PLFE Presidential Life Corp. (MM)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                       to
Commission file number   0-5486

Presidential Life Corporation

 

Delaware		13-2652144
(State of incorporation)		(IRS Employer Identification No.)
69 Lydecker Street, Nyack, NY		10960
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code:		(845) 358-2300

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   R         No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   R         No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “ large accelerated filer ” , “ accelerated filer ” and “ smaller reporting company ” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨		Accelerated filer   R
Non-accelerated filer   ¨		Smaller reporting company   ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨         No   R

The number of shares of registrant’s common stock outstanding as of November 7, 2012 was 29,591,739.

INDEX

Part I	Financial Information	Page No.
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets
	As of September 30, 2012 (Unaudited) and December 31, 2011	3
	Consolidated Statements of Comprehensive Income (Unaudited)
	For the three and nine months ended September 30, 2012 and 2011	4
	Consolidated Statements of Shareholders' Equity (Unaudited)
	For the nine months ended September 30, 2012 and 2011	5
	Consolidated Statements of Cash Flows (Unaudited)
	For the nine months ended September 30, 2012 and 2011	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management's Discussion and Analysis of
	Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
Part II -	Other Information	41
	Item 1.	Legal Proceedings
	Item 1A.	Risk Factors
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Mine Safety Disclosures
	Item 5.	Other Information
	Item 6.	Exhibits
Signatures		45
Certification of Chief Executive Officer Certification of Chief Financial Officer Certification of Chief Executive Officer Certification of Chief Financial Officer	46
47
48
49

2

PART 1 - FINANCIAL INFORMATION
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Item 1. Financial Statements	September 30,		December 31,
			2012		2011
ASSETS:	(Unaudited)
Investments:
	Fixed maturities:
		Available for sale at market (Amortized cost
		of  $ 3,162,017 and $ 3,206,884 respectively)	$	3,584,243		$	3,520,755
	Common stocks (Cost of $ 748 and
		$ 748, respectively)		1,468			1,302
	Derivative instruments, at fair value		1,651			3,358
	Real estate		415			415
	Policy loans		19,565			18,442
	Short-term investments		126,723			61,233
	Limited Partnerships		171,729			166,923
		Total Investments	$	3,905,794		$	3,772,428
Cash and cash equivalents		15,802			47,110
Accrued investment income		45,489			47,289
Deferred policy acquisition costs		37,732			41,746
Furniture and equipment, net		2,385			1,065
Amounts due from reinsurers		29,962			19,116
Amounts due from investment transactions		228			23,880
Federal income taxes recoverable		15,477			-
Other assets		2,321			1,649
TOTAL ASSETS	$	4,055,190		$	3,954,283
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
	Policyholders' account balances	$	2,286,808		$	2,323,364
	Annuity		624,608			634,397
	Life and accident and health		92,357			83,855
	Other policy liabilities		17,528			20,633
		Total Policy Liabilities	$	3,021,301		$	3,062,249
Deposits on policies to be issued		659			490
General expenses and taxes accrued		4,002			2,521
Federal income taxes payable		-			1,411
Deferred federal income taxes, net		136,036			82,355
Amounts due for investment transactions		6,173			268
Other liabilities		18,550			17,045
		Total Liabilities	$	3,186,721		$	3,166,339
Commitments and Contingencies
Shareholders’ Equity:
	Capital stock ($.01 par value; authorized
	100,000,000 shares outstanding,
	29,591,739 and  29,574,697 shares, respectively)	$	296		$	296
	Additional paid in capital		7,532			7,408
	Accumulated other comprehensive income		266,642			192,815
	Retained earnings		593,999			587,425
		Total Shareholders’ Equity		868,469			787,944
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	4,055,190		$	3,954,283
The accompanying notes are an integral part of these Consolidated Financial Statements.

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PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except share data)
				THREE MONTHS ENDED		NINE MONTHS ENDED
				September 30,		September 30,
				(Unaudited)		(Unaudited)
REVENUES:	2012		2011		2012		2011
	Insurance Revenues:
		Premiums	$	4,615		$	4,572		$	12,896		$	13,533
		Annuity considerations		5,661			1,586			14,203			5,983
		Universal life and investment type policy fee income		828			849			2,477			2,647
	Equity in earnings (losses) on limited partnerships		182			103			1,312			2,067
	Net investment income		45,754			48,212			138,981			146,555
	Net realized investment gains (losses):
		Total Other-than-temporary impairment ("OTTI") losses	$	(586)		$	(3,971)		$	(5,660)		$	(10,687)
		OTTI losses recognized in other comprehensive income		235			836			235			3,924
		Net OTTI losses recognized in earnings	$	(351)		$	(3,135)		$	(5,425)		$	(6,763)
		Net realized capital gains, excluding OTTI losses		4,313			2,215			12,229			27,626
	Other income		1,404			257			2,837			2,201
			TOTAL REVENUES	$	62,406		$	54,659		$	179,510		$	193,849
BENEFITS AND EXPENSES:
	Death and other life insurance benefits	$	4,416		$	4,519		$	13,113		$	13,435
	Annuity benefits		19,810			20,426			59,651			62,284
	Interest credited to policyholders' account balances		24,348			25,428			73,514			76,454
	Other interest and other charges		434			243			1,112			950
	Decrease in liability for future policy benefits		(3,522)			(6,836)			(12,380)			(21,293)
	Commissions to agents, net		1,289			700			3,673			3,064
	General expenses and taxes		6,588			4,460			20,109			17,583
	Change in deferred policy acquisition costs		1,105			1,295			2,336			4,457
			TOTAL BENEFITS AND EXPENSES	$	54,468		$	50,235		$	161,128		$	156,934
	Income before income taxes	$	7,938		$	4,424		$	18,382		$	36,915
	Provision (benefit) for income taxes:
		Current	$	(13,273)		$	16,051		$	(7,667)		$	18,341
		Deferred		16,023			(14,525)			13,927			(5,605)
				$	2,750		$	1,526		$	6,260		$	12,736
NET INCOME	$	5,188		$	2,898		$	12,122		$	24,179
OTHER COMPREHENSIVE INCOME (after tax)
	Net unrealized investment gains from available for sale securities, net of income tax expense of $39,753 and $52,613, respectively.		29,000			63,203			73,827			97,711
TOTAL OTHER COMPREHENSIVE INCOME	$	29,000		$	63,203		$	73,827		$	97,711
TOTAL COMPREHENSIVE INCOME	$	34,188		$	66,101		$	85,949		$	121,890
	Earnings per common share, basic	$	0.18		$	0.10		$	0.41		$	0.82
	Earnings per common share, diluted	$	0.18		$	0.10		$	0.41		$	0.82
	Weighted average number of shares outstanding during the period, basic		29,591,739			29,574,697			29,588,007			29,574,697
	Weighted average number of shares outstanding during the period, diluted		29,609,653			29,574,697			29,597,614			29,574,697
The accompanying notes are an integral part of these Consolidated Financial Statements.

4

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(In thousands)
(Unaudited)
										Accumulated
				Additional					Other
	Capital		paid-in-		Retained		Comprehensive
Nine Months Ended September 30, 2011	stock		Capital		Earnings		Income		Total
Balance at January 1, 2011	$	296		$	7,123		$	555,880		$	118,609		$	681,908
Comprehensive Income:
Net income								24,179					$	24,179
Net unrealized investment gains											97,711			97,711
Share based compensation					239									239
Dividends paid to shareholders								(5,544)						(5,544)
Balance at September 30, 2011	$	296		$	7,362		$	574,515		$	216,320		$	798,493
Nine Months Ended September 30, 2012
Balance at January 1, 2012	$	296		$	7,408		$	587,425		$	192,815		$	787,944
Comprehensive Income:
Net income								12,122					$	12,122
Net unrealized investment gains											73,827			73,827
Share based compensation					124									124
Dividends paid to shareholders								(5,548)						(5,548)
Balance at September 30, 2012	$	296		$	7,532		$	593,999		$	266,642		$	868,469
The accompanying notes are an integral part of these Consolidated Financial Statements.

5

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
				NINE MONTHS ENDED
				SEPTEMBER 30,
				(Unaudited)
				2012		2011
OPERATING ACTIVITIES:
Net income	$	12,122		$	24,179
	Adjustments to reconcile net income to net cash provided by operating activities:
	Benefit (provision) for deferred income taxes		13,927			(5,605)
	Depreciation and amortization		68			95
	Stock option expense		124			239
	Amortization of fixed maturity discounts and premiums		(1,893)			(4,565)
	Equity in earnings on limited partnerships		(1,312)			(2,067)
	Realized investment gains including OTTI charges		(6,804)			(20,863)
	Changes in:
		Accrued investment income		1,830			(3,306)
		Deferred policy acquisition costs		2,336			4,457
		Federal income tax recoverable		(16,888)			8,615
		Liability for future policy benefits, net of reinsurance		(10,821)			(20,014)
		Other items, net		(3,497)			2,766
			Net Cash Used in Operating Activities	$	(10,808)		$	(16,069)
INVESTING ACTIVITIES:
	Fixed Maturities: Available for sale
			Acquisitions	$	(155,629)		$	(308,355)
			Sales and maturities		205,825			326,626
	Common Stock:
			Acquisitions		-			(7,458)
			Sales		14			7,752
	Purchase of subsidiary, net of cash		(6,060)			-
	Increase in short-term investments and policy loans		(64,185)			(36,308)
	Limited partnership investments:
		Contributions to limited partnerships		(13,285)			(16,858)
		Distributions from limited partnerships		24,925			51,534
	Net change in amounts due from/for investment transactions		29,557			56,162
			Net Cash Provided By Investing Activities	$	21,162		$	73,095
FINANCING ACTIVITIES:
	Decrease in policyholders’ account balances	$	(36,556)		$	(51,552)
	Change in bank overdrafts		272			(1,837)
	Change in deposits on policies to be issued		170			(330)
	Dividends paid to shareholders		(5,548)			(5,544)
			Net Cash Used In Financing Activities	$	(41,662)		$	(59,263)
	Decrease in Cash and Cash Equivalents		(31,308)			(2,237)
	Cash and Cash Equivalents at Beginning of Period		47,110			5,924
	Cash and Cash Equivalents at End of Period	$	15,802		$	3,687
	Supplemental Cash Flow Disclosure:
			Income Taxes Paid	$	9,222		$	13,957
			Interest Paid	$	-		$	-
The accompanying notes are an integral part of these Consolidated Financial Statements.

6

PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES

 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.

Business

Presidential Life Corporation (the “Company”), through its principal wholly owned subsidiary, Presidential Life Insurance Company (“Insurance Company”), is engaged in the sale of annuity contracts, life insurance and accident and health insurance.  We manage our business and report as a single business segment.  We are a Delaware corporation founded in 1965.  We are licensed to market our products in all 50 states and the District of Columbia.  Unless the context otherwise requires, the “Company,” “we,” “us,” “our” and similar references shall mean Presidential Life Corporation and the Insurance Company, collectively.

B.  

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") applicable to stock life insurance companies for interim financial statements and in accordance with the requirements of Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by GAAP applicable to stock life insurance companies for complete financial statements.  In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Interim results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  Management believes that, although the disclosures are adequate, these consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2011. 

C.  

Segment Reporting

The Company manages and reports the business as a single segment in accordance with Financial Accounting Standards Board (“FASB”) guidance, which views certain qualitative and quantitative criteria for determining whether different lines of business should be aggregated for financial reporting purposes.  Our Chief Executive Officer, who is our chief operating decision maker, evaluates financial information for our business as a single segment in allocating resources and assessing performance.  Substantially all of the Company’s 2012 premiums and deposits received from policyholders are divided between annuities (approximately 72%), life insurance (approximately 20%) and accident and health insurance (approximately 8%).  The nature of these product lines is sufficiently similar to permit their aggregation as a single reporting segment.  

Approximately 68% of the Company’s life insurance liabilities reflect single premium universal life policies, which bear similar economic and business characteristics to our single premium deferred annuity products.  Both products are funded by initial single premiums, both maintain accreting fund values credited with interest as earned, both can be surrendered before maturity with surrender charges in the early years and, both are classified within policyholder account balances in the balance sheet.  Moreover, the two products generate similar returns to the Company and carry similar risks of early surrender by the product holder.  Both are marketed and distributed by the same group of independent agents.  The products are administered and managed within the same administrative facility, with centralized administrative functions.  The products are also directed at a similar market, namely mature consumers seeking financial protection for secure future cash streams for themselves and their heirs and associated tax benefits.  The regulatory frameworks for the products are also substantially the same, as the Insurance Company and its independent agents sell both products under single licenses issued by various state insurance departments.  The remaining business of the Company is not material to the overall performance of the Company.  

D.  

Investments

Fixed maturity investments available for sale represent investments that may be sold in response to changes in various economic conditions.  These investments are carried at fair value and net unrealized gains (losses), net of the effects of amortization of deferred policy acquisition costs and deferred federal income taxes are credited or charged directly to shareholders’ equity, unless a decline in market value is considered to be other than temporary in which case the investment is reduced to its fair value and the portion related to credit loss is recorded in the income statement.  Equity securities include common stocks and non-redeemable preferred stocks and are carried at market value, with the related unrealized gains and losses, net of deferred federal income tax effect, if any, charged or credited directly to shareholders’ equity, unless a decline in market value is deemed to be other than temporary in which case the investment is reduced to its fair value and the loss is recorded in the income statement.  Premium and discounts on fixed maturity investments are amortized/accrued using methods that result in a constant yield over the securities expected lives.  Amortization/accrual of premium and discounts on residential and/or commercial mortgage and asset-backed securities incorporate

7

prepayment assumptions to estimate the securities’ expected lives.

Where consolidation is not appropriate, the Company applies the equity method of accounting consistent with FASB Accounting Standards Codification (“ASC”) 323, Investments – Equity Method and Joint Ventures, to limited partnerships in which the Company holds either (a) a five percent or greater interest or (b) less than a five percent interest but the Company has more than virtually no influence over the operating or financial policies of the limited partnership.  The Company considers certain qualitative factors in assessing whether it has more than virtually no influence for partnership interests of less than five percent.  The Company records realized and unrealized earnings (or losses) of the limited partnerships accounted for under the equity method in net income each period and classifies such income in one line, equity in earnings (losses) on limited partnerships.  Generally, the Company records its share of its limited partnership earnings using a three-month lag.

The Company applies the fair value method of accounting consistent with ASC 944, Financial Services—Insurance, to those limited partnerships in which the Company holds less than a five percent interest and does not have more than virtually no influence over the operating or financial policies of the limited partnership.  The Company recognizes the unrealized change in fair value of a limited partnership interest accounted for under the fair value method as a component of equity (other comprehensive income or loss) each period.  Generally, the Company records unrealized changes in fair value using a three-month lag.  The Company recognizes cash distributions from the limited partnerships accounted for under the fair value method as either a return on capital in earnings or a return of capital that reduces the investment’s carrying amount.  This distinction is based on whether the cash distribution represents earnings or loss of the investee, or a return of our investment.  A cash receipt that does not represent earnings (or loss) of the investee is treated as a return of capital, which the Company records as a reduction of the basis in the investment, rather than as a credit (or charge) to the income statement. Earnings from distributions are classified as realized capital gains or losses in earnings each period.

For limited partnerships as well as common stock investments reported at fair value, if the Company concludes that an other than temporary impairment has occurred, the unrealized loss at the time of write-down becomes realized as a result of reducing the cost-basis of the investment and reporting a corresponding charge to realized gain (loss) in the Consolidated Statements of Income. With respect to limited partnerships, the Company bases its review on a number of factors, including, but not limited to, the severity and duration of the decline in fair value of the investment as well as the cause of the decline, our ability and intent to hold for the remaining duration of the fund to allow for a sufficient period of time for recovery in value, correspondence from managers regarding investment strategies and credit considerations of individual asset holdings, our review of the underlying assets holdings within the limited partnership, and the financial condition and near-term prospects of the underlying assets and their industries taking into consideration the economic prospects of the industry and geographical location. The timing of OTTI recognition on limited partnerships can also be affected by the changing status of a limited partnership position whereby the nature of remaining unrealized gains and losses within the investment portfolio of a limited partnership are apt to change after each distribution, particularly large distributions often made near the close date of the fund. 

When assessing our intent to sell a fixed maturity security or if it is more likely than not that the Company will sell a fixed maturity security before recovery of its cost basis, we evaluate facts and circumstances such as, but not limited to, decisions to reposition our security portfolio and sale of securities to meet cash flow needs.  In order to determine the amount of the credit loss for a fixed maturity security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover.  The discount rate is the effective interest rate implicit in the underlying fixed maturity security.  The effective interest rate is the original yield or the coupon if the fixed maturity security was previously impaired.  If an OTTI exists and we have the intent to sell the security, we conclude that the entire OTTI is credit-related and the amortized cost for the security is written down to current fair value with a corresponding charge to realized loss on our Consolidated Statements of Income.  If we do not intend to sell a fixed maturity security or it is not more likely than not we will be required to sell a fixed maturity security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected is less than the amortized cost of the fixed maturity security (referred to as the credit loss), we conclude that an OTTI has occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge to realized loss on our Consolidated Statements of Income, as this is also deemed the credit portion of the OTTI.  The remainder of the decline to fair value is recorded to Other Comprehensive Income (“OCI”), as an unrealized OTTI loss on our Consolidated Balance Sheets, as this is considered a noncredit (i.e., recoverable) impairment.

To determine the recovery period of a fixed maturity security, we consider the facts and circumstances surrounding the underlying issuer, including, but not limited to, the following:

·

Historic and implied volatility of the security;

·

Length of time and extent to which the fair value has been less than amortized cost;

·

Adverse conditions specifically related to the security or to specific conditions in an industry or geographic area;

·

Failure, if any, of the issuer of the security to make scheduled payments; and

·

Recoveries or additional declines in fair value subsequent to the balance sheet date.

8

For all fixed maturities securities evaluated for OTTI, we consider the timing and amount of the cash flows. When evaluating whether our collateralized mortgage obligations (“CMOs”) are other-than-temporarily impaired, we also examine the characteristics of the underlying collateral, such as delinquency, loss severities and default rates, the quality of the underlying borrower, the type of collateral in the pool, the vintage year of the collateral, subordination levels within the structure of the collateral pool, the quality of any credit guarantors, the susceptibility to variability of prepayments, our intent to sell the security and whether it is more likely than not we will sell the security before the recovery of its amortized cost basis. In assessing corporate fixed maturities securities for OTTI, we evaluate the ability of the issuer to meet its debt obligations and the value of the company or specific collateral securing the debt position including the fundamentals of the issuer to determine what we would recover if they were to file bankruptcy versus the price at which the market is trading; fundamentals of the industry in which the issuer operates; expectations regarding defaults and recovery rates; and changes to the rating of the security by a rating agency.  

Realized gains and losses on disposals of investments are determined for fixed maturities and equity securities by the specific-identification method.

Investments in short-term securities, which consist primarily of commercial paper and corporate debt issues maturing in less than one year, are recorded at amortized cost, which approximate market.  Policy loans are stated at their unpaid principal balance.

The Company’s cash equivalents are primarily comprised of investments in overnight interest-bearing deposits and money market instruments.

The Company's investments in real estate consist of two acres of undeveloped land and two buildings in Nyack, New York, which are occupied entirely by the Company.  The investments are carried at cost less accumulated depreciation.  Both buildings are fully depreciated. The carrying value of real estate in the balance sheet relates to the original cost of land owned in Nyack, NY.

E.

Fair Value Measurements

The following estimated fair value disclosures of financial instruments have been determined using available market information, current pricing information and appropriate valuation methodologies.  If quoted market prices were not readily available for a financial instrument, management determined an estimated fair value. Accordingly, the estimates may not be indicative of the amounts the Company could have realized in market transactions.

Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs are as follows:

Level 1

  

Observable inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.  Level 1 securities include highly liquid U.S. Treasury securities, certain common stocks and cash and cash equivalents.

Level 2

  

Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.  Most debt securities, preferred stocks, certain equity securities, short-term investments and derivatives are model priced using observable inputs and are classified with Level 2.

Level 3

  

Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  The Company’s Level 3 assets include investments in limited partnerships.

For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy.  The Company receives the quoted market prices from a third-party, nationally recognized pricing service (pricing service).  When quoted market prices are unavailable, the Company utilizes a pricing service to determine an estimate of fair value, which is mainly for its fixed maturity investments.  The fair value estimates provided from this pricing service are included in the amount disclosed in Level 2 of the hierarchy.  If quoted market prices and an estimate from a pricing service are unavailable, the Company secures an estimate of fair value from brokers, when available, who utilize valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3.  When broker prices are unavailable, the Company prices the securities using either discounted cash-flow models or matrix pricing.  The Company’s policy is to transfer assets and liabilities into Level 3 when a significant input cannot be corroborated with market observable data.  This may include: circumstances in which market activity has dramatically decreased and transparency to underlying inputs cannot be observed, current prices are not available, and substantial price variances in quotations among market participants exist.  In certain cases, the inputs used to measure the fair value may fall into levels of the fair value hierarchy.  In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the

9

lowest level input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment.  In making the assessment, the Company considers factors specific to the asset.

Observable inputs generally used to measure the fair value of securities classified as Level 2 include benchmark yields, reported secondary trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data.  Additional observable inputs are used when available, and as may be appropriate, for certain security types, such as prepayment, default, and collateral information for the purpose of measuring the fair value of mortgage- and asset-backed securities.  The Company reviews prices for reasonableness relative to prior periods for that security or other comparable securities and will reassess prices that do not seem to represent a reasonable fair value.  If a price is reassessed, the Company will typically obtain a non-binding quote from a broker-dealer; multiple quotations are not typically sought.  At September 30, 2012, the Company has not adjusted any pricing provided by the pricing service based on the review performed by our investment managers.

Level 3 valuations are generated from techniques that use significant assumptions not observable in the market.  These unobservable assumptions reflect the Company’s assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include the use of option pricing models, discounted cash flow models, spread-based models and similar techniques, using the best information available in the circumstances.

F.

Deferred Policy Acquisition Costs

The costs of acquiring new business (principally commissions and certain underwriting, agency and policy issue expenses), all of which vary with the production of new business, have been deferred.  Beginning January 1, 2012, deferred costs must directly relate to the successful acquisition of a new or renewal insurance contract.  Refer to Note 1L below for the effect of adopting this new guidance during the nine months ended September 30, 2012.  When a policy is surrendered, the remaining unamortized cost is written off.  Deferred policy acquisition costs (“DAC”) are subject to recoverability testing at time of policy issue and loss recognition testing at the end of each year.

For immediate annuities with life contingencies, deferred policy acquisition costs are amortized over the life of the contract in proportion to expected future benefit payments.  For immediate annuities without life contingencies, the constant yield method or prospective deposit method is used to establish the DAC asset.

For traditional life policies, deferred policy acquisition costs are amortized over the premium paying periods of the related policies using assumptions that are consistent with those used in computing the liability for future policy benefits.  Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts.  For these contracts, the amortization periods generally are for the scheduled life of the policy, not to exceed 30 years.

Deferred policy acquisition costs are amortized over periods ranging from 15 to 25 years for universal life products and investment type products as a constant percentage of estimated gross profits arising principally from surrender charges and interest and mortality margins based on historical and anticipated future experience, updated regularly.  The effects of revisions to reflect actual experience on previous amortization of deferred policy acquisition costs, subject to the limitation that the outstanding DAC asset can never exceed the original DAC plus accrued interest, are reflected in earnings in the period estimated gross profits are revised.  DAC is also adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized with corresponding credits or charges included in accumulated other comprehensive income.  For that portion of the business where acquisition costs are not deferred (i.e., medical stop loss business), management believes the expensing of policy acquisition costs is immaterial.

G.

Future Policy Benefits

Future policy benefits for traditional life insurance policies are computed using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest established at policy issue.  Assumptions, established at policy issue as to mortality and persistency, together with interest and expense assumptions, provide a margin for adverse deviation.  Benefit liabilities for deferred annuities during the accumulation period are equal to accumulated contract holders' fund balances and, after annuitization, are equal to the present value of expected future payments.  

H.

Policyholders' Account Balances

Policyholders' account balances for universal life and investment type contracts are equal to the policy account values.  The policy account values represent an accumulation of gross premium payments plus credited interest, and when applicable, less mortality and expense charges and withdrawals.

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I.

Federal Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return. The asset and liability method in recording income taxes on all transactions that have been recognized in the financial statements is used.  FASB guidance provides that deferred income taxes are adjusted to reflect tax rates at which future tax liabilities or assets are expected to be settled or realized.

J.

Earnings Per Common Share  (“EPS”)

Basic EPS are computed based upon the weighted average number of common shares outstanding during the periods presented. Diluted EPS are computed based upon the weighted average number of common shares including contingently issuable shares and other dilutive items.  The weighted average number of common shares used to compute diluted EPS for the nine months ended September 30, 2012 and 2011 was 29,597,614 and 29,574,697, respectively.  The dilution from the potential exercise of stock options outstanding did not reduce EPS during the nine months ended September 30, 2012 or 2011.

Options totalling 33,612 and 267,515 shares of common stock for the nine months ended September 30, 2012 and September 30, 2011, respectively were not included in the computation of weighted average shares because the impact of these options was antidilutive.

K.

Reclassifications

To facilitate period-to-period comparisons, certain reclassifications have been made to prior period consolidated financial statement amounts to conform to current period presentation. There was no effect on net income from the change in presentation.

L.

New Accounting Pronouncements

For a full discussion of new accounting pronouncements and their impact on the Company, please refer to the Company’s 2011 Form 10-K.

Pronouncements Adopted during the Nine Months Ended September 30, 2012

Deferred Acquisition Costs

In October 2010, the FASB issued authoritative guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. Further, the guidance clarifies that an entity may defer incremental direct costs of contract acquisition with independent third parties or employees that are essential to the contract transaction, as well as the portion of employee compensation, including payroll fringe benefits and other costs directly related to underwriting, policy issuance and processing, medical inspection and contract selling for successfully negotiated contracts. The updated guidance is effective on either a retrospective or prospective basis for interim and annual reporting periods beginning after December 15, 2011, with early adoption permitted as of the beginning of a company’s annual period. The Company adopted the new guidance on a prospective basis effective January 1, 2012.  As a result of adoption, the Company capitalized approximately $0.5 million less in acquisition costs compared to the amount that would have been capitalized if the Company’s previous accounting policy had been applied for the nine months ended 2012.  

Fair Value Measurements

In May 2011, the FASB issued updated guidance clarifying fair value measurement and disclosure requirements. It is intended to bring consistency to the fair value measurement and disclosure requirements of United States GAAP and International Accounting Standards. This new guidance is effective for interim or annual reporting period beginning after December 15, 2011 and should be applied prospectively. In the period of adoption, the Company will be required to disclose a change, if any, in valuation technique and related inputs resulting from the application of the amendments.   The Company adopted the guidance in the first quarter of 2012 with no material effect to our consolidated financial statements.

Presentation of Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The ASU does not change the items that must be reported in other comprehensive income. The new guidance was

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effective for interim or annual reporting period beginning after December 15, 2011.  The Company adopted this standard in the first quarter of 2012 by reporting a continuous statement of comprehensive income that reconciles net income and comprehensive income, with no impact on our results of operations, financial position or liquidity.

Repo Accounting

On April 29, 2011, the FASB amended its guidance on accounting for repurchase agreements. The amendments simplify the accounting by eliminating the requirement that the transferor demonstrate it has adequate collateral to fund substantially all the cost of purchasing replacement assets. Under the amended guidance, a transferor maintains effective control over transferred financial assets (and thus accounts for the transfer as a secured borrowing) if there is an agreement that both entitles and obligates the transferor to repurchase the financial assets before maturity and if all of the following conditions previously required are met: (i) financial assets to be repurchased or redeemed are the same or substantially the same as those transferred, (ii) repurchase or redemption date before maturity at a fixed or determinable price and (iii) the agreement is entered into contemporaneously with, or in contemplation of, the transfer. As a result, more arrangements could be accounted for as secured borrowings rather than sales. The updated guidance is effective on a prospective basis for interim and annual reporting periods beginning on or after December 15, 2011 and early adoption is prohibited. The Company adopted this guidance on January 1, 2012 with no effect on our consolidated financial statements.

Intangibles - Goodwill and Other

In September 2011, the FASB issued updated guidance that modifies the manner in which the two-step impairment test of goodwill is applied.  Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact a reporting unit’s fair value and lead to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill.  If an entity determines that it is more likely than not, it must perform an impairment test. The first step of the impairment test involves comparing the estimated fair value of a reporting unit to its carrying value, including goodwill.  If the carrying value of a reporting unit exceeds the estimated fair value, a second step must be performed to measure the amount of goodwill impairment, if any.  In the second step, the implied fair value of the reporting unit’s goodwill is determined in the same manner as goodwill is measured in a business combination (i.e., by measuring the fair value of the reporting unit’s assets, liabilities and unrecognized intangible assets and determining the remaining amount ascribed to goodwill) and comparing the amount of the implied goodwill to the carrying amount of the goodwill.  If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The updated guidance is effective January 1, 2012.  The adoption of this guidance did not have an effect on our results of operations, financial position or liquidity.

Pronouncements Finalized but Not Yet Adopted

Disclosures about Offsetting Assets and Liabilities

In December 2011, the FASB issued an Accounting Standards Update (the “Update”) requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The disclosure requirements apply to financial instruments and derivative instruments that are either offset in accordance with ASC Section 210-20-45 or Section 815-10-45, or subject to an enforceable master netting arrangement or similar agreement. The Update requires entities to disclose in tabular format certain quantitative information separately for assets and liabilities, including but not limited to: gross amounts of those recognized assets and liabilities; amounts offset to determine the net amounts presented in the statement of financial position; net amounts presented in the statement of financial position; and amounts subject to an enforceable master netting arrangement.  An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.  We expect this guidance to affect financial statement disclosures but not to have an impact on our consolidated results of operations and financial condition.

Impairment of Indefinite-Lived Intangible Assets

In July 2012, the FASB issued amended guidance on testing indefinite-lived intangible assets for impairment. Under the amended guidance, an entity can first assess qualitative factors to determine whether an indefinite-lived intangible asset may be impaired. If the entity concludes that it is not likely that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. But if the entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the asset’s fair value with its carrying amount in accordance with existing guidance. The entity may also bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. The entity will be able to resume performing the qualitative assessment in any subsequent period. The amended guidance is effective for annual and interim impairment tests

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performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company is currently assessing the impact of this guidance on the Company’s consolidated financial position, results of operations, and financial statement disclosures, but does not expect it to materially impact its consolidated financial position or results of operations.

Net Realized Investment Gains (Losses):
			Nine Months Ended September 30,
			2012			2011
		(In thousands)
Fixed maturities		$	2,262		$	7,796
Common stocks			14			219
Limited partnerships			11,659			24,962
Derivatives			(1,706)			(5,351)
Net realized investment gains (losses), excluding OTTI losses		$	12,229		$	27,626
Total OTTI losses recognized in earnings		$	(5,425)		$	(6,763)
Net realized investment gains (losses), including OTTI losses		$	6,804		$	20,863

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Net Realized Investment Gains (Losses):
			Three Months Ended September 30,
			2012			2011
		(In thousands)
Fixed maturities		$	520		$	1,613
Limited partnerships			4,351			5,290
Derivatives			(558)			(4,688)
Net realized investment gains (losses), excluding OTTI losses		$	4,313		$	2,215
Total OTTI losses recognized in earnings		$	(351)		$	(3,135)
Net realized investment gains (losses), including OTTI losses		$	3,962		$	(920)

The following table presents fair value and gross unrealized losses for fixed maturities and common stock where the estimated fair value had declined and remained below amortized cost at September 30, 2012:
	Less Than 12 Months		12 Months or More		Total
				Unrealized					Unrealized					Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Description of Securities		(In thousands)
US Treasury obligations and direct obligations of US Government Agencies	$	-		$	-		$	1,666		$	187		$	1,666		$	187
States, municipalities and political subdivision		1,998			2			473			-			2,471			2
Public Utilities		6,498			146			3,742			345			10,240			491
Mortgage backed securities		1,784			52			462			24			2,246			76
Corporate Bonds		7,966			615			71,629			3,051			79,595			3,666
Preferred Stocks		-			-			16,571			374			16,571			374
Total Temporarily Impaired Fixed Maturities Securities	$	18,246		$	815		$	94,543		$	3,981		$	112,789		$	4,796
Total Temporarily Impaired Securities	$	18,246		$	815		$	94,543		$	3,981		$	112,789		$	4,796

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The following table presents the fair value and gross unrealized losses for fixed maturities and common stock where the estimated fair value had declined and remained below amortized cost at December 31, 2011:
	Less Than 12 Months		12 Months or More		Total
				Unrealized					Unrealized					Unrealized
Description of Securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
US Treasury obligations and direct obligations of US Government Agencies	$	-		$	-		$	1,777		$	216		$	1,777		$	216
States, municipalities and political subdivisions		2,480			20			4,246			46			6,726			66
Public Utilities		410			114			3,892			197			4,302			311
Mortgage backed securities		6,517			229			5,084			361			11,601			590
Corporate Bonds		138,819			5,664			94,929			11,903			233,748			17,567
Preferred Stocks		3,659			493			30,433			6,760			34,092			7,253
Total Temporarily Impaired Fixed Maturities Securities	$	151,885		$	6,520		$	140,361		$	19,483		$	292,246		$	26,003
Common Stock	$	-		$	100		$	-		$	-		$	-		$	100
Total temporarily Impaired Securities	$	151,885		$	6,620		$	140,361		$	19,483		$	292,246		$	26,103

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Limited Partnerships:
The following table presents the carrying value of the limited partnership investments.
	September 30, 2012		December 31, 2011
	(In thousands)
Debt/Collateralized bond obligations	$	707		$	722
Hedge Related Funds		7,015			7,778
Infrastructure		25,190			22,609
Leveraged buy-out/Merchant		38,705			37,074
Mezzanine and Senior Debt		1,297			1,540
Oil and Gas		22,299			23,823
Real Estate		31,554			30,227
Restructuring		41,945			39,484
Equity Funds		3,017			3,666
	$	171,729		$	166,923

The cost bases of the investments in limited partnerships were approximately $156.8 million and $159.5 million at September 30, 2012 and December 31, 2011, respectively.  At September 30, 2012 and December 31, 2011, the net unrealized gains on limited partnerships were $23.6 million and $16.0 million, respectively, all of which related to limited partnerships accounted for under the fair value method.  The cost and carrying values of the limited partnerships accounted for under the fair value method were $135.3 million and $158.9 million at September 30, 2012 and $139.3 million and $155.3 million at December 31, 2011, respectively.

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The following table presents the investment activity in the limited partnership investments.
			Equity Method Partnerships			Fair Value Partnerships			Total
		(In thousands)
Nine Months Ended September 30, 2012:
Contributions		$	407		$	12,878		$	13,285
Equity in earnings (loss) of partnerships			1,312			-			1,312
Distributions:
Return of capital			(547)			(12,720)			(13,267)
Return on capital (net realized gain, excluding OTTI)			-			(11,659)			(11,659)
Increase in unrealized gains (losses) reflected in other comprehensive income, excluding the effect of realized gains from distributions			-			15,135			15,135
Change in limited partnerships			1,172			3,634			4,806
Limited partnerships, beginning of period			11,651			155,272			166,923
Limited partnerships, end of period		$	12,823		$	158,906		$	171,729
Nine Months Ended September 30, 2011:
Contributions		$	3,721			13,137			16,858
Equity in earnings (loss) of partnerships			2,067			-			2,067
Distributions:
Return of capital			(3,318)		$	(23,255)		$	(26,573)
Return on capital (net realized gain, excluding OTTI)			-			(24,961)			(24,961)
Increase in unrealized gains (losses) reflected in other comprehensive income, excluding the effect of realized gains from distributions			-			45,360			45,360
Change in limited partnerships			2,470			10,281			12,751
Limited partnerships, beginning of period			11,255			184,246			195,501
Limited partnerships, end of period		$	13,725		$	194,527		$	208,252
			Equity Method Partnerships			Fair Value Partnerships			Total
		(In thousands)
Three Months Ended September 30, 2012:
Contributions		$	13		$	5,002		$	5,015
Equity in earnings (loss) of partnerships			182			-			182
Distributions:
Return of capital			(23)			(3,686)			(3,709)
Return on capital (net realized gain, excluding OTTI)			-			(4,351)			(4,351)
Increase in unrealized gains (losses) reflected in other comprehensive income, excluding the effect of realized gains from distributions			-			(2,298)			(2,298)
Change in limited partnerships			172			(5,333)			(5,161)
Limited partnerships, beginning of period			12,651			164,239			176,890
Limited partnerships, end of period		$	12,823		$	158,906		$	171,729
Three Months Ended September 30, 2011:
Contributions		$	2,221			4,765			6,986
Equity in earnings (loss) of partnerships			103			-			103
Distributions:
Return of capital			(309)		$	(4,250)		$	(4,559)
Return on capital (net realized gain, excluding OTTI)			-			(5,289)			(5,289)
Increase in unrealized gains (losses) reflected in other comprehensive income, excluding the effect of realized gains from distributions			-			4,855			4,855
Change in limited partnerships			2,015			81			2,096
Limited partnerships, beginning of period			11,710			194,446			206,156
Limited partnerships, end of period		$	13,725		$	194,527		$	208,252

As of September 30, 2012, limited partnerships with a carrying value of $24.1 million and a gross unrealized loss of $2.4 million, have been in an unrealized loss position for under twelve months.  Limited partnerships with a carrying value of $0.1 million and a gross unrealized loss of $14,900 have been in an unrealized loss position for over twelve months.

As of September 30, 2012, the Company was committed to contribute, if called upon, an aggregate of approximately $31.2 million of additional capital to certain of these limited partnerships.  Commitments of $30.3 million and $0.9 million will expire in 2012 and 2013, respectively.  The commitment expirations are estimates based upon the commitment periods of each of the partnerships.  Certain partnerships provide, however, that in the event capital from the investments is returned to the limited partners prior to the end of the commitment period (generally 3-5 years), the capital may be recalled.

3.

FAIR VALUE MEASUREMENTS

The following section describes the valuation methods used by the Company for each type of financial instrument it holds that is carried at fair value:

 

Fixed Maturities

 

The Company utilizes an independent third-party pricing service to estimate fair value measurements for approximately 99% of its fixed maturities.  The majority of the remaining fair value measurements are based on non-binding broker prices because either quoted market prices or an estimate from a pricing service are unavailable.  The broker prices are based on dealer quotations for recent activity in positions with the same or similar characteristics to that being valued or through consensus pricing of a pricing service.  In general, the Company utilizes one third-party pricing service to obtain the market price of each security and utilizes a secondary pricing service to verify the reasonableness of market prices.  The Company performs an analysis on the prices received from third-party security pricing services and independent brokers to ensure that the prices represent a reasonable estimate of the fair value. The Company validates the valuations from its primary pricing source through a variety of procedures that include but are not limited to comparison to additional independent third-party pricing services or brokers, where possible, a review of third-party pricing service methodologies and comparison of prices to actual trades for specific securities where observable data exists.  The pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications and models that include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing.  The prices developed are “evaluated prices”, representing “bid”-side valuations for the securities as of 3:00 PM on the closing date of the quarterly financial statements.  Additionally, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios for issues that have early redemption features.

The pricing service evaluates each asset class based on relevant market information, relevant credit information, perceived market movements and sector news.  If the pricing service discontinues pricing an investment due to the lack of objectively verifiable data, the Company would be required to produce an estimate of fair value using some of the same methodologies as the pricing service, but would have to make assumptions for market based inputs that are unobservable due to market conditions.

 

The methodology above is relevant for all fixed maturity securities; following are inputs used in the evaluation process associated with each asset class:

Asset Class		Input
Corporate Bonds  (including public utility bonds)		Trades, Bid Price or Spread, Two-sided markets, Quotes, Benchmark Curves including but not limited to Treasury Benchmarks and LIBOR and Swap Curves, Discount Rates, Market Data Feeds such as TRACE trade reports, Financial Statements and Trustee Reports.
Municipal Bonds		Trades, Bid Price or Spread, Two-sided markets, Quotes, Benchmark Curves including but not limited to Treasury Benchmarks and LIBOR and Swap Curves, Market Data Feeds such as MSRB, New Issues and Trustee Reports.
Commercial Mortgage Backed Securities (CMBS), Asset Backed Securities (ABS), and Collateralized Debt Obligations (CDO).		Trades, Bid Price or Spread, Two-sided markets, Quotes, Benchmark Curves including but not limited to Treasury Benchmarks and LIBOR and Swap Curves, Discount Rates, Market Data Feeds from commercial vendors, Derivative Indices, Loan Level Information including without limitation loan loss, recovery and default rates, Prepayment Speeds, Trustee Reports, Investor Reports and Servicer Reports.
Collateral Mortgage Obligations (CMO's)		Trades, Bid Price or Spread, Two-sided markets, Quotes, Benchmark Curves including but not limited to Treasury Benchmarks and LIBOR and Swap Curves, Discount Rates, Market Data Feeds from commercial vendors, Loan Level Information, Prepayment Speeds, Trustee Reports, Investor Reports and Servicer Reports.

The fair value estimates of most fixed maturity investments are based on observable market information rather than market quotes.  Accordingly, the estimates of fair value for such fixed maturities, other than U.S. Treasury securities, provided by the pricing service are included in the amount disclosed in Level 2 of the hierarchy.  The estimated fair value of U.S. Treasury securities are included in the amount disclosed in Level 1 as the estimates are based on unadjusted market prices.

 

The Company holds privately placed corporate bonds and estimates the fair value of these bonds using an internal matrix 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 the Merrill Lynch U.S. Corporate Index and the Merrill Lynch High Yield BB Rated Index.  The Company includes the fair value estimates of these corporate bonds in Level 2 since all significant inputs are market observable.

 

The Company holds privately placed securities and estimates the fair value of these securities using either an internal matrix that is based on market information regarding interest rates, credit spreads and liquidity or a discounted cash flow model.  The Company includes the fair value estimates of these securities in Level 3.

 

Equities

 For public common and preferred stocks, the Company receives prices from a nationally recognized pricing service that are based on observable market transactions and includes these estimates in the amount disclosed in Level 1.  When current market quotes in active markets are unavailable for certain non-redeemable preferred stocks held by the Company, the Company receives an estimate of fair value from the pricing service that provides fair value estimates for the Company’s fixed maturities. The service utilizes some of the same methodologies to price the non-redeemable preferred stocks as it does for the fixed maturities. The Company includes the estimate in the amount disclosed in Level 2.

 

Limited partnerships

The Company initially estimates the fair value of investments in certain limited partnerships by reference to the transaction price. Subsequently, the Company generally obtains the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are generally audited annually. The Company considers observable market data and performs diligence procedures in validating the appropriateness of using the net asset value as a fair value measurement. The Company includes the valuation of limited partnership accounted for under the fair value method in Level 3.  The remaining carrying value recognized in the consolidated balance sheets represents investments in other limited partnership interests accounted for using the equity method, which do not meet the definition of financial instruments for which fair value is required to be disclosed.

Derivatives

 

Valuations are secured monthly from each counterparty which is a major money center bank for the three payor swaptions owned by the Insurance Company. Factors considered in the valuation include interest rate volatility, decay (remaining life of the Swaption before expiration), delta (duration), gamma (convexity), swap rates and swap spreads against U.S. Treasuries. Each dealer has its own proprietary software that evaluates each of these components to determine the swaption valuation at the end of each month.  The Company also obtains a competing valuation from its consultant, Milliman Inc., which uses its own proprietary valuation software called MG Hedge-Information Dashboard. The Company compares the two valuations and generally selects the valuation of the bank, as each counterparty is responsible for settling for cash with the Company if the payor swaption expires with value. All of the factors noted are observable inputs; consequently the Company includes the swaption valuations in Level 2.

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Cash and Short-Term Investments

The market value of cash and short-term investments is estimated to approximate the carrying value.