Three levels of inputs are used to measure fair value of financial instruments: (1) Level 1: quoted price (unadjusted) in active markets for identical assets, (2) Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument, and (3) Level 3: inputs to the valuation methodology are unobservable for the asset or liability.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.

To measure fair value, the Company obtains quoted market prices for its investment securities from its outside investment managers, who utilize independent pricing services. If a quoted market price is not available, the Company uses prices of similar securities. Values for U.S. Treasury and publicly-traded equity securities are generally based on Level 1 inputs which use the market approach valuation technique. The values for all other fixed maturity securities (including state and municipal securities and obligations of U.S. government corporations and agencies) and bank loan participations generally incorporate significant Level 2 inputs, and in some cases, Level 3 inputs, using the market approach and income approach valuation techniques. There have been no changes in the Company’s use of valuation techniques since December 31, 2018.

The Company reviews fair value prices provided by its outside investment managers for reasonableness by comparing the fair values provided by the managers to those provided by its investment custodian or other alternative sources. The Company also reviews and monitors changes in unrealized gains and losses. The Company has not historically adjusted security prices. The Company obtains an understanding of the methods, models and inputs used by the investment managers and independent pricing services, and controls are in place to validate that prices provided represent fair values. The Company’s control process includes, but is not limited to, initial and ongoing evaluation of the methodologies used, a review of specific securities and an assessment for proper classification within the fair value hierarchy, and obtaining and reviewing internal control reports for our investment managers that obtain fair values from independent pricing services.



	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total
	(in thousands)
Fixed maturity securities, available-for-sale:
State and municipal	$	—	$	181,375	$	—	$	181,375
Residential mortgage-backed	—		307,439		—		307,439
Corporate	—		685,021		—		685,021
Commercial mortgage and asset-backed	—		268,979		—		268,979
U.S. Treasury securities and obligations guaranteed by the U.S. government	125,580		443		—		126,023
Redeemable preferred stock	—		1,768		—		1,768
Total fixed maturity securities, available-for-sale	$	125,580	$	1,445,025	$	—	$	1,570,605
Equity securities:
Preferred stock	—		60,861		—		60,861
Common stock	7,980		2,549		4		10,533
Total equity securities	$	7,980	$	63,410	$	4	$	71,394
Bank loan participations	$	—	$	201,860	$	1,028	$	202,888
Short-term investments	$	—	$	71,058	$	—	$	71,058



	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total
	(in thousands)
Fixed maturity securities, available-for-sale:
State and municipal	$	—	$	167,101	$	—	$	167,101
Residential mortgage-backed	—		264,146		—		264,146
Corporate	—		632,221		—		632,221
Commercial mortgage and asset-backed	—		252,457		—		252,457
U.S. Treasury securities and obligations guaranteed by the U.S. government	115,173		494		—		115,667
Redeemable preferred stock	—		2,034		—		2,034
Total fixed maturity securities, available-for-sale	$	115,173	$	1,318,453	$	—	$	1,433,626
Equity securities:
Preferred stock	—		62,747		—		62,747
Common stock	14,669		3,276		43		17,988
Total equity securities	$	14,669	$	66,023	$	43	$	80,735
Short-term investments	$	—	$	156,925	$	—	$	156,925

A reconciliation of the beginning and ending balances of available-for-sale fixed maturity securities, equity securities, and bank loan participations measured at fair value on a recurring basis (as a result of the fair value option effective January 1, 2020) using significant unobservable inputs (Level 3) is shown below:



	Three Months Ended
	March 31, 2020			March 31, 2019
	(in thousands)
Beginning balance	$	43		$	4,442
Transfers out of Level 3	—			(4,228		)
Transfers in to Level 3	358			—
Purchases	703			—
Sales	—			—
Maturities, calls and paydowns	(17		)	—
Amortization of discount	3			—
Total gains or losses (realized/unrealized):				—
Included in earnings	(58		)	(37		)
Included in other comprehensive income	—			—
Ending balance	$	1,032		$	177

The Company held one available-for-sale fixed maturity security at December 31, 2018 for which the fair value was determined using significant unobservable inputs (Level 3). A market approach using prices in trades of comparable securities was utilized to determine a fair value of $4.2 million for the security at December 31, 2018. The Company was able to obtain a quoted price from a pricing vendor for the available-for-sale fixed maturity security at March 31, 2019 and it was transferred to Level 2.

At March 31, 2020, the Company held three bank loan participations and two equity securities for which the fair value was determined using significant unobservable inputs (Level 3). At December 31, 2019, the Company held one equity security for which the fair value was determined using significant unobservable inputs (Level 3). A market approach using prices in trades of comparable securities was utilized to determine a fair value for the securities of $1.0 million at March 31, 2020 and $43,000 at December 31, 2019. At March 31, 2019 and December 31, 2018, the Company held one equity security for which the fair value was determined using significant unobservable inputs (Level 3). A market approach using prices in trades of comparable securities was utilized to determine a fair value for the equity securities of $177,000 at March 31, 2019 and $214,000 at December 31, 2018.

Transfers out of Level 3 occur when the Company is able to obtain reliable prices from pricing vendors for securities for which the Company was previously unable to obtain reliable prices. Transfers in to Level 3 occur when the Company is unable to obtain reliable prices for securities from pricing vendors and instead must use broker price quotes to value the securities.

In connection with the adoption of ASU 2016-13, the Company elected the fair value option in accounting for bank loan participations effective January 1, 2020. Prior to the election, bank loan participations were classified as held-for-investment and carried at amortized cost net of any allowance for credit losses. Prior to January 1, 2020, the Company measured certain bank loan participations at fair value on a non-recurring basis as part of the Company’s impairment evaluation when loans were determined by management to be impaired. Bank loan participations held-for-investment that were determined to be impaired were written down to their fair value at December 31, 2019 as shown below:



	Fair Value Measurements Using
	Quoted Prices In Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total
	(in thousands)
December 31, 2019
Bank loan participations held-for-investment	$	—	$	—	$	6,949	$	6,949

In the determination of the fair value for bank loan participations, the Company’s investment manager endeavors to obtain data from multiple external pricing sources. External pricing sources may include brokers, dealers and price data vendors that provide a composite price based on prices from multiple dealers. Such external pricing sources typically provide valuations for normal institutional size trading units of such securities using methods based on market transactions for comparable securities, and various relationships between securities, as generally recognized by institutional dealers. For investments in which the investment manager determines that only one external pricing source is appropriate or if only one external price is available, the relevant investment is generally recorded at fair value based on such price.

Investments for which external sources are not available or are determined by the investment manager not to be representative of fair value are recorded at fair value as determined by the Company, with input from its investment managers and valuation specialists as considered necessary. In determining the fair value of such investments, the Company considers one or more of the following factors: type of security held, convertibility or exchangeability of the security, redeemability of the security (including the timing of redemptions), application of industry accepted valuation models, recent trading activity, liquidity, estimates of liquidation value, purchase cost, and prices received for securities with similar terms of the same issuer or similar issuers. At March 31, 2020 and December 31, 2019, there were no investments for which external sources were unavailable to determine fair value.



	March 31, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Fixed maturity securities, available-for-sale	$	1,570,605	$	1,570,605	$	1,433,626	$	1,433,626
Equity securities	71,394		71,394		80,735		80,735
Bank loan participations	202,888		202,888		260,864		252,423
Cash and cash equivalents	291,223		291,223		206,912		206,912
Restricted cash equivalents	1,107,321		1,107,321		1,199,164		1,199,164
Short-term investments	71,058		71,058		156,925		156,925
Other invested assets – notes receivable	7,180		11,458		13,250		18,756
Liabilities
Senior debt	277,300		257,965		158,300		158,043
Junior subordinated debt	104,055		106,618		104,055		122,193

The fair values of fixed maturity securities, equity securities, and bank loan participations have been determined by independent pricing services using quoted market prices for securities traded in the public market or prices using bid or closing prices for securities not traded in the public marketplace. The fair values of cash and cash equivalents and short-term investments approximate their carrying values due to their short-term maturity.

The fair values of other invested assets-notes receivable, senior debt, and junior subordinated debt at March 31, 2020 and December 31, 2019 were determined by calculating the present value of expected future cash flows under the terms of the note agreements or debt agreements, as applicable, discounted at an estimated market rate of interest at March 31, 2020 and December 31, 2019, respectively.