Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

(3)Fair Value Measurements

Our financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in our financial statements. 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.

•Level 3 – Inputs are unobservable and not corroborated by market data.

Our Level 1 investments consist of U.S. Treasuries, money market funds 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 maturity securities, which consist of U.S. government agency securities, municipal bonds (including those held as restricted securities), corporate debt securities, bank loans, mortgage-backed and asset-backed securities, and deposits supporting our Lloyd's syndicate business. Level 2 also includes certificates of deposit and other interest-bearing deposits at banks, which we report as short-term investments, and a forward contract, which hedges our net investment in a Euro-functional currency foreign subsidiary. 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 are responsible for the prices used in our fair value measurements. We use independent pricing services to assist us in determining fair value for approximately99% 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 managers and Lloyd's of London 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, third party investment managers or Lloyd's of London as of December 31,2012 or 2011.

Our Level 2 financial instruments also include our notes payable. We determine the fair value of our 6.30% Senior Notes based on quoted prices, but the market is inactive. The fair value of borrowings under our Revolving Loan Facility approximates the carrying amount because interest is based on 30-day LIBOR plus a margin.

Our Level 3 securities include certain fixed maturity securities and an insurance contract that we account for as a derivative and classify in other assets. It also includes a liability for future earnout payments due to former owners of a business we acquired, which is classified within accounts payable and accrued liabilities. 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 the fair value of our financial instruments that were carried or disclosed at fair value.Unless indicated, these items were carried at fair value on our consolidated balance sheet.

		Level 1		Level 2		Level 3		Total
December 31, 2012
Fixed maturity securities - available for sale
	U.S. government and government agency securities	$	174,520	$	25,087	$	0	$	199,607
	Fixed maturity securities of states, municipalities and
	political subdivisions		0		1,065,811		0		1,065,811
	Special purpose revenue bonds of states, municipalities
	and political subdivisions		0		2,200,331		0		2,200,331
	Corporate securities		0		1,315,006		164		1,315,170
	Residential mortgage-backed securities		0		664,887		0		664,887
	Commercial mortgage-backed securities		0		524,289		0		524,289
	Asset-backed securities		0		33,275		0		33,275
	Foreign government securities		0		278,411		0		278,411
	Total fixed maturity securities - available for sale		174,520		6,107,097		164		6,281,781
Equity securities - available for sale			284,639		0		0		284,639
Short-term investments*			251,988		111,065		0		363,053
Other investments			20,925		0		0		20,925
Restricted cash and securities			0		2,043		0		2,043
Premium, claims and other receivables			0		68,207		0		68,207
Other assets			0		0		349		349
	Total assets measured at fair value	$	732,072	$	6,288,412	$	513	$	7,020,997
Notes payable*		$	0	$	636,363	$	0	$	636,363
Accounts payable and accrued liabilities - forward contract			0		3,194		0		3,194
Accounts payable and accrued liabilities - earnout liability			0		2,043		7,009		9,052
	Total liabilities measured at fair value	$	0	$	641,600	$	7,009	$	648,609

__________

*Carried at cost or amortized cost on our consolidated balance sheet.

		Level 1		Level 2		Level 3		Total
December 31, 2011
Fixed maturity securities - available for sale
	U.S. government and government agency securities	$	201,582	$	94,097	$	0	$	295,679
	Fixed maturity 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 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 maturity securities - available for sale		201,582		5,516,082		1,170		5,718,834
Fixed maturity securities - held to maturity*			0		163,136		0		163,136
Short-term investments*			67,288		66,629		0		133,917
Other investments			35,720		0		0		35,720
Other assets			0		0		1,516		1,516
	Total assets measured at fair value	$	304,590	$	5,745,847	$	2,686	$	6,053,123
Notes payable*		$	0	$	505,671	$	0	$	505,671

The following table presents the changes in fair value of our Level 3 financial instruments.

	2012								2011
							Accounts
							payable
	Fixed						and		Fixed
	maturity		Other		Total		accrued		maturity		Other		Total
	securities		assets		assets		liabilities		securities		assets		assets
Balance at beginning of year	$	1,170	$	1,516	$	$2,686	$	0	$	1,438	$	857	$	2,295
Earnout liability		0		0		0		6,968		0		0		0
Settlements		0		(1,863)		(1,863)		0		0		0		0
Sales		0		0		0		0		(283)		0		(283)
Gains (losses) reported in:
Net earnings		(1)		696		695		41		(2)		659		657
Other comprehensive income		10		0		10		0		17		0		17
Transfers out of Level 3		(1,015)		0		(1,015)		0		0		0		0
Balance at December 31	$	164	$	349	$	513	$	7,009	$	1,170	$	1,516	$	2,686

We transferred investments from Level 3 to Level 2 in 2012because we were able to determine their fair value using inputs based on observable market data in the period transferred. There were no other transfers between Level 1, Level 2 or Level 3 in 2012 and none in 2011.