Fair Value Measurements

The Company’s 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 these consolidated financial statements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal most advantageous market for the asset or liability in an orderly transaction between market participants. In determining fair value, the Company applies the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. The inputs to valuation techniques used to measure fair value are prioritized into a three-level hierarchy. The hierarchy gives the highest priority to quoted prices from sources independent of the reporting entity (“observable inputs”) and the lowest priority to prices determined by the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”). The fair value hierarchy is as follows:

Level 1

—Valuations that are based on quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2—Valuations that are based on observable inputs (other than Level 1 prices) such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3—Unobservable inputs that are supported by little or no market activity. The unobservable inputs represent the Company’s best assumption of how market participants would price the assets or liabilities.

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis, classified by the valuation hierarchy as of September 30, 2015 and December 31, 2014 (in thousands):

	September 30, 2015
	Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed Maturity Securities:
U.S. Government obligations	$	5,556	$	-	$	5,556	$	-
State and local government		14,721		-		14,721		-
Corporate debt		34,019		-		34,019		-
Commercial mortgage and asset-backed		43,270		-		43,270		-
Total fixed maturity securities		97,566		-		97,566		-
Equity Securities, common stock		4,030		4,030		-		-
Short-term investments*		6,537		6,537		-		-
Total assets measured at fair value	$	108,133	$	10,567	$	97,566	$	-

Liabilities:
Senior debt*	$	9,750	$	-	$	9,750	$	-
Total Liabilities measured at fair value	$	9,750	$	-	$	9,750	$	-

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

	December 31, 2014
	Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed Maturity Securities:
U.S. Government obligations	$	5,941	$	-	$	5,941	$	-
State and local government		10,961		-		10,961		-
Corporate debt		30,949		-		30,949		-
Commercial mortgage and asset-backed		36,554		-		36,554		-
Total fixed maturity securities		84,405		-		84,405		-
Equity Securities, common stock		4,084		4,084		-		-
Short-term investments*		16,749		16,749		-		-
Total assets measured at fair value	$	105,238	$	20,833	$	84,405	$	-

Liabilities:
Senior debt*	$	27,562	$	-	$	27,562	$	-
Contingent consideration		168		-		-		168
Total Liabilities measured at fair value	$	27,730	$	-	$	27,562	$	168

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

Level 1 investments consist of equity securities traded in an active exchange market. The Company uses unadjusted quoted prices for identical instruments to measure fair value. Level 1 also includes money market funds and other interest-bearing deposits at banks, which are reported as short-term investments. The fair value measurements that were based on Level 1 inputs comprise 9.8% of the fair value of the total investment portfolio as of September 30, 2015.

Level 2 investments include fixed maturity securities, which consist of U.S. government agency securities, state and local municipal bonds (including those held as restricted securities), corporate debt securities, mortgage-backed and asset-backed securities. The fair value of securities included in the Level 2 category were based on the market values obtained from a third party pricing service that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other observable market information. The third party pricing service monitors market indicators, as well as industry and economic events. The fair value measurements that were based on Level 2 inputs comprise 90.2% of the fair value of the total investment portfolio as of September 30, 2015.

The Company obtains pricing for each security from independent pricing services, investment managers or consultants to assist in determining fair value for its Level 2 investments. To validate that these quoted prices are reasonable estimates of fair value, the Company performs various quantitative and qualitative procedures, such as (i) evaluation of the underlying methodologies, (ii) analysis of recent sales activity, (iii) analytical review of our fair values against current market prices or (iv) comparison of the pricing services’ fair value to other pricing services’ fair value for the same investment. No markets for the investments were determined to be inactive at period-ends. Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants.

The Level 2 financial instruments also include our senior debt. The fair value of borrowings under the senior debt, consisting of the revolving credit facility and term loans, approximates its carrying amount because interest is based on a short-term, variable, market-based rate.

The Level 3 financial instruments include the fair value of the contingent consideration arrangements that the Company’s Affiliate entered into at the date of the respective acquisitions. The fair value of these liabilities was determined based on internally developed models that use assumptions or other data that are not readily observable from objective sources.

The following table sets forth a roll-forward of the Level 3 measurements (in thousands):

	Fair Value Measurement Using Significant Unobservable Inputs - Level 3
	Contingent Consideration Liabilities
Balance as of December 31, 2013	$	339
Change in fair value		11
Payout of contingent consideration		(182	)
Balance as of December 31, 2014	$	168
Change in fair value		4
Payout of contingent consideration		(113	)
Deconsolidation of affiliate		(59	)
Balance as of September 30, 2015		-

The Company’s policy on recognizing transfers between hierarchy levels is applied at the end of each reporting period. There were no transfers between Levels 1, 2 and 3 for the three and nine months ended September 30, 2015 and 2014, respectively.