Fair Value Measurements

6 Months Ended

Jun. 30, 2015

(5) 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, foreign government securities, municipal bonds (including those held as restricted securities), corporate debt securities, bank loans, middle market senior loans, foreign debt securities, 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. We measure fair value for the majority of our Level 2 investments using matrix pricing and observable market data, including benchmark securities or yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bids, offers, default rates, loss severity and other economic measures. We measure fair value for our structured securities using observable market data in cash flow models.

We are responsible for the prices used in our fair value measurements. We use independent pricing services to assist us in determining fair value of all 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 June 30, 2015 or December 31, 2014.

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 in an inactive market. 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. Our Level 3 category also includes liabilities for future earnout payments due to former owners of businesses we acquired, which are classified within accounts payable and accrued liabilities. We determine fair value of the derivative and the earnout payments 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 sheets. There were no material transfers between Level 1, Level 2 or Level 3 in the first six months of 2015 and 2014.

			Level 1		Level 2		Level 3		Total
June 30, 2015

Fixed maturity securities
	U.S. government and government agency securities		$	68,889	$	5,249	$	-	$	74,138
	Fixed maturity securities of states, municipalities
		and political subdivisions		-		815,755		-		815,755
	Special purpose revenue bonds of states, municipalities
		and political subdivisions		-		2,338,946		-		2,338,946
	Corporate securities			-		782,169		147		782,316
	Residential mortgage-backed securities			-		792,037		-		792,037
	Commercial mortgage-backed securities			-		532,689		-		532,689
	Asset-backed securities			-		372,791		-		372,791
	Foreign government securities			-		145,251		-		145,251
	Foreign corporate securities			-		442,333		-		442,333
		Total fixed maturity securities		68,889		6,227,220		147		6,296,256
Equity securities				390,077		-		-		390,077
Short-term investments*				154,674		128,746		-		283,420
Other investments**				17		-		-		17
Restricted cash and securities				-		3,780		-		3,780
Premium, claims and other receivables				-		53,749		-		53,749
Other assets				-		-		1,632		1,632
	Total assets measured at fair value		$	613,657	$	6,413,495	$	1,779	$	7,028,931

Notes payable*			$	-	$	951,601	$	-	$	951,601
Accounts payable and accrued liabilities - earnout liabilities				-		3,780		7,530		11,310
	Total liabilities measured at fair value		$	-	$	955,381	$	7,530	$	962,911

__________

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

** Excludes investment with a fair value of $24,940 that is measured at net asset value as a practical expedient.

			Level 1		Level 2		Level 3		Total
December 31, 2014

Fixed maturity securities
	U.S. government and government agency securities		$	63,663	$	7,306	$	-	$	70,969
	Fixed maturity securities of states, municipalities
		and political subdivisions		-		954,708		-		954,708
	Special purpose revenue bonds of states, municipalities
		and political subdivisions		-		2,389,012		-		2,389,012
	Corporate securities			-		798,421		148		798,569
	Residential mortgage-backed securities			-		821,694		-		821,694
	Commercial mortgage-backed securities			-		611,631		-		611,631
	Asset-backed securities			-		366,827		-		366,827
	Foreign government securities			-		118,692		-		118,692
	Foreign corporate securities			-		478,266		-		478,266
		Total fixed maturity securities		63,663		6,546,557		148		6,610,368
Equity securities				296,352		-		-		296,352
Short-term investments*				159,297		98,889		-		258,186
Restricted cash and securities				-		2,729		-		2,729
Premium, claims and other receivables				-		56,493		-		56,493
Other assets				18		-		1,306		1,324
	Total assets measured at fair value		$	519,330	$	6,704,668	$	1,454	$	7,225,452

Notes payable*			$	-	$	875,094	$	-	$	875,094
Accounts payable and accrued liabilities - earnout liabilities				-		2,729		8,744		11,473
	Total liabilities measured at fair value		$	-	$	877,823	$	8,744	$	886,567

__________

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

- 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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