Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [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 September 30, 2012.

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

As of September 30, 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	$	27,849	$	25,687	$	—	$	53,536
States of the U.S. and political subdivisions of the states		—		47,253		—		47,253
Corporate securities		—		326,410		—		326,410
Mortgage-backed securities		—		228,972		—		228,972
Commercial mortgage-backed securities		—		71,918		—		71,918
Asset-backed securities		—		63,672		—		63,672
Total fixed maturities		27,849		763,912		—		791,761
Equity securities		3,065		—		6,706		9,771
Short-term investments		131,936		—		—		131,936
Trading securities		7,044		7,802		—		14,846
Total	$	169,894	$	771,714	$	6,706	$	948,314

Level 3 Financial Instruments	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (dollars in thousands) Equities
Balance at December 31, 2011	$	6,751
Total gains (losses) realized (unrealized):
Included in earnings		—
Included in other comprehensive income		(45	)
Net purchases, sales & distributions		—
Net transfers in (out of) Level 3		—
Balance at September 30, 2012	$	6,706
Change in net unrealized gains relating to assets still held at reporting date	$	(45	)

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

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

Fixed maturities (Available-for-Sale and Trading) 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 relevant market data. We assess the reasonableness of those fair values by evaluating the financial statements and discussions with the investees. 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.

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

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.

The following table sets forth the carrying amount, estimated fair value and level within the fair value hierarchy of financial instruments as of September 30, 2012 and December 31, 2011.

		September 30, 2012				December 31, 2011
	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and cash equivalents	Level 1	$	31,889	$	31,889	$	43,481	$	43,481
Fixed maturities	*	$	791,761	$	791,761	$	815,999	$	815,999
Equity securities	*	$	9,771	$	9,771	$	9,683	$	9,683
Short-term investments	*	$	131,936	$	131,936	$	57,417	$	57,417
Trading securities	*	$	14,846	$	14,846	$	—	$	—
Premiums receivable	Level 2	$	40,397	$	40,397	$	33,458	$	33,458
Reinsurance recoverable	Level 2	$	160,949	$	160,949	$	173,982	$	173,982
Liabilities:
Securities payable	Level 2	$	16,834	$	16,834	$	—	$	—
Loans payable	Level 2	$	39,183	$	39,183	$	39,183	$	39,183

* See investment assets measured at fair value on a recurring basis summary within Note 6 for disclosure of levels for classes of these financial assets.

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 specific counterparties.

Securities payable – The carrying value of this liability is a reasonable estimate of fair value due to its short-term nature of those notes.

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.