Derivative Financial Instruments

6 Months Ended

Jun. 30, 2012

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are equity price risk and interest rate risk. Equity contracts on various equity securities are intended to manage the price risk associated with forecasted purchases or sales of such securities. Interest rate swaps are intended to manage the interest rate risk associated with the Company’s debts with fixed or floating rates.

On February 6, 2009, the Company entered into an interest rate swap of its floating LIBOR rate on a $120 million credit facility for a fixed rate of 1.93% that matured on January 3, 2012. The purpose of the swap was to offset the variability of cash flows resulting from the variable interest rate. The swap was not designated as a hedge and changes in the fair value were adjusted through the consolidated statement of operations in the period of change.

On March 3, 2008, the Company entered into an interest rate swap of its floating LIBOR rate on the $18 million bank loan for a fixed rate of 4.25%. The swap was designated as a cash flow hedge and the fair market value of the interest rate swap was reported as a component of other comprehensive income and amortized into earnings over the term of the hedged transaction. On October 4, 2011, the Company refinanced its Bank of America $18 million LIBOR plus 50 basis points loan that was scheduled to mature on March 1, 2013 with a Union Bank $20 million LIBOR plus 40 basis points loan that matures on January 2, 2015. The related interest rate swap became ineffective and is no longer designated as a hedge. Changes in the fair value are adjusted through the consolidated statement of operations in the period of change. The fair market value of the interest rate swap was $0.4 million and $0.7 million as of June 30, 2012 and December 31, 2011, respectively. The swap terminates on March 1, 2013.

Fair value amounts, and gains and losses on derivative instruments

The following tables present the location and amounts of derivative fair values in the consolidated balance sheets and derivative gains and losses in the consolidated statements of operations:

	Liability Derivatives
	June 30, 2012		December 31, 2011
	(Amount in thousands)
Non-hedging derivatives
Interest rate swap agreements - Other liabilities	$	399	$	670
Equity contracts - Short-term investments - Other liabilities	643		655
Total derivatives	$	1,042	$	1,325

The Effect of Derivative Instruments on the Consolidated Statements of Operations

	Gain Recognized in Other Comprehensive (Loss) Income
	Three Months Ended June 30,				Six Months Ended June 30,
Derivatives Contracts for Cash Flow Hedges	2012		2011		2012		2011
	(Amounts in thousands)
Interest rate swap agreements - Other comprehensive (loss) income	$	0	$	26	$	0	$	169

	Gain Recognized in (Loss) Income
	Three Months Ended June 30,				Six Months Ended June 30,
Derivatives Not Designated as Hedging Instruments	2012		2011		2012		2011
	(Amounts in thousands)
Interest rate swap agreements - Other revenue	$	147	$	432	$	271	$	863
Equity contracts - Net realized investment (losses) gains	368		2,262		1,585		4,734
Total	$	515	$	2,694	$	1,856	$	5,597

Most equity contracts consist of covered calls. The Company writes covered calls on underlying equity positions held as an enhanced income strategy that is permitted for the Company’s insurance subsidiaries under statutory regulations. The Company manages the risk associated with covered calls through strict capital limitations and asset diversification throughout various industries. For additional disclosures regarding equity contracts, see Note 5.