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.



September 30, 2015	Carrying amount		Estimated fair value
($ in thousands)	Carrying amount		Estimated fair value
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,737	$	9,737
U.S. government-sponsored agencies	223,465		223,465
Obligations of states and political subdivisions	343,936		343,936
Commercial mortgage-backed	43,739		43,739
Residential mortgage-backed	89,684		89,684
Other asset-backed	18,738		18,738
Corporate	448,662		448,662
Total fixed maturity securities available-for-sale	1,177,961		1,177,961

Equity securities available-for-sale:
Common stocks:
Financial services	34,519		34,519
Information technology	26,564		26,564
Healthcare	24,118		24,118
Consumer staples	15,769		15,769
Consumer discretionary	19,150		19,150
Energy	21,170		21,170
Industrials	17,745		17,745
Other	17,003		17,003
Non-redeemable preferred stocks	18,267		18,267
Total equity securities available-for-sale	194,305		194,305

Short-term investments	32,798		32,798

Liabilities:
Surplus notes	25,000		11,269



December 31, 2014	Carrying amount		Estimated fair value
($ in thousands)	Carrying amount		Estimated fair value
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,703	$	9,703
U.S. government-sponsored agencies	215,616		215,616
Obligations of states and political subdivisions	326,058		326,058
Commercial mortgage-backed	46,762		46,762
Residential mortgage-backed	97,953		97,953
Other asset-backed	16,005		16,005
Corporate	415,402		415,402
Total fixed maturity securities available-for-sale	1,127,499		1,127,499

Equity securities available-for-sale:
Common stocks:
Financial services	34,379		34,379
Information technology	26,865		26,865
Healthcare	26,852		26,852
Consumer staples	16,694		16,694
Consumer discretionary	22,691		22,691
Energy	22,863		22,863
Industrials	18,221		18,221
Other	16,056		16,056
Non-redeemable preferred stocks	12,415		12,415
Total equity securities available-for-sale	197,036		197,036

Short-term investments	53,262		53,262

Liabilities:
Surplus notes	25,000		12,308

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 September 30, 2015 and December 31, 2014, the Company had no securities priced solely from broker quotes.

A small number of the Company’s securities are not priced by the independent pricing service. One equity security is reported as a Level 3 fair value measurement at September 30, 2015 and December 31, 2014, 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 September 30, 2015 include seven fixed maturity securities (ten at December 31, 2014). 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, the Company's investment custodian, or the Company's investment department 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 September 30, 2015 and December 31, 2014.



September 30, 2015			Fair value measurements using
($ in thousands)	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	$	9,737	$	—	$	9,737	$	—
U.S. government-sponsored agencies	223,465		—		223,465		—
Obligations of states and political subdivisions	343,936		—		343,936		—
Commercial mortgage-backed	43,739		—		43,739		—
Residential mortgage-backed	89,684		—		89,684		—
Other asset-backed	18,738		—		18,738		—
Corporate	448,662		—		447,209		1,453
Total fixed maturity securities available-for-sale	1,177,961		—		1,176,508		1,453

Equity securities available-for-sale:
Common stocks:
Financial services	34,519		34,516		—		3
Information technology	26,564		26,564		—		—
Healthcare	24,118		24,118		—		—
Consumer staples	15,769		15,769		—		—
Consumer discretionary	19,150		19,150		—		—
Energy	21,170		21,170		—		—
Industrials	17,745		17,745		—		—
Other	17,003		17,003		—		—
Non-redeemable preferred stocks	18,267		11,236		7,031		—
Total equity securities available-for-sale	194,305		187,271		7,031		3

Short-term investments	32,798		32,798		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	11,269		—		—		11,269



December 31, 2014			Fair value measurements using
($ in thousands)	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	$	9,703	$	—	$	9,703	$	—
U.S. government-sponsored agencies	215,616		—		215,616		—
Obligations of states and political subdivisions	326,058		—		326,058		—
Commercial mortgage-backed	46,762		—		46,762		—
Residential mortgage-backed	97,953		—		97,953		—
Other asset-backed	16,005		—		16,005		—
Corporate	415,402		—		413,740		1,662
Total fixed maturity securities available-for-sale	1,127,499		—		1,125,837		1,662

Equity securities available-for-sale:
Common stocks:
Financial services	34,379		34,376		—		3
Information technology	26,865		26,865		—		—
Healthcare	26,852		26,852		—		—
Consumer staples	16,694		16,694		—		—
Consumer discretionary	22,691		22,691		—		—
Energy	22,863		22,863		—		—
Industrials	18,221		18,221		—		—
Other	16,056		16,056		—		—
Non-redeemable preferred stocks	12,415		7,745		4,670		—
Total equity securities available-for-sale	197,036		192,363		4,670		3

Short-term investments	53,262		53,262		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	12,308		—		—		12,308

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 nine months ended September 30, 2015 and 2014. Any unrealized gains or losses on these securities are recognized in other comprehensive income. Any gains or losses from settlements, disposals or impairments of these securities are reported as realized investment gains or losses in net income.



Three months ended September 30, 2015	Fair value measurements using significant unobservable (Level 3) inputs
($ in thousands)	Fixed maturity securities available-for-sale, corporate			Equity securities available-for-sale, financial services		Total
Beginning balance	$	1,622		$	3	$	1,625
Settlements	(171		)	—		(171		)
Unrealized gains (losses) included in other comprehensive income (loss)	2			—		2
Balance at September 30, 2015	$	1,453		$	3	$	1,456

Nine months ended September 30, 2015
Beginning balance	$	1,662		$	3	$	1,665
Settlements	(214		)	—		(214		)
Unrealized gains (losses) included in other comprehensive income (loss)	5			—		5
Balance at September 30, 2015	$	1,453		$	3	$	1,456



Three months ended September 30, 2014	Fair value measurements using significant unobservable (Level 3) inputs
($ in thousands)	Fixed maturity securities available-for-sale, corporate			Equity securities available-for-sale, financial services		Total
Beginning balance	$	1,949		$	3	$	1,952
Settlements	(70		)	—		(70		)
Unrealized gains (losses) included in other comprehensive income (loss)	(3		)	—		(3		)
Balance at September 30, 2014	$	1,876		$	3	$	1,879

Nine months ended September 30, 2014
Beginning balance	$	1,976		$	3	$	1,979
Settlements	(112		)	—		(112		)
Unrealized gains (losses) included in other comprehensive income (loss)	12			—		12
Balance at September 30, 2014	$	1,876		$	3	$	1,879

There were no transfers into or out of Levels 1 or 2 during the nine months ended September 30, 2015 or 2014. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.