Fair Value of Financial Instruments

The following is a list of those assets that are measured at fair value by hierarchy level as of December 31, 2017:



	December 31, 2017
(In thousands)	Level I		Level II		Total
Assets at Fair Value
Investment Portfolio:
U.S. government and agency securities	$	124,969	$	8,023	$	132,992
State and municipal obligations	—		386,111		386,111
Money market instruments	213,357		—		213,357
Corporate bonds and notes	—		2,304,017		2,304,017
RMBS	—		216,749		216,749
CMBS	—		503,955		503,955
Other ABS	—		676,158		676,158
Foreign government and agency securities	—		36,448		36,448
Equity securities	175,205		860		176,065
Other investments (1)	—		25,720		25,720
Total Investments at Fair Value (2)	513,531		4,158,041		4,671,572		(3)
Total Assets at Fair Value	$	513,531	$	4,158,041	$	4,671,572	(3)

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(1)	Comprising short-term certificates of deposit and commercial paper.


(2)	Does not include certain other invested assets ($0.3 million), primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value. Includes cash collateral held under securities lending agreements ($19.4 million) reinvested in money market instruments.


(3)	Includes $28.0 million of securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in our consolidated balance sheets. See Note 6 for more information.

At December 31, 2017, there were no Level III assets measured at fair value, and no Level III liabilities. There were no investment transfers between Level I, Level II or Level III for the year ended December 31, 2017.

The following is a list of those assets that are measured at fair value by hierarchy level as of December 31, 2016:



	December 31, 2016
(In thousands)	Level I		Level II		Level III		Total
Assets at Fair Value
Investment Portfolio:
U.S. government and agency securities	$	237,479	$	—	$	—	$	237,479
State and municipal obligations	—		358,536		—		358,536
Money market instruments	431,472		—		—		431,472
Corporate bonds and notes	—		2,024,205		—		2,024,205
RMBS	—		388,842		—		388,842
CMBS	—		507,273		—		507,273
Other ABS	—		450,128		—		450,128
Foreign government and agency securities	—		32,807		—		32,807
Equity securities	—		830		500		1,330
Other investments (1)	—		28,663		500		29,163
Total Investments at Fair Value (2)	668,951		3,791,284		1,000		4,461,235
Total Assets at Fair Value	$	668,951	$	3,791,284	$	1,000	$	4,461,235

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(1)	Comprising short-term certificates of deposit and commercial paper.


(2)	Does not include certain other invested assets ($1.2 million), primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value.

At December 31, 2016, total Level III assets of $1.0 million accounted for less than 0.1% of total assets measured at fair value. Within other investments is a Level III investment which was purchased during the second quarter of 2016, and there were no related gains or losses recorded during the year ended December 31, 2016. Within equity securities is a Level III investment that was purchased during the second quarter of 2015, and there were no related gains or losses recorded during the year ended December 31, 2016. There were no Level III liabilities at December 31, 2016.

There were no investment transfers between Level I, Level II or Level III for the year ended December 31, 2016.

Rollforward activity of Level III assets and liabilities (including realized and unrealized gains and losses, purchases, sales, issuances, settlements and transfers) was immaterial for the years ended December 31, 2017 and 2016.

Valuation Methodologies for Assets Measured at Fair Value

The following are descriptions of our valuation methodologies for financial assets and liabilities measured at fair value.

We are responsible for the determination of the value of all investments carried at fair value and the supporting methodologies and assumptions. To assist us in this responsibility, we utilize independent third-party valuation service providers to gather, analyze and interpret market information and estimate fair values based upon relevant methodologies and assumptions for various asset classes and individual securities. We perform monthly quantitative and qualitative analyses on the prices received from third parties to determine whether the prices are reasonable estimates of fair value. Our analysis includes: (i) a review of the methodology used by third-party pricing services; (ii) a comparison of pricing services’ valuations to other independent sources; (iii) a review of month-to-month price fluctuations; and (iv) a comparison of actual purchase and sale transactions with valuations received from third parties. These processes are designed to ensure that our investment values are accurately recorded, that the data inputs and valuation techniques utilized are appropriate and consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value.

U.S. government and agency securities. The fair value of U.S. government and agency securities is estimated using observed market transactions, including broker-dealer quotes and actual trade activity as a basis for valuation. U.S. government and agency securities are categorized in either Level I or Level II of the fair value hierarchy.

State and municipal obligations. The fair value of state and municipal obligations is estimated using recent transaction activity, including market observations. Valuation models are used, which incorporate bond structure, yield curve, credit spreads and other factors. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable.

Money market instruments. The fair value of money market instruments is based on daily prices, which are published and available to all potential investors and market participants. As such, these securities are categorized in Level I of the fair value hierarchy.

Corporate bonds and notes. The fair value of corporate bonds and notes is estimated using recent transaction activity, including market observations. Spread models are used that incorporate issuer and structure characteristics, such as credit risk and early redemption features, where applicable. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable.

RMBS, CMBS, and Other ABS. The fair value of these instruments is estimated based on prices of comparable securities and spreads and observable prepayment speeds. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. The fair value of any Level III securities is generally estimated by discounting estimated future cash flows.

Foreign government and agency securities. The fair value of foreign government and agency securities is estimated using observed market yields used to create a maturity curve and observed credit spreads from market makers and broker-dealers. These securities are categorized in Level II of the fair value hierarchy.

Equity securities. The fair value of these securities is generally estimated using observable market data in active markets or bid prices from market makers and broker-dealers. Generally, these securities are categorized in Level I or II of the fair value hierarchy, as observable market data are readily available. From time to time, certain equity securities may be categorized in Level III of the fair value hierarchy due to a lack of market-based transaction data or the use of model-based valuations.

Other investments. These securities primarily consist of commercial paper and short-term certificates of deposit, which are categorized in Level II of the fair value hierarchy. Other investments also contains convertible notes of non-reporting issuers, which are categorized in Level III of the fair value hierarchy due to a lack of market-based transaction data.

Other Fair Value Disclosure

The carrying value and estimated fair value of other selected assets and liabilities not carried at fair value on our consolidated balance sheets were as follows as of the dates indicated:



	December 31, 2017				December 31, 2016
(In thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Other invested assets	$	334	$	3,226	$	1,195	$	3,789
Liabilities:
Long-term debt	1,027,074		1,093,934		1,069,537		1,214,471

Other Invested Assets. The fair value of these assets, primarily invested in limited partnerships, is estimated based on the equity recorded within the financial statements provided by the limited partnerships. These interests are accounted for and carried as cost-method investments.

Long-Term Debt. At December 31, 2016, the carrying amount of long-term debt is net of the equity component of our convertible notes, which is accounted for under the accounting standard for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). At December 31, 2017, none of our convertible notes remained outstanding. The fair value is estimated based on the quoted market prices for the same or similar instruments. See Note 12 for further information.