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DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
9 Months Ended
Sep. 30, 2018
Fair Value Disclosures [Abstract]  
DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
DISCLOSURES ABOUT THE FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company’s financial instruments as of September 30, 2018 and December 31, 2017 are summarized in the tables below.
September 30, 2018
 
Carrying
amounts
 
Estimated
fair values
($ in thousands)
 
 
Assets:
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
U.S. treasury
 
$
7,858

 
$
7,858

U.S. government-sponsored agencies
 
290,057

 
290,057

Obligations of states and political subdivisions
 
282,307

 
282,307

Commercial mortgage-backed
 
75,314

 
75,314

Residential mortgage-backed
 
146,725

 
146,725

Other asset-backed
 
21,329

 
21,329

Corporate
 
424,482

 
424,482

Total fixed maturity securities available-for-sale
 
1,248,072

 
1,248,072

 
 
 
 
 
Equity investments, at fair value
 
 
 
 
Common stocks:
 
 
 
 
Financial services
 
48,647

 
48,647

Information technology
 
39,711

 
39,711

Healthcare
 
33,389

 
33,389

Consumer staples
 
13,302

 
13,302

Consumer discretionary
 
24,087

 
24,087

Energy
 
17,808

 
17,808

Industrials
 
23,943

 
23,943

Other
 
15,029

 
15,029

Non-redeemable preferred stocks
 
18,706

 
18,706

Investment funds
 
4,146

 
4,146

Total equity investments
 
238,768

 
238,768

 
 
 
 
 
Short-term investments
 
33,717

 
33,717

 
 
 
 
 
Liabilities:
 
 
 
 
Surplus notes
 
25,000

 
15,145

December 31, 2017
 
Carrying
amounts
 
Estimated
fair values
($ in thousands)
 
 
Assets:
 
 
 
 
Fixed maturity securities available-for-sale:
 
 
 
 
U.S. treasury
 
$
8,078

 
$
8,078

U.S. government-sponsored agencies
 
297,949

 
297,949

Obligations of states and political subdivisions
 
307,536

 
307,536

Commercial mortgage-backed
 
83,980

 
83,980

Residential mortgage-backed
 
119,799

 
119,799

Other asset-backed
 
24,114

 
24,114

Corporate
 
433,560

 
433,560

Total fixed maturity securities available-for-sale
 
1,275,016

 
1,275,016

 
 
 
 
 
Equity securities available-for-sale:
 
 
 
 
Common stocks:
 
 
 
 
Financial services
 
43,522

 
43,522

Information technology
 
35,810

 
35,810

Healthcare
 
30,595

 
30,595

Consumer staples
 
14,127

 
14,127

Consumer discretionary
 
20,538

 
20,538

Energy
 
16,905

 
16,905

Industrials
 
28,489

 
28,489

Other
 
16,421

 
16,421

Non-redeemable preferred stocks
 
21,708

 
21,708

Total equity securities available-for-sale
 
228,115

 
228,115

 
 
 
 
 
Short-term investments
 
23,613

 
23,613

 
 
 
 
 
Liabilities:
 
 
 
 
Surplus notes
 
25,000

 
16,689



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. During 2018, the Company invested in a few privately placed equity investments. One of these was in the form of preferred units in a limited liability corporation offering weather-related predictive analytics and risk mitigation tools. In accordance with the new guidance related to financial instruments that was adopted January 1, 2018, this investment does not have a readily determinable fair value. Therefore, the Company has elected to measure this investment at the alternative measurement of cost, adjusted for impairments and observable price changes. No impairment losses have been made to this investment. Due to the alternative measurement classification, this investment is excluded from the disclosures in this footnote. The other privately placed equity investment, also in the field of insurance technology, is accounted for under the equity method of accounting, and as such is also excluded from these fair value disclosures. Since 2016, the Company has held another privately placed equity investment in the form of non-redeembable convertible preferred stock issued by a start-up technology company that Employers Mutual works with in its data analytics activities. During 2018, the Company purchased common stock in this entity. The Company accounts for its investment in this entity under the equity method of accounting, and as such is excluded from these fair value disclosures.
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 over a 25-year term (the surplus notes have no stated maturity date, and the interest to be paid is assumed to continue at the current interest rate in place of 2.73 percent).
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.
 
 
 
 
NAV -
The fair values of investment company limited partnership investments and similar vehicles (referred to as investment funds) are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.
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 September 30, 2018 and December 31, 2017, 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 of these is an equity security that is reported as a Level 3 fair value measurement since no observable inputs are used in its valuation.  This 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 consist of six fixed maturity securities (eight at December 31, 2017). 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 September 30, 2018 and December 31, 2017.
September 30, 2018
 
 
 
 
 
Fair value measurements using
($ in thousands)
 
Total
 
Investments measured at net asset value (NAV)
 
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
 
$
7,858

 
$

 
$

 
$
7,858

 
$

U.S. government-sponsored agencies
 
290,057

 

 

 
290,057

 

Obligations of states and political subdivisions
 
282,307

 

 

 
282,307

 

Commercial mortgage-backed
 
75,314

 

 

 
75,314

 

Residential mortgage-backed
 
146,725

 

 

 
146,725

 

Other asset-backed
 
21,329

 

 

 
21,329

 

Corporate
 
424,482

 

 

 
424,133

 
349

Total fixed maturity securities available-for-sale
 
1,248,072

 

 

 
1,247,723

 
349

 
 
 
 
 
 
 
 
 
 
 
Equity investments, at fair value:
 
 
 
 
 
 
 
 
 
 
Common stocks:
 
 
 
 
 
 
 
 
 
 
Financial services
 
48,647

 

 
48,647

 

 

Information technology
 
39,711

 

 
39,711

 

 

Healthcare
 
33,389

 

 
33,389

 

 

Consumer staples
 
13,302

 

 
13,302

 

 

Consumer discretionary
 
24,087

 

 
24,087

 

 

Energy
 
17,808

 

 
17,808

 

 

Industrials
 
23,943

 

 
23,943

 

 

Other
 
15,029

 

 
15,029

 

 

Non-redeemable preferred stocks
 
18,706

 

 
9,093

 
9,613

 

Investment funds
 
4,146

 
4,146

 

 

 

Total equity investments
 
238,768

 
4,146

 
225,009

 
9,613

 

 
 
 
 
 
 
 
 
 
 
 
Short-term investments
 
33,717

 

 
33,717

 

 

 
 
 
 
 
 
 
 
 
 
 
Financial instruments not reported at fair value:
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Surplus notes
 
15,145

 

 

 

 
15,145

December 31, 2017
 
 
 
 
 
Fair value measurements using
($ in thousands)
 
Total
 
Investments measured at net asset value (NAV)
 
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
 
$
8,078

 
$

 
$

 
$
8,078

 
$

U.S. government-sponsored agencies
 
297,949

 

 

 
297,949

 

Obligations of states and political subdivisions
 
307,536

 

 

 
307,536

 

Commercial mortgage-backed
 
83,980

 

 

 
83,980

 

Residential mortgage-backed
 
119,799

 

 

 
119,799

 

Other asset-backed
 
24,114

 

 

 
24,114

 

Corporate
 
433,560

 

 

 
432,940

 
620

Total fixed maturity securities available-for-sale
 
1,275,016

 

 

 
1,274,396

 
620

 
 
 
 
 
 
 
 
 
 
 
Equity securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
Common stocks:
 
 
 
 
 
 
 
 
 
 
Financial services
 
43,522

 

 
43,519

 

 
3

Information technology
 
35,810

 

 
35,810

 

 

Healthcare
 
30,595

 

 
30,595

 

 

Consumer staples
 
14,127

 

 
14,127

 

 

Consumer discretionary
 
20,538

 

 
20,538

 

 

Energy
 
16,905

 

 
16,905

 

 

Industrials
 
28,489

 

 
28,489

 

 

Other
 
16,421

 

 
16,421

 

 

Non-redeemable preferred stocks
 
21,708

 

 
9,512

 
10,196

 
2,000

Total equity securities available-for-sale
 
228,115

 

 
215,916

 
10,196

 
2,003

 
 
 
 
 
 
 
 
 
 
 
Short-term investments
 
23,613

 

 
23,613

 

 

 
 
 
 
 
 
 
 
 
 
 
Financial instruments not reported at fair value:
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Surplus notes
 
16,689

 

 

 

 
16,689


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, 2018 and 2017.  Any unrealized gains or losses on fixed maturity securities are recognized in other comprehensive income (loss).  Any gains or losses from settlements, disposals, impairments and, starting in 2018, unrealized gains or losses on equity securities are reported as realized investment gains or losses in net income.
($ in thousands)
 
Fair value measurements using significant unobservable (Level 3) inputs
Three months ended September 30, 2018
 
Fixed maturity securities available-for-sale, corporate
 
Equity securities,
financial services
 
Total
Beginning balance
 
$
474

 
$

 
$
474

Settlements
 
(125
)
 

 
(125
)
Balance at September 30, 2018
 
$
349

 
$

 
$
349

 
 
 
 
 
 
 
Nine months ended September 30, 2018
 
 
 
 
 
 
Beginning balance
 
$
620

 
$
3

 
$
623

Settlements
 
(270
)
 

 
(270
)
Unrealized losses included in net income
 

 
(3
)
 
(3
)
Unrealized losses included in other comprehensive income (loss) on securities still held at reporting date
 
(1
)
 

 
(1
)
Balance at September 30, 2018
 
$
349

 
$

 
$
349


($ in thousands)
 
Fair value measurements using significant
unobservable (Level 3) inputs
Three months ended September 30, 2017
 
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
 
$
840

 
$
3

 
$
2,000

 
$
2,843

Settlements
 
(125
)
 

 

 
(125
)
Unrealized losses included in other comprehensive income (loss) on securities still held at reporting date
 
(1
)
 

 

 
(1
)
Balance at September 30, 2017
 
$
714

 
$
3

 
$
2,000

 
$
2,717

 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2017
 
 
 
 
 
 
 
 
Beginning balance
 
$
982

 
$
3

 
$
2,000

 
$
2,985

Settlements
 
(265
)
 

 

 
(265
)
Unrealized losses included in other comprehensive income (loss) on securities still held at reporting date
 
(3
)
 

 

 
(3
)
Balance at September 30, 2017
 
$
714

 
$
3

 
$
2,000

 
$
2,717