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

The Company elected to apply the fair value option within its limited partnership investment portfolio to an investment where the Company previously owned more than a 3% interest. The fair value of this investment was $1.1 million as of December 31, 2010. In February, 2011, the Company liquidated its remaining interest in this limited partnership.

During the quarters and nine months ended September 30, 2011 and 2010, the Company recognized the following gains (losses), net of taxes, due to changes in the value of these investments.

 

     Quarter Ended
September  30,		      Nine Months  Ended
September 30,		  
(Dollars in thousands)    2011      2010      2011      2010  

Limited partnership > 3% ownership

    $ —         $ —         $ 53       $ (29 ) 

These gains (losses) are reflected on the consolidated statement of operations as equity in net income (loss) of partnerships, net of taxes.

 

The fair value option was not elected for the Company's investments in limited partnerships with less than a 3% ownership interest.

The accounting standards related to fair value measurements define fair value, establish a framework for measuring fair value, outline a fair value hierarchy based on inputs used to measure fair value, and enhance disclosure requirements for fair value measurements. These standards do not change existing guidance as to whether or not an instrument is carried at fair value. The Company has determined that its fair value measurements are in accordance with the requirements of these accounting standards.

The Company's invested assets are carried at their fair value and are categorized based upon a fair value hierarchy:

 

  •  

Level 1 - inputs utilize quoted prices (unadjusted) in active markets for identical assets that the Company has the ability to access at the measurement date.

 

  •  

Level 2 - inputs utilize other than quoted prices included in Level 1 that are observable for the similar assets, either directly or indirectly.

 

  •  

Level 3 - inputs are unobservable for the asset, and include situations where there is little, if any, market activity for the asset.

In certain cases, the 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 falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.

Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains and losses for invested assets within the Level 3 category presented in the tables below may include changes in fair value that are attributed to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

The following tables present information about the Company's invested assets measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

$0,000,000 $0,000,000 $0,000,000 $0,000,000
As of September 30, 2011    Fair Value Measurements  
(Dollars in thousands)    Level 1      Level 2      Level 3      Total  

Fixed maturities:

            

U.S. treasury and agency obligations

    $ 90,579       $ 40,889       $ —         $ 131,468   

Obligations of states and political subdivisions

      —           218,615         —           218,615   

Mortgage-backed securities

      —           298,212         —           298,212   

Commercial mortgage-backed securities

      —           34,571         —           34,571   

Asset-backed securities

      —           102,755         —           102,755   

Corporate bonds and loans

      —           565,939         —           565,939   

Foreign corporate bonds

      —           54,782         —           54,782   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total fixed maturities

      90,579         1,315,763         —           1,406,342   

Common shares

      146,067         —           —           146,067   

Other invested assets

      —           —           16,169         16,169   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total invested assets

    $ 236,646       $ 1,315,763       $ 16,169       $ 1,568,578   
  

 

 

     

 

 

     

 

 

     

 

 

  

 

$0,000,000 $0,000,000 $0,000,000 $0,000,000
As of December 31, 2010    Fair Value Measurements  
(Dollars in thousands)    Level 1      Level 2      Level 3      Total  

Fixed maturities:

            

U.S. treasury and agency obligations

    $   89,187       $ 113,503       $   —         $ 202,690   

Obligations of states and political subdivisions

      —           245,012         —           245,012   

Mortgage-backed securities

      —           249,080         —           249,080   

Commercial mortgage-backed securities

      —           38,733         —           38,733   

Asset-backed securities

      —           115,099         —           115,099   

Corporate bonds and loans

      —           532,784         —           532,784   

Foreign corporate bonds

      —           60,994         —           60,994   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total fixed maturities

      89,187         1,355,205         —           1,444,392   

Preferred shares

      —           2,252         —           2,252   

Common shares

      145,274         —           —           145,274   

Other invested assets

      —           —           5,380         5,380   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total invested assets

    $ 234,461       $ 1,357,457       $   5,380       $ 1,597,298   
  

 

 

     

 

 

     

 

 

     

 

 

  

The securities classified as Level 1 in the above table consist of U.S. Treasuries and equity securities actively traded on an exchange.

The securities classified as Level 2 in the above table consist primarily of fixed maturity securities. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, security prices are derived through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. If there are no recent reported trades, matrix or model processes are used to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of asset-backed securities, collateralized mortgage obligations, and mortgage-backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. For corporate loans, price quotes from multiple dealers along with recent reported trades for identical or similar securities are used to develop prices.

There were no significant transfers between Level 1 and Level 2 during the quarters or nine months ended September 30, 2011 or 2010.

The following tables present changes in Level 3 investments measured at fair value on a recurring basis for the quarter and nine months ended September 30, 2011:

 

Quarter Ended September 30, 2011

(Dollars in thousands)

    Other
Invested
Assets		  

Beginning balance at July 1, 2011

    $ 17,579   

Total losses (realized / unrealized):

   

Included in accumulated other comprehensive income

      (1,434 ) 

Purchases

      24   
  

 

 

  

Ending balance at September 30, 2011

    $ 16,169   
  

 

 

  

Net unrealized losses included in net income for the period related to assets still held at September 30, 2011

    $ —     
  

 

 

  

Nine Months Ended September 30, 2011

(Dollars in thousands)

    Other
Invested
Assets		  

Beginning balance at January 1, 2011

    $ 5,380   

Total losses (realized / unrealized):

   

Included in equity in net income of partnership

      81   

Included in accumulated other comprehensive income

      2,006   

Purchases

      10,049   

Sales

      (1,347 ) 
  

 

 

  

Ending balance at September 30, 2011

    $ 16,169   
  

 

 

  

Net unrealized losses included in net income for the period related to assets still held at September 30, 2011

    $ —     
  

 

 

  

 

The $16.2 million is comprised of $7.2 million related to investments in limited partnerships and $9.0 million related to an investment in a mutual fund. The $7.2 million related to investments in limited partnerships was comprised of securities for which the Company does not have the ability to see the underlying valuations. The estimated fair value of these limited partnerships is measured utilizing the Company's net asset value as a practical expedient for each limited partnership. Material assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates, and any market clearing activity that may have occurred since the prior month-end pricing period. The Company's investment in a mutual fund of $9.0 million is measured utilizing the fund's net asset value. The net asset value of the fund is based on the actual market price of the assets of the portfolio, including accrued income less liabilities and provisions for accrued expenses. The fund is comprised primarily of foreign equities. However, since the Company does not have the ability to see the invested asset composition of the mutual fund on a daily basis, this investment has been classified within the Level 3 category.

The following tables present changes in Level 3 investments measured at fair value on a recurring basis for the quarter and nine months ended September 30, 2010:

 

Quarter Ended September 30, 2010

(Dollars in thousands)

    Other
Invested
Assets		  

Beginning balance at July 1, 2010

    $ 6,490   

Total losses (realized / unrealized):

   

Included in accumulated other comprehensive income

      (1,275 ) 
  

 

 

  

Ending balance at September 30, 2010

    $ 5,215   
  

 

 

  

Net unrealized losses included in net income for the period related to assets still held at September 30, 2010

    $ —     
  

 

 

  

 

Nine Months Ended September 30, 2010

(Dollars in thousands)

    Other
Invested
Assets		  

Beginning balance at January 1, 2010

    $ 7,999   

Total losses (realized / unrealized):

   

Included in equity in net loss of partnership

      (44 ) 

Included in accumulated other comprehensive income

      (2,672 ) 

Distribution

      (68 ) 
  

 

 

  

Ending balance at September 30, 2010

    $ 5,215   
  

 

 

  

Net unrealized losses included in net income for the period related to assets still held at September 30, 2010

    $ (44 ) 
  

 

 

  

The $5.2 million is related to investments in limited partnerships. Of the investments in limited partnerships, $4.1 million was comprised of securities for which the Company does not have the ability to see the underlying valuations. The estimated fair value of these limited partnerships is measured utilizing the Company's net asset value as a practical expedient for each limited partnership. Material assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates, and any market clearing activity that may have occurred since the prior month-end pricing period. Of our investments in limited partnerships, $1.1 million was related to a limited partnership which holds convertible preferred securities of a privately held company. In February, 2011, the Company's remaining interest of $1.1 million was liquidated.

Fair Value of Alternative Investments

Included in "Other invested assets" in the fair value hierarchy at September 30, 2011 are limited liability partnerships and a mutual fund measured at fair value. The following table provides the fair value and future funding commitments related to these investments at September 30, 2011.

(Dollars in thousands)    Fair Value      Future
Funding
Commitments		  

Equity Fund, LP (1)

   $ 7,221       $ 2,520   

Real Estate Fund, LP (2)

     —           —     

Mutual Fund (3)

     8,948         —     
  

 

 

     

 

 

  

Total

    $ 16,169       $ 2,520   
  

 

 

     

 

 

  

 

(1) This limited partnership invests in companies, from various business sectors, whereby the partnership has acquired control of the operating business as a lead or organizing investor. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner.
(2) This limited partnership invests in real estate assets through a combination of direct or indirect investments in partnerships, limited liability companies, mortgage loans, and lines of credit. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company continues to hold an investment in this limited partnership and has written the fair value down to zero in 2010.
(3) This is an open-ended unincorporated mutual investment fund which seeks to generate attractive long term total returns by investing in companies which benefit from increasing levels of domestic consumption expenditure in the Asia ex Japan region. Investments will primarily be in equity securities within the consumer staples, consumer discretionary and healthcare sectors in the Asia ex Japan region; however, the approach is unconstrained and may opportunistically invest in any sector. The Company may request to redeem units of the portfolio. However, depending on the size of the redemption request, certain restrictions may apply.

Pricing

The Company's pricing vendors provide prices for all investment categories except for investments in limited partnerships. One vendor provides prices for equity securities and select fixed maturity categories including: corporate loans, commercial mortgage backed securities, high yield, investment grade, short term securities, and international fixed income securities, if any. A second vendor provides prices for other fixed maturity categories including: asset backed securities ("ABS"), collateralized mortgage obligations ("CMO"), and municipals. A third vendor provides prices for the remaining fixed maturity categories including mortgage backed securities ("MBS") and treasuries.

The following is a description of the valuation methodologies used by the Company's pricing vendors for investment securities carried at fair value:

 

  •  

Equity prices are received from all primary and secondary exchanges.

 

  •  

Corporate bonds are individually evaluated on a nominal spread or an option adjusted spread basis depending on how the market trades a security or sector. Spreads are updated each day and compared with those from the broker/dealer community and contributing firms. Issues are generally benchmarked off of the U.S. treasuries or LIBOR.

 

  •  

For CMOs, which are categorized with mortgage-backed securities in the tables listed above, a volatility-driven, multi-dimensional single cash flow stream model or option-adjusted spread model is used. For ABSs, a single expected cash flow stream model is utilized. For both asset classes, evaluations utilize standard inputs plus new issue data, monthly payment information, and collateral performance. The evaluated pricing models incorporate security set-up, prepayment speeds, cash flows, treasury, swap curves and spread adjustments.

 

  •  

For municipals, a series of matrices are used to evaluate securities within this asset class. The evaluated pricing models for this asset class incorporate security set-up, sector curves, yield to worst, ratings updates, and adjustments for material events notices.

 

  •  

U.S. Treasuries are priced on the bid side by a market maker.

 

  •  

For MBSs, the pricing vendor utilizes a matrix model correlation to TBA (a forward MBS trade) or benchmarking to value a security.

 

  •  

Corporate loans are priced using averages of bids and offers obtained from the broker/dealer community involved in trading such loans.

The Company performs certain procedures to validate whether the pricing information received from the pricing vendors is reasonable, to ensure that the fair value determination is consistent with the most recent accounting guidance, and to ensure that its assets are properly classified in the fair value hierarchy. The Company's procedures include, but are not limited to:

 

  •  

Reviewing periodic reports provided by the Investment Manager that provides information regarding rating changes and securities placed on watch. This procedure allows the Company to understand why a particular security's market value may have changed.

 

  •  

Understanding and periodically evaluating the various pricing methods and procedures used by the Company's pricing vendors to ensure that investments are properly classified within the fair value hierarchy.

During the quarter and nine months ended September 30, 2011, the Company did not consider it necessary to adjust quotes or prices obtained from the pricing vendors.