XML 106 R10.htm IDEA: XBRL DOCUMENT v2.4.0.6
Fair Value Measurements
 12 Months Ended
Dec. 31, 2011
Fair Value Measurements [Abstract]  
Fair Value Measurements

3. Fair Value Measurements

The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount 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 using the exit price. Accordingly, when market observable data is not readily available, the Company's own assumptions are set to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded on the consolidated balance sheets at fair value are categorized based on the level of judgment associated with inputs used to measure their fair value and the level of market price observability, as follows:

 

  Level 1

Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date.

 

  Level 2

Pricing inputs are other than quoted prices in active markets, which are based on the following:

 

  •  

Quoted prices for similar assets or liabilities in active markets;

 

  •  

Quoted prices for identical or similar assets or liabilities in non-active markets; or

 

  •  

Either directly or indirectly observable inputs as of the reporting date.

 

  Level 3

Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation.

In certain cases, inputs used to measure fair value may fall into different 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 has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.

The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer.

 

Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities

The Company's fair value measurements are based on a combination of the market approach and the income approach. The market approach utilizes market transaction data for the same or similar instruments. The income approach is based on a discounted cash flow methodology, where expected cash flows are discounted to present value.

The Company obtained unadjusted fair values on approximately 98% of its portfolio from an independent pricing service. For approximately 2% of its portfolio, the Company obtained specific unadjusted broker quotes from at least one knowledgeable outside security broker to determine the fair value as of December 31, 2011.

Level 1 Measurements—Fair values of financial assets and financial liabilities are obtained from an independent pricing service, and are based on unadjusted quoted prices for identical assets or liabilities in active markets. Additional pricing services and closing exchange values are used as a comparison to ensure that realistic fair values are used in pricing the investment portfolio.

U.S. government bonds and agencies: Valued using unadjusted quoted market prices for identical assets in active markets.

Common stock: Comprised of actively traded, exchange listed U.S. and international equity securities and valued based on unadjusted quoted prices for identical assets in active markets.

Money market instruments: Valued based on unadjusted quoted prices for identical assets.

Equity contracts: Comprised of free-standing exchange listed derivatives that are actively traded and valued based on quoted prices for identical instruments in active markets.

Level 2 Measurements—Fair values of financial assets and financial liabilities are obtained from an independent pricing service or outside brokers, and are based on prices for similar assets or liabilities in active markets or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. Additional pricing services are used as a comparison to ensure reliable fair values are used in pricing the investment portfolio.

Municipal securities: Valued based on models or matrices using inputs, such as quoted prices for identical or similar assets in active markets.

Mortgage-backed securities: Comprised of securities that are collateralized by residential mortgage loans and valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets. At December 31, 2011 and December 31, 2010, the Company had no holdings in commercial mortgage-backed securities.

Corporate securities/Short-term bonds: Valued based on a multi-dimensional model using multiple observable inputs, such as benchmark yields, reported trades, broker/dealer quotes and issue spreads, for identical or similar assets in active markets.

Non-redeemable preferred stock: Valued based on observable inputs, such as underlying and common stock of same issuer and appropriate spread over a comparable U.S. Treasury security, for identical or similar assets in active markets.

 

Interest rate swap agreements: Valued based on models using inputs, such as interest rate yield curves, observable for substantially the full term of the contract.

Level 3 Measurements—Fair values of financial assets are based on inputs that are both unobservable and significant to the overall fair value measurement, including any items in which the evaluated prices obtained elsewhere were deemed to be of a distressed trading level.

Municipal securities: Comprised of certain distressed municipal securities, including ARS, for which valuation is based on models that are widely accepted in the financial services industry and require projections of future cash flows that are not market observable.

Collateralized debt obligations/Partnership interest in a private credit fund: Valued based on underlying debt/credit instruments and the appropriate benchmark spread for similar assets in active markets; taking into consideration unobservable inputs related to liquidity assumptions.

The Company's financial instruments, at fair value, are reflected in the consolidated balance sheets on a trade-date basis. Related unrealized gains or losses are recognized in net realized investment gains in the consolidated statements of operations. Fair value measurements are not adjusted for transaction costs.

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

     December 31, 2011  
     Level 1      Level 2      Level 3      Total  
     (Amounts in thousands)  

Assets

            

Fixed maturity securities:

            

U.S. government bonds and agencies

    $ 14,298       $ 0       $ 0       $ 14,298   

Municipal securities

      0         2,271,275         0         2,271,275   

Mortgage-backed securities

      0         37,371         0         37,371   

Corporate securities

      0         75,142         0         75,142   

Collateralized debt obligations

      0         0         47,503         47,503   

Equity securities:

            

Common stock:

            

Public utilities

      26,342         0         0         26,342   

Banks, trusts and insurance companies

      16,027         0         0         16,027   

Industrial and other

      316,592         0         0         316,592   

Non-redeemable preferred stock

      0         11,419         0         11,419   

Partnership interest in a private credit fund

      0         0         10,008         10,008   

Short-term bonds

      0         9,011         0         9,011   

Money market instruments

      227,433         0         0         227,433   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total assets at fair value

    $ 600,692       $ 2,404,218       $ 57,511       $ 3,062,421   
  

 

 

     

 

 

     

 

 

     

 

 

  

Liabilities

            

Equity contracts

    $ 655       $ 0       $ 0       $ 655   

Interest rate swap agreements

      0         670         0         670   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total liabilities at fair value

    $ 655       $ 670       $ 0       $ 1,325   
  

 

 

     

 

 

     

 

 

     

 

 

  
     December 31, 2010  
     Level 1      Level 2      Level 3      Total  
     (Amounts in thousands)  

Assets

            

Fixed maturity securities:

            

U.S. government bonds and agencies

    $ 8,805       $ 0       $ 0       $ 8,805   

Municipal securities

      0         2,433,589         1,624         2,435,213   

Mortgage-backed securities

      0         57,367         0         57,367   

Corporate securities

      0         95,203         0         95,203   

Collateralized debt obligations

      0         0         55,692         55,692   

Equity securities:

            

Common stock:

            

Public utilities

      27,214         0         0         27,214   

Banks, trusts and insurance companies

      20,521         0         0         20,521   

Industrial and other

      302,103         0         0         302,103   

Non-redeemable preferred stock

      0         9,768         0         9,768   

Short-term bonds

      0         17,043         0         17,043   

Money market instruments

      126,328         0         0         126,328   

Interest rate swap agreements

      0         4,240         0         4,240   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total assets at fair value

    $ 484,971       $ 2,617,210       $ 57,316       $ 3,159,497   
  

 

 

     

 

 

     

 

 

     

 

 

  

Liabilities

            

Equity contracts

    $ 2,776       $ 0       $ 0       $ 2,776   

Interest rate swap agreements

      0         3,042         0         3,042   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total liabilities at fair value

    $ 2,776       $ 3,042       $ 0       $ 5,818   
  

 

 

     

 

 

     

 

 

     

 

 

  

The following table presents a summary of changes in fair value of Level 3 financial assets and financial liabilities held at fair value at December 31:

 

    2011     2010  
    Municipal
Securities		     Collateralized
Debt
Obligations		     Partnership
Interest in a
Private Credit
Fund		     Municipal
Securities		     Collateralized
Debt
Obligations		  
    (Amounts in thousands)  

Beginning Balance

   $ 1,624      $ 55,692      $ 0      $ 3,322      $ 47,473   

Realized gains (losses) included in earnings

     39        (9,300 )      8        (108 )      13,388   

Purchase

     0        0        10,000        0        0   

Sales

     (1,663 )      0        0        (1,590 )      0   

Issuances

     0        0        0        0        0   

Settlements

     0        1,111        0        0        (5,169 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Ending Balance

   $ 0      $ 47,503      $ 10,008      $ 1,624      $ 55,692   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

The amount of total (losses) gains for the period included in earnings attributable to assets still held at December 31

   $ 0      $ (8,189 )    $ 8      $ (83 )    $ 12,810   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

There were no transfers between Levels 1, 2, and 3 of the fair value hierarchy in 2011 and 2010. There were $10 million and $0 increases in Level 3 financial assets in 2011 and 2010, respectively, which include the use of unobservable inputs related to liquidity assumptions.

At December 31, 2011, the Company did not have any nonrecurring measurements of nonfinancial assets or nonfinancial liabilities.