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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2014
Fair Value Measurements |
4. | Fair Value Measurements
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 and derivative instruments 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 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 table presents information about the Company’s invested assets and derivative instruments measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
As of September 30, 2014 |  | Fair Value Measurements |
(Dollars in thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. treasury and agency obligations |  | $ | 99,488 |  |  | $ | 8,473 |  |  | $ | — |  |  | $ | 107,961 |
Obligations of states and political subdivisions |  |  | — |  |  |  | 196,446 |  |  |  | — |  |  |  | 196,446 |
Mortgage-backed securities |  |  | — |  |  |  | 222,577 |  |  |  | — |  |  |  | 222,577 |
Commercial mortgage-backed securities |  |  | — |  |  |  | 117,332 |  |  |  | — |  |  |  | 117,332 |
Asset-backed securities |  |  | — |  |  |  | 173,307 |  |  |  | — |  |  |  | 173,307 |
Corporate bonds and loans |  |  | — |  |  |  | 384,545 |  |  |  | — |  |  |  | 384,545 |
Foreign corporate bonds |  |  | — |  |  |  | 106,603 |  |  |  | — |  |  |  | 106,603 |
Total fixed maturities |  |  | 99,488 |  |  |  | 1,209,283 |  |  |  | — |  |  |  | 1,308,771 |
Common stock |  |  | 120,736 |  |  |  | — |  |  |  | — |  |  |  | 120,736 |
Other invested assets |  |  | — |  |  |  | — |  |  |  | 21,118 |  |  |  | 21,118 |
Total assets measured at fair value |  | $ | 220,224 |  |  | $ | 1,209,283 |  |  | $ | 21,118 |  |  | $ | 1,450,625 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative instruments |  | $ | — |  |  | $ | 7,780 |  |  | $ | — |  |  | $ | 7,780 |
Total liabilities measured at fair value |  | $ | — |  |  | $ | 7,780 |  |  | $ | — |  |  | $ | 7,780 |
As of December 31, 2013 |  | Fair Value Measurements |
(Dollars in thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. treasury and agency obligations |  | $ | 71,294 |  |  | $ | 10,380 |  |  | $ | — |  |  | $ | 81,674 |
Obligations of states and political subdivisions |  |  | — |  |  |  | 180,936 |  |  |  | — |  |  |  | 180,936 |
Mortgage-backed securities |  |  | — |  |  |  | 229,910 |  |  |  | — |  |  |  | 229,910 |
Commercial mortgage-backed securities |  |  | — |  |  |  | 53,975 |  |  |  | — |  |  |  | 53,975 |
Asset-backed securities |  |  | — |  |  |  | 168,436 |  |  |  | — |  |  |  | 168,436 |
Corporate bonds and loans |  |  | — |  |  |  | 435,392 |  |  |  | — |  |  |  | 435,392 |
Foreign corporate bonds |  |  | — |  |  |  | 54,041 |  |  |  | — |  |  |  | 54,041 |
Total fixed maturities |  |  | 71,294 |  |  |  | 1,133,070 |  |  |  | — |  |  |  | 1,204,364 |
Common stock |  |  | 254,070 |  |  |  | — |  |  |  | — |  |  |  | 254,070 |
Other invested assets |  |  | — |  |  |  | — |  |  |  | 3,489 |  |  |  | 3,489 |
Derivative instruments |  |  | — |  |  |  | 1,668 |  |  |  | — |  |  |  | 1,668 |
Total assets measured at fair value |  | $ | 325,364 |  |  | $ | 1,134,738 |  |  | $ | 3,489 |  |  | $ | 1,463,591 |
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 and derivative instruments. 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. The estimated fair value of the interest rate swaps is obtained from a third party financial institution who utilizes observable inputs such as the forward interest rate curve. There were no transfers between Level 1 and Level 2 during the quarters and nine months ended September 30, 2014 or 2013. The following table presents changes in Level 3 investments measured at fair value on a recurring basis for the quarters and nine months ended September 30, 2014 and 2013:
|  | Other Invested Assets |
|  | Quarters Ended September 30, |  |  | Nine Months Ended September 30, |
(Dollars in thousands) |  | 2014 |  |  | 2013 |  |  | 2014 |  |  | 2013 |
Beginning balance |  | $ | 15,034 |  |  | $ | 3,226 |  |  | $ | 3,489 |  |  | $ | 3,132 |
Total gains (losses) (realized / unrealized): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in accumulated other comprehensive income (loss) |  |  | (404 | ) |  |  | 37 |  |  |  | (834 | ) |  |  | 121 |
Purchases |  |  | 6,500 |  |  |  | 6 |  |  |  | 18,475 |  |  |  | 16 |
Sales |  |  | (12 | ) |  |  | — |  |  |  | (12 | ) |  |  | — |
Ending balance |  | $ | 21,118 |  |  | $ | 3,269 |  |  | $ | 21,118 |  |  | $ | 3,269 |
The investments classified as Level 3 in the above table relate to investments in limited partnerships. The Company does not have access to daily valuations; therefore, the estimated fair values of the limited partnerships are measured utilizing net asset value as a practical expedient for the limited partnerships. Fair Value of Alternative Investments Included in “Other invested assets” in the fair value hierarchy at September 30, 2014 and December 31, 2013 are limited liability partnerships measured at fair value. The following table provides the fair value and future funding commitments related to these investments at September 30, 2014 and December 31, 2013.
|  | September 30, 2014 |  |  | December 31, 2013 |
(Dollars in thousands) |  | Fair Value |  |  | Future Funding Commitment |  |  | Fair Value |  |  | Future Funding Commitment |
Equity Fund, LP (1) |  | $ | 3,428 |  |  | $ | 2,436 |  |  | $ | 3,489 |  |  | $ | 2,490 |
Real Estate Fund, LP (2) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
European Non-Performing Loan Fund, LP (3) |  |  | 17,690 |  |  |  | 31,664 |  |  |  | — |  |  |  | — |
Total |  | $ | 21,118 |  |  | $ | 34,100 |  |  | $ | 3,489 |  |  | $ | 2,490 |
(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.
(3) | This limited partnership invests in distressed securities and assets through senior and subordinated, secured and unsecured debt and equity, in both public and private large-cap and middle-market companies. 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.
Pricing The Company’s pricing vendors provide prices for all investment categories except for investments in limited partnerships which are measured utilizing net asset values as a practical expedient. One vendor provides prices for equity securities and all fixed maturity categories. 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 and agency bonds are evaluated by utilizing a multi-dimensional relational model. For bonds with early redemption options, an option adjusted spread model is utilized. Both asset classes use standard inputs and incorporate security set up, defined sector breakdown, benchmark yields, apply base spreads, yield to maturity, and adjust for corporate actions.
| • |  | A volatility-driven multi-dimensional spread table or an option-adjusted spread model and prepayment model is used for agency commercial mortgage obligations (“CMO”). For non-agency CMOs, a prepayment/spread/yield/price adjustment model is utilized. CMOs are categorized with mortgage-backed securities in the tables listed above. For ABSs, a multi-dimensional, collateral specific spread / prepayment speed tables 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, and treasury swap curves and spread adjustments.
| • |  | For municipals, a multi-dimensional relational model is used to evaluate securities within this asset class. The evaluated pricing models for this asset class incorporate security set-up, benchmark yields, apply base spreads, yield to worst or market convention, ratings updates, prepayment schedules and adjustments for material events notices.
| • |  | U.S. treasuries are evaluated by obtaining feeds from a number of live data sources including active market makers and inter-dealer brokers.
| • |  | For MBSs, a matrix model correlation to TBA (a forward MBS trade) or benchmarking is utilized to value a security.
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 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 provide 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.
| • |  | On a quarterly basis, the Company corroborates investment security prices received from its pricing vendors by obtaining pricing from a second pricing vendor for a sample of securities.
During the quarters and nine months ended September 30, 2014 and 2013, the Company has not adjusted quotes or prices obtained from the pricing vendors.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13504-108611 + Details
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