v2.3.0.15
Fair Value Measurements
9 Months Ended
Sep. 30, 2011
Fair Value Measurements [Abstract] 
Fair Value Measurements

10. Fair Value Measurements

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820-10, Fair Value Measurements and Disclosures, establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy are defined as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.

Level 3 – Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement.

In accordance with FASB ASC 820, the Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, including the market, income and cost approaches. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The following section describes the valuation methodologies used by the Company to measure assets and liabilities at fair value, including an indication of the level within the fair value hierarchy in which each asset or liability is generally classified.

Investments available-for-sale. Investments available-for-sale are recorded at fair value on a recurring basis and include fixed maturities, equity securities and short-term investments. Short-term investments include certificates of deposit, commercial paper, discount notes and treasury bills with original maturities of one year or less. Fair value for investments available-for-sale is determined by the Company after considering various sources of information, including information provided by a third party pricing service. The pricing service provides prices for substantially all of the Company's fixed maturities and equity securities. In determining fair value, the Company generally does not adjust the prices obtained from the pricing service. The Company obtains an understanding of the pricing service's valuation methodologies and related inputs, which include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, duration, credit ratings, estimated cash flows and prepayment speeds. The Company validates prices provided by the pricing service by reviewing prices from other pricing sources and analyzing pricing data in certain instances.

The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Level 1 investments include those traded on an active exchange, such as the New York Stock Exchange. Level 2 investments include U.S. Treasury securities and obligations of U.S. government agencies, municipal bonds, foreign government bonds, residential mortgage-backed securities and corporate debt securities.

Fair value for investments available-for-sale is measured based upon quoted prices in active markets, if available. Due to variations in trading volumes and the lack of quoted market prices, fixed maturities are classified as Level 2 investments. The fair value of fixed maturities is normally derived through recent reported trades for identical or similar securities, making adjustments through the reporting date based upon available market observable data described above. If there are no recent reported trades, the fair value of fixed maturities may be derived through the use of matrix pricing or model processes, where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Significant inputs used to determine the fair value of obligations of states, municipalities and political subdivisions, corporate bonds and obligations of foreign governments include reported trades, benchmark yields, issuer spreads, bids, offers, credit information and estimated cash flows. Significant inputs used to determine the fair value of residential mortgage-backed securities include the type of underlying mortgage loans, benchmark yields, prepayment speeds, collateral information, tranche type and volatility, estimated cash flows, credit information, default rates, recovery rates, issuer spreads and the year of issue.

Derivatives. Derivatives are recorded at fair value on a recurring basis and include a credit default swap. The fair value of the credit default swap is measured by the Company using a third party pricing model. See note 7 for a discussion of the valuation model for the credit default swap, including the key inputs and assumptions to the model. Due to the significance of unobservable inputs required in measuring the fair value of the credit default swap, the credit default swap has been classified as Level 3 within the fair value hierarchy.

 

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy.

 

     September 30, 2011  

(dollars in thousands)

    Level 1      Level 2      Level 3      Total  

Assets:

            

Investments available-for-sale:

            

Fixed maturities:

            

U.S. Treasury securities and obligations of U.S. government agencies

    $ 0       $ 308,159       $ 0       $ 308,159   

Obligations of states, municipalities and political subdivisions

      0         2,918,163         0         2,918,163   

Foreign governments

      0         740,363         0         740,363   

Residential mortgage-backed securities

      0         417,954         0         417,954   

Asset-backed securities

      0         17,552         0         17,552   

Public utilities

      0         76,107         0         76,107   

All other corporate bonds

      0         1,098,286         0         1,098,286   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total fixed maturities

      0         5,576,584         0         5,576,584   
  

 

 

     

 

 

     

 

 

     

 

 

  

Equity securities:

            

Insurance companies, banks and trusts

      612,395         0         0         612,395   

Industrial, consumer and all other

      996,804         0         0         996,804   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total equity securities

      1,609,199         0         0         1,609,199   
  

 

 

     

 

 

     

 

 

     

 

 

  

Short-term investments

      428,681         63,075         0         491,756   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total investments available-for-sale

      2,037,880         5,639,659         0         7,677,539   
  

 

 

     

 

 

     

 

 

     

 

 

  

Liabilities:

            

Derivative contracts

    $ 0       $ 0       $ 27,915       $ 27,915   
  

 

 

     

 

 

     

 

 

     

 

 

  

 

     December 31, 2010  

(dollars in thousands)

    Level 1      Level 2      Level 3      Total  

Assets:

            

Investments available-for-sale:

            

Fixed maturities:

            

U.S. Treasury securities and obligations of U.S. government agencies

    $ 0       $ 321,338       $ 0       $ 321,338   

Obligations of states, municipalities and political subdivisions

      0         2,799,339         0         2,799,339   

Foreign governments

      0         572,818         0         572,818   

Residential mortgage-backed securities

      0         425,563         0         425,563   

Asset-backed securities

      0         22,756         0         22,756   

Public utilities

      0         102,444         0         102,444   

Convertible bonds

      0         16,725         0         16,725   

All other corporate bonds

      0         1,170,243         0         1,170,243   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total fixed maturities

      0         5,431,226         0         5,431,226   
  

 

 

     

 

 

     

 

 

     

 

 

  

Equity securities:

            

Insurance companies, banks and trusts

      710,986         0         0         710,986   

Industrial, consumer and all other

      1,010,985         0         0         1,010,985   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total equity securities

      1,721,971         0         0         1,721,971   
  

 

 

     

 

 

     

 

 

     

 

 

  

Short-term investments

      269,466         55,874         0         325,340   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total investments available-for-sale

      1,991,437         5,487,100         0         7,478,537   
  

 

 

     

 

 

     

 

 

     

 

 

  

Liabilities:

            

Derivative contracts

    $ 0       $ 0       $ 25,228       $ 25,228   
  

 

 

     

 

 

     

 

 

     

 

 

  

 

The following tables summarize changes in Level 3 liabilities measured at fair value on a recurring basis.

 

         Quarter Ended September 30,      

(dollars in thousands)

    2011     2010  

Derivatives, Beginning of Period

    $ 24,596      $ 28,397   

Total (gains) losses included in:

     

Net income

      3,319        (1,445 ) 

Other comprehensive income (loss)

      0        0   

Transfers into Level 3

      0        0   

Transfers out of Level 3

      0        0   
  

 

 

    

 

 

  

Derivatives, End of Period

    $ 27,915      $ 26,952   
  

 

 

    

 

 

  

Net unrealized (gains) losses included in net income relating to liabilities held at September 30, 2011 and 2010

    $ 3,319  (1)    $ (1,445 ) (1) 
  

 

 

    

 

 

  

 

     Nine Months Ended September 30,  

(dollars in thousands)

    2011     2010  

Derivatives, Beginning of Period

    $ 25,228      $ 26,968   

Total (gains) losses included in:

     

Net income

      2,687        (16 ) 

Other comprehensive income (loss)

      0        0   

Transfers into Level 3

      0        0   

Transfers out of Level 3

      0        0   
  

 

 

    

 

 

  

Derivatives, End of Period

    $ 27,915      $ 26,952   
  

 

 

    

 

 

  

Net unrealized (gains) losses included in net income relating to liabilities held at September 30, 2011 and 2010

    $ 2,687  (1)    $ (16 ) (1) 
  

 

 

    

 

 

  

 

(1)

Included in net investment income in the consolidated statements of income and comprehensive income (loss).

There were no transfers into or out of Level 1 and Level 2 during the quarters and nine months ended September 30, 2011 and 2010. The Company did not have any assets or liabilities measured at fair value on a non-recurring basis during the nine months ended September 30, 2011 and 2010.