Derivative Financial Instruments

6 Months Ended

Jun. 30, 2011

Derivative Financial Instruments

Derivative Financial Instruments

6. 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 loans with fixed or floating rates.

On February 6, 2009, the Company entered into an interest rate swap of its floating LIBOR rate on the $120 million credit facility, which was used for the acquisition of Auto Insurance Specialists LLC, resulting in a fixed rate of 3.18%. The purpose of the swap is to offset the variability of cash flows resulting from the variable interest rate. The swap is not designated as a hedge and changes in the fair value are adjusted through the consolidated statement of operations in the period of change.

Effective January 2, 2002, the Company entered into an interest rate swap on the $125 million senior notes for a floating rate of LIBOR plus 107 basis points. The swap agreement terminates on August 15, 2011. The swap is designated as a fair value hedge and qualifies for the shortcut method as the hedge is deemed to have no ineffectiveness. The fair market value of the interest rate swap was $0.9 million as of June 30, 2011, and has been recorded in other assets in the consolidated balance sheets with a corresponding increase in notes payable. The Company includes the gain or loss on the hedged item in the same line item, other revenue, as the offsetting loss or gain on the related interest rate swaps as follows:

Income Statement Classification	Three Months Ended June 30,
	2011					2010
	Gain (Loss) on Swap			Gain (Loss) on Loan		Gain (Loss) on Swap			Gain (Loss) on Loan
	(Amounts in thousands)
Other revenue	$	(1,707	)	$	1,707	$	(961	)	$	961
Income Statement Classification	Six Months Ended June 30,
	2011					2010
	Gain (Loss) on Swap			Gain (Loss) on Loan		Gain (Loss) on Swap			Gain (Loss) on Loan
	(Amounts in thousands)
Other revenue	$	(3,338	)	$	3,338	$	(1,454	)	$	1,454

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 agreement terminates on March 1, 2013. The swap is designated as a cash flow hedge. The fair market value of the interest rate swap was $1.0 million as of June 30, 2011, and has been reported as a component of other comprehensive income and amortized into earnings over the term of the hedged transaction. The interest rate swap was determined to be highly effective, and no amount of ineffectiveness was recorded in earnings during the six months ended June 30, 2011 and 2010.

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:

	Asset Derivatives				Liability Derivatives
	June 30, 2011		December 31, 2010		June 30, 2011			December 31, 2010
	(Amounts in thousands)
Hedging derivatives
Interest rate contracts - Other assets (liabilities)	$	902	$	4,240	$	(970	)	$	(1,139	)
Non-hedging derivatives
Interest rate contracts - Other liabilities	$	0	$	0	$	(1,040	)	$	(1,903	)
Equity contracts - Short-term investments (Other liabilities)		635		0		(2,049	)		(2,776	)
Total non-hedging derivatives	$	635	$	0	$	(3,089	)	$	(4,679	)
Total derivatives	$	1,537	$	4,240	$	(4,059	)	$	(5,818	)

The Effect of Derivative Instruments on the Statements of Operations

Derivatives Contracts for Fair Value Hedges	Loss Recognized in Income
	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(Amounts in thousands)
Interest rate contract - Interest expense	$	(1,815	)	$	(1,641	)	$	(3,583	)	$	(3,482	)
	Gain (loss) Recognized in Other Comprehensive Income
	Three Months Ended June 30,						Six Months Ended June 30,
Derivatives Contracts for Cash Flow Hedges	2011			2010			2011			2010
	(Amounts in thousands)
Interest rate contract - Other comprehensive income	$	26		$	(156	)	$	169		$	(309	)
	Gain (Loss) Recognized in Income
	Three Months Ended June 30,						Six Months Ended June 30,
Derivatives Not Designated as Hedging Instruments	2011			2010			2011			2010
	(Amounts in thousands)
Interest rate contract - Other revenue	$	432		$	(189	)	$	863		$	(853	)
Equity contracts - Net realized investment gains		2,262			2,721			4,734			3,295
Total	$	2,694		$	2,532		$	5,597		$	2,442

There were no gains or losses on derivative instruments designated as cash flow hedges reclassified from accumulated other comprehensive income into earnings during the three or six months ended June 30, 2011 and 2010.

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 of Condensed Notes to Consolidated Financial Statements.