Fair Value Measurements

Our estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available.

To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized by the independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation.

Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. This model combines all inputs to arrive at a value assigned to each security. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information, data changes, and directional moves compared to market moves. In addition, on a quarterly basis, we perform quality controls over values received from the pricing sources which also include reviewing tolerance reports, trading information, data changes, and directional moves compared to market moves. We have not made any adjustments to the prices obtained from the independent pricing sources.

In accordance with fair value accounting guidance, we applied the following fair value hierarchy in order to measure fair value for assets and liabilities:

Level 1 - Quoted prices for identical instruments in active markets that we can access. Financial assets utilizing Level 1 inputs primarily include U.S. Treasury securities, equity securities, and Australian government and semi government securities.

Level 2 - Quoted prices for similar instruments in active markets that we can access; quoted prices for identical or similar instruments in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace for the instrument. The observable inputs are used in valuation models to calculate the fair value of the instruments. Financial assets utilizing Level 2 inputs primarily include obligations of U.S. government corporations and agencies, corporate bonds, mortgage-backed securities, asset-backed securities, and most municipal bonds.

The independent pricing sources utilize these approaches to determine the fair value of the instruments in Level 2 of the fair value hierarchy based on type of instrument:

Corporate Debt & U.S. Government and Agency Bonds are evaluated by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the evaluation process.

Obligations of U.S. States & Political Subdivisions are evaluated by tracking, capturing, and analyzing quotes for active issues and trades reported via the Municipal Securities Rulemaking Board records. Daily briefings and reviews of current economic conditions, trading levels, spread relationships, and the slope of the yield curve provide further data for evaluation.

Residential Mortgage-Backed Securities are evaluated by monitoring interest rate movements, and other pertinent data daily. Incoming market data is enriched to derive spread, yield and/or price data as appropriate, enabling known data points to be extrapolated for valuation application across a range of related securities.

Commercial Mortgage-Backed Securities are evaluated using valuation techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. Evaluation utilizes regular reviews of the inputs for securities covered, including executed trades, broker quotes, credit information, collateral attributes and/or cash flow waterfall as applicable.

Asset-Backed Securities are evaluated using spreads and other information solicited from market buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. Cash flows are generated for each tranche, benchmark yields are determined, and deal collateral performance and tranche level attributes including market color as available are used, resulting in tranche-specific spreads.

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable or from par values for equity securities restricted in their ability to be redeemed or sold. The inputs used to derive the fair value of Level 3 securities reflect our own assumptions about the assumptions a market participant would use in pricing an asset or liability. Financial assets utilizing Level 3 inputs include equity securities that can only be redeemed or sold at their par value and only to the security issuer and certain state premium tax credit investments. The state premium tax credit investments have an average maturity of less than 3 years, credit ratings of AA+ or higher, and their balances reflect their remaining scheduled payments discounted at an average annual rate of 7.1%. Our non-financial assets that are classified as Level 3 securities consist of real estate acquired through claim settlement. The fair value of real estate acquired is the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the appraised value is based upon our historical sales experience adjusted for current trends.

Fair value measurements for assets measured at fair value included the following as of September 30, 2016 and December 31, 2015:

September 30, 2016

(In thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	42,256	$	8,755	$	33,501	$	—
Obligations of U.S. states and political subdivisions	2,132,669		—		2,131,839		830
Corporate debt securities	1,749,869		—		1,749,869		—
Asset-backed securities	79,182		—		79,182		—
Residential mortgage-backed securities	243,436		—		243,436		—
Commercial mortgage-backed securities	350,213		—		350,213		—
Collateralized loan obligations	121,000		—		121,000		—
Total debt securities	4,718,625		8,755		4,709,040		830
Equity securities ⁽¹⁾	7,218		2,950		—		4,268
Total investment portfolio	$	4,725,843	$	11,705	$	4,709,040	$	5,098
Real estate acquired ⁽²⁾	$	10,564	$	—	$	—	$	10,564


⁽¹⁾	Equity securities in Level 3 are carried at cost, which approximates fair value.


⁽²⁾	Real estate acquired through claim settlement, which is held for sale, is reported in Other assets on the consolidated balance sheets.

December 31, 2015

(In thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	160,584	$	46,197	$	114,387	$	—
Obligations of U.S. states and political subdivisions	1,792,527		—		1,791,299		1,228
Corporate debt securities	2,004,763		—		2,004,763		—
Asset-backed securities	116,617		—		116,617		—
Residential mortgage-backed securities	257,648		—		257,648		—
Commercial mortgage-backed securities	233,491		—		233,491		—
Collateralized loan obligations	60,200		—		60,200		—
Debt securities issued by foreign sovereign governments	31,731		31,731		—		—
Total debt securities	4,657,561		77,928		4,578,405		1,228
Equity securities ⁽¹⁾	5,645		2,790		—		2,855
Total investment portfolio	$	4,663,206	$	80,718	$	4,578,405	$	4,083
Real estate acquired ⁽²⁾	$	12,149	$	—	$	—	$	12,149


⁽¹⁾	Equity securities in Level 3 are carried at cost, which approximates fair value.


⁽²⁾	Real estate acquired through claim settlement, which is held for sale, is reported in Other assets on the consolidated balance sheets.

There were no transfers of securities between Level 1 and Level 2 during the first nine months of 2016.

For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three and nine months ended September 30, 2016 and 2015 is shown in the following tables. There were no transfers into or out of Level 3 in those periods and there were no losses included in earnings for those periods attributable to the change in unrealized losses on assets still held at the end of the applicable period.



Three Months Ended September 30, 2016
(In thousands)	Debt Securities			Equity Securities			Total Investments			Real Estate Acquired
Balance at June 30, 2016	$	1,056		$	6,940		$	7,996		$	9,642
Total realized/unrealized gains (losses):
Included in other comprehensive income	—			(3,519		)	(3,519		)	—
Included in earnings and reported as net realized investment gains, net	—			3,579			3,579			—
Included in earnings and reported as losses incurred, net	—			—			—			(501		)
Purchases	—			1,167			1,167			8,938
Sales	(226		)	(3,899		)	(4,125		)	(7,515		)
Balance at September 30, 2016	$	830		$	4,268		$	5,098		$	10,564



Three Months Ended September 30, 2015
(In thousands)	Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
Balance at June 30, 2015	$	1,634		$	321	$	1,955		$	7,995
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net	—			—		—			(1,031		)
Purchases	—			2,535		2,535			9,632
Sales	(247		)	—		(247		)	(6,512		)
Balance at September 30, 2015	$	1,387		$	2,856	$	4,243		$	10,084



Nine Months Ended September 30, 2016
(In thousands)	Debt Securities			Equity Securities			Total Investments			Real Estate Acquired
Balance at December 31, 2015	$	1,228		$	2,855		$	4,083		$	12,149
Total realized/unrealized gains (losses):
Included in other comprehensive income	—			—			—			—
Included in earnings and reported as net realized investment gains, net	—			3,579			3,579			—
Included in earnings and reported as losses incurred, net	—			—			—			(143		)
Purchases	—			4,258			4,258			27,953
Sales	(398		)	(6,424		)	(6,822		)	(29,395		)
Balance at September 30, 2016	$	830		$	4,268		$	5,098		$	10,564



Nine Months Ended September 30, 2015
(In thousands)	Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
Balance at December 31, 2014	$	1,846		$	321	$	2,167		$	12,658
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net	—			—		—			(1,503		)
Purchases	7			2,535		2,542			26,346
Sales	(466		)	—		(466		)	(27,417		)
Balance at September 30, 2015	$	1,387		$	2,856	$	4,243		$	10,084

Authoritative guidance over disclosures about the fair value of financial instruments requires additional disclosure for financial instruments not measured at fair value. Certain financial instruments, including insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level 2) approximated their fair values. Additional fair value disclosures related to our investment portfolio are included in Note 7 – “Investments.”

Financial Liabilities Not Measured at Fair Value

We incur financial liabilities in the normal course of our business. The following table presents the carrying value and fair value of our financial liabilities disclosed, but not carried, at fair value at September 30, 2016 and December 31, 2015. The fair values of our Convertible Senior Notes, Senior Notes and Convertible Junior Subordinated Debentures were based on observable market prices and the fair value of the Federal Home Loan Bank Advance was estimated using discounted cash flows on current incremental borrowing rates for similar borrowing arrangements, and in all cases they are categorized as Level 2.



	September 30, 2016				December 31, 2015
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial liabilities:
FHLB Advance	$	155,000	$	159,302	n/a		n/a
5% Notes	144,629		148,904		331,546		345,616
2% Notes	204,444		261,530		490,755		701,955
5.75% Notes	417,087		442,531		n/a		n/a
9% Debentures	256,872		318,077		389,522		455,067
Total long-term debt	$	1,178,032	$	1,330,344	$	1,211,823	$	1,502,638