5. 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 March 31, 2014 and December 31, 2013.

The Company internally manages a small public equity portfolio which had a fair value at March 31, 2014 and December 31, 2013 of $184,175 thousand and $174,628 thousand, respectively, 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.

As of March 31, 2014 and December 31, 2013, all Level 3 fixed maturity securities, were priced using single non-binding broker quotes since prices for these securities were not provided by normal pricing service companies. The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company.

The Company sold seven equity index put option contracts which meet the definition of a derivative. The Company's position in these contracts is unhedged. The Company records the change in fair value of equity index put option contracts in its consolidated statements of operations and comprehensive income (loss).

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


	At March 31, 2014
		Contract
	Contracts	based on
	based on	FTSE 100
	S & P 500 Index	Index
Equity index	1,872.3	6,598.4
Interest rate	1.28% to 3.64%	2.52%
Time to maturity	3.1 to 17.0 yrs	6.3 yrs
Volatility	20.8% to 25.0%	23.2%

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)	March 31, 2014		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	162,279	$	-	$	162,279	$	-
Obligations of U.S. States and political subdivisions		966,324		-		966,324		-
Corporate securities		4,454,354		-		4,454,354		-
Asset-backed securities		184,064		-		180,392		3,672
Mortgage-backed securities
Commercial		249,334		-		249,334		-
Agency residential		2,214,344		-		2,214,344		-
Non-agency residential		4,405		-		4,141		264
Foreign government securities		1,748,271		-		1,748,271		-
Foreign corporate securities		3,035,801		-		3,035,328		473
Total fixed maturities, market value		13,019,176		-		13,014,767		4,409

Fixed maturities, fair value		-		-		-		-
Equity securities, market value		153,822		136,145		17,677		-
Equity securities, fair value		1,398,430		1,282,347		116,083		-

Liabilities:
Equity index put option contracts	$	37,083	$	-	$	-	$	37,083

There were no transfers between Level 1 and Level 2 for the three months ended March 31, 2014.

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, 2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	161,025	$	-	$	161,025	$	-
Obligations of U.S. States and political subdivisions		1,002,528		-		1,002,528		-
Corporate securities		4,079,416		-		4,079,416		-
Asset-backed securities		173,043		-		167,744		5,299
Mortgage-backed securities
Commercial		270,441		-		270,441		-
Agency residential		2,279,053		-		2,279,053		-
Non-agency residential		4,819		-		4,472		347
Foreign government securities		1,780,769		-		1,780,769		-
Foreign corporate securities		2,885,813		-		2,885,332		481
Total fixed maturities, market value		12,636,907		-		12,630,780		6,127

Fixed maturities, fair value		19,388		-		19,388		-
Equity securities, market value		144,081		127,030		17,051		-
Equity securities, fair value		1,462,079		1,342,278		119,801		-

Liabilities:
Equity index put option contracts	$	35,423	$	-	$	-	$	35,423

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


	Three Months Ended March 31, 2014												Three Months Ended March 31, 2013
	Asset-backed			Foreign			Non-agency						Asset-backed			Foreign			Non-agency			Agency
(Dollars in thousands)	Securities			Corporate			RMBS			Total			Securities			Corporate			RMBS			RMBS			Total
Beginning balance	$	5,299		$	481		$	347		$	6,127		$	4,849		$	11,913		$	426		$	34,842		$	52,030
Total gains or (losses) (realized/unrealized)
Included in earnings		18			1			138			157			(99	)		-			57			-			(42	)
Included in other comprehensive income (loss)		33			-			(21	)		12			(190	)		(123	)		7			-			(306	)
Purchases, issuances and settlements		(742	)		(9	)		(200	)		(951	)		126			743			(83	)		-			786
Transfers in and/or (out) of Level 3		(936	)		-			-			(936	)		-			(10,254	)		-			(34,842	)		(45,096	)
Ending balance	$	3,672		$	473		$	264		$	4,409		$	4,686		$	2,279		$	407		$	-		$	7,372

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 transfers from level 3, fair value measurements using significant unobservable inputs, of $936 thousand and $45,096 thousand of investments for the three months ended March 31, 2014 and March 31, 2013, respectively, primarily relate to securities that were priced using single non-binding broker quotes as of December 31, 2013 and December 31, 2012, respectively. The securities were subsequently priced using a recognized pricing service as of March 31, 2014 and March 31, 2013, respectively, and were classified as level 2 as of those dates.

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:


	Three Months Ended
	March 31,
(Dollars in thousands)	2014		2013
Liabilities:
Balance, beginning of period	$	35,423	$	79,467
Total (gains) or losses (realized/unrealized)
Included in earnings		1,661		(15,285	)
Included in other comprehensive income (loss)		-		-
Purchases, issuances and settlements		-		-
Transfers in and/or (out) of Level 3		-		-
Balance, end of period	$	37,083	$	64,181

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.)

- 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

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