Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

a) Fair Values of Financial Instruments

ASC 825, “Disclosure about Fair Value of Financial Instruments,” requires all entities to disclose the fair value of their financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value.

The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as at December 31, 2011.

U.S. Government and U.S. Government agencies:  Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Government National Mortgage Association and the Federal National Mortgage Association. The fair values of U.S. government securities are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. We believe the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.

Non-U.S. government bonds:  Comprised of Non-U.S. government bonds issued by non-U.S. governments primarily Germany, Sweden and Netherlands. These securities are generally priced by pricing services. The pricing services may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the pricing service typically uses analytical models which may incorporate spreads, interest rate data and market/sector news. As the significant inputs used to price Non-U.S. government bonds are observable market inputs, the fair values of Non-U.S. government bonds are included in the Level 2 fair value hierarchy.

Other mortgage-backed securities: Other mortgage-backed securities consist of a commercial mortgage-backed security (“CMBS”). This security is priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. As the significant inputs used to price the CMBS are observable market inputs, the fair value of the CMBS is included in the Level 2 fair value hierarchy.

Corporate bonds:  Comprised of bonds issued by corporations that on acquisition are rated BBB-/Baa3 or higher . These securities are generally priced by pricing services. The fair values of corporate bonds that are short-term are priced, by the pricing services, using the spread above the London Interbank Offering Rate ("LIBOR') yield curve and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker/dealers, trade prices and the new issue market. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.

Municipals:  Municipal securities comprise bonds and auction rate securities issued by U.S. domiciled state and municipality entities. The fair values of municipal bonds are generally priced by pricing services. The pricing services typically use spreads obtained from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the municipal bonds are observable market inputs, municipals are classified within Level 2. Municipal auction rate securities are reported in the consolidated balance sheet at cost which approximates their fair value.

Other investments:  The fair values of the investment in limited partnerships are determined by the fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals, and as such, the fair values are included in the Level 3 fair value hierarchy.

Reinsurance balance receivable:  The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value due to short term nature of the assets.

Loan to related party:  The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair value.

Senior notes: The amount reported in the accompanying balance sheets for these financial instruments represents the carrying value of the notes. At December 31, 2011, the fair value of the 8.25% senior notes was $104,888 based on its traded price and yield information obtained from a third party service provider.

Junior subordinated debt:  The amount reported in the accompanying balance sheets for these financial instruments represents the carrying value of the debt. At December 31, 2011, the fair value of the debt was $173,621 based on the binomial lattice model, Black-Derman-Toy model.

b) Fair Value Hierarchy

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in ASC 820. The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the ASC 820 hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions.

In accordance with ASC 820, the Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

At December 31, 2011 and 2010, we classified our financial instruments measured at fair value on a recurring basis in the following valuation hierarchy:

As at December 31, 2011	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets
Fixed maturities
U.S. treasury bonds	$	45,949		$	—		$	—		$	45,949
U.S. agency bonds – mortgage-backed	—			972,099			—			972,099
U.S. agency bonds – other	—			10,996			—			10,996
Non U.S. government bonds	—			51,198			—			51,198
Other mortgage-backed securities	—			9,920			—			9,920
Corporate bonds	—			761,433			—			761,433
Municipal bonds	—			169,066			—			169,066
Other investments	—			—			2,192			2,192
Total	$	45,949		$	1,974,712		$	2,192		$	2,022,853
As a percentage of total assets	1.4		%	58.8		%	0.1		%	60.3		%
Liabilities
Securities sold but not yet purchased	$	—		$	55,830		—			$	55,830
As a percentage of total liabilities	—		%	2.2		%	—		%	2.2		%

As at December 31, 2010	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets
Fixed maturities
U.S. treasury bonds	$	91,729		$	—		$	—		$	91,729
U.S. agency bonds – mortgage-backed	—			969,468			—			969,468
U.S. agency bonds – other	—			43,408			—			43,408
Non U.S. government bonds	—			15,938			—			15,938
Corporate bonds	—			708,993			—			708,993
Municipal bonds	—			44,897			—			44,897
Other investments	—			—			5,847			5,847
Total	$	91,729		$	1,782,704		$	5,847		$	1,880,280
As a percentage of total assets	3.1		%	59.7		%	0.2		%	63.0		%
Liabilities
Securities sold under agreements to repurchase	$	—		$	76,225		$	—		$	76,225
As a percentage of total liabilities	—		%	3.4		%	—		%	3.4		%

The Company utilized a pricing service to estimate fair value measurements for approximately 99.4% of its fixed maturities. The pricing service utilizes market quotations for fixed maturity securities that have quoted market prices in active markets. Since fixed maturities other than U.S. treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing and these have been classified as level 2.

Other investments.  The Company has $2,192 or approximately 0.1% of its investment portfolio in limited partnerships where the fair value estimate is determined by the fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals. Due to the significant unobservable inputs in these valuations, the Company includes the estimate in the amount disclosed in Level 3. The Company has determined that its investments in Level 3 securities are not material to its financial position or results of operations.

c) Level 3 Financial Instruments

The following table presents changes in Level 3 for our financial instruments measured at fair value on a recurring basis for the years ended December 31, 2011 and 2010:

	For the Year Ended December 31,
Other investments:	2011			2010
Balance at beginning of period	$	5,847		$	5,549
Net realized and unrealized gains – included in net income	—			—
Net realized and unrealized (losses) – included in net income	(73		)	(249		)
Change in net unrealized (gains) – included in other comprehensive income	—			—
Change in net unrealized losses – included in other comprehensive income	141			231
Purchases	1,173			5,175
Sales and redemptions	(4,896		)	(4,859		)
Transfers into Level 3	—			—
Transfers out of Level 3	—			—
Balance at end of period	$	2,192		$	5,847
Level 3 gains (losses) included in net income attributable to the change in unrealized gains (losses) relating to assets held at the reporting date	$	—		$	—