Fair Value Measurements

9 Months Ended

Sep. 30, 2013

(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 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 (including collateralized loan obligations), 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, prior to September 30, 2013, a forward contract that hedged 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 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 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 September 30, 2013 or December 31, 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 bond auction 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
September 30, 2013

Fixed maturity securities
	U.S. government and government agency securities		$	97,279	$	20,226	$	0	$	117,505
	Fixed maturity securities of states, municipalities and
		political subdivisions		0		1,016,139		0		1,016,139
	Special purpose revenue bonds of states, municipalities and
		political subdivisions		0		2,287,625		9,213		2,296,838
	Corporate securities			0		1,297,554		150		1,297,704
	Residential mortgage-backed securities			0		592,957		0		592,957
	Commercial mortgage-backed securities			0		531,216		0		531,216
	Asset-backed securities			0		141,301		0		141,301
	Foreign government securities			0		200,965		0		200,965
		Total fixed maturity securities		97,279		6,087,983		9,363		6,194,625
Equity securities				433,345		0		0		433,345
Short-term investments*				107,350		121,841		0		229,191
Restricted cash and securities				0		1,846		0		1,846
Premium, claims and other receivables				0		65,490		0		65,490
Other assets				17		0		831		848
	Total assets measured at fair value		$	637,991	$	6,277,160	$	10,194	$	6,925,345
Notes payable*			$	0	$	701,881	$	-	$	701,881
Accounts payable and accrued liabilities - earnout liability				0		1,846		7,195		9,041
	Total liabilities measured at fair value		$	0	$	703,727	$	7,195	$	710,922

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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

__________

*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
Nine months ended September 30
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
Settlements			0		0		0		0		0		(1,863)		(1,863)
Gains (losses) reported in:
	Net earnings		37		482		519		(186)		(1)		553		552
	Other comprehensive income (loss)		(268)		0		(268)		0		8		0		8
Transfers out of Level 3			0		0		0		0		(1,015)		0		(1,015)
	Balance at September 30	$	9,363	$	831	$	10,194	$	7,195	$	162	$	206	$	368

Three months ended September 30
Balance at beginning of quarter		$	9,446	$	589	$	10,035	$	7,133	$	159	$	1,847	$	2,006
Settlements			0		0		0		0		0		(1,863)		(1,863)
Gains (losses) reported in:
	Net earnings		16		242		258		(62)		0		222		222
	Other comprehensive income (loss)		(99)		0		(99)		0		3		0		3
	Balance at September 30	$	9,363	$	831	$	10,194	$	7,195	$	162	$	206	$	368

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.

- 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.

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