6. Fair Value Measurements

The Company has established a framework for valuing financial assets and financial liabilities. The framework is based on a hierarchy of inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The standard describes three levels of inputs that may be used to measure fair value and categorize the assets and liabilities within the hierarchy:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. These prices generally provide the most reliable evidence and are used to measure fair value whenever available. Active markets are defined as having the following for the measured asset/liability: (i) many transactions, (ii) current prices, (iii) price quotes not varying substantially among market makers, (iv) narrow bid/ask spreads and (v) most information publicly available.

As of March 31, 2020 and December 31, 2019, the Company does not hold any Level 1 securities.

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, nonbinding quotes in markets that are not active for identical or similar assets and other market observable inputs (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.).

The Company’s Level 2 assets include U.S. Treasury securities, government agency securities, municipal debt obligations, RMBS, CMBS, CLO, ABS, corporate debt securities and non-redeemable preferred stock securities.

The Company generally obtains valuations from third-party pricing services and/or security dealers for identical or comparable assets or liabilities by obtaining nonbinding broker quotes (when pricing service information is not available) in order to determine an estimate of fair value. The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third-party market participant would be willing to pay in an arm’s-length transaction.

Level 3 – Fair value is based on at least one or more significant unobservable inputs that are supported by little or no market activity for the asset. These inputs reflect the Company’s understanding about the assumptions market participants would use in pricing the asset or liability.

The Company’s Level 3 assets include its investments in corporate debt securities and commercial levered loans as they are illiquid and trade in inactive markets. These markets are considered inactive as a result of the low level of trades of such investments. Commercial levered loans are also not considered within the Level 3 tabular disclosure, because they are in the “held for investment” category and are also not measured at fair value on a recurring basis.

The corporate debt securities classified under Level 3 in the fair value hierarchy are provided to the Company by an independent valuation service provider which use both observable and unobservable inputs in the calculation of fair value. Unobservable inputs, significant to the measurement and valuation of the corporate debt securities are assumptions about prepayment speed, default rates and reinvestment parameters. Significant changes to any of these inputs, or combination of inputs, could significantly change the fair value measurement for these securities when using the income approach.

The primary pricing sources for the Company’s investments in commercial levered loans are reviewed for reasonableness, based on the Company’s understanding of the respective market. Prices may then be determined using valuation methodologies such as discounted cash flow models, as well as matrix pricing analyses performed on nonbinding quotes from brokers or other market makers.

The following are the major categories of assets measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019, using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):


	March 31, 2020
($ in thousands)	Level 1		Level 2		Level 3		Total
Fixed maturity securities:
U.S. Treasury securities	$	—	$	43,322	$	—	$	43,322
Government agency securities		—		28,589		—		28,589
Corporate debt securities		—		1,149,269		152,418		1,301,687
Municipal debt obligations		—		100,641		—		100,641
ABS		—		46,020		—		46,020
CLO		—		157,563		—		157,563
CMBS		—		94,474		—		94,474
RMBS - non agency		—		90,633		—		90,633
RMBS - agency		—		139,491		—		139,491
Total fixed maturity securities		—		1,850,002		152,418		2,002,420
Non-redeemable preferred stock securities		—		11,378		—		11,378
Total investments measured at fair value	$	—	$	1,861,380	$	152,418		2,013,798

Investments measured at net asset value:
Limited partnerships and limited liability companies								65,011
Total assets at fair value							$	2,078,809


	December 31, 2019
($ in thousands)	Level 1		Level 2		Level 3		Total
Fixed maturity securities:
U.S. Treasury securities	$	—	$	49,985	$	—	$	49,985
Government agency securities		—		6,531		—		6,531
Corporate debt securities		—		1,189,181		149,631		1,338,812
Municipal debt obligations		—		79,815		—		79,815
ABS		—		73,582		—		73,582
CLO		—		179,549		—		179,549
CMBS		—		97,526		—		97,526
RMBS - non agency		—		71,610		—		71,610
RMBS - agency		—		143,272		—		143,272
Total investments measured at fair value	$	—	$	1,891,051	$	149,631		2,040,682

Investments measured at net asset value:
Limited partnerships and limited liability companies								66,660
Total assets at fair value							$	2,107,342

Management believes that the use of the fair value option as specified in Accounting Standards Codification No. 825, Financial Instruments to record limited partnerships and limited liability companies is consistent with its objective for such investments. As such, the entire limited partnership portfolio of $65.0 million and $66.7 million as of March 31, 2020 and December 31, 2019, respectively, was recorded using net asset value, which the Company has determined to be the best indicator of fair value for these investments.

The following tables disclose the carrying value and fair value of financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheets as of March 31, 2020 and December 31, 2019:


	March 31, 2020
	Carrying		Fair Value
($ in thousands)	Value		Total		Level 1		Level 2		Level 3
Assets
Commercial levered loans	$	13,725	$	12,246	$	—	$	—	$	12,246

Liabilities
Notes payable	$	165,000	$	166,288	$	—	$	166,288	$	—
Unamortized debt issuance costs		(222)
Notes payable, net of debt issuance costs	$	164,778


	December 31, 2019
	Carrying		Fair Value
($ in thousands)	Value		Total		Level 1		Level 2		Level 3
Assets
Commercial levered loans	$	14,069	$	13,950	$	—	$	—	$	13,950

Liabilities
Notes payable	$	165,000	$	167,507	$	—	$	167,507	$	—
Unamortized debt issuance costs		(307)
Notes payable, net of debt issuance costs	$	164,693

The fair value of the notes payable at March 31, 2020, approximated a price equal to $166.3 million or 100.8% of the par value. The fair value of the notes payable at December 31, 2019, approximated a price equal to $167.5 million or 101.5% of the par value.

The following tables provides a summary of the changes in the fair value of securities measured using Level 3 inputs during the three months ended March 31, 2020 and 2019:


	Level 3
	Corporate Debt
($ in thousands)	Securities
Fair value, December 31, 2019	$	149,631
Total net (losses) gains for the period included in:
Other comprehensive loss		(10,703)
Net realized gain		1
Purchases		14,241
Sales		—
Issuances		—
Settlements		(752)
Transfers into Level 3		—
Transfers out of Level 3		—
Fair value, March 31, 2020	$	152,418


	Level 3
	Corporate Debt
($ in thousands)	Securities
Fair value, December 31, 2018	$	126,497
Total net losses for the period included in:
Other comprehensive loss		(1,273)
Net realized loss		(40)
Purchases		2,329
Sales		—
Issuances		—
Settlements		(1,373)
Transfers into Level 3		—
Transfers out of Level 3		—
Fair value, March 31, 2019	$	126,140