Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 8 – Fair Value Measurements

In accordance with fair value guidance, we applied the following fair value hierarchy in order to measure fair value for assets and liabilities:

Level 1 – Quoted prices for identical instruments in active markets that we can access. Financial assets utilizing Level 1 inputs primarily include certain U.S. Treasury securities and obligations of U.S. government corporations and agencies and Australian government and semi government securities.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace for the financial instrument. The observable inputs are used in valuation models to calculate the fair value of the financial instruments. Financial assets utilizing Level 2 inputs primarily include certain municipal and corporate bonds.

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. Level 3 inputs reflect our own assumptions about the assumptions a market participant would use in pricing an asset or liability. Financial assets utilizing Level 3 inputs include certain state and auction rate (backed by student loans) securities. Non-financial assets which utilize Level 3 inputs include real estate acquired through claim settlement.

To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized by the independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation. Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information and data changes, and directional moves compared to market moves. This model combines all inputs to arrive at a value assigned to each security. In addition, on a quarterly basis, we perform quality controls over values received from the pricing sources which include reviewing tolerance reports, trading information and data changes, and directional moves compared to market moves. We have not made any adjustments to the prices obtained from the independent pricing sources.

Assets classified as Level 3 are as follows:

· Securities available-for-sale classified in Level 3 are not readily marketable and are valued using internally developed models based on the present value of expected cash flows. Our Level 3 securities primarily consist of auction rate securities as observable inputs or value drivers are unavailable due to events described in Note 7 – "Investments." Due to limited market information, we utilized a discounted cash flow ("DCF") model to derive an estimate of fair value of these assets at September 30, 2012 and December 31, 2011. The assumptions used in preparing the DCF model included estimates with respect to the amount and timing of future interest and principal payments, the probability of full repayment of the principal considering the credit quality and guarantees in place, and the rate of return required by investors to own such securities given the current liquidity risk associated with them. The DCF model for the auction rate securities is based on the following key assumptions:

· Nominal credit risk as substantially all of the underlying collateral of these securities is ultimately guaranteed by the United States Department of Education;

· Time to liquidity ranging from December 31, 2013 through December 31, 2015;

· Continued receipt of contractual interest; and

· Discount rates ranging from 2.21% to 3.71%, which include a spread for liquidity risk.

A 1% change in the discount rate would change the value of our ARS by approximately $2.4 million. A two year change to the years to liquidity assumption would change the value of our ARS by approximately $4.6 million.

· Real estate acquired through claim settlement is fair valued at the lower of our acquisition cost or a percentage of appraised value. The percentage applied to appraised value is based upon our historical sales experience adjusted for current trends.

Fair value measurements for assets measured at fair value included the following as of September 30, 2012 and December 31, 2011:

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
September 30, 2012
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	219,263	$	219,263	$	-	$	-
Obligations of U.S. states and political subdivisions		1,272,032		-		1,198,237		73,795
Corporate debt securities		2,563,438		-		2,522,513		40,925
Residential mortgage-backed securities		456,910		-		456,910		-
Commercial mortgage-backed securities		266,790		-		266,790		-
Debt securities issued by foreign sovereign governments		145,413		145,413		-		-
Total debt securities		4,923,846		364,676		4,444,450		114,720
Equity securities		2,918		2,597		-		321
Total investments	$	4,926,764	$	367,273	$	4,444,450	$	115,041
Real estate acquired (1)	$	3,097	$	-	$	-	$	3,097
December 31, 2011
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	597,037	$	597,037	$	-	$	-
Obligations of U.S. states and political subdivisions		2,323,471		-		2,209,245		114,226
Corporate debt securities		2,032,851		1,455		1,971,168		60,228
Residential mortgage-backed securities		445,417		-		445,417		-
Commercial mortgage-backed securities		264,934		-		264,934		-
Debt securities issued by foreign sovereign governments		157,190		147,976		9,214		-
Total debt securities		5,820,900		746,468		4,899,978		174,454
Equity securities		2,747		2,426		-		321
Total investments	$	5,823,647	$	748,894	$	4,899,978	$	174,775
Real estate acquired (1)	$	1,621	$	-	$	-	$	1,621

(1) Real estate acquired through claim settlement, which is held for sale, is reported in Other Assets on the consolidated balance sheet.

There were no transfers of securities between Level 1 and Level 2 during the first nine months of 2012 or 2011.

For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three and nine months ended September 30, 2012 and 2011 is as follows:

	Obligations of U.S. States and Political Subdivisions			Corporate Debt Securities		Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at June 30, 2012	$	83,981		$	40,857	$	321	$	125,159		$	3,074
Total realized/unrealized gains (losses):
Included in earnings and reported as realized investment gains (losses), net		(467	)		-		-		(467	)		-
Included in earnings and reported as impairment losses, net		-			-		-		-			-
Included in earnings and reported as losses incurred, net		-			-		-		-			(309	)
Included in other comprehensive income		971			68		-		1,039			-
Purchases		-			-		-		-			2,718
Sales		(10,690	)		-		-		(10,690	)		(2,386	)
Transfers into Level 3		-			-		-		-			-
Transfers out of Level 3		-			-		-		-			-
Balance at September 30, 2012	$	73,795		$	40,925	$	321	$	115,041		$	3,097
Amount of total losses included in earnings for the three months ended September 30, 2012 attributable to the change in unrealized losses on assets still held at September 30, 2012	$	-		$	-	$	-	$	-		$	-

	Obligations of U.S. States and Political Subdivisions			Corporate Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at December 31, 2011	$	114,226		$	60,228		$	321	$	174,775		$	1,621
Total realized/unrealized gains (losses):
Included in earnings and reported as realized investment gains (losses), net		(2,992	)		(1,081	)		-		(4,073	)		-
Included in earnings and reported as impairment losses, net		-			(339	)		-		(339	)		-
Included in earnings and reported as losses incurred, net		-			-			-		-			(774	)
Included in other comprehensive income		1,727			423			-		2,150			-
Purchases		27			-			-		27			8,688
Sales		(39,193	)		(18,306	)		-		(57,499	)		(6,438	)
Transfers into Level 3		-			-			-		-			-
Transfers out of Level 3		-			-			-		-			-
Balance at September 30, 2012	$	73,795		$	40,925		$	321	$	115,041		$	3,097
Amount of total losses included in earnings for the nine months ended September 30, 2012 attributable to the change in unrealized losses on assets still held at September 30, 2012	$	-		$	-		$	-	$	-		$	-

	Obligations of U.S. States and Political Subdivisions			Corporate Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at June 30, 2011	$	223,402		$	70,039		$	321	$	293,762		$	2,828
Total realized/unrealized gains (losses):
Included in earnings and reported as net impairment losses recognized in earnings		-			(200	)		-		(200	)		-
Included in earnings and reported as losses incurred, net		-			-			-		-			(85	)
Included in other comprehensive income		342			451			-		793			-
Purchases		-			-			-		-			1,148
Sales		(2,537	)		-			-		(2,537	)		(1,567	)
Transfers into Level 3		-			-			-		-			-
Transfers out of Level 3		-			-			-		-			-
Balance at September 30, 2011	$	221,207		$	70,290		$	321	$	291,818		$	2,324
Amount of total losses included in earnings for the three months ended September 30, 2011 attributable to the change in unrealized losses on assets still held at September 30, 2011	$	-		$	-		$	-	$	-		$	-

	Obligations of U.S. States and Political Subdivisions			Corporate Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at December 31, 2010	$	295,690		$	70,053		$	321	$	366,064		$	6,220
Total realized/unrealized gains (losses):
Included in earnings and reported as net impairment losses recognized in earnings		-			(200	)		-		(200	)		-
Included in earnings and reported as losses incurred, net		-			-			-		-			(180	)
Included in other comprehensive income		(845	)		437			-		(408	)		-
Purchases		-			-			-		-			3,944
Sales		(73,638	)		-			-		(73,638	)		(7,660	)
Transfers into Level 3		-			-			-		-			-
Transfers out of Level 3		-			-			-		-			-
Balance at September 30, 2011	$	221,207		$	70,290		$	321	$	291,818		$	2,324
Amount of total losses included in earnings for the nine months ended September 30, 2011 attributable to the change in unrealized losses on assets still held at September 30, 2011	$	-		$	-		$	-	$	-		$	-

Additional fair value disclosures related to our investment portfolio are included in Note 7 – "Investments." Fair value disclosures related to our debt are included in Note 3 – "Debt."