricing services for identical or similar assets or liabilities in markets that are not active; and valuations, using models or other valuation techniques, that use observable market data. All significant inputs are observable, or derived from observable information in the marketplace, or are supported by observable levels at which transactions are executed in the market place.

Level 3 -		Instruments that use non-binding broker quotes, model driven valuations that do not have observable market data or those that are estimated based on an ownership interest to which a proportionate share of net assets is attributed.

The Company categorizes valuation methods used in its identifiable intangible assets impairment tests as Level 3. To determine the fair value of acquired trademarks and trade names, the Company uses the relief-from-royalty method, which requires the Company to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. The Company also categorizes valuation methods used to fair value its investments in limited partnerships as Level 3, since the Company uses an estimate based on its ownership interest to which a proportionate share of the partners’ net assets is attributed.

Fair Value of Financial Instruments

The carrying values and fair values of certain of the Company’s financial instruments were as follows (in thousands).


	June 30, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Investments, available-for-sale	$	132,762	$	132,762	$	139,046	$	139,046
Other investments		1,727		1,727		—		—
Liabilities:
Debentures payable		40,281		12,588		40,261		12,723

The fair values as presented represent the Company’s best estimates and may not be substantiated by comparisons to independent markets. The fair value of the debentures payable was based on current market rates offered for debt with similar risks and maturities. Carrying values of certain financial instruments, such as cash and cash equivalents and premiums and fees receivable, approximate fair value due to the short-term nature of the instruments and are not required to be disclosed. Therefore, the aggregate of the fair values presented in the preceding table do not purport to represent the Company’s underlying value.

The Company holds available-for-sale investments and limited partnership interests, which are carried at fair value. The following tables present the fair-value measurements for each major category of assets that are measured on a recurring basis (in thousands).


			Fair Value Measurements Using
June 30, 2013	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Fixed maturities, available-for-sale:
U.S. government and agencies	$	11,872	$	11,872	$	—	$	—
State		3,044		—		3,044		—
Political subdivisions		773		—		773		—
Revenue and assessment		16,134		—		16,134		—
Corporate bonds		69,320		—		69,320		—
Collateralized mortgage obligations:
Agency backed		9,334		—		9,334		—
Non-agency backed – residential		5,102		—		5,102		—
Non-agency backed – commercial		4,853		—		4,853		—
Redeemable preferred stocks		1,693		1,693		—		—

Total fixed maturities, available-for-sale		122,125		13,565		108,560		—
Mutual funds, available-for-sale		10,637		10,637		—		—

Total investments, available-for-sale		132,762		24,202		108,560		—
Limited partnership interests		1,727		—		—		1,727
Cash and cash equivalents		74,382		74,382		—		—

Total	$	208,871	$	98,584	$	108,560	$	1,727


			Fair Value Measurements Using
December 31, 2012	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Fixed maturities, available-for-sale:
U.S. government and agencies	$	12,110	$	12,110	$	—	$	—
State		4,111		—		4,111		—
Political subdivisions		790		—		790		—
Revenue and assessment		17,996		—		17,996		—
Corporate bonds		71,537		—		71,537		—
Collateralized mortgage obligations:
Agency backed		11,870		—		11,870		—
Non-agency backed – residential		5,472		—		5,472		—
Non-agency backed – commercial		5,109		—		5,109		—
Redeemable preferred stock		1,718		1,718		—		—

Total fixed maturities, available-for-sale		130,713		13,828		116,885		—
Mutual fund, available-for-sale		8,333		8,333		—		—

Total investments, available-for-sale		139,046		22,161		116,885		—
Cash and cash equivalents		59,104		59,104		—		—

Total	$	198,150	$	81,265	$	116,885	$	—

The fair values of the Company’s investments are determined by management after taking into consideration available sources of data. All of the portfolio valuations classified as Level 1 or Level 2 in the above tables are priced exclusively by utilizing the services of independent pricing sources using observable market data. The Level 2 classified security valuations are obtained from a single independent pricing service. The Level 3 classified securities in the table above consist of limited partnership interests for which fair value is estimated based on the Company’s ownership interest in partners’ capital. There were no transfers between Level 1 and Level 2 for the three and six months ended June 30, 2013 and 2012. The Company’s policy is to recognize transfers between levels at the end of the reporting period. The Company has not made any adjustments to the prices obtained from the independent pricing sources.

The Company has reviewed the pricing techniques and methodologies of the independent pricing service for Level 2 investments and believes that its policies adequately consider market activity, either based on specific transactions for the security valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. The Company monitored security-specific valuation trends and has made inquiries with the pricing service about material changes or the absence of expected changes to understand the underlying factors and inputs and to validate the reasonableness of the pricing.

Based on the above categorization, there were no Level 3 classified security valuations at June 30, 2012 and December 31, 2012 and 2011, nor any transfers into or out of Level 3 during these periods. At June 30, 2013, the Level 3 classification was the result of purchases during the three months ended June 30, 2013.