14.

Fair Value Measurements

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP describes three approaches to measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach. Each approach includes multiple valuation techniques. GAAP does not prescribe which valuation technique should be used when measuring fair value, but does establish a fair value hierarchy that prioritizes the inputs used in applying the various techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the hierarchy while Level 3 inputs are given the lowest priority. Assets and liabilities carried at fair value are classified in one of the following three categories based on the nature of the inputs to the valuation technique used:

•

Level 1—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

•

Level 2—Observable market-based inputs or unobservable inputs that are corroborated by market data.

•

Level 3—Unobservable inputs that are not corroborated by market data. These inputs reflect management’s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.

Summary of significant valuation techniques for assets measured at fair value on a recurring basis

Level 1

Cash and cash equivalents and restricted cash and cash equivalents: Cash equivalents and restricted cash equivalents comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access. The carrying value of cash and cash equivalents and restricted cash and cash equivalents approximates fair value due to its liquid nature.

Common stock: Comprise actively traded, exchange-listed U.S. and international equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Exchange-traded and mutual funds: Comprise actively traded funds. Valuation is based on daily quoted net asset values for identical assets in active markets that the Company can access.

Other investments: Comprise physical metal positions held by the Company. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Level 2

U.S. government obligations and agencies: Comprise U.S. Treasury Bills or Notes or U.S. Treasury Inflation Protected Securities (TIPS). The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.

Corporate Bonds: Comprise investment-grade fixed income securities. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.

Mortgage-backed and asset-backed securities: Comprise securities that are collateralized by mortgage obligations and other assets. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields, collateral performance and credit spreads.

Derivatives: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active or highly active.

As required by GAAP, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect their placement within the fair value hierarchy levels.

The following tables set forth by level within the fair value hierarchy the Company’s assets that were accounted for at fair value on a recurring basis as of the periods presented (in thousands):


	Fair Value Measurements As of June 30, 2013
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	180,857	$	—	$	—	$	180,857
Restricted cash and cash equivalents		2,653		—		—		2,653

Available for sale portfolio:
Fixed maturities:
US government obligations and agencies		—		104,154		—		104,154
Corporate bonds		—		93,971		—		93,971
Mortgage-backed and asset-backed securities		—		91,263		—		91,263
Equity securities:
Common stock		11,625		—		—		11,625
Mutual funds		41,882		—		—		41,882

Total available for sale portfolio investments	$	53,507	$	289,388	$	—	$	342,895


Total investments	$	237,017	$	289,388	$	—	$	526,405


	Fair Value Measurements As of December 31, 2012
	Level 1		Level 2			Level 3		Total
Cash and cash equivalents	$	347,392	$	—		$	—	$	347,392
Restricted cash and cash equivalents		33,009		—			—		33,009

Trading portfolio:
Fixed maturities:
US government obligations and agencies		—		4,009			—		4,009
Equity securities:
Common stock:
Metals and mining		26,130		—			—		26,130
Energy		10,868		—			—		10,868
Other		8,215		—			—		8,215
Exchange traded and mutual funds:
Metals and mining		21,989		—			—		21,989
Agriculture		10,265		—			—		10,265
Energy		5,068							5,068
Indices		2,506		—			—		2,506
Non-hedging derivative liability, net (2)		—		(21	)		—		(21	)
Other investments		317		—			—		317

Total trading portfolio investments	$	85,358	$	3,988		$	—	$	89,346

Total investments	$	465,759	$	3,988		$	—	$	469,747

The Company utilizes third-party independent pricing services that provide a price quote for each fixed maturity, equity security and derivative. Management reviews the methodology used by the pricing services. If management believes that the price used by the pricing service does not reflect an orderly transaction between participants, management will use an alternative valuation methodology. There were no adjustments made by the Company to the prices obtained from the independent pricing source for any fixed maturities, equity securities or derivatives included in the tables above.

The following table summarizes the carrying value and estimated fair values of the Company’s financial instruments that are not carried at fair value (in thousands):


	As of June 30, 2013
	Carrying value		(Level 3) Estimated Fair Value
Liabilities (debt):
Surplus note	$	19,485	$	17,235
Term loan		17,991		17,991


	As of December 31, 2012
	Carrying value		(Level 3) Estimated Fair Value
Liabilities (debt):
Surplus note	$	20,221	$	18,057

Level 3

Long-term debt: The fair value of the surplus note was determined by management from the expected cash flows discounted using the interest rate quoted by the issuer. The State Board of Administration of Florida (“SBA”) is the issuer of the surplus note and the quoted interest rate is below prevailing rates quoted by private lending institutions. However, as the Company’s use of funds from the surplus note is limited by the terms of the agreement, the Company has determined the interest rate quoted by the SBA to be appropriate for purposes of establishing the fair value of the note.

The fair value of the Term Loan approximates the carrying value given the original issue discount which was calculated based on the present value of future cash flows using the Company’s effective borrowing rate for similar instruments.