Fair Value Measurements

Recurring fair value measurements

In accordance with fair value accounting guidance, we applied the following fair value hierarchy 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 and equity 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 based on the type of instrument. 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.

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. 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. 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.

Assets measured at fair value, by hierarchy level, as of March 31, 2018 and December 31, 2017 as shown in tables 8.1a and 8.1b below are estimated using the process described above, and more fully in Note 3 - “Significant Accounting Policies” of the notes to the consolidated financial statements in our 2017 Annual Report on Form 10-K.



	Table	8.1a
Fair value hierarchy - current year			March 31, 2018
Fair value hierarchy - current year	(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		$	189,062	$	81,418	$	107,644	$	—
	Obligations of U.S. states and political subdivisions		2,102,697		—		2,102,443		254
	Corporate debt securities		2,056,079		—		2,056,079		—
	ABS		9,422		—		9,422		—
	RMBS		171,540		—		171,540		—
	CMBS		293,356		—		293,356		—
	CLOs		107,907		—		107,907		—
	Total fixed income securities		4,930,063		81,418		4,848,391		254
	Equity securities ⁽¹⁾		4,099		2,931		—		1,168
	Total investments at fair value		$	4,934,162	$	84,349	$	4,848,391	$	1,422
	Real estate acquired ⁽²⁾		$	10,078	$	—	$	—	$	10,078


⁽¹⁾	Equity securities in Level 3 are carried at cost, which approximates fair value. See “Reconciliations of Level 3 assets” below for information regarding a change in presentation of amounts previously included in Level 3 Equity securities.


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



	Table	8.1b
Fair value hierarchy - prior year-end			December 31, 2017
Fair value hierarchy - prior year-end	(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		$	178,846	$	81,598	$	97,248	$	—
	Obligations of U.S. states and political subdivisions		2,152,524		—		2,152,253		271
	Corporate debt securities		2,066,838		—		2,066,838		—
	ABS		4,923		—		4,923		—
	RMBS		181,849		—		181,849		—
	CMBS		297,312		—		297,312		—
	CLOs		101,023		—		101,023		—
	Total fixed income securities		4,983,315		81,598		4,901,446		271
	Equity securities ⁽¹⁾		7,246		2,978		—		4,268
	Total investments at fair value		$	4,990,561	$	84,576	$	4,901,446	$	4,539
	Real estate acquired ⁽²⁾		$	12,713	$	—	$	—	$	12,713


⁽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.

Reconciliations of Level 3 assets

For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three months ended March 31, 2018 and 2017 is shown in tables 8.2a and 8.2b below. As described in Note 2 - “New Accounting Pronouncements,” updated guidance regarding the Recognition and Measurement of Financial Assets and Financial Liabilities became effective on January 1, 2018, which requires that our investment in FHLB stock not be presented with equity securities. Prior to the updated guidance, our FHLB stock was included in our Level 3 equity securities. As shown in table 8.2a below, for the three months ended March 31, 2018, we have transferred our FHLB stock out of Level 3 assets, and they are carried at cost, which approximates fair value on our consolidated balance sheet as of March 31, 2018. The amount of FHLB stock is presented in “Other invested assets” as of March 31, 2018. 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.



	Table	8.2a
Development of assets and liabilities classified within level 3 - current year quarter			Three Months Ended March 31, 2018
	(In thousands)		Debt Securities			Equity Securities			Total Investments			Real Estate Acquired
	Balance at December 31, 2017		$	271		$	4,268		$	4,539		$	12,713
	Transfers out of Level 3		—			(3,100		)	(3,100		)	—
	Total realized/unrealized gains (losses):
	Included in earnings and reported as losses incurred, net		—			—			—			341
	Purchases		—			—			—			5,894
	Sales		(17		)	—			(17		)	(8,870		)
	Balance at March 31, 2018		$	254		$	1,168		$	1,422		$	10,078



	Table	8.2b
Development of assets and liabilities classified within level 3 - prior year quarter			Three Months Ended March 31, 2017
	(In thousands)		Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	Balance at December 31, 2016		$	691		$	4,268	$	4,959		$	11,748
	Total realized/unrealized gains (losses):
	Included in earnings and reported as losses incurred, net		—			—		—			(163		)
	Purchases		—			—		—			8,683
	Sales		(8		)	—		(8		)	(9,538		)
	Balance at March 31, 2017		$	683		$	4,268	$	4,951		$	10,730

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. Table 8.3 presents the carrying value and fair value of our financial liabilities disclosed, but not carried, at fair value at March 31, 2018 and December 31, 2017. The fair values of our 5.75% Notes and 9% Debentures were based on observable market prices. The fair value of the FHLB Advance was estimated using discounted cash flows on current incremental borrowing rates for similar borrowing arrangements. In all cases the fair values of the financial liabilities below are categorized as Level 2.



	Table	8.3
Fair value measurements - liabilities			March 31, 2018				December 31, 2017
	(In thousands)		Carrying Value		Fair Value		Carrying Value		Fair Value
	FHLB Advance		155,000		149,756		$	155,000	$	152,124
	5.75% Notes		418,848		446,730		418,560		465,473
	9% Debentures		256,872		350,897		256,872		353,507
	Total financial liabilities		$	830,720	$	947,383	$	830,432	$	971,104