Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 6 – Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market. Market participants are buyers and sellers in the principal (or most advantageous) market that are independent, knowledgeable, able to transact for the asset or liability, and willing to transact for the asset or liability.

We determined the fair values of certain financial instruments based on the fair value hierarchy established in “Fair Value Measurements”, topic ASC 820-10-05. Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value. The inputs of these valuation techniques are categorized into three levels. The guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

Our Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the reporting date. The Company receives one quote per instrument for Level 1 inputs.

Our Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These fair value measurements are provided by using quoted prices of securities with similar characteristics.

Our Level 3 inputs are valuations based on inputs that are unobservable. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

The Company receives fair value prices from its third-party investment managers who use an independent pricing service. These prices are determined using observable market information such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other things. The Company has reviewed the processes used by the third party providers for pricing the securities, and has determined that these processes result in fair values consistent with the GAAP requirements. In addition, the Company reviews these prices for reasonableness and has not adjusted any prices received from the third-party providers as of March 31, 2012.

Assets measured at fair value on a recurring basis are summarized below:

As of March 31, 2012

Fair Value Measurements Using

(dollars in thousands)

	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Fixed Maturities:
U.S. Treasury securities and other government corporations and agencies	$	23,161	$	31,065	$	—	$	54,226
States of the U.S. and political subdivisions of the states		—		32,419		—		32,419
Corporate securities		—		325,678		—		325,678
Mortgage-backed securities		—		258,322		—		258,322
Commercial mortgage-backed Securities		—		63,073		—		63,073
Asset-backed securities		—		54,050		—		54,050
Total fixed maturities		23,161		764,607		—		787,768
Equities securities		3,041		—		6,751		9,792
Short term investments		99,644		—		—		99,644
Total	$	125,846	$	764,607	$	6,751	$	897,204

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (dollars in thousands)
Level 3 Financial Instruments	Equities
Balance at December 31, 2011	$	6,751
Total gains(losses) realized (unrealized):
Included in earnings		—
Included in other comprehensive income		—
Net purchases, sales & distributions		—
Net transfers in (out of) Level 3		—
Balance at March 31, 2012	$	6,751
Change in net unrealized gains relating to assets still held at reporting date	$	—

There were no transfers in and out of Level 1 and 2 categories during the first three months of 2012.

A description of the Company’s inputs used to measure fair value is as follows:

Fixed maturities (Available for Sale) Levels 1 and 2

• United States Treasury securities are valued using quoted (unadjusted) prices in active markets and are therefore shown as Level 1.

• United States Government agencies are reported at fair value utilizing Level 2 inputs. These fair value measurements are provided by using quoted prices of securities with similar characteristics.

• States of the U.S. and political subdivisions of the states are reported at fair value utilizing Level 2 inputs. These fair value measurements are provided by using quoted prices of securities with similar characteristics.

• Corporate securities are reported at fair value utilizing Level 2 inputs. These fair value measurements are provided by using quoted prices of securities with similar characteristics.

• Mortgage-backed securities are reported at fair value utilizing Level 2 inputs. These fair value measurements are provided by using quoted prices of securities with similar characteristics.

• Commercial mortgage-backed securities are reported at fair value utilizing Level 2 inputs. These fair value measurements are provided by using quoted prices of securities with similar characteristics.

• Asset-backed securities are reported at fair value utilizing Level 2 inputs. These fair value measurements are provided by using quoted prices of securities with similar characteristics.

Equity securities (Level 1) – For these securities, fair values are based on quoted market prices (unadjusted) in active markets.

Equity securities (Level 3) – Includes private equity investments which are carried at the Company’s equity in the estimated net assets of the investments based on valuations provided by the investee or other relavant market data. We assess the reasonableness of those fair values by evaluating the fund’s financial statements and discussions with the fund manager. Due to the delay of reported information, our estimates are based on the most recent available information. These inputs are considered unobservable and therefore the private equity investments are being classified as Level 3 measurements.

As management is ultimately responsible for determining the fair value measurements for all securities, we validate prices received from our investment advisor by comparing the fair value estimates to our knowledge of the current market and investigate any prices deemed not to be representative of fair value. We review fair values for significant changes in a one-month period and security values that change in value contrary to general market movements.

Short-term investments are reported at fair value using Level 1 inputs.

The investments classified as Level 3 in the above table consist of $6.7 million related to investments in privately-held companies. This entire amount was comprised of investments for which there is no readily available independent market price. Material assumptions and factors utilized in pricing these investments including future cash flows, market activity and evaluation of the overall stability of the privately held companies.

Cash and cash equivalents – The carrying amounts approximate fair value because of the short-term maturity of those instruments.

Premiums receivable – The carrying value of premiums receivable approximate fair value due to its short-term nature.

Reinsurance recoverables – The carrying value of reinsurance receivables approximate fair value. The Company has established an allowance for bad debts associated with reinsurance balances recoverable and is primarily related to specifically identified counterparties.

Loans payable – The carrying value of those notes is a reasonable estimate of fair value. Due to the variable interest rate of these instruments, carrying value approximates market value.