Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2013

Fair Value of Financial Instruments [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable, willing parties who are under no compulsion to act. Fair value is best evidenced by quoted bid or ask price, as appropriate, in an active market. Where bid or ask prices are not available, such as in an illiquid or inactive market, the closing price of the most recent transaction of that instrument subject to appropriate adjustments as required is used. Where quoted market prices are not available, the quoted prices of similar financial instruments or valuation models with observable market based inputs are used to estimate the fair value. These valuation models may use multiple observable market inputs, including observable interest rates, foreign exchange rates, index levels, credit spreads, equity prices, counterparty credit quality, corresponding market volatility levels and option volatilities. Minimal management judgment is required for fair values calculated using quoted market prices or observable market inputs for models. Greater subjectivity is required when making valuation adjustments for financial instruments in inactive markets or when using models where observable parameters do not exist. Also, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. For the Company's financial instruments carried at cost or amortized cost, the book value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes, as it is the Company's intention to hold them until there is a recovery of fair value, which may be to maturity.

The Company classifies its investments in fixed maturities and equity investments as available-for-sale and reports these investments at fair value. The Company's LROC preferred units, senior unsecured debentures, subordinated debt and contingent consideration liabilities are measured and reported at fair value.

Fair values of equity investments are considered to approximate quoted market values based on the latest bid prices in active markets. Fair values of fixed maturities for which no active market exists are derived from quoted market prices of similar instruments or other third-party evidence.

The fair value of the LROC preferred units is based on quoted market prices, and the fair value of the subordinated debt is estimated using an internal model based on significant market observable inputs. The fair value of the senior unsecured debentures, for which no active market exists, is derived from quoted market prices of similar instruments or other third-party evidence.

The fair value of contingent consideration liabilities is estimated using internal models without relevant observable market data over fair value inputs such as probability weighting of payment outcomes.

The Company employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The extent of use of quoted market prices (Level 1), valuation models using observable market information (Level 2) and internal models without observable market information (Level 3) in the valuation of the Company's financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and December 31, 2012 was as follows:



(in thousands)					December 31, 2013
			Fair Value Measurements at the End of the Reporting Period Using

	Total		Quoted Prices in Active Markets for Identical Assets(Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements

Assets:
Fixed maturities:
U.S. government, government agencies and authorities	$	18,338	$	—	$	18,338	$	—
Canadian government	4,082		—		4,082		—
States municipalities and political subdivisions	6,231		—		6,231		—
Mortgage-backed	2,006		—		2,006		—
Asset-backed securities and collateralized mortgage obligations	3,994		—		3,994		—
Corporate	19,500		—		19,500		—
Total fixed maturities	54,151		—		54,151		—
Equity investments	7,137		7,137		—		—
Other investments	3,000		—		3,000		—
Short-term investments	501		—		501		—
Total assets	$	64,789	$	7,137	$	57,652	$	—

Liabilities:
LROC preferred units	14,854		14,854		—		—
Senior unsecured debentures	14,356		—		14,356		—
Subordinated debt	28,471		—		28,471		—
Contingent consideration	5,344		—		—		5,344
Total liabilities	$	63,025	$	14,854	$	42,827	$	5,344



(in thousands)					December 31, 2012
			Fair Value Measurements at the End of the Reporting Period Using

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements

Assets:
Fixed maturities:
U.S. government, government agencies and authorities	$	24,915	$	—	$	24,915	$	—
Canadian government	3,782		—		3,782		—
States municipalities and political subdivisions	7,345		—		7,345		—
Mortgage-backed	5,043		—		5,043		—
Asset-backed securities and collateralized mortgage obligations	1,092		—		1,092		—
Corporate	37,357		—		37,357		—
Total fixed maturities	79,534		—		79,534		—
Equity investments	3,548		3,548		—		—
Other investments	2,000		—		2,000		—
Short-term investments	585		—		585		—
Total assets	$	85,667	$	3,548	$	82,119	$	—

Liabilities:
LROC preferred units	13,655		13,655		—		—
Senior unsecured debentures	23,730		—		23,730		—
Subordinated debt	23,774		—		23,774		—
Contingent consideration	3,987		—		—		3,987
Total liabilities	$	65,146	$	13,655	$	47,504	$	3,987

The following table provides a reconciliation of the fair value of recurring Level 3 fair value measurements for the years ended December 31, 2013 and 2012:



(in thousands)	December 31,
	2013	2012
Contingent consideration:
Beginning balance	3,987	—
Issuance of contingent consideration in connection with acquisitions	572	3,912
Settlements of contingent consideration liabilities	—	—
Change in fair value of contingent consideration included in net loss	785	75
Ending balance	5,344	3,987

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References+ Details