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.

The fair values of fixed maturity securities, equity securities, and bank loan participations have been determined using fair value prices provided by the Company’s investment accounting services provider or investment managers, who utilize internationally recognized independent pricing services. The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g. broker quotes and prices observed for comparable 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, 2020.

The Company reviews fair value prices provided by its outside investment accounting service provider or investment managers for reasonableness by comparing the fair values provided by the managers to those provided by its investment custodian. 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 manager that obtains 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	$	—	$	302,405	$	—	$	302,405
Residential mortgage-backed	—		290,555		—		290,555
Corporate	—		606,821		—		606,821
Commercial mortgage and asset-backed	—		322,204		—		322,204

U.S. Treasury securities and obligations guaranteed by the U.S. government	75,356		354		—		75,710

Total fixed maturity securities, available-for-sale	$	75,356	$	1,522,339	$	—	$	1,597,695
Equity securities:
Preferred stock	—		51,750		—		51,750
Common stock	43,470		3,433		—		46,903
Total equity securities	$	43,470	$	55,183	$	—	$	98,653

Bank loan participations	$	—	$	159,885	$	—	$	159,885
Short-term investments	$	—	$	130,435	$	—	$	130,435


	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	$	—	$	333,717	$	—	$	333,717
Residential mortgage-backed	—		246,631		—		246,631
Corporate	—		732,335		—		732,335
Commercial mortgage and asset-backed	—		304,488		—		304,488

U.S. Treasury securities and obligations guaranteed by the U.S. government	59,988		402		—		60,390

Total fixed maturity securities, available-for-sale	$	59,988	$	1,617,573	$	—	$	1,677,561
Equity securities:
Preferred stock	—		63,612		—		63,612
Common stock	41,244		3,452		102		44,798
Total equity securities	$	41,244	$	67,064	$	102	$	108,410
Bank loan participations	$	—	$	156,043	$	—	$	156,043
Short-term investments	$	—	$	136,563	$	—	$	136,563

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 using significant unobservable inputs (Level 3) is shown below:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(in thousands)				(in thousands)
Beginning balance	$	—	$	299	$	102	$	980
Transfers out of Level 3	—		—		—		—
Transfers in to Level 3	—		—		—		—
Purchases	—		—		—		—
Sales	—		—		(92)		(282)
Maturities, calls and paydowns	—		(17)		—		(41)
Amortization of discount	—		—		—		—
Total gains or losses (realized/unrealized):
Included in earnings	—		(51)		(10)		(426)
Included in other comprehensive income	—		—		—		—
Ending balance	$	—	$	231	$	—	$	231

The Company had one equity security at December 31, 2021 for which the fair value was determined using significant unobservable inputs (Level 3). The fair value of $102,000 for the equity security was based on expected proceeds from its sale. During the six months ended June 30, 2022, the Company sold the equity security.

The Company held one bank loan participation and one equity security at June 30, 2021 and one bank loan participation and two equity securities at December 31, 2020 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 $231,000 at June 30, 2021 and $980,000 at December 31, 2020.

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 the determination of the fair value for bank loan participations and certain high yield bonds, 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 June 30, 2022 and December 31, 2021, there were no investments for which external sources were unavailable to determine fair value.


	June 30, 2022				December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Assets
Fixed maturity securities, available-for-sale	$	1,597,695	$	1,597,695	$	1,677,561	$	1,677,561
Equity securities	98,653		98,653		108,410		108,410

Bank loan participations	159,885		159,885		156,043		156,043
Cash and cash equivalents	350,740		350,740		190,123		190,123
Restricted cash equivalents	102,099		102,099		102,005		102,005
Short-term investments	130,435		130,435		136,563		136,563
Other invested assets – notes receivable	9,740		11,536		9,740		11,921
Liabilities
Senior debt	222,300		215,550		262,300		252,213
Junior subordinated debt	104,055		108,235		104,055		106,635

The fair values of fixed maturity securities, equity securities, and bank loan participations have been determined 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 June 30, 2022 and December 31, 2021 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 June 30, 2022 and December 31, 2021, respectively.