Fair Value Measurements

3 Months Ended

Mar. 31, 2013

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 March 31, 2013.

Assets measured at fair value on a recurring basis for March 31, 2013 and December 31, 2012 are summarized below:

As of March 31, 2013

Fair Value Measurements Using

(dollars in thousands)

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant  Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	36,161	$	25,248	$	—	$	61,409
States of the U.S. and political subdivisions of the states		—		44,695		—		44,695
Corporate securities		—		336,297		—		336,297
Mortgage-backed securities		—		237,567		—		237,567
Commercial mortgage-backed securities		—		57,536		—		57,536
Asset-backed securities		—		80,453		—		80,453
Total fixed maturity securities		36,161		781,796		—		817,957
Equity securities		8,559		—		6,073		14,632
Short term investments		81,101		—		—		81,101
Trading securities		266		12,861		—		13,127
Total	$	126,087	$	794,657	$	6,073	$	926,817

As of December 31, 2012

Fair Value Measurements Using

(dollars in thousands)

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	31,032	$	25,509	$	—	$	56,541
States of the U.S. and political subdivisions of the states		—		46,164		—		46,164
Corporate securities		—		340,729		—		340,729
Mortgage-backed securities		—		248,240		—		248,240
Commercial mortgage-backed securities		—		63,215		—		63,215
Asset-backed securities		—		74,688		—		74,688
Total fixed maturity securities		31,032		798,545		—		829,577
Equity securities		5,151		—		6,706		11,857
Short term investments		76,502		—		—		76,502
Trading securities		990		11,722		—		12,712
Total	$	113,675	$	810,267	$	6,706	$	930,648

A reconciliation of the beginning and ending balances for the investments categorized as Level 3 at March 31, 2013 and December 31, 2012 are as follows:

	As of March 31, 2013 Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (dollars in thousands) Equity Securities
Balance at December 31, 2012	$	6,706
Total gains(losses) realized (unrealized):
Included in earnings		—
Included in other comprehensive income		(633	)
Purchases		—
Sales		—
Issuance and settlements		—
Net transfers in (out of) Level 3		—
Balance at March 31, 2013	$	6,073
Change in net unrealized losses relating to assets still held at reporting date	$	(633	)

	As of December 31, 2012 Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (dollars in thousands) Equity Securities
Balance at December 31, 2011	$	6,751
Total gains(losses) realized (unrealized):
Included in earnings		—
Included in other comprehensive income		(45	)
Purchases		—
Sales		—
Issuance and settlements		—
Net transfers in (out of) Level 3		—
Balance at December 31, 2012	$	6,706
Change in net unrealized losses relating to assets still held at reporting date	$	(45	)

There were no transfers in and out of Level 1 and 2 categories during 2013 or 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 2) – These fair value measurements are provided by using quoted prices of securities with similar characteristics.

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.

The following table sets forth the carrying amount, estimated fair value and level within the fair value hierarchy of financial instruments as of March 31, 2013 and December 31, 2012.

		March 31, 2013				December 31, 2012
	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and cash equivalents	Level 1	$	32,800	$	32,800	$	20,224	$	20,224
Fixed maturities	*	$	817,957	$	817,957	$	829,577	$	829,577
Equity securities	*	$	14,632	$	14,632	$	11,857	$	11,857
Short-term investments	*	$	81,101	$	81,101	$	76,502	$	76,502
Trading securities	*	$	13,127	$	13,127	$	12,712	$	12,712
Premiums receivable	Level 2	$	28,404	$	28,404	$	32,559	$	32,559
Reinsurance recoverable	Level 2	$	184,909	$	184,909	$	183,562	$	183,562
Liabilities:
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 this note 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 recoverable – 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.

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.