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, equity 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 primarily 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. The fair value of real estate acquired is the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the 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.

Our financial assets that are classified as Level 3 securities are primarily state premium tax credit investments. The state premium tax credit investments have an average maturity of less than 4 years, credit ratings of AA+ or higher, and their balance reflects their remaining scheduled payments discounted at an average annual rate of 7.2%.

Fair value measurements for assets measured at fair value included the following as of March 31, 2015 and December 31, 2014:

	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2015	(In thousands)

U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	312,805	$	189,913	$	122,892	$	-
Obligations of U.S. states and political subdivisions		952,703		-		950,912		1,791
Corporate debt securities		2,408,016		-		2,408,016		-
Asset-backed securities		253,919		-		253,919		-
Residential mortgage-backed securities		309,031		-		309,031		-
Commercial mortgage-backed securities		260,606		-		260,606		-
Collateralized loan obligations		60,544		-		60,544		-
Debt securities issued by foreign sovereign governments		37,039		37,039		-		-
Total debt securities		4,594,663		226,952		4,365,920		1,791
Equity securities		3,100		2,779		-		321
Total investment portfolio	$	4,597,763	$	229,731	$	4,365,920	$	2,112
Real estate acquired (1)	$	10,897	$	-	$	-	$	10,897

	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2014	(In thousands)

U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	346,775	$	188,824	$	157,951	$	-
Obligations of U.S. states and political subdivisions		855,142		-		853,296		1,846
Corporate debt securities		2,425,281		-		2,425,281		-
Asset-backed securities		286,655		-		286,655		-
Residential mortgage-backed securities		321,237		-		321,237		-
Commercial mortgage-backed securities		275,278		-		275,278		-
Collateralized loan obligations		60,076		-		60,076		-
Debt securities issued by foreign sovereign governments		39,170		39,170		-		-
Total debt securities		4,609,614		227,994		4,379,774		1,846
Equity securities		3,055		2,734		-		321
Total investment portfolio	$	4,612,669	$	230,728	$	4,379,774	$	2,167
Real estate acquired (1)	$	12,658	$	-	$	-	$	12,658

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

There were no transfers of securities between Level 1 and Level 2 during the first three months of 2015.

For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three months ended March 31, 2015 and 2014 is as follows:

	Debt Securities			Equity Securities		Total Investments			Real Estate Acquired

Balance at December 31, 2014	$	1,846		$	321	$	2,167		$	12,658
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net		-			-		-			(503	)
Purchases		7			-		7			10,797
Sales		(62	)		-		(62	)		(12,055	)
Transfers into Level 3		-			-		-			-
Transfers out of Level 3		-			-		-			-
Balance at March 31, 2015	$	1,791		$	321	$	2,112		$	10,897

Amount of total losses included in earnings for the three months ended March 31, 2015 attributable to the change in unrealized losses on assets still held at March 31, 2015	$	-		$	-	$	-		$	-

	Debt Securities			Equity Securities		Total Investments			Real Estate Acquired

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		-			-		-			(1,160	)
Purchases		30			-		30			8,010
Sales		(75	)		-		(75	)		(8,993	)
Transfers into Level 3		-			-		-			-
Transfers out of Level 3		-			-		-			-
Balance at March 31, 2014	$	2,378		$	321	$	2,699		$	11,137

Amount of total losses included in earnings for the three months ended March 31, 2014 attributable to the change in unrealized losses on assets still held at March 31, 2014	$	-		$	-	$	-		$	-

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.”

We incur financial liabilities in the normal course of our business. The following tables present the carrying value and fair value of our financial liabilities disclosed, but not carried, at fair value at March 31, 2015 and December 31, 2014, and the level within the fair value hierarchy at which such liabilities are measured on a recurring basis.

March 31, 2015	Par Value		Total 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)

Financial liabilities:
Senior Notes	$	61,953	$	63,309	$	-	$	63,309	$	-
Convertible Senior Notes due 2017		345,000		382,622		-		382,622		-
Convertible Senior Notes due 2020		500,000		735,945		-		735,945		-
Convertible Junior Subordinated Debentures		389,522		497,221		-		497,221		-
Total Debt	$	1,296,475	$	1,679,097	$	-	$	1,679,097	$	-

December 31, 2014	Par Value		Total 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)

Financial liabilities:
Senior Notes	$	61,953	$	63,618	$	-	$	63,618	$	-
Convertible Senior Notes due 2017		345,000		387,997		-		387,997		-
Convertible Senior Notes due 2020		500,000		735,075		-		735,075		-
Convertible Junior Subordinated Debentures		389,522		500,201		-		500,201		-
Total Debt	$	1,296,475	$	1,686,891	$	-	$	1,686,891	$	-

The fair values of our Senior Notes, Convertible Senior Notes and Debentures were determined using available pricing for these debentures or similar instruments and are considered Level 2 securities.