NOTE 22. FAIR VALUE MEASUREMENTS

The Company classifies its Investments in Fixed Maturities and Equity Securities as available for sale and reports these investments at fair value. The Company classifies certain investments in mutual funds included in Other Investments as trading securities and reports these investments at fair value. The Company has no material liabilities that are measured and reported at fair value.

The valuation of assets measured at fair value in the Company’s Consolidated Balance Sheet at December 31, 2013 is summarized below:



DOLLARS IN MILLIONS	Fair Value Measurements						Fair Value
DOLLARS IN MILLIONS	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
Fixed Maturities:
U.S. Government and Government Agencies and Authorities	$	121.2	$	241.0	$	—	$	362.2
States and Political Subdivisions	—		1,361.0		—		1,361.0
Corporate Securities:
Bonds and Notes	—		2,429.6		364.1		2,793.7
Redeemable Preferred Stocks	—		—		7.4		7.4
Mortgage and Asset-backed	—		1.5		49.2		50.7
Total Investments in Fixed Maturities	121.2		4,033.1		420.7		4,575.0
Equity Securities:
Preferred Stocks:
Finance, Insurance and Real Estate	—		80.8		5.0		85.8
Other Industries	—		10.5		13.9		24.4
Common Stocks:
Manufacturing	95.1		7.3		2.2		104.6
Other Industries	71.7		2.2		11.0		84.9
Other Equity Interests:
Exchange Traded Funds	124.9		—		—		124.9
Limited Liability Companies and Limited Partnerships	—		—		173.9		173.9
Total Investments in Equity Securities	291.7		100.8		206.0		598.5
Other Investments:
Trading Securities	5.0		—		—		5.0
Total	$	417.9	$	4,133.9	$	626.7	$	5,178.5

At December 31, 2013, the Company had unfunded commitments to invest an additional $121.1 million in certain limited liability companies and limited partnerships that are reportable as Other Equity Interests.

NOTE 22. FAIR VALUE MEASUREMENTS (Continued)

The valuation of assets measured at fair value in the Company’s Consolidated Balance Sheet at December 31, 2012 is summarized below:



DOLLARS IN MILLIONS	Fair Value Measurements						Fair Value
DOLLARS IN MILLIONS	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
Fixed Maturities:
U.S. Government and Government Agencies and Authorities	$	135.8	$	293.1	$	—	$	428.9
States and Political Subdivisions	—		1,401.4		—		1,401.4
Corporate Securities:
Bonds and Notes	—		2,632.4		361.0		2,993.4
Redeemable Preferred Stocks	—		27.9		4.7		32.6
Mortgage and Asset-backed	—		3.8		0.1		3.9
Total Investments in Fixed Maturities	135.8		4,358.6		365.8		4,860.2
Equity Securities:
Preferred Stocks:
Finance, Insurance and Real Estate	—		79.2		—		79.2
Other Industries	—		15.3		6.0		21.3
Common Stocks:
Manufacturing	79.6		6.0		1.9		87.5
Other Industries	60.1		1.2		5.4		66.7
Other Equity Interests:
Exchange Traded Funds	125.9		—		—		125.9
Limited Liability Companies and Limited Partnerships	—		—		141.3		141.3
Total Investments in Equity Securities	265.6		101.7		154.6		521.9
Other Investments:
Trading Securities	4.5		—		—		4.5
Total	$	405.9	$	4,460.3	$	520.4	$	5,386.6

The Company’s investments in Fixed Maturities that are classified as Level 1 in the two preceding tables primarily consist of U.S. Treasury Bonds and Notes. The Company’s investments in Equity Securities that are classified as Level 1 in the two preceding tables consist of either investments in publicly-traded common stocks or exchange traded funds. The Company’s investments in Fixed Maturities that are classified as Level 2 in the two preceding tables primarily consist of investments in corporate bonds and redeemable preferred stocks, states and political subdivisions, and bonds and mortgage-backed securities of U.S. government agencies. The Company’s investments in Equity Securities that are classified as Level 2 in the two preceding tables primarily consist of investments in preferred stocks. The Company uses a leading, nationally recognized provider of market data and analytics to price the vast majority of the Company’s Level 2 measurements. The provider utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information. Because many fixed maturity securities do not trade on a daily basis, the provider’s evaluated pricing applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to prepare evaluations. In addition, the provider uses model processes to develop prepayment and interest rate scenarios. The pricing provider’s models and processes also take into account market convention. For each asset class, teams of its evaluators gather information from market sources and integrate relevant credit information, perceived market movements and sector news into the evaluated pricing applications and models. The Company generally validates the measurements obtained from its primary pricing provider by comparing them with measurements obtained from one additional pricing provider that provides either prices from recent market transactions or quotes in inactive markets or evaluations based on its own proprietary models.

NOTE 22. FAIR VALUE MEASUREMENTS (Continued)

The Company investigates significant differences related to the values provided. On completion of its investigation, management exercises judgment to determine the price selected and whether adjustments, if any, to the price obtained from the Company’s primary pricing provider would warrant classification of the price as Level 3. In instances where a measurement cannot be obtained from either pricing provider, the Company generally will evaluate bid prices from one or more binding quotes obtained from market makers to value investments in inactive markets and classified by the Company as Level 2. The Company generally classifies securities when it receives non-binding quotes or indications as Level 3 securities unless the Company can validate the quote or indication against recent transactions in the market. For securities classified as Level 3, the Company either uses valuations provided by third party fund managers, third party appraisers, the Company’s own internal valuations or net asset values provided for Limited Liability Companies and Limited Partnerships. These valuations typically employ various valuation techniques, including earnings multiples based on comparable public securities, comparable market yields as well as industry specific non-earnings based multiples or discounted cash flow models. Valuations classified as Level 3 by the Company generally consist of investments in various private placement securities of non-rated entities. In rare cases, if the private placement security has only been outstanding for a short amount of time, the Company, after considering the initial assumptions used in acquiring an investment, considers the original purchase price as representative of the fair value.

The majority of Investments in Fixed Maturities that are classified as Level 3 are priced using a market yield approach. A market yield approach uses a risk-free rate plus a credit spread depending on the underlying credit profile of the security. For floating rate securities, the risk free rate used in the market yield is the contractual floating rate of the security. For each individual security, the Company or the Company’s third party appraiser gathers information from market sources, relevant credit information, perceived market movements and sector news and determines an appropriate market yield for each security. The market yield selected is then used to discount the estimated future cash flows of the security to determine the fair value. The Company separately evaluates market yields based upon asset class to assess the reasonableness of the recorded fair value. For Investments in Fixed Maturities, corporate bonds and notes makes up the majority of the Company’s investments classified as Level 3. For corporate bonds and notes, the primary asset classes are investment grade private placements, non-investment grade senior debt, non-investment grade junior debt and other debt. Non-investment grade senior debt includes those securities that receive first priority in a liquidation and non-investment grade junior debt includes any fixed maturity security with other than first priority in a liquidation.

The table below presents quantitative information about the significant unobservable inputs utilized by the Company in determining fair values for investments in corporate bonds and notes classified as Level 3 at December 31, 2013.



DOLLARS IN MILLIONS	Unobservable Input	Total Fair Value		Range of Unobservable Inputs					Weighted Average Yield
Investment Grade	Market Yield	$	108.5	1.0	%	-	6.0	%	4.3	%
Non-investment Grade:
Senior Debt	Market Yield	93.9		4.2		-	15.6		8.6
Junior Debt	Market Yield	153.5		8.8		-	26.6		14.2
Other Debt	Various	8.2
Bonds and Notes Classified as Level 3		$	364.1



DOLLARS IN MILLIONS	Unobservable Input	Total Fair Value		Range of Unobservable Inputs					Weighted Average Yield
Investment Grade	Market Yield	$	94.6	1.3	%	-	6.3	%	4.0	%
Non-investment Grade:
Senior Debt	Market Yield	77.7		5.7		-	18.0		9.1
Junior Debt	Market Yield	173.2		8.8		-	21.4		14.8
Other Debt	Various	15.5
Bonds and Notes Classified as Level 3		$	361.0

NOTE 22. FAIR VALUE MEASUREMENTS (Continued)

For an investment in a fixed maturity security, an increase in the yield used to determine the fair value of the security will decrease the fair value of the security. A decrease in the yield used to determine fair value will increase the fair value of the security, but the fair value increase is generally limited to par if the security is currently callable.

Information by security type pertaining to the changes in the fair value of the Company’s investments classified as Level 3 for the year ended December 31, 2013 is presented below:



DOLLARS IN MILLIONS	Fixed Maturities									Equity Securities
DOLLARS IN MILLIONS	Corporate Bonds and Notes			Redeemable Preferred Stocks			Mortgage and Asset- backed			Preferred and Common Stocks			Other Equity Interests			Total
Balance at Beginning of Year	$	361.0		$	4.7		$	0.1		$	13.3		$	141.3		$	520.4
Total Gains (Losses):
Included in Consolidated Statement of Income	(7.9		)	0.2			0.3			(1.0		)	(1.6		)	(10.0		)
Included in Other Comprehensive Income	(7.8		)	(1.3		)	(0.1		)	4.6			5.6			1.0
Purchases	145.1			5.1			48.6			15.9			55.4			270.1
Settlements	(123.2		)	(1.3		)	(0.1		)	—			(26.8		)	(151.4		)
Sales	(0.1		)	—			(2.0		)	(0.7		)	—			(2.8		)
Transfers into Level 3	5.8			—			2.4			—			—			8.2
Transfers out of Level 3	(8.8		)	—			—			—			—			(8.8		)
Balance at End of Year	$	364.1		$	7.4		$	49.2		$	32.1		$	173.9		$	626.7

The Company’s policy is to recognize transfers between levels as of the end of the reporting period. There were no transfers between Levels 1 and 2 or Levels 1 and 3 for the year ended December 31, 2013. The transfers into Level 3 and out of Level 3 for the year ended December 31, 2013 were due to changes in the availability of market observable inputs.

Information by security type pertaining to the changes in the fair value of the Company’s investments classified as Level 3 for the year ended December 31, 2012 is presented below:



DOLLARS IN MILLIONS	Fixed Maturities									Equity Securities						Total
DOLLARS IN MILLIONS	Corporate Bonds and Notes			Redeemable Preferred Stocks			Mortgage and Asset- backed			Preferred and Common Stocks			Other Equity Interests			Total
Balance at Beginning of Year	$	235.1		$	6.1		$	0.3		$	13.5		$	93.1		$	348.1
Total Gains (Losses):
Included in Consolidated Statement of Income	4.0			(0.4		)	—			3.2			—			6.8
Included in Other Comprehensive Income	1.4			0.5			—			(1.3		)	8.3			8.9
Purchases	199.7			0.1			—			1.6			52.0			253.4
Settlements	(73.1		)	(1.6		)	(0.2		)	—			(12.1		)	(87.0		)
Sales	(0.9		)	—			—			(3.7		)	—			(4.6		)
Transfers into Level 3	0.9			—			—			—			—			0.9
Transfers out of Level 3	(6.1		)	—			—			—			—			(6.1		)
Balance at End of Year	$	361.0		$	4.7		$	0.1		$	13.3		$	141.3		$	520.4

The Company’s policy is to recognize transfers between levels as of the end of the reporting period. There were no transfers between Levels 1 and 2 or Levels 1 and 3 for the year ended December 31, 2012. The transfers into Level 3 and out of Level 3 for the year ended December 31, 2012 were due to changes in the availability of market observable inputs.

NOTE 22. FAIR VALUE MEASUREMENTS (Continued)

The fair value of Notes Payable is estimated using quoted prices in markets that are not active. The inputs used in the valuation are considered Level 2 measurements. The fair value of Short-term Investments is estimated using inputs that are considered Level 1 or Level 2 measurements.