Fair Value

12 Months Ended

Dec. 31, 2011

Fair Value [Abstract]

Fair Value

4.  FAIR VALUE

The Company's fixed maturity and equity securities are primarily managed by third party investment asset managers.  The investment asset managers obtain prices from nationally recognized pricing services.   These services seek to utilize market data and observations in their evaluation process.  They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing.  In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices.  In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source.  No material variances were noted during these price validation procedures.  In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value.  The Company made no such adjustments at December 31, 2011 and 2010.

The Company internally manages a small public equity portfolio which had a fair value at December 31, 2011 of $168,227 thousand and all prices were obtained from publically published sources.

Equity securities in U.S. denominated currency are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are actively traded on an exchange and prices are based on quoted prices from the exchange.  Equity securities traded on foreign exchanges are categorized as Level 2 due to potential foreign exchange adjustments to fair or market value.

Fixed maturity securities are generally categorized as Level 2, Significant Other Observable Inputs, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority.  Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk) are categorized as Level 3, Significant Unobservable Inputs.  These securities include broker priced securities and the Company's equity index put option contracts.

The Company sold seven equity index put option contracts, based on two indices, in 2001 and 2005, which are outstanding.  The Company sold these equity index put options as insurance products with the intent of achieving a profit.  These equity index put option contracts meet the definition of a derivative under FASB guidance and the Company's position in these equity index put option contracts is unhedged.  Accordingly, these equity index put option contracts are carried at fair value in the consolidated balance sheets with changes in fair value recorded in the consolidated statements of operations and comprehensive income (loss).

The Company sold six equity index put option contracts, based on the Standard & Poor's 500 ("S&P 500") index, for total consideration, net of commissions, of $22,530 thousand.  At December 31, 2011, fair value for these equity index put option contracts was $62,425 thousand.  These equity index put option contracts each have a single exercise date, with maturities ranging from 12 to 30 years and strike prices ranging from $1,141.21 to $1,540.63.  No amounts will be payable under these equity index put option contracts if the S&P 500 index is at, or above, the strike prices on the exercise dates, which fall between June 2017 and March 2031.  If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due would vary proportionately with the percentage by which the index is below the strike price.  Based on historical index volatilities and trends and the December 31, 2011 S&P 500 index value, the Company estimates the probability that each equity index put option contract of the S&P 500 index falling below the strike price on the exercise date to be less than 47%.  The theoretical maximum payouts under the equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero.  At December 31, 2011, the present value of these theoretical maximum payouts using a 6% discount factor was $285,390 thousand.

The Company sold one equity index put option contract based on the FTSE 100 index for total consideration, net of commissions, of $6,706 thousand.  At December 31, 2011, fair value for this equity index put option contract was $7,303 thousand.  This equity index put option contract has an exercise date of July 2020 and a strike price of £5,989.75.  No amount will be payable under this equity index put option contract if the FTSE 100 index is at, or above, the strike price on the exercise date.  If the FTSE 100 index is lower than the strike price on the exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price.  Based on historical index volatilities and trends and the December 31, 2011 FTSE 100 index value, the Company estimates the probability that the equity index put option contract of the FTSE 100 index will fall below the strike price on the exercise date to be less than 44%.  The theoretical maximum payout under the equity index put option contract would occur if on the exercise date the FTSE 100 index value was zero.  At December 31, 2011, the present value of the theoretical maximum payout using a 6% discount factor and current exchange rate was $30,800 thousand.

The Company's equity index put option contracts contain provisions that require collateralization of the fair value, as calculated by the counterparty, above a specified threshold, which is based on the Company's financial strength ratings (Moody's Investors Service, Inc.) and/or debt ratings (Standard & Poor's Ratings Services).  The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on December 31, 2011, was $69,729 thousand for which the Company had posted collateral with a market value of $49,189 thousand.  If on December 31, 2011, the Company's ratings were such that the collateral threshold was zero, the Company's collateral requirement would increase by $55,000 thousand.

The fair value was calculated using an industry accepted option pricing model, Black-Scholes, which used the following assumptions:

	At December 31, 2011
		Contract
	Contracts	based on
	based on	FTSE 100
	S & P 500 Index	Index
Equity index	1,257.6	5,572.3
Interest rate	3.09% to 4.37%	3.76%
Time to maturity	5.4to 19.3 yrs	8.6yrs
Volatility	22.4% to 25.1%	24.7%

The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	300,634	$	-	$	300,634	$	-
Obligations of U.S. States and political subdivisions		1,660,905		-		1,660,905		-
Corporate securities		3,666,621		-		3,666,621		-
Asset-backed securities		193,406		-		176,469		16,937
Mortgage-backed securities
Commercial		321,427		-		321,427		-
Agency residential		2,282,593		-		2,282,593		-
Non-agency residential		53,089		-		52,603		486
Foreign government securities		1,668,218		-		1,668,218		-
Foreign corporate securities		2,146,631		-		2,143,587		3,044
Total fixed maturities, market value		12,293,524		-		12,273,057		20,467
Fixed maturities, fair value		113,606		-		113,606		-
Equity securities, market value		448,930		433,278		15,652		-
Equity securities, fair value		1,249,106		1,133,011		116,095		-
Liabilities:
Equity index put option contracts	$	69,729	$	-	$	-	$	69,729

There were no significant transfers between Level 1 and Level 2 for the twelve months ended December 31, 2011.

The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	December 31, 2010		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	401,807	$	-	$	401,807	$	-
Obligations of U.S. States and political subdivisions		2,901,505		-		2,901,505		-
Corporate securities		3,069,146		-		3,069,146		-
Asset-backed securities		218,301		-		217,306		995
Mortgage-backed securities
Commercial		337,219		-		337,219		-
Agency residential		2,093,282		-		2,093,282		-
Non-agency residential		75,741		-		74,241		1,500
Foreign government securities		1,638,348		-		1,638,348		-
Foreign corporate securities		1,715,120		-		1,710,704		4,416
Total fixed maturities, market value		12,450,469		-		12,443,558		6,911
Fixed maturities, fair value		180,482		-		180,482		-
Equity securities, market value		363,736		363,736		-		-
Equity securities, fair value		721,449		721,449		-		-
Liabilities:
Equity index put option contracts	$	58,467	$	-	$	-	$	58,467

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:

	December 31, 2011												December 31, 2010
	Asset-backed			Foreign			Non-agency						Corporate			Asset-backed			Foreign		Non-agency
(Dollars in thousands)	Securities			Corporate			RMBS			Total			Securities			Securities			Corporate		RMBS			Total
Beginning balance	$	995		$	4,416		$	1,500		$	6,911		$	9,900		$	6,268		$	-	$	1,394		$	17,563
Total gains or (losses) (realized/unrealized)
Included in earnings (or changes in net assets)		193			(8	)		634			819			(1	)		(258	)		2		408			151
Included in other comprehensive income (loss)		(714	)		(80	)		(230	)		(1,024	)		101			2,098			325		287			2,811
Purchases, issuances and settlements		16,470			3,131			(1,070	)		18,531			(10,000	)		(7,140	)		4,089		(589	)		(13,640	)
Transfers in and/or (out) of Level 3		(7	)		(4,415	)		(348	)		(4,770	)		-			26			-		-			26
Ending balance	$	16,937		$	3,044		$	486		$	20,467		$	-		$	995		$	4,416	$	1,500		$	6,911
The amount of total gains or losses for the period included
in earnings (or changes in net assets) attributable to the
change in unrealized gains or losses relating to assets
still held at the reporting date	$	-		$	-		$	-		$	-		$	-		$	-		$	-	$	-		$	-
(Some amounts may not reconcile due to rounding.)

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs for equity index put option contracts, for the periods indicated:

	Years Ended December 31,
(Dollars in thousands)	2011		2010
Liabilities:
Balance, beginning of period	$	58,467	$	57,349
Total (gains) or losses (realized/unrealized)
Included in earnings (or changes in net assets)		11,261		1,119
Included in other comprehensive income (loss)		-		-
Purchases, issuances and settlements		-		-
Transfers in and/or (out) of Level 3		-		-
Balance, end of period	$	69,729	$	58,467
The amount of total gains or losses for the period included in earnings
(or changes in net assets) attributable to the change in unrealized
gains or losses relating to liabilities still held at the reporting date	$	-	$	-
(Some amounts may not reconcile due to rounding.)