| Fair Value of Financial Instruments |
4. Fair Value of Financial Instruments
Fair Value Hierarchy
The following tables present the level within the fair value
hierarchy at which the Company’s financial assets and
financial liabilities are measured on a recurring basis as of
December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands) |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities |
|
$ |
53,274 |
|
|
$ |
53,274 |
|
|
$ |
— |
|
|
$ |
— |
|
|
U.S. government securities |
|
|
6,790 |
|
|
|
— |
|
|
|
6,790 |
|
|
|
— |
|
|
Municipal bonds |
|
|
275,017 |
|
|
|
— |
|
|
|
275,017 |
|
|
|
— |
|
Corporate bonds and other bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance |
|
|
515,951 |
|
|
|
— |
|
|
|
515,951 |
|
|
|
— |
|
|
Industrial |
|
|
132,891 |
|
|
|
— |
|
|
|
132,891 |
|
|
|
— |
|
|
Utilities |
|
|
38,506 |
|
|
|
— |
|
|
|
38,506 |
|
|
|
— |
|
|
Commercial mortgage backed securities |
|
|
150 |
|
|
|
— |
|
|
|
150 |
|
|
|
— |
|
Residential mortgage backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
364,000 |
|
|
|
— |
|
|
|
364,000 |
|
|
|
— |
|
|
Non-agency backed |
|
|
7,664 |
|
|
|
— |
|
|
|
7,664 |
|
|
|
— |
|
|
Equity securities |
|
|
35,600 |
|
|
|
35,600 |
|
|
|
— |
|
|
|
— |
|
|
Short term investments |
|
|
128,565 |
|
|
|
128,565 |
|
|
|
— |
|
|
|
— |
|
|
Other investments |
|
|
14,588 |
|
|
|
— |
|
|
|
— |
|
|
|
14,588 |
|
|
Life settlement contracts |
|
|
131,387 |
|
|
|
— |
|
|
|
— |
|
|
|
131,387 |
|
|
|
|
$ |
1,704,383 |
|
|
$ |
217,439 |
|
|
$ |
1,340,969 |
|
|
$ |
145,975 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities sold but not yet purchased, market |
|
$ |
112 |
|
|
$ |
112 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Fixed maturity securities sold but not yet purchased, market |
|
|
55,830 |
|
|
|
— |
|
|
|
55,830 |
|
|
|
— |
|
|
Securities sold under agreements to repurchase, at contract
value |
|
|
191,718 |
|
|
|
— |
|
|
|
191,718 |
|
|
|
— |
|
|
Life settlement contract profit commission |
|
|
7,311 |
|
|
|
— |
|
|
|
— |
|
|
|
7,311 |
|
|
Derivatives |
|
|
3,508 |
|
|
|
— |
|
|
|
— |
|
|
|
3,508 |
|
|
|
|
$ |
258,479 |
|
|
$ |
112 |
|
|
$ |
247,548 |
|
|
$ |
10,819 |
|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands) |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S treasury securities |
|
$ |
82,447 |
|
|
$ |
82,447 |
|
|
$ |
— |
|
|
$ |
— |
|
|
U.S. government securities |
|
|
7,162 |
|
|
|
— |
|
|
|
7,162 |
|
|
|
— |
|
|
Municipal bonds |
|
|
66,676 |
|
|
|
— |
|
|
|
66,676 |
|
|
|
— |
|
Corporate bonds and other bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance |
|
|
406,012 |
|
|
|
— |
|
|
|
406,012 |
|
|
|
— |
|
|
Industrial |
|
|
49,753 |
|
|
|
— |
|
|
|
49,753 |
|
|
|
— |
|
|
Utilities |
|
|
37,311 |
|
|
|
— |
|
|
|
37,311 |
|
|
|
— |
|
|
Commercial mortgage backed securities |
|
|
2,076 |
|
|
|
— |
|
|
|
2,076 |
|
|
|
— |
|
Residential mortgage backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
546,098 |
|
|
|
— |
|
|
|
546,098 |
|
|
|
— |
|
|
Non-agency backed |
|
|
8,591 |
|
|
|
— |
|
|
|
8,591 |
|
|
|
— |
|
|
Asset-backed securities |
|
|
2,687 |
|
|
|
— |
|
|
|
2,687 |
|
|
|
— |
|
|
Equity securities |
|
|
17,412 |
|
|
|
17,412 |
|
|
|
— |
|
|
|
— |
|
|
Short term investments |
|
|
32,137 |
|
|
|
32,137 |
|
|
|
— |
|
|
|
— |
|
|
Other investments |
|
|
21,514 |
|
|
|
— |
|
|
|
— |
|
|
|
21,514 |
|
|
Life settlement contracts |
|
|
22,155 |
|
|
|
— |
|
|
|
— |
|
|
|
22,155 |
|
|
|
|
$ |
1,302,031 |
|
|
$ |
131,996 |
|
|
$ |
1,126,366 |
|
|
$ |
43,669 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities sold but not yet purchased, market |
|
$ |
364 |
|
|
$ |
364 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Fixed maturity securities sold but not yet purchased, market |
|
|
8,483 |
|
|
|
— |
|
|
|
8,483 |
|
|
|
— |
|
|
Securities sold under agreements to repurchase, at contract
value |
|
|
347,617 |
|
|
|
— |
|
|
|
347,617 |
|
|
|
— |
|
|
Life settlement contract profit commission |
|
|
4,711 |
|
|
|
— |
|
|
|
— |
|
|
|
4,711 |
|
|
|
|
$ |
361,175 |
|
|
$ |
364 |
|
|
$ |
356,100 |
|
|
$ |
4,711 |
|
The Company had no transfers between levels during 2011 and
2010.
The following table provides a summary of changes in fair value of
the Company’s Level 3 financial assets for the years ended
December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands) |
|
Balance as of
January 1,
2011 |
|
Net income
(loss) |
|
Other
comprehensive
income |
|
Purchases and
issuances |
|
Sales and
settlements |
|
Net transfers
into (out of)
Level 3 |
|
Balance as of
December 31,
2011 |
|
Other investments |
|
$ |
21,514 |
|
|
$ |
883 |
|
|
$ |
(1,644 |
) |
|
$ |
611 |
|
|
$ |
(6,776 |
) |
|
$ |
— |
|
|
$ |
14,588 |
|
|
Life settlement contracts |
|
|
22,155 |
|
|
|
80,523 |
|
|
|
— |
|
|
|
39,239 |
|
|
|
(10,530 |
) |
|
|
— |
|
|
|
131,387 |
|
|
Life settlement contract profit commission |
|
|
(4,711 |
) |
|
|
(2,600 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,311 |
) |
|
Derivatives |
|
|
— |
|
|
|
— |
|
|
|
(3,508 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,508 |
) |
|
Total |
|
$ |
38,958 |
|
|
$ |
78,806 |
|
|
$ |
(5,152 |
) |
|
$ |
39,850 |
|
|
$ |
(17,306 |
) |
|
$ |
— |
|
|
$ |
135,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in Thousands) |
|
Balance as of January 1, 2010 |
|
Net income (loss) |
|
Other comprehensive income |
|
Purchases and
issuances |
|
Sales and
settlements |
|
Net transfers
into (out of)
Level 3 |
|
Balance as of
December 31,
2010 |
|
Other investments |
|
$ |
14,034 |
|
|
$ |
283 |
|
|
$ |
2,113 |
|
|
$ |
5,284 |
|
|
$ |
(200 |
) |
|
$ |
— |
|
|
$ |
21,514 |
|
|
Life settlement contracts |
|
|
— |
|
|
|
16,853 |
|
|
|
— |
|
|
|
5,302 |
|
|
|
— |
|
|
|
— |
|
|
|
22,155 |
|
|
Life settlement contract profit commission |
|
|
— |
|
|
|
(4,711 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,711 |
) |
|
Derivatives |
|
|
(1,893 |
) |
|
|
33 |
|
|
|
— |
|
|
|
— |
|
|
|
1,860 |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
12,141 |
|
|
$ |
12,458 |
|
|
$ |
2,113 |
|
|
$ |
10,586 |
|
|
$ |
1,660 |
|
|
$ |
— |
|
|
$ |
38,958 |
|
The Company uses the following methods and assumptions in
estimating its fair value disclosures for financial
instruments:
|
• |
Equity and Fixed Income
Investments: Fair value disclosures for these
investments are disclosed elsewhere in Note 2. “Significant
Accounting Policies”; |
|
• |
Premiums
Receivable: The carrying values reported in the
accompanying balance sheets for these financial instruments
approximate their fair values due to the short term nature of the
asset; |
|
• |
Subordinated Debentures and
Debt: The carrying values reported in the
accompanying balance sheets for these financial instruments
approximate fair value. Fair value was estimated using projected
cash flows, discounted at rates currently being offered for similar
notes. |
The fair value of life settlement contracts is based on information
available to the Company at the end of the reporting period. The
Company considers the following factors in its fair value
estimates: cost at date of purchase, recent purchases and sales of
similar investments, financial standing of the issuer, changes in
economic conditions affecting the issuer, maintenance cost,
premiums, benefits, standard actuarially developed mortality tables
and industry life expectancy reports. The fair value of a life
insurance policy is estimated using present value calculations
based on the data specific to each individual life insurance
policy. The following summarizes data utilized in estimating the
fair value of the portfolio of life insurance policies for the
years ended December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
2011 |
|
2010 |
|
Average age of insured |
|
|
77 |
|
|
|
75 |
|
|
Average life expectancy, months(1) |
|
|
155 |
|
|
|
193 |
|
|
Average face amount per policy |
|
$ |
6,703,000 |
|
|
$ |
6,084,000 |
|
|
Fair value discount rate |
|
|
7.5 |
% |
|
|
7.3 |
% |
|
(1) |
Mortality rates: standard life
expectancy as adjusted for insured’s specific
circumstances |
These assumptions are, by their nature, inherently uncertain and
the effect of changes in estimates may be significant. The fair
value measurements used in estimating the present value calculation
are derived from valuation techniques generally used in the
industry that include inputs for the asset that are not based on
observable market data. The extent to which the fair value could
reasonable vary in the near term has been quantified by evaluating
the effect of changes in significant underlying assumptions used to
estimate the fair value amount. If the life expectancies were
increased or decreased by 4 months and the discount factors were
increased or decreased by 1% while all other variables are held
constant, the carrying value of the investment in life insurance
policies would increase or (decrease) by the unaudited amounts
summarized below for the years ended December 31, 2011 and
2010:
|
|
|
|
|
|
|
|
Change in life expectancy |
|
|
|
Plus
4 Months |
|
Minus
4 Months |
Investment in life policies:
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
$ |
(18,778 |
) |
|
$ |
20,785 |
|
|
December 31, 2010 |
|
$ |
(4,163 |
) |
|
$ |
4,912 |
|
|
|
|
|
|
|
|
|
Change in discount rate |
|
|
|
Plus 1% |
|
Minus 1% |
Investment in life policies:
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
$ |
(13,802 |
) |
|
$ |
15,804 |
|
|
December 31, 2010 |
|
$ |
(2,996 |
) |
|
$ |
2,537 |
|