Fair Value

6 Months Ended

Jun. 30, 2011

Fair Value

Fair Value

8. Fair Value

The Company follows the guidance in ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), as it relates to the fair value of its financial assets and liabilities. ASC 820 provides for a standard definition of fair value to be used in new and existing pronouncements. This guidance requires disclosure of fair value information about certain financial instruments (insurance contracts, real estate, goodwill and taxes are excluded) for which it is practicable to estimate such values, whether or not these instruments are included in the balance sheet at fair value. The fair values presented for certain financial instruments are estimates which, in many cases, may differ significantly from the amounts that could be realized upon immediate liquidation.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, i.e., exit price, in an orderly transaction between market participants and also provides a hierarchy for determining fair value, which emphasizes the use of observable market data whenever available. The three broad levels defined by the hierarchy are as follows, with the highest priority given to Level 1 as these are the most reliable, and the lowest priority given to Level 3.

Level 1 – Quoted prices in active markets for identical assets.

Level 2 – Quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations.

Level 3 – Unobservable inputs that are supported by little or no market activity.

When more than one level of input is used to determine fair value, the financial instrument is classified as Level 2 or 3 according to the lowest level input that has a significant impact on the fair value measurement.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments and have not changed since last year:

Cash and Cash Equivalents

The carrying amount approximates fair value.

Fixed Maturities

Level 1 securities generally include U.S. Treasury issues and other securities that are highly liquid and for which quoted market prices are available. Level 2 securities are valued using pricing for similar securities and pricing models that incorporate observable inputs including, but not limited to, yield curves and issuer spreads. Level 3 securities include issues for which little observable data can be obtained, primarily due to the illiquid nature of the securities, and for which significant inputs used to determine fair value are based on the Company's own assumptions. Non-binding broker quotes are also included in Level 3.

The Company utilizes a third party pricing service for the valuation of the majority of its fixed maturity securities and receives one quote per security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. 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 for those securities using pricing applications based on a market approach. Inputs into the fair value pricing applications which are common to all asset classes include benchmark U.S. Treasury security yield curves, reported trades of identical or similar fixed maturity securities, broker/dealer quotes of identical or similar fixed maturity securities and structural characteristics of the security, such as maturity date, coupon, mandatory principal payment dates, frequency of interest and principal payments and optional principal redemption features. Inputs into the fair value applications that are unique by asset class include, but are not limited to:

• Municipals – overall credit quality, including assessments of the level and variability of: sources of payment such as income, sales or property taxes, levies or user fees; credit support such as insurance; state or local economic and political base; natural resource availability; and susceptibility to natural or man-made catastrophic events such as hurricanes, earthquakes or acts of terrorism.

• Corporate fixed maturities – overall credit quality, including assessments of the level and variability of: industry economic sensitivity; company financial policies; quality of management; regulatory environment; competitive position; indenture restrictive covenants; and security or collateral.

• Residential mortgage-backed securities – estimates of prepayment speeds based upon: historical prepayment rate trends; underlying collateral interest rates; geographic concentration; vintage year; borrower credit quality characteristics; interest rate and yield curve forecasts; U.S. government support programs; tax policies; and delinquency/default trends; and, in the case of non-agency collateralized mortgage obligations, severity of loss upon default and length of time to recover proceeds following default.

• Commercial mortgage-backed securities – overall credit quality, including assessments of the level and variability of: collateral type such as office, retail, residential, lodging, or other; geographic concentration by region, state, metropolitan statistical area and locale; vintage year; historical collateral performance including defeasance, delinquency, default and special servicer trends; and capital structure support features.

• Asset-backed securities – overall credit quality, including assessments of the underlying collateral type such as credit card receivables, auto loan receivables, equipment lease receivables and real property lease receivables; geographic diversification; vintage year; historical collateral performance including delinquency, default and casualty trends; economic conditions influencing use rates and resale values; and contract structural support features.

Generally, all prices provided by the pricing service, except actively traded securities with quoted market prices, are reported as Level 2.

The Company holds privately placed fixed maturity securities and certain other fixed maturity securities that do not have an active market and for which the pricing service cannot provide fair values. The Company determines fair values for these securities using either matrix pricing utilizing the market approach or broker quotes. The Company will use observable market data as inputs into the fair value applications, as discussed in the determination of Level 2 fair values, to the extent it is available, but is also required to use a certain amount of unobservable judgment due to the illiquid nature of the securities involved. Unobservable judgment reflected in the Company's matrix model accounts for estimates of additional spread required by market participants for factors such as issue size, structural complexity, high bond coupon, long maturity term or other unique features. These matrix-priced securities are reported as Level 2 or Level 3, depending on the significance of the impact of unobservable judgment on the security's value. Additionally, the Company may obtain non-binding broker quotes which are reported as Level 3.

Equity Securities

Level 1 includes publicly traded securities valued at quoted market prices. Level 2 includes securities that are valued using pricing for similar securities and pricing models that incorporate observable inputs. Level 3 consists of common stock of private companies for which observable inputs are not available.

The Company utilizes a third party pricing service for the valuation of the majority of its equity securities and receives one quote for each equity security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. Generally, all prices provided by the pricing service, except quoted market prices, are reported as Level 2.

Mortgage Loans

Fair values are estimated by discounting the future contractual cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings.

Derivative Instruments

The Company's derivatives are traded in the over-the-counter ("OTC") derivative market and are classified as Level 2 in the fair value hierarchy. The Company's counterparty in the derivative agreements is a highly rated major financial institution. OTC derivatives classified as Level 2 are valued using discounted cash flow models widely accepted in the financial services industry that use actively quoted or observable market input values from external market data providers, third party pricing vendors and/or recent trading activity. Key assumptions include the contractual terms of the contracts along with significant observable inputs including currency rates, interest rates and non-performance risk. The Company uses mid-market pricing in determining its best estimate of fair value.

Legal Indemnities

Fair values are estimated using probability-weighted discounted cash flow analyses.

Debt

If available, the fair value of debt is estimated based on quoted market prices. If a quoted market price is not available, fair values are estimated using discounted cash flows that are based on current interest rates and yield curves for debt issuances with maturities and credit risks consistent with the debt being valued.

The estimated fair values of the financial instruments were as follows:

(In millions)	June 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets
Cash and cash equivalents	$	721.6	$	721.6	$	290.4	$	290.4
Fixed maturities		4,697.9		4,697.9		4,797.9		4,797.9
Equity securities		164.2		164.2		128.6		128.6
Mortgage loans		5.1		5.4		5.5		5.8
Total financial assets	$	5,588.8	$	5,589.1	$	5,222.4	$	5,222.7
Financial Liabilities
Derivative instruments	$	4.7	$	4.7	$	—	$	—
Legal indemnities		5.6		5.6		5.4		5.4
Debt		857.9		872.7		605.9		603.9
Total financial liabilities	$	868.2	$	883.0	$	611.3	$	609.3

The Company performs a review of the fair value hierarchy classifications and of prices received from its third party pricing service on a quarterly basis. The Company reviews the pricing services' policy describing its processes, practices and inputs, including various financial models used to value securities. Also, the Company reviews the portfolio pricing. Securities with changes in prices that exceed a defined threshold are verified to independent sources. If upon review, the Company is not satisfied with the validity of a given price, a pricing challenge would be submitted to the pricing service along with supporting documentation for its review. The Company does not adjust quotes or prices obtained from the pricing service unless the pricing service agrees with the Company's challenge. During 2011 and 2010, the Company did not adjust any prices received from brokers or its pricing service.

Changes in the observability of valuation inputs may result in a reclassification of certain financial assets or liabilities within the fair value hierarchy. Reclassifications between levels of the fair value hierarchy are reported as of the beginning of the period in which the reclassification occurs. As previously discussed, the Company utilizes a third party pricing service for the valuation of the majority of its fixed maturities and equity securities. The pricing service has indicated that it will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company will use observable market data to the extent it is available, but may also be required to make assumptions for market based inputs that are unavailable due to market conditions.

The Company currently holds fixed maturity securities, equity securities and a derivative instrument for which fair value is determined on a recurring basis. The following tables provide, for each hierarchy level, the Company's assets and liabilities that were measured at fair value at June 30, 2011 and December 31, 2010. Equity securities exclude FHLBB common stock of $8.7 million at June 30, 2011 and $8.6 million at December 31, 2010, which is carried at cost.

	June 30, 2011
(In millions)	Total		Level 1		Level 2		Level 3
Fixed maturities:
U.S. Treasury and government agencies	$	214.4	$	94.6	$	119.8	$	—
Municipal		969.1		—		953.0		16.1
Corporate		2,417.1		—		2,380.3		36.8
Residential mortgage-backed, U.S. agency backed		598.6		—		598.6		—
Residential mortgage-backed, non-agency		101.0		—		100.5		0.5
Commercial mortgage-backed		354.1		—		349.0		5.1
Asset-backed		43.6		—		30.1		13.5
Total fixed maturities		4,697.9		94.6		4,531.3		72.0
Equity securities		155.5		127.7		24.9		2.9
Total investment assets at fair value	$	4,853.4	$	222.3	$	4,556.2	$	74.9
Liabilities:
Derivative instruments	$	4.7	$	—	$	4.7	$	—

	December 31, 2010
	Total		Level 1		Level 2		Level 3
Fixed maturities:
U.S. Treasury and government agencies	$	261.2	$	124.0	$	137.2	$	—
Municipal		954.7		—		938.1		16.6
Corporate		2,420.4		—		2,392.2		28.2
Residential mortgage-backed, U.S. agency backed		600.4		—		600.4		—
Residential mortgage-backed, non-agency		133.7		—		132.9		0.8
Commercial mortgage-backed		366.6		—		361.1		5.5
Asset-backed		60.9		—		47.4		13.5
Total fixed maturities		4,797.9		124.0		4,609.3		64.6
Equity securities		120.0		106.6		10.5		2.9
Total investment assets at fair value	$	4,917.9	$	230.6	$	4,619.8	$	67.5

The table below provides a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

	Fixed Maturities																		Equities			Total Assets
(In millions)	Municipal			Corporate			Residential mortgage- backed, non- agency			Commercial mortgage- backed			Asset- backed			Total
Quarter Ended June 30, 2011
Balance April 1, 2011	$	15.9		$	34.3		$	0.6		$	5.3		$	13.4		$	69.5		$	2.9		$	72.4
Transfers out of Level 3		—			(6.5	)		—			—			—			(6.5	)		—			(6.5	)
Total gains:
Included in other comprehensive income		0.5			0.2			—			—			0.3			1.0			—			1.0
Purchases and sales:
Purchases		—			8.9			—			—			—			8.9			—			8.9
Sales		(0.3	)		(0.1	)		(0.1	)		(0.2	)		(0.2	)		(0.9	)		—			(0.9	)
Balance June 30, 2011	$	16.1		$	36.8		$	0.5		$	5.1		$	13.5		$	72.0		$	2.9		$	74.9
Quarter Ended June 30, 2010
Balance April 1, 2010	$	15.2		$	35.8		$	1.4		$	5.9		$	17.6		$	75.9		$	2.8		$	78.7
Transfers out of Level 3		—			—			—			—			(2.0	)		(2.0	)		—			(2.0	)
Total gains:
Included in other comprehensive income		0.1			0.7			—			0.1			0.4			1.3			—			1.3
Purchases and sales:
Purchases		—			—			—			—			—			—			—			—
Sales		(0.4	)		(5.3	)		(0.3	)		(0.1	)		(0.3	)		(6.4	)		—			(6.4	)
Balance June 30, 2010	$	14.9		$	31.2		$	1.1		$	5.9		$	15.7		$	68.8		$	2.8		$	71.6
Six Months Ended June 30, 2011
Balance January 1, 2011	$	16.6		$	28.2		$	0.8		$	5.5		$	13.5		$	64.6		$	2.9		$	67.5
Transfers into Level 3		—			3.7			—			—			—			3.7			—			3.7
Transfers out of Level 3		—			(6.5	)		—			—			—			(6.5	)		—			(6.5	)
Total gains (losses):
Included in earnings		—			—			—			—			—			—			(0.5	)		(0.5	)
Included in other comprehensive income		0.1			0.3			—			—			0.3			0.7			0.5			1.2
Purchases and sales:
Purchases		—			11.8			—			—			—			11.8			—			11.8
Sales		(0.6	)		(0.7	)		(0.3	)		(0.4	)		(0.3	)		(2.3	)		—			(2.3	)
Balance June 30, 2011	$	16.1		$	36.8		$	0.5		$	5.1		$	13.5		$	72.0		$	2.9		$	74.9
Six Months Ended June 30, 2010
Balance January 1, 2010	$	15.5		$	28.9		$	—		$	6.2		$	9.2		$	59.8		$	2.8		$	62.6
Transfers into Level 3		—			6.6			—			—			6.9			13.5			—			13.5
Transfer out of Level 3		—			—			—			—			(2.0	)		(2.0	)		—			(2.0	)
Total gains (losses):
Included in earnings		—			0.1			—			—			—			0.1			(0.3	)		(0.2	)
Included in other comprehensive income		0.2			1.0			—			—			0.2			1.4			0.3			1.7
Purchases and sales:
Purchases		—			0.3			1.4			—			2.0			3.7			—			3.7
Sales		(0.8	)		(5.7	)		(0.3	)		(0.3	)		(0.6	)		(7.7	)		—			(7.7	)
Balance June 30, 2010	$	14.9		$	31.2		$	1.1		$	5.9		$	15.7		$	68.8		$	2.8		$	71.6

During the six months ended June 30, 2011 and 2010, the Company transferred fixed maturities between Level 2 and Level 3 primarily as a result of assessing the significance of unobservable inputs on the fair value measurement. There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2011 or 2010.

For the quarters ended June 30, 2011 or 2010, there was no impact on income relating to Level 3 securities. The following table summarizes gains and losses due to changes in fair value that are recorded in net income for Level 3 assets for the six months ended June 30, 2011 and 2010.

	2011			2010
(In millions)	Other-than- temporary impairments			Other-than- temporary impairments			Net realized investment gains		Total
Level 3 Assets:
Fixed maturities:
Corporate	$	—		$	—		$	0.1	$	0.1
Equity securities		(0.5	)		(0.3	)		—		(0.3	)
Total assets	$	(0.5	)	$	(0.3	)	$	0.1	$	(0.2	)

There were no Level 3 liabilities held by the Company for the six months ended June 30, 2011 and 2010.