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, 2014 and 2013.

The Company internally manages a small public equity portfolio which had a fair value at December 31, 2014 and December 31, 2013 of $196,980 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.

At December 31, 2014 and 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, based on two indices, in 2001 and 2005, which remain 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, 2014, fair value for these equity index put option contracts was $38,063 thousand. Based on historical index volatilities and trends and the December 31, 2014 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 19%. The theoretical maximum payouts under these six 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, 2014, the present value of these theoretical maximum payouts using a 3% discount factor was $420,013 thousand. Conversely, if the contracts had all expired on December 31, 2014, with the S&P index at $2,058.90, there would have been no settlement amount.

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, 2014, fair value for this equity index put option contract was $8,959 thousand. Based on historical index volatilities and trends and the December 31, 2014 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, 2014, the present value of the theoretical maximum payout using a 3% discount factor and current exchange rate was $43,334 thousand. Conversely, if the contract had expired on December 31, 2014, with the FTSE index at £6,566.10, there would have been no settlement amount.

The fair value of the equity put option contract is calculated using an industry accepted option pricing model, Black-Scholes. The inputs and assumptions for the model are updated on a quarterly basis.

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, 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	$	231,038	$	-	$	231,038	$	-
Obligations of U.S. States and political subdivisions		824,472		-		824,472		-
Corporate securities		4,706,985		-		4,706,985		-
Asset-backed securities		341,222		-		341,222		-
Mortgage-backed securities
Commercial		241,685		-		233,088		8,597
Agency residential		2,183,164		-		2,183,164		-
Non-agency residential		2,731		-		2,731		-
Foreign government securities		1,532,455		-		1,532,455		-
Foreign corporate securities		3,037,315		-		3,030,149		7,166
Total fixed maturities, market value		13,101,067		-		13,085,304		15,763

Fixed maturities, fair value		1,509		-		1,509		-
Equity securities, market value		140,210		124,295		15,915		-
Equity securities, fair value		1,447,820		1,337,396		110,424		-

Liabilities:
Equity index put option contracts	$	47,022	$	-	$	-	$	47,022

There were no transfers between Level 1 and Level 2 for the twelve months ended December 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:


	December 31, 2014																					December 31, 2013
	Corporate			Asset-backed						Foreign			Non-agency			Agency						Asset-backed			Foreign			Foreign			Non-agency			Agency
(Dollars in thousands)	Securities			Securities			CMBS			Corporate			RMBS			RMBS			Total			Securities			Corporate			Government			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		-			1,259			-			73			329			-			1,661			258			(738	)		(112	)		161			-			(431	)
Included in other comprehensive income (loss)		42			(126	)		(426	)		(5,221	)		(138	)		-			(5,869	)		(717	)		(587	)		(179	)		(38	)		-			(1,521	)
Purchases, issuances and settlements		1,274			21,303			9,023			4,038			(538	)		29,845			64,945			(624	)		2,858			516			(317	)		-			2,433
Transfers in and/or (out) of Level 3		(1,316	)		(27,735	)		-			7,795			-			(29,845	)		(51,101	)		1,533			(12,965	)		(225	)		115			(34,842	)		(46,384	)
Ending balance	$	-		$	-		$	8,597		$	7,166		$	-		$	-		$	15,763		$	5,299		$	481		$	-		$	347		$	-		$	6,127

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 $51,101 thousand and $46,384 thousand of investments for the years ended December 31, 2014 and December 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 December 31, 2014 and 2013, 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:


	Years Ended December 31,
(Dollars in thousands)	2014		2013
Liabilities:
Balance, beginning of period	$	35,423	$	79,467
Total (gains) or losses (realized/unrealized)
Included in earnings		11,599		(44,044	)
Included in other comprehensive income (loss)		-		-
Purchases, issuances and settlements		-		-
Transfers in and/or (out) of Level 3		-		-
Balance, end of period	$	47,022	$	35,423

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.)