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Fair Value

9 Months Ended

Sep. 30, 2011

7. Fair Value

Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).

The levels in the hierarchy are defined as follows:

Level 1: Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement

Following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy.

The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to: (i) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the average number of prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value including a review of deep dive reports on selected securities which indicated the use of observable inputs in the pricing process; (iv) comparing the fair value estimates to its knowledge of the current market; (v) a comparison of the pricing services' fair values to other pricing services' fair values for the same investments; and (vi) back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. At September 30, 2011, the Company obtained an average of 2.8 quotes per investment, compared to 2.7 quotes at December 31, 2010. Where multiple quotes or prices were obtained, a price source hierarchy was maintained in order to determine which price source provided the fair value (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value. The Company did not adjust the prices or quotes provided by the pricing services at September 30, 2011 or December 31, 2010.

The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value. In addition, pricing vendors use model processes, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage backed and asset backed securities. In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Of the $11.98 billion of financial assets and liabilities measured at fair value at September 30, 2011, approximately $1.59 billion, or 13.3%, were priced using non-binding broker-dealer quotes. Of the $11.52 billion of financial assets and liabilities measured at fair value at December 31, 2010, approximately $1.81 billion, or 15.7%, were priced using non-binding broker-dealer quotes.

The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisors and others. Upon adoption of the accounting guidance regarding fair value measurement, the Company determined that Level 1 securities included highly liquid, recent issue U.S. Treasuries and certain of its short-term investments held in highly liquid money market-type funds where it believes that quoted prices are available in an active market. On January 1, 2010, the Company determined that all U.S. Treasuries would be classified as Level 1 securities due to observed levels of trading activity, the high number of strongly correlated pricing quotes received on U.S. Treasuries and other factors. Such determination resulted in $1.09 billion of U.S. Treasuries previously classified as Level 2 being moved into Level 1. In addition, the Company determined that exchange-traded equity securities would be included in Level 1.

Where the Company believes that quoted market prices are not available or that the market is not active, fair values are estimated by using quoted prices of securities with similar characteristics, pricing models or matrix pricing and are generally classified as Level 2 securities. The Company determined that Level 2 securities included corporate bonds, mortgage backed securities, municipal bonds, asset backed securities, non-U.S. government securities, TALF investments and TALF borrowings, certain equities, certain short-term securities and certain other investments.

The Company determined that certain Euro-denominated corporate bonds which invest in underlying portfolios of fixed income securities for which there is a low level of transparency around inputs to the valuation process should be classified within Level 3 of the valuation hierarchy and certain other corporate bonds. In addition, the Company determined that certain mutual funds, included in other investments, which invest in underlying portfolios of fixed income securities for which there is a low level of transparency around inputs to the valuation process should be classified within Level 3 of the valuation hierarchy. The Company reviews the classification of its investments each quarter.

In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged under securities lending agreements. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged under securities lending agreements, at fair value.

The following table presents the Company's financial assets and liabilities measured at fair value by level at September 30, 2011:

					Fair Value Measurement Using:
			Estimated Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			Value		(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value:
Available for sale securities:
	Fixed maturities and fixed maturities pledged
	under securities lending agreements (1):
	Corporate bonds		$	2,766,651	$	-	$	2,625,630	$	141,021
	Mortgage backed securities			1,545,321		-		1,545,321		-
	Municipal bonds			1,422,943		-		1,422,943		-
	Commercial mortgage backed securities			1,118,905		-		1,118,905		-
	U.S. government and government agencies			1,263,665		1,263,665		-		-
	Non-U.S. government securities			837,043		-		837,043		-
	Asset backed securities			647,705		-		647,705		-
		Total		9,602,233		1,263,665		8,197,547		141,021

	Equity securities			273,213		273,157		56		-
	Other investments			229,974		-		223,974		6,000
	Short-term investments			799,662		771,217		28,445		-

Fair value option:
	Investments accounted for using the
	fair value option:
	Corporate bonds			107,215		-		107,215		-
	Non-U.S. government bonds			15,651		-		15,651		-
	Equity securities			100,719		100,719		-		-
	Other investments			95,796		-		95,796		-
		Total		319,381		100,719		218,662		-

	TALF investments			392,455		-		392,455		-
		Total assets measured at fair value	$	11,616,918	$	2,408,758	$	9,061,139	$	147,021

Liabilities measured at fair value:
Fair value option:
	TALF borrowings		$	314,137	$	-	$	314,137	$	-
	Securities sold but not yet purchased (2)			46,526		46,526		-		-
		Total liabilities measured at fair value	$	360,663	$	46,526	$	314,137	$	-

In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged.
Represents the Company's obligation to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company's consolidated balance sheets.

The following table presents the Company's financial assets and liabilities measured at fair value by level at December 31, 2010:

					Fair Value Measurement Using:
			Estimated Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			Value		(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value:
Available for sale securities:
	Fixed maturities and fixed maturities pledged
	under securities lending agreements (1):
	Corporate bonds		$	2,714,375	$	-	$	2,560,866	$	153,509
	Mortgage backed securities			1,806,813		-		1,806,813		-
	Municipal bonds			1,182,100		-		1,182,100		-
	Commercial mortgage backed securities			1,167,299		-		1,167,299		-
	U.S. government and government agencies			872,149		872,149		-		-
	Non-U.S. government securities			732,666		-		732,666		-
	Asset backed securities			558,032		-		558,032		-
		Total		9,033,434		872,149		8,007,776		153,509

	Equity securities			310,194		297,623		12,571		-
	Other investments			275,538		-		267,680		7,858
	Short-term investments			915,841		859,042		56,799		-

Fair value option:
	Investments accounted for using the
	fair value option:
	Corporate bonds			124,969		-		124,969		-
	Non-U.S. government bonds			-		-		-		-
	Equity securities			94,204		94,204		-		-
	Other investments			-		-		-		-
		Total		219,173		94,204		124,969		-

	TALF investments			402,449		-		402,449		-
		Total assets measured at fair value	$	11,156,629	$	2,123,018	$	8,872,244	$	161,367

Liabilities measured at fair value:
Fair value option:
	TALF borrowings		$	325,770	$	-	$	325,770	$	-
	Securities sold but not yet purchased (2)			41,143		41,143		-		-
		Total liabilities measured at fair value	$	366,913	$	41,143	$	325,770	$	-

In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged.
Represents the Company's obligation to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company's consolidated balance sheets.

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs for the 2011 third quarter and 2010 third quarter:

			Fair Value Measurements Using:
			Significant Unobservable Inputs (Level 3)
			Corporate Bonds		Other Investments		Total

Three Months Ended September 30, 2011
Balance at beginning of period			$	164,456	$	7,929	$	172,385
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		(5,742)		-		(5,742)
		Included in other comprehensive income		(17,317)		(1,929)		(19,246)
	Purchases, issuances and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		-		-
		Settlements		(376)		-		(376)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	141,021	$	6,000	$	147,021

Three Months Ended September 30, 2010
Balance at beginning of period			$	147,891	$	48,788	$	196,679
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		2,974		1,813		4,787
		Included in other comprehensive income		18,741		1,226		19,967
	Purchases, issuances and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		-		-
		Settlements		(1)		(42,157)		(42,158)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	169,605	$	9,670	$	179,275

(1) Gains or losses on corporate bonds and other investments were recorded in net realized gains (losses).

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs for the nine months ended September 30, 2011 and 2010:

			Fair Value Measurements Using:
			Significant Unobservable Inputs (Level 3)
			Corporate Bonds		Other Investments		Total

Nine Months Ended September 30, 2011
Balance at beginning of period			$	153,509	$	7,858	$	161,367
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		507		1,709		2,216
		Included in other comprehensive income		(3,763)		(2,901)		(6,664)
	Purchases, issuances and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		(666)		(666)
		Settlements		(9,232)		-		(9,232)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	141,021	$	6,000	$	147,021

Nine Months Ended September 30, 2010
Balance at beginning of period			$	178,385	$	49,668	$	228,053
	Total gains or (losses) (realized/unrealized)
		Included in earnings (1)		7,916		2,242		10,158
		Included in other comprehensive income		(5,618)		346		(5,272)
	Purchases, issuances and settlements
		Purchases		-		-		-
		Issuances		-		-		-
		Sales		-		-		-
		Settlements		(11,078)		(42,586)		(53,664)
	Transfers in and/or out of Level 3			-		-		-
Balance at end of period			$	169,605	$	9,670	$	179,275

Gains or losses on corporate bonds and other investments were recorded in net realized gains (losses).

The amount of total losses for the 2011 third quarter included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2011 was $5.7 million, while the amount of total gains for the nine months ended September 30, 2011 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2011 was $1.9 million. The amount of total gains for the 2010 third quarter included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2010 was $4.8 million while the amount of total gains for the nine months ended September 30, 2010 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2010 was $10.2 million.

Fair Values of Financial Instruments

The carrying amount of financial assets and liabilities presented in the consolidated balance sheets at September 30, 2011 and December 31, 2010 approximated their fair values with the exception of the Company's senior notes, which are carried at their cost of $300.0 million. The fair value of the senior notes at September 30, 2011 and December 31, 2010 was $343.6 million and $310.9 million, respectively.

- Definition

Tabular disclosure of the fair value measurement of assets and liabilities which includes [financial] instruments measured at fair value that are classified in stockholders' equity. Such assets and liabilities may be measured on a recurring or nonrecurring basis. The disclosures which may be required or desired include: (1) for assets and liabilities measured on a recurring basis, disclosure may include: (a) the fair value measurements at the reporting date; (b) the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3); (c) for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (ii) purchases, sales, issuances, and settlements (net); (iii) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs); (d) the amount of the total gains or losses for the period in subparagraph (c) (i) above included in earnings (or changes in net assets) that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date and a description of where those unrealized gains or losses are reported in the statement of income (or activities); (e) the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period and (2) for assets and liabilities that are measured at fair value on a nonrecurring basis (for example, impaired assets) disclosure may include, in addition to (a) above: (a) the reasons for the fair value measurements recorded; (b) the same as (b) above; (c) for fair value measurements using significant unobservable inputs (Level 3), a description of the inputs and the information used to develop the inputs; and (d) the valuation technique(s) used to measure fair value and a discussion of changes, if any, in the valuation technique(s) used to measure similar assets and/or liabilities in prior periods. Where the quoted price in an active market for the identical liability is not available, the Level 1 input is the quoted price of an identical liability when traded as an asset.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 820

-SubTopic 10

-Section 50

-Paragraph 3

-URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19279-110258

Reference 2: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 157

-Paragraph 32

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 157

-Paragraph 33

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 4: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 10

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 5: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 820

-SubTopic 10

-Section 50

-Paragraph 5

-URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19296-110258

Reference 6: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 820

-SubTopic 10

-Section 50

-Paragraph 2

-URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19207-110258

Reference 7: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 157

-Paragraph 6

-Footnote 4

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 8: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 820

-SubTopic 10

-Section 50

-Paragraph 1

-URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19190-110258

+ Details