Fair Value Of Financial Instruments

9 Months Ended

Sep. 30, 2011

Fair Value Of Financial Instruments [Abstract]

Fair Value Of Financial Instruments

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

     In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:

• Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

• Level 3: Inputs to the valuation methodology that are unobservable for the asset or liability.

     The following table shows the fair value of the Company's financial instruments and where in the fair value hierarchy the fair value measurements are included as of the dates indicated:

					Fair value measurement using:
					Quoted prices in				Significant
					active markets for		Significant other		unobservable
	Carrying				identical assets		observable inputs		inputs
September 30, 2011	amount		Total fair value		(Level 1)		(Level 2)		(Level 3)
Available for sale securities:
U.S. Government and Government agencies	$	35,298	$	35,298	$	35,298	$	—	$	—
States, municipalities and political subdivisions		33,107		33,107		—		33,107		—
Corporate debt		216,561		216,561		—		216,561		—
Total available for sale fixed maturity investments		284,966		284,966
Trading securities:
U.S. Government and Government agencies	$	1,067,673	$	1,067,673	$	858,948	$	208,725	$	—
Non-U.S. Government and Government agencies		225,782		225,782		—		225,782		—
States, municipalities and political subdivisions		103,180		103,180		—		103,180		—
Corporate debt		2,234,717		2,234,717		—		2,234,717		—
Mortgage-backed		2,053,663		2,053,663		—		1,806,200		247,463
Asset-backed		594,600		594,600		—		498,993		95,607
Total trading fixed maturity investments		6,279,615		6,279,615
Total fixed maturity investments		6,564,581		6,564,581
Equity securities		424,104		424,104		424,104		—		—
Other invested assets		552,074		552,074		—		—		552,074
Total investments	$	7,540,759	$	7,540,759	$	1,318,350	$	5,327,265	$	895,144
Senior notes	$	797,885	$	865,868	$	—	$	865,868	$	—

					Fair value measurement using:
					Quoted prices in				Significant
					active markets for		Significant other		unobservable
	Carrying				identical assets		observable inputs		inputs
December 31, 2010	amount		Total fair value		(Level 1)		(Level 2)		(Level 3)
Available for sale securities:
U.S. Government and Government agencies	$	91,953	$	91,953	$	65,234	$	26,719	$	—
Non-U.S. Government and Government agencies		145,384		145,384		—		145,384		—
States, municipalities and political subdivisions		118,177		118,177		—		118,177		—
Corporate debt		536,335		536,335		—		536,335		—
Total available for sale fixed maturity investments		891,849		891,849
Trading securities:
U.S. Government and Government agencies	$	1,229,720	$	1,229,720	$	1,088,967	$	140,753	$	—
Non-U.S. Government and Government agencies		120,793		120,793		—		120,793		—
States, municipalities and political subdivisions		127,436		127,436		—		127,436		—
Corporate debt		1,990,215		1,990,215		—		1,990,215		—
Mortgage-backed		1,751,883		1,751,883		—		1,579,324		172,559
Asset-backed		549,050		549,050		—		500,343		48,707
Total trading fixed maturity investments		5,769,097		5,769,097
Total fixed maturity investments		6,660,946		6,660,946
Equity securities		174,976		174,976		174,976		—		—
Other invested assets		347,632		347,632		—		—		347,632
Total investments	$	7,183,554	$	7,183,554	$	1,329,177	$	5,285,479	$	568,898
Senior notes	$	797,700	$	850,570	$	—	$	850,570	$	—

:     The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of the balance sheet date.

     U.S. government and U.S. government agencies: Comprised primarily of bonds issued by the U.S. treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. The fair values of the Company's U.S. government securities are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The Company believes the market for U.S. treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.

     Non-U.S. government and government agencies: Comprised of fixed income obligations of non-U.S. governmental entities. The fair values of these securities are based on prices obtained from international indices and are included in the Level 2 fair value hierarchy.

     States, municipalities and political subdivisions: Comprised of fixed income obligations of U.S. domiciled state and municipality entities. The fair values of these securities are based on prices obtained from the new issue market, and are included in the Level 2 fair value hierarchy.

     Corporate debt: Comprised of bonds issued by corporations that are diversified across a wide range of issuers and industries. The fair values of corporate bonds that are short-term are priced using spread above the London Interbank Offered Rate yield curve, and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.

     Mortgage-backed: Primarily comprised of residential and commercial mortgages originated by both U.S. government agencies (such as the Federal National Mortgage Association) and non-U.S. government agencies. The fair values of mortgage-backed securities originated by U.S. government agencies and non-U.S. government agencies are based on a pricing model that incorporates prepayment speeds and spreads to determine appropriate average life of mortgage-backed securities. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the mortgage-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the mortgage-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.

     Asset-backed: Principally comprised of bonds backed by pools of automobile loan receivables, home equity loans, credit card receivables and collateralized loan obligations originated by a variety of financial institutions. The fair values of asset-backed securities are priced using prepayment speed and spread inputs that are sourced from the new issue market or broker-dealer quotes. As the significant inputs used to price the asset-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the asset-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.

     Equity securities: The fair value of the equity securities are priced from market exchanges and therefore included in the Level 1 fair value hierarchy.

     Other invested assets: Comprised of funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the funds are based on the net asset value of the funds as reported by the fund manager which the Company believes is an unobservable input, and as such, the fair values of those funds are included in the Level 3 fair value hierarchy.

     Senior notes: The fair value of the senior notes is based on trades as reported in Bloomberg. As of September 30, 2011, the 7.50% Senior Notes and 5.50% Senior Notes (each as defined in Note 8) were traded at 114.3% and 98.2% of their principal amount, providing an effective yield of 4.2% and 5.8%, respectively. The fair value of the senior notes is included in the Level 2 fair value hierarchy.

     The following is a reconciliation of the beginning and ending balance of financial instruments using significant unobservable inputs:
(Level 3)

	Fair value measurement using significant
	unobservable inputs (Level 3):
	Other invested assets			Mortgage-backed			Asset-backed
Three Months Ended September 30, 2011
Opening balance	$	562,267		$	216,660		$	113,310
Total realized and unrealized gains included in net income		3,938			4,671			28
Total realized and unrealized losses included in net income		(38,667	)		(2,795	)		(1,402	)
Purchases		29,553			46,077			328
Sales		(5,017	)		(7,021	)		(5,708	)
Transfers into Level 3		—			18,170			1,351
Transfers out of Level 3		—			(28,299	)		(12,300	)
Ending balance	$	552,074		$	247,463		$	95,607
Three Months Ended September 30, 2010
Opening balance	$	319,592		$	278,789		$	103,555
Total realized and unrealized gains included in net income		6,093			6,448			406
Total realized and unrealized losses included in net income		(3,990	)		(1,548	)		(257	)
Change in unrealized gains included in Other Comprehensive Income ("OCI")		—			3,238			21
Change in unrealized losses included in OCI		—			(5,119	)		(2	)
Purchases		6,580			1,115			2,177
Sales		—			(58,998	)		(1,803	)
Cumulative effect adjustment related to the adoption of ASU 2010-11		—			1,796			(19	)
Transfers into Level 3		—			6,773			5,294
Transfers out of Level 3		—			(3,257	)		(51,680	)
Ending balance	$	328,275		$	229,237		$	57,692

	Fair value measurement using significant
	unobservable inputs (Level 3):
	Other invested assets			Mortgage-backed			Asset-backed
Nine Months Ended September 30, 2011
Opening balance	$	347,632		$	172,558		$	48,707
Total realized and unrealized gains included in net income		16,641			8,480			115
Total realized and unrealized losses included in net income		(38,877	)		(3,377	)		(903	)
Purchases		274,893			108,681			115,745
Sales		(48,215	)		(50,308	)		(8,933	)
Transfers into Level 3		—			104,255			34,152
Transfers out of Level 3		—			(92,826	)		(93,276	)
Ending balance	$	552,074		$	247,463		$	95,607
Nine Months Ended September 30, 2010
Opening balance	$	184,725		$	253,979		$	104,871
Total realized and unrealized gains included in net income		8,233			15,928			573
Total realized and unrealized losses included in net income		(2,932	)		(41	)		—
Change in unrealized gains included in OCI		—			2,755			64
Change in unrealized losses included in OCI		138,249			—			—
Purchases		—			122,058			53,358
Sales		—			(178,226	)		(7,049	)
Cumulative effect adjustment related to the adoption of ASU 2010-11		—			1,796			(19	)
Transfers into Level 3		—			55,504			56,034
Transfers out of Level 3		—			(44,516	)		(150,140	)
Ending balance	$	328,275		$	229,237		$	57,692

:     The Company attempts to verify the significant inputs used by broker-dealers in determining the fair value of the securities priced by them. If the Company could not obtain sufficient information to determine if the broker-dealers were using significant observable inputs, such securities have been transferred to Level 3 fair value hierarchy. The Company believes the prices obtained from the broker-dealers are the best estimate of fair value of the securities being priced as the broker-dealers are typically involved in the initial pricing of the security, and the Company has compared the price per the broker-dealer to other pricing sources and noted no material differences.

     During the three and nine months ended September 30, 2011, the Company transferred $28,299 and $92,826 of mortgage-backed securities, respectively, and $12,300 and $93,276 of asset-backed securities, respectively, from Level 3 to Level 2 in the fair value hierarchy. During the three and nine months ended September 30, 2010, the Company transferred $3,257 and $44,516 of mortgage-backed securities, respectively, and $51,680 and $150,140 of asset-backed securities, respectively, from Level 3 to Level 2 in the fair value hierarchy. The Company transferred those securities as they no longer utilized broker-dealer quotes and instead used other pricing sources that have significant observable inputs. The Company recognizes transfers between levels at the end of the reporting period.