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, 2019 and December 31, 2018 are summarized in the tables below.



March 31, 2019	Carrying amounts		Estimated fair values
($ in thousands)	Carrying amounts		Estimated fair values
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,113	$	8,113
U.S. government-sponsored agencies	309,120		309,120
Obligations of states and political subdivisions	276,857		276,857
Commercial mortgage-backed	86,664		86,664
Residential mortgage-backed	168,765		168,765
Other asset-backed	17,719		17,719
Corporate	424,622		424,622
Total fixed maturity securities available-for-sale	1,291,860		1,291,860

Equity investments, at fair value
Common stocks:
Financial services	47,345		47,345
Information technology	39,346		39,346
Healthcare	34,006		34,006
Consumer staples	14,694		14,694
Consumer discretionary	28,764		28,764
Energy	15,853		15,853
Industrials	19,435		19,435
Other	15,471		15,471
Non-redeemable preferred stocks	18,180		18,180
Investment funds	9,489		9,489
Total equity investments	242,583		242,583

Short-term investments	48,265		48,265

Liabilities:
Surplus notes	25,000		16,056



December 31, 2018	Carrying amounts		Estimated fair values
($ in thousands)	Carrying amounts		Estimated fair values
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,021	$	8,021
U.S. government-sponsored agencies	304,479		304,479
Obligations of states and political subdivisions	283,651		283,651
Commercial mortgage-backed	84,379		84,379
Residential mortgage-backed	162,137		162,137
Other asset-backed	20,834		20,834
Corporate	419,408		419,408
Total fixed maturity securities available-for-sale	1,282,909		1,282,909

Equity investments, at fair value
Common stocks:
Financial services	41,839		41,839
Information technology	31,581		31,581
Healthcare	34,571		34,571
Consumer staples	13,180		13,180
Consumer discretionary	22,765		22,765
Energy	13,372		13,372
Industrials	19,389		19,389
Other	14,371		14,371
Non-redeemable preferred stocks	16,654		16,654
Investment funds	7,641		7,641
Total equity investments	215,363		215,363

Short-term investments	28,204		28,204

Liabilities:
Surplus notes	25,000		15,259

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 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 March 31, 2019 and December 31, 2018, 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 was an equity security that was reported as a Level 3 fair value measurement since no observable inputs were used in its valuation. This security was sold in the fourth quarter of 2018 and in prior periods was reported at the fair value obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC). The SVO established a per share price for this security based on an annual review of that company’s financial statements, typically performed during second quarter. The other securities not priced by the Company’s independent pricing service consist of six fixed maturity securities. One of these fixed maturity securities (two at December 31, 2018), 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, 2019 and December 31, 2018.



March 31, 2019					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	$	8,113	$	—	$	—	$	8,113	$	—
U.S. government-sponsored agencies	309,120		—		—		309,120		—
Obligations of states and political subdivisions	276,857		—		—		276,857		—
Commercial mortgage-backed	86,664		—		—		86,664		—
Residential mortgage-backed	168,765		—		—		168,765		—
Other asset-backed	17,719		—		—		17,719		—
Corporate	424,622		—		—		424,421		201
Total fixed maturity securities available-for-sale	1,291,860		—		—		1,291,659		201

Equity investments, at fair value:
Common stocks:
Financial services	47,345		—		47,345		—		—
Information technology	39,346		—		39,346		—		—
Healthcare	34,006		—		34,006		—		—
Consumer staples	14,694		—		14,694		—		—
Consumer discretionary	28,764		—		28,764		—		—
Energy	15,853		—		15,853		—		—
Industrials	19,435		—		19,435		—		—
Other	15,471		—		15,471		—		—
Non-redeemable preferred stocks	18,180		—		8,578		9,602		—
Investment funds	9,489		9,489		—		—		—
Total equity investments	242,583		9,489		223,492		9,602		—

Short-term investments	48,265		—		48,265		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	16,056		—		—		—		16,056



December 31, 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	$	8,021	$	—	$	—	$	8,021	$	—
U.S. government-sponsored agencies	304,479		—		—		304,479		—
Obligations of states and political subdivisions	283,651		—		—		283,651		—
Commercial mortgage-backed	84,379		—		—		84,379		—
Residential mortgage-backed	162,137		—		—		162,137		—
Other asset-backed	20,834		—		—		20,834		—
Corporate	419,408		—		—		419,149		259
Total fixed maturity securities available-for-sale	1,282,909		—		—		1,282,650		259

Equity investments, at fair value:
Common stocks:
Financial services	41,839		—		41,839		—		—
Information technology	31,581		—		31,581		—		—
Healthcare	34,571		—		34,571		—		—
Consumer staples	13,180		—		13,180		—		—
Consumer discretionary	22,765		—		22,765		—		—
Energy	13,372		—		13,372		—		—
Industrials	19,389		—		19,389		—		—
Other	14,371		—		14,371		—		—
Non-redeemable preferred stocks	16,654		—		10,325		6,329		—
Investment funds	7,641		7,641		—		—		—
Total equity investments	215,363		7,641		201,393		6,329		—

Short-term investments	28,204		—		28,204		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	15,259		—		—		—		15,259

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, 2019 and 2018. 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 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
	Fixed maturity securities available-for-sale, corporate			Total
Three months ended March 31, 2019
Beginning balance	$	259		$	259
Settlements	(57		)	(57		)
Unrealized losses included in other comprehensive income (loss) on securities still held at reporting date	(1		)	(1		)
Balance at March 31, 2019	$	201		$	201



($ in thousands)	Fair value measurements using significant unobservable (Level 3) inputs
	Fixed maturity securities available-for-sale, corporate			Equity securities, financial services		Total
Three months ended March 31, 2018
Beginning balance	$	620		$	3	$	623
Settlements	(56		)	—		(56		)
Unrealized losses included in other comprehensive income (loss) on securities still held at reporting date	(2		)	—		(2		)
Balance at March 31, 2018	$	562		$	3	$	565