We carry financial assets and financial liabilities at fair value. In determining fair value, we generally apply the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. We classify our financial instruments into the following three-level hierarchy:

• Level 1 – Inputs are based on quoted prices in active markets for identical instruments.

• Level 2 – Inputs are based on observable market data (other than quoted prices), or are derived from or corroborated by observable market data.

Our Level 1 investments consist of U.S. Treasuries and equity securities traded in an active exchange market. We use unadjusted quoted prices for identical instruments to measure fair value.

Our Level 2 investments include most of our fixed income securities, which consist of U.S. government agency securities, municipal bonds, certain corporate debt securities, and certain mortgage-backed and asset-backed securities. We measure fair value for the majority of our Level 2 investments using quoted prices of securities with similar characteristics. The remaining investments are valued using pricing models or matrix pricing. The fair value measurements consider observable assumptions, including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, default rates, loss severity and other economic measures.

We use independent pricing services to assist us in determining fair value for approximately 99% of our Level 2 investments. The pricing services provide a single price or quote per security. We use data provided by our third party investment manager to value the remaining Level 2 investments. To validate that these quoted and modeled prices are reasonable estimates of fair value, we perform various quantitative and qualitative procedures, including: 1) evaluation of the underlying methodologies, 2) analysis of recent sales activity, 3) analytical review of our fair values against current market prices and 4) comparison of the pricing services' fair value to other pricing services' fair value for the same investment. No markets for our investments were judged to be inactive at period end. Based on these procedures, we did not adjust the prices or quotes provided by our independent pricing services or third party investment manager as of December 31, 2011 or 2010.

Our Level 3 securities include certain fixed income securities and an insurance contract that we account for as a derivative and classify in consolidated other assets. In 2010, we terminated our interest in a similar insurance contract and recognized an $8.0 million gain. We determine fair value of our Level 3 securities based on internally developed models that use assumptions or other data that are not readily observable from objective sources.

The following tables present our assets and liabilities that were measured at fair value.

		Level 1		Level 2		Level 3		Total
December 31, 2011

Fixed income securities - available for sale
	U.S. government and government agency securities	$	201,582	$	94,097	$	0	$	295,679
	Fixed income securities of states, municipalities and
	political subdivisions		0		1,085,341		0		1,085,341
	Special purpose revenue bonds of states, municipalities
	and political subdivisions		0		1,863,888		0		1,863,888
	Corporate fixed income securities		0		846,178		155		846,333
	Residential mortgage-backed securities		0		1,100,086		0		1,100,086
	Commercial mortgage-backed securities		0		256,124		0		256,124
	Asset-backed securities		0		33,731		1,015		34,746
	Foreign government securities		0		236,637		0		236,637
	Total fixed income securities - available for sale		201,582		5,516,082		1,170		5,718,834
Other investments			35,720		0		0		35,720
Other assets			0		0		1,516		1,516
	Total assets measured at fair value	$	237,302	$	5,516,082	$	2,686	$	5,756,070

December 31, 2010

Fixed income securities - available for sale
	U.S. government and government agency securities	$	148,217	$	176,050	$	0	$	324,267
	Fixed income securities of states, municipalities and
	political subdivisions		0		1,082,057		0		1,082,057
	Special purpose revenue bonds of states, municipalities
	and political subdivisions		0		1,628,059		0		1,628,059
	Corporate fixed income securities		0		570,152		242		570,394
	Residential mortgage-backed securities		0		995,108		0		995,108
	Commercial mortgage-backed securities		0		145,228		0		145,228
	Asset-backed securities		0		11,370		1,196		12,566
	Foreign government securities		0		241,761		0		241,761
	Total fixed income securities - available for sale		148,217		4,849,785		1,438		4,999,440
Other investments			5,575		0		0		5,575
Other assets			0		0		857		857
	Total assets measured at fair value	$	153,792	$	4,849,785	$	2,295	$	5,005,872

We exclude from our fair value disclosures our held to maturity investment portfolio measured at amortized cost.

	2011						2010
	Fixed						Fixed
	income		Other				income		Other
	securities		assets		Total		securities		assets		Total
Balance at beginning of year	$	1,438	$	857	$	2,295	$	4,262	$	432	$	4,694
Settlements		0		0		0		0		(8,342)		(8,342)
Net gains (losses) – realized		(2)		0		(2)		0		8,342		8,342
Net gains – unrealized		17		659		676		203		425		628
Sales		(283)		0		(283)		(484)		0		(484)
Transfers out of Level 3		0		0		0		(2,543)		0		(2,543)
Balance at December 31	$	1,170	$	1,516	$	2,686	$	1,438	$	857	$	2,295

Unrealized gains and losses on our Level 3 fixed income securities are reported in other comprehensive income within shareholders' equity, and unrealized gains and losses on our Level 3 other assets are reported in other operating income. There were no transfers between Level 1, Level 2 or Level 3 in 2011. We transferred investments from Level 3 to Level 2 in 2010 because we were able to determine their fair value using inputs based on observable market data in the period transferred.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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