Fair Value Measurements

6 Months Ended

Jun. 30, 2022

Fair Value Measurements

Fair Value measurements

3. Fair Value Measurements

Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment.

The three-tier hierarchy of inputs is summarized in the three broad levels listed below:

Level 1—Unadjusted quoted prices are available in active markets for identical investments as of the reporting date.

Level 2—Pricing inputs are quoted prices for similar investments in active markets; quoted prices for identical or similar investments in inactive markets; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data.

Level 3—Pricing inputs into models are unobservable for the investment. The unobservable inputs require significant management judgment or estimation.

To measure fair value, the Company obtains quoted market prices for its investment securities from its outside investment managers. If a quoted market price is not available, the Company uses prices of similar securities. The fair values obtained from the outside investment managers are reviewed for reasonableness and any discrepancies are investigated for final valuation.

The fair value of the Company’s investments in fixed maturity securities is estimated using relevant inputs, including available market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. An Option Adjusted Spread model is also used to develop prepayment and interest rate scenarios. Industry standard models are used to analyze and value securities with embedded options or prepayment sensitivities. These fair value measurements are estimated based on observable, objectively verifiable market information rather than market quotes. Therefore, these investments are classified and disclosed in Level 2 of the hierarchy.

The following tables present the hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021.

June 30, 2022	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Fixed maturity securities
U.S. Governments	$	—	$	45,168	$	—	$	45,168
States, territories, and possessions		—		5,580		—		5,580
Political subdivisions		—		6,043		—		6,043
Special revenue excluding mortgage/asset-backed securities		—		38,977		—		38,977
Corporate and other		—		246,407		—		246,407
Mortgage/asset-backed securities		—		136,301		—		136,301
Equity securities		37,509		—		—		37,509
Cash, cash equivalents, and restricted cash		36,508		—		—		36,508
Total assets	$	74,017	$	478,476	$	—	$	552,493

December 31, 2021	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Fixed maturity securities
U.S. Governments	$	—	$	16,870	$	—	$	16,870
States, territories, and possessions		—		4,014		—		4,014
Political subdivisions		—		6,380		—		6,380
Special revenue excluding mortgage/asset-backed securities		—		44,498		—		44,498
Corporate and other		—		249,046		—		249,046
Mortgage/asset-backed securities		—		110,374		1,500		111,874
Equity securities		33,261		—		—		33,261
Cash, cash equivalents, and restricted cash		50,371		—		—		50,371
Total assets	$	83,632	$	431,182	$	1,500	$	516,314

The carrying amounts of financial assets and liabilities reported in the accompanying condensed consolidated balance sheet including cash and cash equivalents, restricted cash, receivables, reinsurance recoverable, and accounts payable and other accrued liabilities approximate fair value due to their short term-maturity. The carrying amount of the Company’s borrowings under the Federal Home Loan Bank (“FHLB”) line of credit approximates fair value as the Company is currently borrowing at the overnight rate.

Transfers between Level 3 and Level 2 securities result from changes in the availability of observable market inputs and are recorded at the beginning of the reporting period. As of June 30, 2022, the Company had no fixed income securities classified as Level 3. As of December 31, 2021, the Company had $1.5 million of fixed income securities classified as Level 3 due to the availability of observable market inputs for recently purchased securities.