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Fair Value Measurements
 3 Months Ended
Mar. 31, 2012
Fair Value Measurements [Abstract]  
Fair Value Measurements

NOTE 7.               Fair Value Measurements

The following table presents the carrying amounts and estimated fair values of our financial instruments as of March 31, 2012 and December 31, 2011:

 

                 

 

 

March 31, 2012

 

December 31, 2011

 

 

Carrying

 

Fair

 

Carrying

 

Fair

($ in thousands)

 

Amount

 

Value

 

Amount

 

Value

Financial Assets

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

  HTM

$

667,192

 

711,731

 

712,348

 

758,043

  AFS

 

3,034,511

 

3,034,511

 

2,897,373

 

2,897,373

Equity securities, AFS

 

152,986

 

152,986

 

157,355

 

157,355

Short-term investments

 

174,472

 

174,472

 

217,044

 

217,044

Receivable for proceeds related to sale of Selective

 

 

 

 

 

 

 

 

  HR Solutions ("Selective HR")

 

2,989

 

2,989

 

3,212

 

3,212

Financial Liabilities

 

 

 

 

 

 

 

 

Notes payable:

 

 

 

 

 

 

 

 

  7.25% Senior Notes

 

49,909

 

59,814

 

49,908

 

51,111

  6.70% Senior Notes

 

99,457

 

113,261

 

99,452

 

113,195

  7.50% Junior Notes

 

100,000

 

100,520

 

100,000

 

100,360

  2.90% borrowings from FHLBI

 

13,000

 

13,725

 

13,000

 

13,759

  1.25% borrowings from FHLBI

 

45,000

 

44,688

 

45,000

 

44,629

Total notes payable

$

307,366

 

332,008

 

307,360

 

323,054

               

The techniques used to value our financial assets are as follows:

  • For valuations of securities in our equity securities portfolio and U.S. Treasury notes held in our fixed maturity securities portfolio, we receive prices from an independent pricing service that are based on observable market transactions.  We validate these prices against a second external pricing service, and if established market value comparison thresholds are breached, further analysis is performed, in conjunction with our external investment managers, to determine the price to be used.  These securities are classified as Level 1 in the fair value hierarchy.

 

  • For approximately 95% of our fixed maturity securities portfolio, we utilize a market approach, using primarily matrix pricing models prepared by external pricing services.  Matrix pricing models use mathematical techniques to value debt securities by relying on the securities relationship to other benchmark quoted securities, and not relying exclusively on quoted prices for specific securities, as the specific securities are not always frequently traded.  As a matter of policy, we consistently use one pricing service as our primary source and secondary pricing services if prices are not available from the primary pricing service.  In conjunction with our external investment portfolio managers, fixed maturity securities portfolio pricing is reviewed for reasonableness in the following ways:  (i) comparing positions traded directly by the external investment portfolio managers to prices received from the third-party pricing services; (ii) comparing the primary vendor pricing to other third-party pricing services as well as benchmark indexed pricing; (iii) comparing market value fluctuations between months for reasonableness; and (iv) reviewing stale prices.  If further analysis is needed, a challenge is sent to the primary pricing service for review and confirmation of the price. In addition to the tests described above, management also selects a sample of prices for a comparison to a secondary price source.  Historically, we have not experienced significant variances in prices, and therefore, we have consistently used our primary pricing service.  These prices are typically Level 2 in the fair value hierarchy.

 

  • For the small portion of our fixed maturity securities portfolio that we cannot price using our primary service, we typically use non-binding broker quotes.  These prices are from various broker/dealers that utilize bid or ask prices, or benchmarks to indices, in measuring the fair value of a security.  In conjunction with our external investment portfolio managers, broker quotes are reviewed for reasonableness.  This review includes an analysis of price fluctuations between months with variances over established thresholds being analyzed further.  These prices are generally classified as Level 3 in the fair value hierarchy, as the inputs cannot be corroborated by observable market data. 

 

  • Short-term investments are carried at cost, which approximates fair value.  Given the liquid nature of our short-term investments, we generally validate their fair value by way of active trades within approximately one week of the financial statement close.  These securities are classified as Level 1 in the fair value hierarchy. 

 

  • Our investments in other miscellaneous securities are generally accounted for under the equity method.  Investments in tax credits are carried under the effective yield method of accounting. 

 

  • The fair value of the receivable for proceeds related to the 2009 sale of Selective HR Solutions operations ("Selective HR") is estimated using a discounted cash flow analysis, which includes our judgment regarding future worksite life generation and retention assumptions.  These assumptions are derived based on our historical experience modified to reflect current and anticipated future trends.  Proceeds related to the sale are scheduled to be received over a 10-year period based on the ability of the purchaser to retain and generate new worksite lives though our independent agency distribution channel.  We have concluded that these proceeds are not directly related to the operations of Selective HR since we have no continuing involvement with the operations of this company and have no continuing cash flows other than these proceeds.  This receivable is classified as Level 3 in the fair value hierarchy. 

 

The techniques used to value our financial liabilities are as follows:

  • The fair values of the 7.25% Senior Notes due November 15, 2034, the 6.70% Senior Notes due November 1, 2035, and the 7.50% Junior Subordinated Notes due September 27, 2066 are based on quoted market prices.  These prices are typically Level 1 in the fair value hierarchy.

 

·      The fair value of the 2.90% and 1.25% borrowings from the FHLBI are estimated using a discounted cash flow analysis based on a current borrowing rate provided by the FHLBI consistent with the remaining term of the borrowing.  These prices are typically Level 2 in the fair value hierarchy.

 

The following tables provide quantitative disclosures of our financial assets that were measured at fair value at March 31, 2012 and December 31, 2011:

 

                 

March 31, 2012

 

 

 

Fair Value Measurements Using

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

Assets

 

Active Markets for

 

Significant Other

 

 

Significant

 

 

Measured at

 

Identical Assets/

 

Observable

 

Unobservable

 

 

Fair Value

 

Liabilities

 

Inputs

 

Inputs

($ in thousands)

 

at 3/31/12

 

(Level 1) 1

 

(Level 2) 1

 

(Level 3)

Description

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

U.S. government and government agencies2

$

335,180

 

130,189

 

183,768

 

21,223

Foreign government

 

37,817

 

-

 

37,817

 

-

Obligations of states and political subdivisions

 

669,073

 

-

 

669,073

 

-

Corporate securities

 

1,294,945

 

-

 

1,292,433

 

2,512

ABS

 

94,742

 

-

 

94,742

 

-

CMBS

 

112,048

 

-

 

111,667

 

381

RMBS

 

490,706

 

-

 

490,706

 

-

   Total AFS fixed maturity securities

 

3,034,511

 

130,189

 

2,880,206

 

24,116

Equity securities

 

152,986

 

152,986

 

-

 

-

Short-term investments

 

174,472

 

174,472

 

-

 

-

Receivable for proceeds related to sale of Selective HR

 

2,989

 

-

 

-

 

2,989

   Total assets

$

3,364,958

 

457,647

 

2,880,206

 

27,105

 

 

 

 

 

 

 

 

 

 

 
                 

December 31, 2011

 

 

 

Fair Value Measurements Using

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

Assets

 

Active Markets for

 

 

Significant Other

 

 

Significant

 

 

Measured at

 

Identical Assets/

 

Observable

 

Unobservable

 

 

Fair Value

 

Liabilities

 

Inputs

 

Inputs

($ in thousands)

 

at 12/31/11

 

(Level 1)

 

(Level 2)

 

(Level 3)

Description

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

U.S. government and government agencies2

$

353,796

 

126,475

 

205,580

 

21,741

Foreign government

 

34,173

 

-

 

34,173

 

-

Obligations of states and political subdivisions

 

622,659

 

-

 

622,659

 

-

Corporate securities

 

1,213,310

 

-

 

1,210,707

 

2,603

ABS

 

78,949

 

-

 

78,949

 

-

CMBS

 

112,598

 

-

 

112,244

 

354

RMBS

 

481,888

 

-

 

481,888

 

-

   Total AFS fixed maturity securities

 

2,897,373

 

126,475

 

2,746,200

 

24,698

Equity securities

 

157,355

 

157,355

 

-

 

-

Short-term investments

 

217,044

 

217,044

 

-

 

-

Receivable for proceeds related to sale of Selective HR

 

3,212

 

-

 

-

 

3,212

   Total assets

$

3,274,984

 

500,874

 

2,746,200

 

27,910

 

 

 

 

 

 

 

 

 

1 There were no transfers of securities between Level 1 and Level 2 in First Quarter 2012.

2 U.S. government includes corporate securities fully guaranteed by the FDIC.

 

 

The following tables provide a summary of the changes in the fair value of securities measured using Level 3 inputs and related quantitative information as of March 31, 2012:

 

 

 

 

($ in thousands)

 

 

 

 

Government

 

 

 

Corporate

 

 

 

CMBS

Receivable for Proceeds Related to Sale of Selective HR

 

 

 

Total

 

 

 

 

 

 

 

Fair value, December 31, 2011

$

21,741

2,603

354

3,212 

27,910

Total net (losses) gains for the period included in:

 

 

 

 

 

 

    OCI1

 

105

99

27

-

231

    Net income2,3

 

(46)

-

-

64

18

Purchases

 

-

-

-

-

-

Sales

 

-

-

-

-

-

Issuances

 

-

-

-

-

-

Settlements

 

(577)

(190)

-

(287)

(1,054)

Transfers into Level 3

 

-

-

-

-

-

Transfers out of Level 3

 

-

-

-

-

-

Fair value, March 31, 2012

$

21,223

2,512

381

2,989

27,105

1  Amounts are reported in "Unrealized holding gains (losses) arising during period" on the Consolidated Statements of Comprehensive Income.

2  Amounts are reported in "Net realized gains (losses)" for realized gains and losses and "Net investment income earned" for amortization of securities on the Consolidated Statements of Income.

3  Amounts are reported in "Other income" for the receivable related to the sale of Selective HR on the Consolidated Statements of Income and are related to interest accretion on the receivable.

As discussed above, the fair value of our Level 3 fixed maturity securities are typically obtained through non-binding broker quotes, which we review for reasonableness. The receivable related to the sale of Selective HR is also a Level 3 fair value measurement using unobservable inputs, the most significant of which is our assumption regarding the retention of business. If this assumption were to change by +/-10%, the value of this receivable would increase/decrease by approximately $0.1 million.

 

The following table provides a summary of the changes in the fair value of securities measured using Level 3 inputs in 2011:

 

2011

 

 

($ in thousands)

 

 

 

 

Government

 

 

 

Corporate

 

 

 

CMBS

Receivable for Proceeds Related to Sale of Selective HR

 

 

 

Total

 

 

 

 

 

 

 

 

Fair value, December 31, 2010

 

$

 

-

-

185 

5,002 

5,187 

Total net (losses) gains for the period included in:

 

 

 

 

 

 

    OCI1

 

-

-

507 

- 

507 

    Net income2,3

 

-

-

(322)

(638)

(960)

Purchases

 

-

-

- 

- 

- 

Sales

 

-

-

- 

- 

- 

Issuances

 

-

-

- 

- 

- 

Settlements

 

-

-

(16)

(1,152)

(1,168)

Transfers into Level 3

 

21,741

2,603

- 

- 

24,344 

Transfers out of Level 3

 

-

-

- 

- 

- 

Fair value, December 31, 2011

$

21,741

2,603

354 

3,212 

27,910 

1   Amounts are reported in "Other net unrealized gains on investment securities, net of deferred income tax" on the Consolidated Statements of Stockholders' Equity in our 2011 Annual Report.

2  Amounts are reported in "Net realized gains (losses)" for realized gains and losses and "Net investment income earned" for amortization for the CMBS securities on the Consolidated Statements of Income in our 2011 Annual Report.

3  Amounts are reported in either "Loss on disposal of discontinued operations, net of tax" or "Other income" for the receivable related to the sale of Selective HR on the Consolidated Statements of Income.  Amounts in "Loss on disposal of discontinued operations, net of tax" related to charges to reduce the fair value of our receivable, and amounts in "Other income" related to interest accretion on the receivable in our 2011 Annual Report.

 

The transfers of the government and corporate securities into level 3 classification at December 31, 2011 were primarily the result of broker-priced securities being transferred from an HTM to an AFS designation in 2011. 

 

The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair value at March 31, 2012:

 

                 

March 31, 2012

 

 

 

Fair Value Measurements Using

 

 

Assets/

 

Quoted Prices in

 

 

 

 

 

 

Liabilities

 

Active Markets for

 

Significant Other

 

Significant

 

 

Disclosed at

 

Identical Assets/

 

Observable

 

Unobservable

 

 

Fair Value

 

Liabilities

 

Inputs

 

Inputs

($ in thousands)

 

at 3/31/12

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial Assets

 

 

 

 

 

 

 

 

HTM:

 

 

 

 

 

 

 

 

Foreign government

$

5,455

 

-

 

5,455

 

-

Obligations of states and political subdivisions

 

612,293

 

-

 

612,293

 

-

Corporate securities

 

69,063

 

-

 

63,280

 

5,783

ABS

 

7,863

 

-

 

6,188

 

1,675

CMBS

 

17,057

 

-

 

14,366

 

2,691

   Total HTM fixed maturity securities

$

711,731

 

-

 

701,582

 

10,149

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

Notes payable:

 

 

 

 

 

 

 

 

  7.25% Senior Notes

$

59,814

 

59,814

 

-

 

-

  6.70% Senior Notes

 

113,261

 

113,261

 

-

 

-

  7.50% Junior Notes

 

100,520

 

100,520

 

-

 

-

  2.90% borrowings from FHLBI

 

13,725

 

-

 

13,725

 

-

  1.25% borrowings from FHLBI

 

44,688

 

-

 

44,688

 

-

Total notes payable

$

332,008

 

273,595

 

58,413

 

-