4. FAIR VALUE

GAAP guidance regarding fair value measurements address how companies should measure fair value when they are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3 being the lowest priority.

The levels in the hierarchy are defined as follows:

Level 1:

Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in an active market;

Level 2:

Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;

Level 3:

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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. Due to the unavailability of prices for two private placement securities, the Company valued the securities at $3,593 thousand at December 31, 2015 and made no such adjustments at December 31, 2014.

The Company internally manages a public equity portfolio which had a fair value at December 31, 2015 and December 31, 2014 of $253,575 thousand and $196,980 thousand, respectively, and all prices were obtained from publically published sources.

Equity securities denominated in U.S. currency with quoted prices in active markets for identical assets are categorized as level 1 since the quoted prices are directly observable. Equity securities traded on foreign exchanges are categorized as level 2 due to the added input of a foreign exchange conversion rate to determine fair or market value. The Company uses foreign currency exchange rates published by nationally recognized sources.

All categories of fixed maturity securities listed in the tables below are generally categorized as level 2, 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. For foreign government securities and foreign corporate securities, the fair values provided by the third party pricing services in local currencies, and where applicable, are converted to U.S. dollars using currency exchange rates from nationally recognized sources.

The fixed maturities with fair values categorized as level 3 result when prices are not available from the nationally recognized pricing services. The asset managers will then obtain non-binding price quotes for the securities from brokers. 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. If the broker quotes are for foreign denominated securities, the quotes are converted to U.S. dollars using currency exchange rates from nationally recognized sources. In limited circumstances when broker prices are not available for private placements, the Company will value the securities using comparable market information. Historically, most of the level 3 fixed maturities have resulted from new issuances and the third party prices services have not yet included the issuance in their data base. Generally, in subsequent measurement periods, the issuances will be included in the data base and the fair value will transfer to level 2.

The composition and valuation inputs for the presented fixed maturities categories are as follows:

·	U.S. Treasury securities and obligations of U.S. government agencies and corporations are primarily comprised of U.S. Treasury bonds and the fair value is based on observable market inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields;

·	Obligations of U.S. states and political subdivisions are comprised of state and municipal bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

·	Corporate securities are primarily comprised of U.S. corporate and public utility bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

·	Asset-backed and mortgage-backed securities fair values are based on observable inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields and cash flow models using observable inputs such as prepayment speeds, collateral performance and default spreads;

Foreign government securities are comprised of global non-U.S. sovereign bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source;

Foreign corporate securities are comprised of global non-U.S. corporate bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source.

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, 2015, fair value for these equity index put option contracts was $31,763 thousand. Based on historical index volatilities and trends and the December 31, 2015 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 16%. 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, 2015, the present value of these theoretical maximum payouts using a 3% discount factor was $432,613 thousand. Conversely, if the contracts had all expired on December 31, 2015, with the S&P index at $2,043.94, 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, 2015, fair value for this equity index put option contract was $8,942 thousand. Based on historical index volatilities and trends and the December 31, 2015 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 46%. 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, 2015, the present value of the theoretical maximum payout using a 3% discount factor and current exchange rate was $42,599 thousand. Conversely, if the contract had expired on December 31, 2015, with the FTSE index at £6,242.30, there would have been no settlement amount.

The Company's liability for equity index put options is categorized as level 3 since there is no active market for these seven long dated equity put options. The fair values for these options are calculated by the Company using an industry accepted pricing model, Black-Scholes. The model inputs and assumptions are: risk free interest rates, equity market indexes values, volatilities and dividend yields and duration. The model results are then adjusted for the Company's credit default swap rate. All of these inputs and assumptions are updated quarterly. One of the option contacts is in British Pound Sterling so the fair value for this contract is converted to U.S. dollars using an exchange rate from a nationally recognized source.

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, 2015		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	816,877	$	-	$	816,877	$	-
Obligations of U.S. States and political subdivisions		703,075		-		703,075		-
Corporate securities		4,804,863		-		4,800,930		3,933
Asset-backed securities		467,226		-		467,226		-
Mortgage-backed securities
Commercial		266,299		-		266,299		-
Agency residential		2,320,524		-		2,320,524		-
Non-agency residential		898		-		898		-
Foreign government securities		1,259,181		-		1,259,181		-
Foreign corporate securities		2,718,351		-		2,716,758		1,593
Total fixed maturities, market value		13,357,294		-		13,351,768		5,526

Fixed maturities, fair value		2,102		-		2,102		-
Equity securities, market value		108,940		91,907		17,033		-
Equity securities, fair value		1,337,733		1,275,666		62,067		-

Liabilities:
Equity index put option contracts	$	40,705	$	-	$	-	$	40,705

There were no transfers between Level 1 and Level 2 for the twelve months ended December 31, 2015.

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

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, 2015												December 31, 2014
	Corporate						Foreign						Corporate			Asset-backed						Foreign			Non-agency			Agency
(Dollars in thousands)	Securities			CMBS			Corporate			Total			Securities			Securities			CMBS			Corporate			RMBS			RMBS			Total
Beginning balance	$	-		$	8,597		$	7,166		$	15,763		$	-		$	5,299		$	-		$	481		$	347		$	-		$	6,127
Total gains or (losses) (realized/unrealized)
Included in earnings		4			-			(9,480	)		(9,476	)		-			1,259			-			73			329			-			1,661
Included in other comprehensive income (loss)		(96	)		-			3,908			3,812			42			(126	)		(426	)		(5,221	)		(138	)		-			(5,869	)
Purchases, issuances and settlements		3,626			-			-			3,626			1,274			21,303			9,023			4,038			(538	)		29,845			64,945
Transfers in and/or (out) of Level 3		399			(8,597	)		(1	)		(8,199	)		(1,316	)		(27,735	)		-			7,795			-			(29,845	)		(51,101	)
Ending balance	$	3,933		$	-		$	1,593		$	5,526		$	-		$	-		$	8,597		$	7,166		$	-		$	-		$	15,763

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	$	-		$	-		$	9,721		$	9,721		$	-		$	-		$	-		$	-		$	-		$	-		$	-

(Some amounts may not reconcile due to rounding.)

The net transfers from level 3, fair value measurements using significant unobservable inputs, of $8,199 thousand and $51,101 thousand of investments for the years ended December 31, 2015 and 2014, respectively, primarily relate to securities that were priced using single non-binding broker quotes as of December 31, 2014 and 2013, respectively. The securities were subsequently priced using a recognized pricing service as of December 31, 2015 and 2014, 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)	2015			2014
Liabilities:
Balance, beginning of period	$	47,022		$	35,423
Total (gains) or losses (realized/unrealized)
Included in earnings		(6,317	)		11,599
Included in other comprehensive income (loss)		-			-
Purchases, issuances and settlements		-			-
Transfers in and/or (out) of Level 3		-			-
Balance, end of period	$	40,705		$	47,022

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.)