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 principally 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.

Net Asset Value (NAV)—The fair values of investment company limited partnership investments are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.

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, 2019 and December 31, 2018 (dollars in thousands):



	September 30, 2019
	Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Debt Securities:
U.S. Government	$	13,979	$	—	$	13,979	$	—
State and local government	14,673		—		14,673		—
Corporate debt	38,149		—		38,149		—
Asset-backed securities	20,194		—		20,194		—
Mortgage-backed securities	30,132		—		30,132		—
Commercial mortgage-backed securities	4,464		—		4,464		—
Collateralized mortgage obligations	4,113		—		4,113		—
Total debt securities	125,704		—		125,704		—
Equity Securities	6,414		6,150		264		—
Short-term investments	3,508		3,508		—		—
Total marketable investments measured at fair value	$	135,626	$	9,658	$	125,968	$	—

Investments measured at NAV:
Investment in limited partnership	$	586
Total investments measured at NAV	$	586

Total assets measured at fair value	$	136,212

Liabilities:
Senior Unsecured Notes *	$	23,276	$	—	$	23,276	$	—
Subordinated Notes *	11,133		—		—		11,133
Total Liabilities measured at fair value	$	34,409	$	—	$	23,276	$	11,133

* Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheet

** Carried at cost on the consolidated balance sheet



	December 31, 2018
	Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Debt Securities:
U.S. Government	$	15,185	$	—	$	15,185	$	—
State and local government	15,788		—		15,788		—
Corporate debt	29,846		—		29,846		—
Asset-backed securities	24,284		—		24,284		—
Mortgage-backed securities	29,240		—		29,240		—
Commercial mortgage-backed securities	3,953		—		3,953		—
Collateralized mortgage obligations	2,144		—		2,144		—
Total debt securities	120,440		—		120,440		—
Equity securities	6,587		6,323		264		—
Short-term investments	8,925		8,925		—		—
Total marketable investments measured at fair value	$	135,952	$	15,248	$	120,704	$	—

Investments measured at NAV:
Investment in limited partnership	$	4,150
Total investments measured at NAV	$	4,150

Total assets measured at fair value	$	140,102

Liabilities:
Senior Unsecured Notes *	$	21,252	$	—	$	21,252	$	—
Subordinated Notes *	10,640		—		—		10,640
Total Liabilities measured at fair value	$	31,892	$	—	$	21,252	$	10,640

* Carried at face value of debt net of unamortized debt issuance costs 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 7.1% of the fair value of the total investment portfolio as of September 30, 2019.

Level 2 investments include debt 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 92.5% of the fair value of the total investment portfolio as of September 30, 2019.

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 and (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 the Company's senior debt. The fair value of the borrowings under the senior revolving credit facility approximates its carrying amount because interest is based on a short-term, variable, market-based rate.

As of September 30, 2019, Level 3 is entirely comprised of the Company's subordinated debt. In determining the fair value of the subordinated debt outstanding at September 30, 2019, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 24, 2018 (the date of issuance) were fed into a valuation model. A lognormal trinomial interest rate lattice was created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S. Treasury rates. The OAS was then fed back into the model along with the September 30, 2019, U.S. Treasury rates. A new lattice was generated and the fair value was computed from the OAS. There were no changes in assumptions of credit risk from the issuance date.

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, 2019 and 2018, respectively.