Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements

Fair Value Measurements

4. Fair Value Measurements

(a) Fair Value Measurements on a Recurring Basis

TRH measures at fair value on a recurring basis financial instruments included principally in its available for sale securities portfolios and short-term investments. The fair value of a financial instrument is the amount that would be received to sell an asset or settle a liability in an orderly transaction between willing, able and knowledgeable market participants at the measurement date.

The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An active market is one in which transactions for the asset being valued occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. An other-than-active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or in which little information is released publicly for the asset being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and general market conditions.

TRH management is responsible for the determination of the fair value of the financial assets and the supporting methodologies and assumptions. With respect to securities, TRH employs independent third party valuation service providers to gather, analyze and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. When TRH’s valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting from brokers who are knowledgeable about these securities to provide a quote, which is generally non-binding, or by employing widely accepted internal valuation models.

Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted internal valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested under the terms of service agreements. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates, and other market observable information, as applicable. The valuation models take into account, among other things, market observable information as of the measurement date as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other issue or issuer specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased.

TRH employs specific control processes to determine the reasonableness of the fair values of TRH’s financial assets. TRH’s processes are designed to ensure that the values received or internally estimated are accurately recorded and that the data inputs and the valuation techniques utilized are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. TRH assesses the reasonableness of individual security values received from valuation service providers through various analytical techniques. In addition, TRH may validate the reasonableness of fair values by comparing information obtained from TRH’s valuation service providers to other third party valuation sources for selected securities. TRH also validates prices obtained from brokers for selected securities through reviews by those who have relevant expertise and who are independent of those charged with executing investing transactions.

A further discussion of the most significant categories of investments carried at fair value on a recurring basis follows:

(1) Fixed Maturity and Equity Securities Available for Sale

TRH maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Whenever available, TRH obtains quoted prices in active markets for identical assets at the balance sheet date to measure at fair value fixed maturity and marketable equity securities in its available for sale portfolios. Market price data generally are obtained from exchange or dealer markets.

TRH estimates the fair value of fixed maturity securities not traded in active markets by referring to traded securities with similar attributes, using dealer quotations and matrix pricing methodologies, discounted cash flow analyses or internal valuation models. This methodology considers such factors as the issuer’s industry, the security’s rating and tenor, its coupon rate, its position in the capital structure of the issuer, yield curves, credit curves, prepayment rates and other relevant factors. For fixed maturity securities that are not traded in active markets or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments generally are based on available market evidence. In the absence of such evidence, management’s best estimate is used.

Fair values for fixed maturity securities based on observable market prices for identical or similar instruments implicitly include the incorporation of counterparty credit risk. Fair values for fixed maturity securities based on internal models would incorporate counterparty credit risk by using discount rates that take into consideration cash issuance spreads for similar instruments or other observable information.

(2) Short-Term Investments

Short-term investments are carried at cost or amortized cost, which approximates fair value, and principally include money market instruments, treasury bills and commercial paper. These instruments are typically not traded in active markets; however, their fair values are based on market observable inputs.

(b) Fair Value Measurements on a Non-Recurring Basis

TRH also measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually, or when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. These assets primarily include held-to-maturity fixed maturities, which are carried on the balance sheet at amortized cost, and equity method investments. When TRH determines that the carrying value of these assets may not be recoverable, TRH records the assets at fair value with the loss recognized in income as a realized capital loss. In such cases, TRH measures the fair value of these assets using the techniques discussed above for fixed maturity and equity securities.

(c) Fair Value Hierarchy

Assets recorded at fair value in the consolidated balance sheet are measured and classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:

· Level 1:  Fair value measurements that are quoted prices (unadjusted) in active markets that TRH has the ability to access for identical assets. Market price data generally is obtained from exchange or dealer markets. Assets measured at fair value on a recurring basis and classified as Level 1 consists of actively traded listed common stocks and mutual funds (which are included on the balance sheet in equities available for sale).

· Level 2:  Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly. Level 2 inputs include quoted prices for similar assets in active markets and inputs other than quoted prices that are observable for the asset, such as interest rates and yield curves that are observable at commonly quoted intervals. Assets measured at fair value on a recurring basis and classified as Level 2 generally include most government and government agency securities, state, municipal and political subdivision obligations, corporate bonds, residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), other asset-backed securities and short-term investments.

· Level 3:  Fair value measurements based on valuation techniques that use significant inputs that are unobservable. These measurements may be made under circumstances in which there is little, if any, market activity for the asset. TRH’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, TRH considers factors specific to the asset. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assets measured at fair value on a recurring basis and classified as Level 3 principally include certain RMBS, CMBS, other-asset backed securities and other invested assets.

(d) Assets Measured at Fair Value on a Recurring Basis

The following table presents information about assets measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010 and indicates the level of the fair value measurement based on the levels of the inputs used:

	Level 1		Level 2		Level 3		Total
	(in millions)
As of June 30, 2011
Assets(1):
Fixed maturities available for sale:
U.S. Government	$	—	$	15.9	$	—	$	15.9
U.S. Government agencies	—		946.9		—		946.9
States, municipalities and political subdivisions	—		4,656.3		—		4,656.3
Foreign governments	—		722.9		0.8		723.7
U.S. corporate	—		2,332.0		6.3		2,338.3
Foreign corporate	—		1,990.4		—		1,990.4
Asset-backed:
RMBS	—		208.3		38.4		246.7
CMBS	—		167.6		79.3		246.9
Other asset-backed	—		77.9		6.4		84.3
Total fixed maturities available for sale	—		11,118.2		131.2		11,249.4
Equities available for sale	601.1		—		7.0		608.1
Other invested assets(2)	—		—		63.3		63.3
Short-term investments(3)	—		210.3		—		210.3
Other assets	—		—		2.7		2.7
Total	$	601.1	$	11,328.5	$	204.2	$	12,133.8
As of December 31, 2010
Assets(1):
Fixed maturities available for sale:
U.S. Government	$	—	$	25.6	$	—	$	25.6
U.S. Government agencies	—		864.6		—		864.6
States, municipalities and political subdivisions	—		4,841.6		—		4,841.6
Foreign governments	—		800.5		0.8		801.3
U.S. corporate	—		1,957.2		6.5		1,963.7
Foreign corporate	—		1,731.7		—		1,731.7
Asset-backed:
RMBS	—		217.8		26.7		244.5
CMBS	—		158.8		91.2		250.0
Other asset-backed	—		85.9		13.4		99.3
Total fixed maturities available for sale	—		10,683.7		138.6		10,822.3
Equities available for sale	559.5		—		5.0		564.5
Other invested assets(2)	—		—		86.4		86.4
Short-term investments(3)	—		120.2		—		120.2
Total	$	559.5	$	10,803.9	$	230.0	$	11,593.4

(1) Represents only items measured at fair value.

(2) Primarily private equities.

(3) Short-term investments in Level 2 are carried at cost or amortized cost, which approximates fair value.

During the second quarter of 2011, there were no transfers in or out of Level 1, $5.6 million of transfers into Level 2 from Level 3 and $19.0 million of transfers out of Level 2 into Level 3.  During the first six months of 2011, there were no transfers in or out of Level 1, $25.8 million of transfers into Level 2 from Level 3 and $19.0 million of transfers out of Level 2 into Level 3. The transfers into Level 2 from Level 3 in the second quarter and first six months of 2011 were due to an increase in observable inputs related to the valuation of such securities. The transfers out of Level 2 into Level 3 were due to a decrease in the observability of the significant inputs used in determining the fair value of the securities.  During the second quarter and first six months of 2010, there were no transfers in or out of Level 1, $2.5 million of transfers out of Level 2 into Level 3 and there were no transfers into Level 2 from Level 3.

At June 30, 2011 and December 31, 2010, Level 3 assets totaled $204.2 million and $230.0 million, respectively, representing 1.7% and 2.0%, respectively, of total assets measured at fair value on a recurring basis.

Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. As a result, the unrealized gains and losses on instruments held at June 30, 2011 and December 31, 2010 may include changes in fair value that were attributable to both observable inputs (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities).

Net unrealized depreciation related to Level 3 investments at June 30, 2011 and December 31, 2010 approximated $5.1 million and $6.7 million, respectively.

The following tables present analyses of the changes during the three and six month periods ended June 30, 2011 and 2010 in Level 3 assets measured at fair value on a recurring basis:

	Fixed Maturities Available for Sale
					Asset-backed:
											Other			Equities		Other
Three Months Ended	Foreign		U.S.								Asset-			Available		Invested			Other
June 30, 2011	Governments		Corporate		RMBS			CMBS			backed			for Sale		Assets(2)			Assets		Total
	(in millions)
Balance April 1, 2011	$	0.8	$	—	$	26.8		$	78.1		$	12.4		$	5.0	$	63.5		$	—	$	186.6
Net realized/unrealized gains (losses) included in:
Net investment income	—		—		0.2			(0.1		)	—			—		(0.2		)	—		(0.1		)
Realized net capital gains (losses) (1)	—		—		—			—			—			—		—			—		—
AOCI	—		—		(0.3		)	2.2			0.2			—		—			—		2.1
Purchases	—		—		—			—			—			2.0		—			2.7		4.7
Sales	—		—		—			—			—			—		—			—		—
Issuances	—		—		—			—			—			—		—			—		—
Settlements	—		—		(1.0		)	(0.9		)	(0.6		)	—		—			—		(2.5		)
Transfers into Level 3	—		6.3		12.7			—			—			—		—			—		19.0
Transfers out of Level 3	—		—		—			—			(5.6		)	—		—			—		(5.6		)
Balance June 30, 2011	$	0.8	$	6.3	$	38.4		$	79.3		$	6.4		$	7.0	$	63.3		$	2.7	$	204.2

(1)   There were no unrealized losses recorded in realized net capital gains (losses) in the three months ended June 30, 2011 on instruments still held at June 30, 2011.

(2)   Primarily private equities.

	Fixed Maturities Available for Sale
					Asset-backed:
											Other		Equities		Other
Three Months Ended	Foreign		U.S.								Asset-		Available		Invested			Other
June 30, 2010	Governments		Corporate		RMBS			CMBS			backed		for Sale		Assets(2)			Assets		Total
	(in millions)
Balance April 1, 2010	$	—	$	—	$	19.2		$	33.9		$	16.3	$	7.5	$	67.7		$	2.4	$	147.0
Net realized/unrealized gains (losses) included in:
Net investment income	—		—		0.5			(0.1		)	0.1		—		0.9			—		1.4
Realized net capital gains (losses) (1)	—		—		—			—			—		—		—			—		—
AOCI	—		—		(0.1		)	3.1			0.3		—		(0.6		)	—		2.7
Purchases, sales, issuances and settlements, net	—		—		(1.6		)	92.3			20.6		—		—			0.1		111.4
Transfers in (out) of Level 3, net	0.7		—		—			1.8			—		—		—			—		2.5
Balance June 30, 2010	$	0.7	$	—	$	18.0		$	131.0		$	37.3	$	7.5	$	68.0		$	2.5	$	265.0

(1)   There were no unrealized losses recorded in realized net capital gains (losses) in the three months ended June 30, 2010 on instruments still held at June 30, 2010.

(2)   Primarily private equities.

	Fixed Maturities Available for Sale
						Asset-backed:
												Other			Equities		Other
Six Months Ended	Foreign		U.S.									Asset-			Available		Invested			Other
June 30, 2011	Governments		Corporate			RMBS			CMBS			backed			for Sale		Assets(2)			Assets		Total
	(in millions)
Balance January 1, 2011	$	0.8	$	6.5		$	26.7		$	91.2		$	13.4		$	5.0	$	86.4		$	—	$	230.0
Net realized/unrealized gains (losses) included in:
Net investment income	—		—			0.7			(0.4		)	—			—		(10.7		)	—		(10.4		)
Realized net capital gains (losses) (1)	—		—			—			—			—			—		—			—		—
AOCI	—		—			0.6			3.7			0.5			—		0.1			—		4.9
Purchases	—		—			—			—			—			2.0		—			2.7		4.7
Sales	—		—			—			—			—			—		(12.5		)	—		(12.5		)
Issuances	—		—			—			—			—			—		—			—		—
Settlements	—		—			(2.3		)	(1.5		)	(1.9		)	—		—			—		(5.7		)
Transfers into Level 3	—		6.3			12.7			—			—			—		—			—		19.0
Transfers out of Level 3	—		(6.5		)	—			(13.7		)	(5.6		)	—		—			—		(25.8		)
Balance June 30, 2011	$	0.8	$	6.3		$	38.4		$	79.3		$	6.4		$	7.0	$	63.3		$	2.7	$	204.2

(1)   There were no unrealized losses recorded in realized net capital gains (losses) in the six months ended June 30, 2011 on instruments still held at June 30, 2011.

(2)   Primarily private equities.

	Fixed Maturities Available for Sale
						Asset-backed:
												Other		Equities		Other
Six Months Ended	Foreign			U.S.								Asset-		Available		Invested			Other
June 30, 2010	Governments			Corporate		RMBS			CMBS			backed		for Sale		Assets(2)			Assets		Total
	(in millions)
Balance January 1, 2010	$	1.4		$	—	$	18.6		$	32.7		$	17.6	$	7.5	$	72.2		$	—	$	150.0
Net realized/unrealized gains (losses) included in:
Net investment income	—			—		0.1			(0.2		)	0.1		—		(2.3		)	—		(2.3		)
Realized net capital gains (losses) (1)	—			—		(6.1		)	—			—		—		—			—		(6.1		)
AOCI	0.2			—		8.7			4.8			0.6		—		(0.4		)	—		13.9
Purchases, sales, issuances and settlements, net	(1.6		)	—		(3.3		)	91.9			19.0		—		(1.5		)	2.5		107.0
Transfers in (out) of Level 3, net	0.7			—		—			1.8			—		—		—			—		2.5
Balance June 30, 2010	$	0.7		$	—	$	18.0		$	131.0		$	37.3	$	7.5	$	68.0		$	2.5	$	265.0

(1)	There were $6.1 million of OTTI related to RMBS fixed maturities available for sale that was recorded in realized net capital gains (losses) in the six months ended June 30, 2010 on instruments still held at June 30, 2010.
(2)	Primarily private equities.

(e) Assets Measured at Fair Value on a Non-Recurring Basis

None of TRH’s assets were written down to fair value on a non-recurring basis during the three or six month periods ended June 30, 2011 and 2010.