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Fair Value of Financial Instruments
 3 Months Ended
Mar. 31, 2013
Fair Value of Financial Instruments [Abstract]  
Fair Value of Financial Instruments

Note 3 - Fair Value of Financial Instruments

The Company is required under GAAP to disclose estimated fair values for certain financial and non-financial assets and liabilities. Fair values of the Company’s insurance contracts other than annuity contracts are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between knowledgeable, unrelated and willing market participants on the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company categorizes its financial and non-financial assets and liabilities into a three-level hierarchy based on the priority of the inputs to the valuation technique. The three levels of inputs that may be used to measure fair value are:

 

     
Level 1  

Unadjusted quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include fixed maturity and equity securities (both common stock and preferred stock) that are traded in an active exchange market, as well as U.S. Treasury securities.
   
Level 2  

Unadjusted observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for the assets or liabilities. Level 2 assets and liabilities include fixed maturity securities with quoted prices that are traded less frequently than exchange-traded instruments. This category generally includes certain U.S. Government and agency mortgage-backed securities, non-agency structured securities, corporate fixed maturity securities and preferred stocks.
   
Level 3  

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, certain discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation and for which the significant inputs are unobservable. This category generally includes certain private debt and equity investments.

 

When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. As a result, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). Net transfers into or out of Level 3 are reported as having occurred at the end of the reporting period in which the transfers were determined.

The following discussion describes the valuation methodologies used for financial assets and financial liabilities measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. The use of different methodologies, assumptions and inputs may have a material effect on the estimated fair values of the Company’s securities holdings. Care should be exercised in deriving conclusions about the Company’s business, its value or financial position based on the fair value information of financial and nonfinancial assets and liabilities presented below.

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial asset or financial liability, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial asset or financial liability. The disclosed fair values do not reflect any premium or discount that could result from offering for sale at one time an entire holding of a particular financial asset or financial liability. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.

Investments

For fixed maturity securities, each month the Company obtains fair value prices from its investment managers and custodian bank. Fair values for the Company’s fixed maturity securities are based primarily on prices provided by its investment managers as well as its custodian bank for certain securities. The prices from the custodian bank are compared to prices from the investment managers. Differences in prices between the sources that the Company considers significant are researched and the Company utilizes the price that it considers most representative of an exit price. Both the investment managers and the custodian bank use a variety of independent, nationally recognized pricing sources to determine market valuations. Each designate specific pricing services or indexes for each sector of the market based upon the provider’s expertise. Typical inputs used by these pricing sources include, but are not limited to, reported trades, benchmark yield curves, benchmarking of like securities, ratings designations, sector groupings, issuer spreads, bids, offers, and/or estimated cash flows and prepayment speeds.

 

When the pricing sources cannot provide fair value determinations, the Company obtains non-binding price quotes from broker-dealers. The broker-dealers’ valuation methodology is sometimes matrix-based, using indicative evaluation measures and adjustments for specific security characteristics and market sentiment. The market inputs utilized in the evaluation measures and adjustments include: benchmark yield curves, reported trades, broker/dealer quotes, ratings and corresponding issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each market input depends on the market sector and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.

The Company analyzes price and market valuations received to verify reasonableness, to understand the key assumptions used and their sources, to conclude the prices obtained are appropriate, and to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on this evaluation and investment class analysis, each security is classified into Level 1, 2, or 3. The Company has in place certain control processes to determine the reasonableness of the financial asset fair values. These processes are designed to ensure (1) the values received are reasonable and accurately recorded, (2) the data inputs and valuation techniques utilized are appropriate and consistently applied, and (3) the assumptions are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis, the Company assesses the reasonableness of individual security values received from pricing sources that vary from certain thresholds. The Company’s fixed maturity securities portfolio is primarily publicly traded, which allows for a high percentage of the portfolio to be priced through pricing services. Approximately 88% and 91% of the portfolio, based on fair value, was priced through pricing services or index priced as of March 31, 2013 and 2012, respectively. The remainder of the portfolio was priced by broker-dealers or pricing models. When non-binding broker-dealer quotes could be corroborated by comparison to other vendor quotes, pricing models or analysis, the securities were generally classified as Level 2, otherwise they were classified as Level 3. There were no significant changes to the valuation process during the first three months of 2013.

Fair values of equity securities have been determined by the Company from observable market quotations, when available. When a public quotation is not available, equity securities are valued by using non-binding broker quotes or through the use of pricing models or analysis that is based on market information regarding interest rates, credit spreads and liquidity. The underlying source data for calculating the matrix of credit spreads relative to the U.S. Treasury curve are nationally recognized indices. In addition, credit rating (or credit quality equivalent information) of securities is also factored into a pricing matrix. These inputs are based on assumptions deemed appropriate given the circumstances and are believed to be consistent with what other market participants would use when pricing such securities. There were no significant changes to the valuation process in the first three months of 2013.

 

Short-term and other investments are comprised of short-term fixed income securities, policy loans and mortgage loans, as well as certain alternative investments which are accounted for as equity method investments and therefore excluded from the fair value tabular disclosures. For short-term fixed income securities, because of the nature of these assets, carrying amounts generally approximate fair values, which have been determined from public quotations, when available. The fair value of policy loans is based on estimates using discounted cash flow analysis and current interest rates being offered for new loans. The fair value of mortgage loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities.

Separate Account (Variable Annuity) Assets and Liabilities

Separate Account (variable annuity) assets are carried at fair value and represent variable annuity contractholder funds invested in various mutual funds. Fair values of these assets are based primarily on market quotations of the underlying securities. Investment performance related to these assets is fully offset by corresponding amounts credited to contractholders with the liability reflected within Separate Account (variable annuity) liabilities. Separate Account liabilities are equal to the estimated fair value of Separate Account assets.

Fixed Annuity Contract Liabilities and Policyholder Account Balances on Interest-sensitive Life Contracts

The fair values of fixed annuity contract liabilities and policyholder account balances on interest-sensitive life contracts are equal to the discounted estimated future cash flows (using the Company’s current interest rates for similar products including consideration of minimum guaranteed interest rates). The Company carries these financial liabilities at cost.

Other Policyholder Funds

Other policyholder funds are liabilities related to supplementary contracts without life contingencies and dividend accumulations, which represent deposits that do not have defined maturities. Other policyholder funds are carried at cost, which management believes is a reasonable estimate of fair value due to the relatively short duration of these deposits, based on the Company’s past experience.

Short-term Debt

Short-term debt is carried at amortized cost, which management believes is a reasonable estimate of fair value due to the liquidity and short duration of these variable rate instruments.

Long-term Debt

The Company carries long-term debt at amortized cost. The fair value of long-term debt is estimated based on unadjusted quoted market prices of identical publicly traded issues.

 

Other Liabilities, Repurchase Agreements

The Company carries the obligations for securities sold under agreements to repurchase at cost, which approximates fair value due to the short duration of the obligations.

Financial Instruments Measured and Carried at Fair Value

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis as of March 31, 2013 and December 31, 2012. At March 31, 2013, Level 3 invested assets below comprised approximately 1.6% of the Company’s total investment portfolio fair value.

 

                                         
                Fair Value Measurements at  
    Carrying     Fair     Reporting Date Using  
    Amount     Value     Level 1     Level 2     Level 3  

March 31, 2013

                                        

Financial Assets

                                        

Investments

                                        

Fixed maturities

                                        

U.S. government and federally sponsored agency obligations:

                                        

Mortgage-backed securities

   $ 631,424     $ 631,424     $ -     $ 631,424     $ -  

Other, including U.S. Treasury securities

     448,519       448,519       18,443       430,076       -  

Municipal bonds

     1,604,242       1,604,242       -       1,589,096       15,146  

Foreign government bonds

     59,343       59,343       -       59,343       -  

Corporate bonds

     2,649,520       2,649,520       13,579       2,580,414       55,527  

Other mortgage-backed securities

     750,625       750,625       -       717,542       33,083  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total fixed maturities

     6,143,673       6,143,673       32,022       6,007,895       103,756  

Equity securities

     58,661       58,661       47,760       10,561       340  

Short-term investments

     34,475       34,475       34,475       -       -  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Totals

     6,236,809       6,236,809       114,257       6,018,456       104,096  

Separate Account (variable annuity) assets (1)

     1,508,260       1,508,260       1,508,260       -       -  

Financial Liabilities

     -       -       -       -       -  
           

December 31, 2012

                                        

Financial Assets

                                        

Investments

                                        

Fixed maturities

                                        

U.S. government and federally sponsored agency obligations:

                                        

Mortgage-backed securities

   $ 619,559     $ 619,559     $ -     $ 619,559     $ -  

Other, including U.S. Treasury securities

     409,428       409,428       18,594       390,834       -  

Municipal bonds

     1,586,037       1,586,037       -       1,573,762       12,275  

Foreign government bonds

     57,869       57,869       -       57,869       -  

Corporate bonds

     2,567,034       2,567,034       11,934       2,469,378       85,722  

Other mortgage-backed securities

     722,305       722,305       -       689,133       33,172  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total fixed maturities

     5,962,232       5,962,232       30,528       5,800,535       131,169  

Equity securities

     53,503       53,503       43,704       9,459       340  

Short-term investments

     87,561       87,561       87,561       -       -  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Totals

     6,103,296       6,103,296       161,793       5,809,994       131,509  

Separate Account (variable annuity) assets (1)

     1,398,281       1,398,281       1,398,281       -       -  

Financial Liabilities

     -       -       -       -       -  

 

 

(1)

Separate Account (variable annuity) liabilities are set equal to Separate Account (variable annuity) assets.

 

As of March 31, 2013, the Company transferred the separate account assets and liabilities into Level 1 from Level 2 after reassessing the underlying inputs for the determination of fair value for these assets and liabilities. As disclosed above, fair value is based primarily on market quotations of the underlying securities consistent with the method applied in all prior periods. The Company did not have any other transfers between Levels 1 and 2 during the three months ended March 31, 2013. The following tables present reconciliations for the three months ended March 31, 2013 and 2012 for all Level 3 assets measured at fair value on a recurring basis.

 

                                                 
    Municipal
Bonds		     Corporate
Bonds		     Other
Mortgage-
Backed
Securities		     Total
Fixed
Maturities		     Equity
Securities		     Total  

Financial Assets

                                                

Beginning balance, January 1, 2013

   $ 12,275     $ 85,722     $ 33,172     $ 131,169     $ 340     $ 131,509  

Transfers into Level 3 (1)

     2,907       4,671       8,466       16,044       -       16,044  

Transfers out of Level 3 (1)

     -       (33,678 )      -       (33,678 )      -       (33,678 ) 

Total gains or losses

                                                

Net realized gains (losses) included in net income

     -       -       -       -       -       -  

Net unrealized gains (losses) included in other comprehensive income

     (36 )      (885 )      (127 )      (1,048 )      -       (1,048 ) 

Purchases

     -       -       -       -       -       -  

Issuances

     -       -       -       -       -       -  

Sales

     -       -       -       -       -       -  

Settlements

     -       -       -       -       -       -  

Paydowns, maturities and distributions

     -       (303 )      (8,428 )      (8,731 )      -       (8,731 ) 
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Ending balance, March 31, 2013.

   $ 15,146     $ 55,527     $ 33,083     $ 103,756     $ 340     $ 104,096  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
             

Beginning balance, January 1, 2012

   $ -     $ 88,256     $ 4,532     $ 92,788     $ 385     $ 93,173  

Transfers into Level 3 (1)

     -       8,833       8,504       17,337       -       17,337  

Transfers out of Level 3 (1)

     -       (5,247 )      -       (5,247 )      -       (5,247 ) 

Total gains or losses

                                                

Net realized gains (losses) included in net income

     -       -       -       -       -       -  

Net unrealized gains (losses) included in other comprehensive income

     -       (1,779 )      156       (1,623 )      -       (1,623 ) 

Purchases

     -       -       -       -       -       -  

Issuances

     -       -       -       -       -       -  

Sales

     -       -       -       -       -       -  

Settlements

     -       -       -       -       -       -  

Paydowns, maturities and distributions

     -       (143 )      (127 )      (270 )      -       (270 ) 
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Ending balance, March 31, 2012.

   $ -     $ 89,920     $ 13,065     $ 102,985     $ 385     $ 103,370  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

 

(1)

Transfers into and out of Level 3 during the periods ended March 31, 2013 and 2012 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels as of the ending date of the reporting period.

 

At March 31, 2013 and 2012, there were no net realized gains included in earnings that were attributable to changes in the fair value of Level 3 assets still held.

The valuation techniques and significant unobservable inputs used in the fair value measurement for financial instruments classified as Level 3 are subject to the control processes as previously described in this note for “Investments”. Generally, valuation for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; inputs such as quoted prices for identical or similar securities that are less liquid; and based on lower levels of trading activity than securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as fixed maturities.

The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturities and equity securities included in Level 3 generally relate to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.

Financial Instruments Disclosed, But Not Carried, at Fair Value

The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities at March 31, 2013 and December 31, 2012.

 

                                         
                Fair Value Measurements at  
    Carrying     Fair     Reporting Date Using  
    Amount     Value     Level 1     Level 2     Level 3  

March 31, 2013

                                        

Financial Assets

                                        

Investments

                                        

Other investments

   $ 135,653     $ 137,393     $ -     $ -     $ 137,393  

Financial Liabilities

                                        

Fixed annuity contract liabilities

     3,311,013       3,119,794       -       -       3,119,794  

Policyholder account balances on interest-sensitive life contracts

     78,902       78,404       -       -       78,404  

Other policyholder funds

     101,032       101,032       -       -       101,032  

Short-term debt

     38,000       38,000       -       38,000       -  

Long-term debt

     199,825       221,712       221,712       -       -  

Other liabilities, repurchase agreement obligations

     87,846       87,846       -       87,846       -  
           

December 31, 2012

                                        

Financial Assets

                                        

Investments

                                        

Other investments

   $ 134,985     $ 135,121     $ -     $ -     $ 135,121  

Financial Liabilities

                                        

Fixed annuity contract liabilities

     3,257,758       3,070,111       -       -       3,070,111  

Policyholder account balances on interest-sensitive life contracts

     79,017       78,519       -       -       78,519  

Other policyholder funds

     103,227       103,227       -       -       103,227  

Short-term debt

     38,000       38,000       -       38,000       -  

Long-term debt

     199,809       219,319       219,319       -       -