DISCLOSURES ABOUT THE FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of the Company’s financial instruments as of March 31, 2017 and December 31, 2016 are summarized in the tables below.



March 31, 2017	Carrying amounts		Estimated fair values
($ in thousands)	Carrying amounts		Estimated fair values
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	7,863	$	7,863
U.S. government-sponsored agencies	229,671		229,671
Obligations of states and political subdivisions	351,708		351,708
Commercial mortgage-backed	35,619		35,619
Residential mortgage-backed	87,099		87,099
Other asset-backed	25,617		25,617
Corporate	460,716		460,716
Total fixed maturity securities available-for-sale	1,198,293		1,198,293

Equity securities available-for-sale:
Common stocks:
Financial services	39,655		39,655
Information technology	35,575		35,575
Healthcare	27,522		27,522
Consumer staples	19,866		19,866
Consumer discretionary	20,367		20,367
Energy	17,622		17,622
Industrials	25,171		25,171
Other	18,313		18,313
Non-redeemable preferred stocks	26,111		26,111
Total equity securities available-for-sale	230,202		230,202

Short-term investments	25,530		25,530

Liabilities:
Surplus notes	25,000		11,735



December 31, 2016	Carrying amounts		Estimated fair values
($ in thousands)	Carrying amounts		Estimated fair values
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	7,830	$	7,830
U.S. government-sponsored agencies	239,197		239,197
Obligations of states and political subdivisions	335,757		335,757
Commercial mortgage-backed	37,572		37,572
Residential mortgage-backed	96,434		96,434
Other asset-backed	26,393		26,393
Corporate	456,516		456,516
Total fixed maturity securities available-for-sale	1,199,699		1,199,699

Equity securities available-for-sale:
Common stocks:
Financial services	35,122		35,122
Information technology	30,542		30,542
Healthcare	24,707		24,707
Consumer staples	19,100		19,100
Consumer discretionary	22,321		22,321
Energy	19,071		19,071
Industrials	24,245		24,245
Other	18,384		18,384
Non-redeemable preferred stocks	20,347		20,347
Total equity securities available-for-sale	213,839		213,839

Short-term investments	39,670		39,670

Liabilities:
Surplus notes	25,000		11,228

The estimated fair values 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 market 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 March 31, 2017 and December 31, 2016, 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. Two of these are equity securities that are reported as Level 3 fair value measurements since no reliable observable inputs are used in their valuations. The largest of these equity security holdings is in a privately placed non-redeemable convertible preferred stock investment in a technology company that Employers Mutual intends to work closely with in its data analytics activities. Due to the recent purchase of this security in November, 2016, this security is currently carried at its acquisition cost, which is presumed to be equivalent to fair value. The other equity security, a much smaller holding, 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 consist of nine 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, 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 tables below are the estimated fair values of the Company’s financial instruments as of March 31, 2017 and December 31, 2016.



March 31, 2017			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	$	7,863	$	—	$	7,863	$	—
U.S. government-sponsored agencies	229,671		—		229,671		—
Obligations of states and political subdivisions	351,708		—		351,708		—
Commercial mortgage-backed	35,619		—		35,619		—
Residential mortgage-backed	87,099		—		87,099		—
Other asset-backed	25,617		—		25,617		—
Corporate	460,716		—		459,787		929
Total fixed maturity securities available-for-sale	1,198,293		—		1,197,364		929

Equity securities available-for-sale:
Common stocks:
Financial services	39,655		39,652		—		3
Information technology	35,575		35,575		—		—
Healthcare	27,522		27,522		—		—
Consumer staples	19,866		19,866		—		—
Consumer discretionary	20,367		20,367		—		—
Energy	17,622		17,622		—		—
Industrials	25,171		25,171		—		—
Other	18,313		18,313		—		—
Non-redeemable preferred stocks	26,111		11,611		12,500		2,000
Total equity securities available-for-sale	230,202		215,699		12,500		2,003

Short-term investments	25,530		25,530		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	11,735		—		—		11,735



December 31, 2016			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	$	7,830	$	—	$	7,830	$	—
U.S. government-sponsored agencies	239,197		—		239,197		—
Obligations of states and political subdivisions	335,757		—		335,757		—
Commercial mortgage-backed	37,572		—		37,572		—
Residential mortgage-backed	96,434		—		96,434		—
Other asset-backed	26,393		—		26,393		—
Corporate	456,516		—		455,534		982
Total fixed maturity securities available-for-sale	1,199,699		—		1,198,717		982

Equity securities available-for-sale:
Common stocks:
Financial services	35,122		35,119		—		3
Information technology	30,542		30,542		—		—
Healthcare	24,707		24,707		—		—
Consumer staples	19,100		19,100		—		—
Consumer discretionary	22,321		22,321		—		—
Energy	19,071		19,071		—		—
Industrials	24,245		24,245		—		—
Other	18,384		18,384		—		—
Non-redeemable preferred stocks	20,347		11,074		7,273		2,000
Total equity securities available-for-sale	213,839		204,563		7,273		2,003

Short-term investments	39,670		39,670		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	11,228		—		—		11,228

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 months ended March 31, 2017 and 2016. 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 March 31, 2017	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		Equity securities available-for-sale, non-redeemable preferred stocks		Total
Beginning balance	$	982		$	3	$	2,000	$	2,985
Settlements	(50		)	—		—		(50		)
Unrealized gains (losses) included in other comprehensive income (loss)	(3		)	—		—		(3		)
Balance at March 31, 2017	$	929		$	3	$	2,000	$	2,932



Three months ended March 31, 2016	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		Equity securities available-for-sale, non-redeemable preferred stocks		Total
Beginning balance	$	1,329		$	3	$	—	$	1,332
Settlements	(61		)	—		—		(61		)
Unrealized gains (losses) included in other comprehensive income (loss)	3			—		—		3
Balance at March 31, 2016	$	1,271		$	3	$	—	$	1,274

There were no transfers into or out of Levels 1 or 2 during the three months ended March 31, 2017 or 2016. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.