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 U.S. Treasury securities 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 obligations of U.S. government corporations and agencies and 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 premium tax credit investments. Our non-financial assets that are classified as Level 3 securities consist of real estate acquired through claim settlement that 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.

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.

During the quarter ended September 30, 2014, we changed the classification of our U.S. government corporation and agency securities with a fair value of $215 million, from Level 1 to Level 2 in the fair value hierarchy. The fair value of our U.S. government corporation and agency securities, in current market conditions, is determined from quoted prices for similar instruments in active markets, which is in accordance with our policy for determining fair value for Level 2 securities. The classification of these securities in the fair value table as of December 31, 2013 has been revised, as we believe the most appropriate classification for these securities was Level 2 at that date. There were no other transfers between Level 1 and Level 2 during the nine months ended September 30, 2014.

Fair value measurements for assets measured at fair value included the following as of September 30, 2014 and December 31, 2013:

	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, 2014

U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	407,619	$	192,683	$	214,936	$	-
Obligations of U.S. states and political subdivisions		839,262		-		837,268		1,994
Corporate debt securities		2,338,555		-		2,338,555		-
Asset-backed securities		342,249		-		342,249		-
Residential mortgage-backed securities		330,931		-		330,931		-
Commercial mortgage-backed securities		267,500		-		267,500		-
Collateralized loan obligations		60,576		-		60,576		-
Debt securities issued by foreign sovereign governments		40,287		40,287		-		-
Total debt securities		4,626,979		232,970		4,392,015		1,994
Equity securities		3,022		2,701		-		321
Total investments	$	4,630,001	$	235,671	$	4,392,015	$	2,315
Real estate acquired (1)	$	16,565	$	-	$	-	$	16,565

	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)

December 31, 2013

U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	639,590	$	347,273	$	292,317	$	-
Obligations of U.S. states and political subdivisions		921,367		-		918,944		2,423
Corporate debt securities		2,171,415		-		2,171,415		-
Asset-backed securities		400,486		-		400,486		-
Residential mortgage-backed securities		358,537		-		358,537		-
Commercial mortgage-backed securities		271,383		-		271,383		-
Collateralized loan obligations		60,295		-		60,295		-
Debt securities issued by foreign sovereign governments		40,852		40,852		-		-
Total debt securities		4,863,925		388,125		4,473,377		2,423
Equity securities		2,894		2,573		-		321
Total investments	$	4,866,819	$	390,698	$	4,473,377	$	2,744
Real estate acquired (1)	$	13,280	$	-	$	-	$	13,280

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

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, 2014 and 2013 is as follows:

	Obligations of U.S. States and Political Subdivisions			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at June 30, 2014	$	2,231		$	321	$	2,552		$	10,804
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net		-			-		-			(2,062	)
Purchases		-			-		-			14,107
Sales		(237	)		-		(237	)		(6,284	)
Transfers into Level 3		-			-		-			-
Transfers out of Level 3		-			-		-			-
Balance at September 30, 2014	$	1,994		$	321	$	2,315		$	16,565

Amount of total losses included in earnings for the three months ended September 30, 2014 attributable to the change in unrealized losses on assets still held at September 30, 2014	$	-		$	-	$	-		$	-

	Obligations of U.S. States and Political Subdivisions			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at December 31, 2013	$	2,423		$	321	$	2,744		$	13,280
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net		-			-		-			(4,378	)
Purchases		30			-		30			33,484
Sales		(459	)		-		(459	)		(25,821	)
Transfers into Level 3		-			-		-			-
Transfers out of Level 3		-			-		-			-
Balance at September 30, 2014	$	1,994		$	321	$	2,315		$	16,565

Amount of total losses included in earnings for the nine months ended September 30, 2014 attributable to the change in unrealized losses on assets still held at September 30, 2014	$	-		$	-	$	-		$	-

	Obligations of U.S. States and Political Subdivisions			Corporate Debt Securities		Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at June 30, 2013	$	2,811		$	-	$	321	$	3,132		$	8,741
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net		-			-		-		-			(1,378	)
Purchases		-			-		-		-			10,857
Sales		(241	)		-		-		(241	)		(5,844	)
Transfers into Level 3		-			-		-		-			-
Transfers out of Level 3		-			-		-		-			-
Balance at September 30, 2013	$	2,570		$	-	$	321	$	2,891		$	12,376

Amount of total losses included in earnings for the three months ended September 30, 2013 attributable to the change in unrealized losses on assets still held at September 30, 2013	$	-		$	-	$	-	$	-		$	-

	Obligations of U.S. States and Political Subdivisions			Corporate Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at December 31, 2012	$	3,130		$	17,114		$	321	$	20,565		$	3,463
Total realized/unrealized gains (losses):
Included in earnings and reported as realized investment gains (losses), net		-			(225	)		-		(225	)		-
Included in earnings and reported as losses incurred, net		-			-			-		-			(3,680	)
Purchases		30			-			-		30			28,401
Sales		(590	)		(16,889	)		-		(17,479	)		(15,808	)
Transfers into Level 3		-			-			-		-			-
Transfers out of Level 3		-			-			-		-			-
Balance at September 30, 2013	$	2,570		$	-		$	321	$	2,891		$	12,376

Amount of total losses included in earnings for the nine months ended September 30, 2013 attributable to the change in unrealized losses on assets still held at September 30, 2013	$	-		$	-		$	-	$	-		$	-

Authoritative guidance over disclosures about the fair value of financial instruments requires additional disclosure for financial instruments not measured at fair value. Certain financial instruments, including insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level 2) approximated their fair values.

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.”