Fair Value Measurements

3 Months Ended

Mar. 31, 2013

Fair Value Measurements [Abstract]

Fair Value Measurements

(4) 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 ofU.S. Treasuries, money market fundsand 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 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 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 March 31, 2013 or 2012.

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. This category 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. Fixed maturity securities classified as Level 3 are primarily special purpose revenue bondauction rate securities.  The interest rates on these securities are reset through auctions at periodic intervals.  These securities are thinly traded and observable market data is not readily available.  We determine the fair value of these securities using prices quoted by a broker. We determine fair value of our other Level 3 assets and liabilities 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
March 31, 2013
Fixed maturity securities
	U.S. government and government agency securities	$	105,667	$	20,582	$	0	$	126,249
	Fixed maturity securities of states, municipalities and
	political subdivisions		0		1,043,001		0		1,043,001
	Special purpose revenue bonds of states, municipalities
	and political subdivisions		0		2,241,742		9,448		2,251,190
	Corporate securities		0		1,301,458		167		1,301,625
	Residential mortgage-backed securities		0		655,623		0		655,623
	Commercial mortgage-backed securities		0		522,063		0		522,063
	Asset-backed securities		0		42,530		0		42,530
	Foreign government securities		0		243,175		0		243,175
	Total fixed maturity securities		105,667		6,070,174		9,615		6,185,456
Equity securities			350,352		0		0		350,352
Short-term investments*			193,033		74,401		0		267,434
Other investments			2,810		0		0		2,810
Restricted cash and securities			0		2,041		0		2,041
Premium, claims and other receivables			0		72,398		0		72,398
Other assets			0		0		459		459
	Total assets measured at fair value	$	651,862	$	6,219,014	$	10,074	$	6,880,950
Notes payable*		$	0	$	676,400	$	-	$	676,400
Accounts payable and accrued liabilities - forward contract			0		1,411		-		1,411
Accounts payable and accrued liabilities - earnout liability			0		2,041		7,071		9,112
	Total liabilities measured at fair value	$	0	$	679,852	$	7,071	$	686,923

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

		Level 1		Level 2		Level 3		Total
December 31, 2012
Fixed maturity securities
	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		174,520		6,107,097		164		6,281,781
Equity securities			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*		$	-	$	636,363	$	-	$	636,363
Accounts payable and accrued liabilities - forward contract			-		3,194		-		3,194
Accounts payable and accrued liabilities - earnout liability			-		2,043		7,009		9,052
	Total liabilities measured at fair value	$	0	$	641,600	$	7,009	$	648,609

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

The following tables present the changes in fair value of our Level 3 financial instruments.

	2013								2012
							Accounts
							payable
	Fixed						and		Fixed
	maturity		Other		Total		accrued		maturity		Other		Total
	securities		assets		assets		liabilities		securities		assets		assets
Balance at beginning of year	$	164	$	349	$	513	$	7,009	$	1,170	$	1,516	$	2,686
Purchases		9,430		0		9,430		0		0		0		0
Gains reported in:
Net earnings		6		110		116		62		0		215		215
Other comprehensive income		15		0		15		0		2		0		2
Transfers out of Level 3		0		0		0		0		(1,015)		0		(1,015)
Balance at March 31	$	9,615	$	459	$	10,074	$	7,071	$	157	$	1,731	$	1,888

There were no transfers between Level 1, Level 2 or Level 3 in 2013.We transferred an investment from Level 3 to Level 2 in 2012 because we were able to determine its fair value using inputs based on observable market data in the period transferred.