DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount and the estimated fair value of the Company’s financial instruments is summarized below.



	Carrying amount		Estimated fair value
June 30, 2014
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,615	$	9,615
U.S. government-sponsored agencies	185,481		185,481
Obligations of states and political subdivisions	342,501		342,501
Commercial mortgage-backed	55,594		55,594
Residential mortgage-backed	97,235		97,235
Other asset-backed	11,564		11,564
Corporate	369,213		369,213
Total fixed maturity securities available-for-sale	1,071,203		1,071,203

Equity securities available-for-sale:
Common stocks:
Financial services	31,701		31,701
Information technology	23,945		23,945
Healthcare	22,298		22,298
Consumer staples	13,474		13,474
Consumer discretionary	20,776		20,776
Energy	27,137		27,137
Industrials	14,805		14,805
Other	17,947		17,947
Non-redeemable preferred stocks	12,493		12,493
Total equity securities available-for-sale	184,576		184,576

Short-term investments	59,799		59,799

Liabilities:
Surplus notes	25,000		11,485



	Carrying amount		Estimated fair value
December 31, 2013
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,412	$	9,412
U.S. government-sponsored agencies	146,946		146,946
Obligations of states and political subdivisions	357,052		357,052
Commercial mortgage-backed	68,939		68,939
Residential mortgage-backed	94,179		94,179
Other asset-backed	12,648		12,648
Corporate	338,808		338,808
Total fixed maturity securities available-for-sale	1,027,984		1,027,984

Equity securities available-for-sale:
Common stocks:
Financial services	28,498		28,498
Information technology	18,917		18,917
Healthcare	21,945		21,945
Consumer staples	13,011		13,011
Consumer discretionary	21,031		21,031
Energy	21,117		21,117
Industrials	17,264		17,264
Other	17,811		17,811
Non-redeemable preferred stocks	10,254		10,254
Total equity securities available-for-sale	169,848		169,848

Short-term investments	56,166		56,166

Liabilities:
Surplus notes	25,000		10,040

The estimated fair value of fixed maturity and equity securities is based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security.

Short-term investments generally include money market funds, U.S. Treasury bills and commercial paper. Short-term investments are carried at fair value, which approximates cost, due to the highly liquid nature of the securities. Short-term securities are classified as Level 1 fair value measurements when the fair values can be validated by recent trades. When recent trades are not available, fair value is deemed to be the cost basis and the securities are classified as Level 2 fair value measurements.

The estimated fair value of the surplus notes is derived by discounting future expected cash flows at a rate deemed appropriate. The discount rate was set at the average of current yields-to-maturity on several insurance company surplus notes that are traded in observable markets, adjusted upward by 50 basis points to reflect illiquidity and perceived risk premium differences. Other assumptions include a 25-year term (the surplus notes have no stated maturity date) and an interest rate that continues at the current 1.35 percent interest rate. The rate is typically adjusted every five years and is based upon the then-current Federal Home Loan Bank borrowing rate for 5-year funds available to Employers Mutual.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value:



	Level 1 -	Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

	Level 2 -	Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

	Level 3 -	Prices or valuation techniques that require significant unobservable inputs because observable inputs are not available. The unobservable inputs may reflect the Company’s own judgments about the assumptions that market participants would use.

The Company uses an independent pricing source to obtain the estimated fair values of a majority of its securities, subject to an internal validation. The fair values are based on quoted market prices, where available. This is typically the case for equity securities and money market funds, which are accordingly classified as Level 1 fair value measurements. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. Fixed maturity securities, non-redeemable preferred stocks and various short-term investments in the Company’s portfolio may not trade on a daily basis; however, observable inputs are utilized in their valuations, and these securities are therefore classified as Level 2 fair value measurements. Following is a brief description of the various pricing techniques used by the independent pricing source for different asset classes.


•	U.S. Treasury securities (including bonds, notes, and bills) are priced according to a number of live data sources, including active market makers and inter-dealer brokers. Prices from these sources are reviewed based on the sources’ historical accuracy for individual issues and maturity ranges.

•

U.S. government-sponsored agencies and corporate securities (including fixed-rate corporate bonds and medium-term notes) are priced by determining a bullet (non-call) spread scale for each issuer for maturities going out to forty years. These spreads represent credit risk and are obtained from the new issue market, secondary trading, and dealer quotes. An option adjusted spread model is incorporated to adjust spreads of issues that have early redemption features. The final spread is then added to the U.S. Treasury curve.

•

Obligations of states and political subdivisions are priced by tracking and analyzing actively quoted issues and reported trades, material event notices and benchmark yields. Municipal bonds with similar characteristics are grouped together into market sectors, and internal yield curves are constructed daily for these sectors. Individual bond evaluations are extrapolated from these sectors, with the ability to make individual spread adjustments for attributes such as discounts, premiums, alternative minimum tax, and/or whether or not the bond is callable.

•

Mortgage-backed and asset-backed securities are first reviewed for the appropriate pricing speed (if prepayable), spread, yield and volatility. The securities are priced with models using spreads and other information solicited from Wall Street buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. To determine a tranche’s price, first the benchmark yield is determined and adjusted for collateral performance, tranche level attributes and market conditions. Then the cash flow for each tranche is generated (using consensus prepayment speed assumptions including, as appropriate, a prepayment projection based on historical statistics of the underlying collateral). The tranche-level yield is used to discount the cash flows and generate the price. Depending on the characteristics of the tranche, a volatility-driven, multi-dimensional single cash flow stream model or an option-adjusted spread model may be used. When cash flows or other security structure or market information is not available, broker quotes may be used.

On a quarterly basis, the Company receives from its independent pricing service a list of fixed maturity securities, if any, that were priced solely from broker quotes. For these securities, fair value may be determined using the broker quotes, or by the Company using similar pricing techniques as the Company’s independent pricing service. Depending on the level of observable inputs, these securities would be classified as Level 2 or Level 3 fair value measurements. At June 30, 2014, one security was priced solely from a broker quote (seven at December 31, 2013); however, all of these securities were reported as Level 2 fair value measurements due to the broker quote prices approximating the Company's price estimates obtained by applying pricing techniques with observable inputs.

A small number of the Company’s securities are not priced by the independent pricing service. One is an equity security that is reported as a Level 3 fair value measurement at June 30, 2014 and December 31, 2013, since no reliable observable inputs are used in its valuation. This equity security continues to be reported at the fair value obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC). The SVO establishes a per share price for this security based on an annual review of that company’s financial statements, typically performed during the second quarter. The other securities not priced by the Company’s independent pricing service at June 30, 2014 and December 31, 2013 include six fixed maturity securities. Two of these fixed maturity securities, classified as Level 3 fair value measurements, are corporate securities that convey premium tax benefits and are not publicly traded. The fair values for these securities are based on discounted cash flow analyses. The other fixed maturity securities are classified as Level 2 fair value measurements. The fair values for these fixed maturity securities were obtained from either the SVO or the Company's investment custodian using similar pricing techniques as the Company’s independent pricing service.

Presented in the table below are the estimated fair values of the Company’s financial instruments as of June 30, 2014 and December 31, 2013.



			Fair value measurements using
June 30, 2014	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,615	$	—	$	9,615	$	—
U.S. government-sponsored agencies	185,481		—		185,481		—
Obligations of states and political subdivisions	342,501		—		342,501		—
Commercial mortgage-backed	55,594		—		55,594		—
Residential mortgage-backed	97,235		—		97,235		—
Other asset-backed	11,564		—		11,564		—
Corporate	369,213		—		367,264		1,949
Total fixed maturity securities available-for-sale	1,071,203		—		1,069,254		1,949

Equity securities available-for-sale:
Common stocks:
Financial services	31,701		31,698		—		3
Information technology	23,945		23,945		—		—
Healthcare	22,298		22,298		—		—
Consumer staples	13,474		13,474		—		—
Consumer discretionary	20,776		20,776		—		—
Energy	27,137		27,137		—		—
Industrials	14,805		14,805		—		—
Other	17,947		17,947		—		—
Non-redeemable preferred stocks	12,493		7,850		4,643		—
Total equity securities available-for-sale	184,576		179,930		4,643		3

Short-term investments	59,799		59,799		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	11,485		—		—		11,485



			Fair value measurements using
December 31, 2013	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,412	$	—	$	9,412	$	—
U.S. government-sponsored agencies	146,946		—		146,946		—
Obligations of states and political subdivisions	357,052		—		357,052		—
Commercial mortgage-backed	68,939		—		68,939		—
Residential mortgage-backed	94,179		—		94,179		—
Other asset-backed	12,648		—		12,648		—
Corporate	338,808		—		336,832		1,976
Total fixed maturity securities available-for-sale	1,027,984		—		1,026,008		1,976

Equity securities available-for-sale:
Common stocks:
Financial services	28,498		28,495		—		3
Information technology	18,917		18,917		—		—
Healthcare	21,945		21,945		—		—
Consumer staples	13,011		13,011		—		—
Consumer discretionary	21,031		21,031		—		—
Energy	21,117		21,117		—		—
Industrials	17,264		17,264		—		—
Other	17,811		17,811		—		—
Non-redeemable preferred stocks	10,254		5,795		4,459		—
Total equity securities available-for-sale	169,848		165,386		4,459		3

Short-term investments	56,166		56,166		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	10,040		—		—		10,040

Presented in the table below is a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2014 and 2013. Any unrealized gains or losses on these securities are recognized in other comprehensive income. Any gains or losses from disposals or impairments of these securities are reported as realized investment gains or losses in net income.



	Fair value measurements using significant unobservable inputs (Level 3)
Three months ended June 30, 2014	Fixed maturity securities available-for-sale, corporate			Equity securities available-for-sale, financial services		Total
Beginning balance	$	1,975		$	3	$	1,978
Settlements	(42		)	—		(42		)
Unrealized gains included in other comprehensive income (loss)	16			—		16
Balance at June 30, 2014	$	1,949		$	3	$	1,952

Six months ended June 30, 2014
Beginning balance	$	1,976		$	3	$	1,979
Settlements	(42		)	—		(42		)
Unrealized gains included in other comprehensive income (loss)	15			—		15
Balance at June 30, 2014	$	1,949		$	3	$	1,952



	Fair value measurements using significant unobservable inputs (Level 3)
Three months ended June 30, 2013	Fixed maturity securities available-for-sale, corporate		Equity securities available-for-sale, financial services		Total
Beginning balance	$	—	$	2	$	2
Purchases	948		—		948
Unrealized gains included in other comprehensive income (loss)	—		1		1
Balance at June 30, 2013	$	948	$	3	$	951

Six months ended June 30, 2013
Beginning balance	$	—	$	2	$	2
Purchases	948		—		948
Unrealized gains included in other comprehensive income (loss)	—		1		1
Balance at June 30, 2013	$	948	$	3	$	951

There were no transfers into or out of Levels 1 or 2 during the three or six months ended June 30, 2014 or 2013. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.