Note 4. Fair Value

Our available-for-sale and trading securities are recorded at fair value, which is the price that would be received to sell the asset in an orderly transaction between willing market participants as of the measurement date.

Valuation techniques used to derive the fair value of our available-for-sale and trading securities are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our own assumptions regarding fair market value for these securities. Although the majority of our prices are obtained from third party sources, we also perform an internal pricing review for securities with low trading volumes under current market conditions. Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:


•	Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.


•	Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.


•	Level 3 – Unobservable inputs for the asset or liability.

Estimates of fair values for our investment portfolio are obtained primarily from a nationally recognized pricing service. Our Level 1 category includes those securities valued using an exchange traded price provided by the pricing service. The methodologies used by the pricing service that support a Level 2 classification of a financial instrument include multiple verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. Pricing service valuations for Level 3 securities are based upon proprietary models and are used when observable inputs are not available or in illiquid markets.

In limited circumstances we adjust the price received from the pricing service when, in our judgment, a better reflection of fair value is available based upon corroborating information and our knowledge and monitoring of market conditions such as a disparity in price of comparable securities and/or non-binding broker quotes. In other circumstances, certain securities are internally priced because prices are not provided by the pricing service.

We perform continuous reviews of the prices obtained from the pricing service. This includes evaluating the methodology and inputs used by the pricing service to ensure that we determine the proper classification level of the financial instrument. Price variances, including large periodic changes, are investigated and corroborated by market data. We have reviewed the pricing methodologies of our pricing service as well as other observable inputs, such as data, and transaction volumes and believe that their prices adequately consider market activity in determining fair value. Our review process continues to evolve based upon accounting guidance and requirements.

When a price from the pricing service is not available, values are determined by obtaining broker/dealer quotes and/or market comparables. When available, we obtain multiple quotes for the same security. The ultimate value for these securities is determined based upon our best estimate of fair value using corroborating market information. Our evaluation includes the consideration of benchmark yields, reported trades, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data.

For certain securities in an illiquid market, there may be no prices available from a pricing service and no comparable market quotes available. In these situations, we value the security using an internally-developed, risk-adjusted discounted cash flow model.

The following tables present our fair value measurements on a recurring basis by asset class and level of input:



	At September 30, 2016
	Fair value measurements using:
(in thousands)	Total		Quoted prices in active markets for identical assets Level 1		Observable inputs Level 2		Unobservable inputs Level 3
Available-for-sale securities:
U.S. government & agencies	$	2,048	$	0	$	2,048	$	0
States & political subdivisions	246,259		0		246,259		0
Corporate debt securities	320,268		0		310,079		10,189
Residential mortgage-backed securities	17,145		0		17,145		0
Commercial mortgage-backed securities	40,985		0		40,985		0
Collateralized debt obligations	66,647		0		61,526		5,121
Other debt securities	2,003		0		2,003		0
Total fixed maturities	695,355		0		680,045		15,310
Common stock	9,020		9,020		0		0
Total available-for-sale securities	704,375		9,020		680,045		15,310
Other investments ⁽¹⁾	3,964		—		—		—
Total	$	708,339	$	9,020	$	680,045	$	15,310



	At December 31, 2015
	Fair value measurements using:
(in thousands)	Total		Quoted prices in active markets for identical assets Level 1		Observable inputs Level 2		Unobservable inputs Level 3
Available-for-sale securities:
States & political subdivisions	$	231,847	$	0	$	231,847	$	0
Corporate debt securities	250,333		0		250,264		69
Residential mortgage-backed securities	13,513		0		13,513		0
Commercial mortgage-backed securities	37,571		0		37,571		0
Collateralized debt obligations	51,745		0		43,168		8,577
Other debt securities	2,200		0		2,200		0
Total fixed maturities	587,209		0		578,563		8,646
Common stock	12,732		12,732		0		0
Total available-for-sale securities	599,941		12,732		578,563		8,646
Other investments ⁽¹⁾	4,526		—		—		—
Total	$	604,467	$	12,732	$	578,563	$	8,646

(1) Other investments measured at fair value represent real estate funds included on the balance sheet as limited partnership investments that are reported under the fair value option using the net asset value practical expedient. These amounts are not required to be categorized in the fair value hierarchy. The investments can never be redeemed with the funds. Instead, distributions are received when liquidation of the underlying assets of the funds occur. It is estimated that the underlying assets will generally be liquidated between 5 and 10 years from the inception of the funds. The fair value of these investments is based on the net asset value (NAV) information provided by the general partner. Fair value is based on our proportionate share of the NAV based on the most recent partners' capital statements received from the general partners, which is generally one quarter prior to our balance sheet date. These values are then analyzed to determine if the NAV represents fair value at our balance sheet date, with adjustment being made where appropriate. We consider observable market data and perform a review validating the appropriateness of the NAV at each balance sheet date. It is likely that all of the investments will be redeemed at a future date for an amount different than the NAV of our ownership interest in partners' capital as of September 30, 2016 and December 31, 2015. During the nine months ended September 30, 2016, no contributions were made and distributions totaling $0.7 million were received from these investments. During the year ended December 31, 2015, no contributions were made and distributions totaling $3.5 million were received from these investments. The amount of unfunded commitments related to the investments was $0.3 million as of September 30, 2016, and $0.6 million as of December 31, 2015.

Level 3 Assets – Quarterly Change:





(in thousands)	Beginning balance at June 30, 2016		Included in earnings ⁽¹⁾		Included in other comprehensive income		Purchases		Sales			Transfers in and (out) of Level 3			Ending balance at September 30, 2016
Available-for-sale securities:
Corporate debt securities	$	8,851	$	22	$	38	$	3,217	$	(318	)	$	(1,621	)	$	10,189
Commercial mortgage-backed securities	1,003		0		0		0		0			(1,003		)	0
Collateralized debt obligations	1,200		0		7		3,000		0			914			5,121
Total fixed maturities	11,054		22		45		6,217		(318		)	(1,710		)	15,310
Total available-for-sale securities	11,054		22		45		6,217		(318		)	(1,710		)	15,310
Total Level 3 assets	$	11,054	$	22	$	45	$	6,217	$	(318	)	$	(1,710	)	$	15,310


(1)	These amounts are reported in the Statement of Operations as net investment income and net realized investment gains (losses) for the three months ended September 30, 2016 on Level 3 securities.

We review the fair value hierarchy classifications each reporting period. Transfers between hierarchy levels may occur due to changes in the available market observable inputs. Transfers in and out of level classifications are reported as having occurred at the beginning of the quarter in which the transfers occurred.

There were no transfers between Level 1 and Level 2 for the three months ended September 30, 2016. Level 2 to Level 3 transfers totaled $4.6 million for 11 fixed maturity holdings due to the use of unobservable market data to determine the fair value at September 30, 2016. Level 3 to Level 2 transfers totaled $6.3 million for 18 fixed maturity holdings due to the use of observable market data to determine the fair value at September 30, 2016.

Level 3 Assets – Year-to-Date Change:




(in thousands)	Beginning balance at December 31, 2015		Included in earnings ⁽¹⁾		Included in other comprehensive income			Purchases		Sales			Transfers in and (out) of Level 3			Ending balance at September 30, 2016
Available-for-sale securities:
Corporate debt securities	$	69	$	67	$	119		$	11,887	$	(924	)	$	(1,029	)	$	10,189
Commercial mortgage-backed securities	0		0		3			1,000		0			(1,003		)	0
Collateralized debt obligations	8,577		4		(5		)	7,722		(54		)	(11,123		)	5,121
Total fixed maturities	8,646		71		117			20,609		(978		)	(13,155		)	15,310
Total available-for-sale securities	8,646		71		117			20,609		(978		)	(13,155		)	15,310
Total Level 3 assets	$	8,646	$	71	$	117		$	20,609	$	(978	)	$	(13,155	)	$	15,310


(1)	These amounts are reported in the Statement of Operations as net investment income and net realized investment gains (losses) for the nine months ended September 30, 2016 on Level 3 securities.

There were no transfers between Level 1 and Level 2 for the nine months ended September 30, 2016. Level 2 to Level 3 transfers totaled $7.6 million for 27 fixed maturity holdings due to the use of unobservable market data to determine the fair value at September 30, 2016. Level 3 to Level 2 transfers totaled $20.8 million for 40 fixed maturity holdings due to the use of observable market data to determine the fair value at September 30, 2016.

Level 3 Assets – Quarterly Change:





(in thousands)	Beginning balance at June 30, 2015		Included in earnings ⁽¹⁾			Included in other comprehensive income			Purchases		Sales		Transfers in and (out) of Level 3		Ending balance at September 30, 2015
Available-for-sale securities:
Corporate debt securities	$	0	$	(1	)	$	(58	)	$	0	$	0	$	124	$	65
Collateralized debt obligations	660		1			(3		)	4,546		0		0		5,204
Total fixed maturities	660		0			(61		)	4,546		0		124		5,269
Total available-for-sale securities	660		0			(61		)	4,546		0		124		5,269
Total Level 3 assets	$	660	$	0		$	(61	)	$	4,546	$	0	$	124	$	5,269


(1)	These amounts are reported in the Statement of Operations as net investment income for the three months ended September 30, 2015 on Level 3 securities.

There were no transfers between Level 1 and Level 2 or from Level 3 to Level 2 for the three months ended September 30, 2015. Level 2 to Level 3 transfers totaled $0.1 million for one fixed maturity holding due to the use of unobservable market data to determine the fair value at September 30, 2015.

Level 3 Assets – Year-to-Date Change:




(in thousands)	Beginning balance at December 31, 2014		Included in earnings ⁽¹⁾			Included in other comprehensive income			Purchases		Sales		Transfers in and (out) of Level 3		Ending balance at September 30, 2015
Available-for-sale securities:
Corporate debt securities	$	0	$	(1	)	$	(58	)	$	110	$	0	$	14	$	65
Collateralized debt obligations	0		1			(3		)	5,206		0		0		5,204
Total fixed maturities	0		0			(61		)	5,316		0		14		5,269
Total available-for-sale securities	0		0			(61		)	5,316		0		14		5,269
Total Level 3 assets	$	0	$	0		$	(61	)	$	5,316	$	0	$	14	$	5,269


(1)	These amounts are reported in the Statement of Operations as net investment income for the nine months ended September 30, 2015 on Level 3 securities.

There were no transfers between Level 1 and Level 2 for the nine months ended September 30, 2015. Level 2 to Level 3 transfers totaled $0.1 million for one fixed maturity holding due to the use of unobservable market data to determine the fair value at September 30, 2016. Level 3 to Level 2 transfers totaled $0.1 million for one fixed maturity holding due to the use of observable market data to determine the fair value at September 30, 2015.

Quantitative and Qualitative Disclosures about Unobservable Inputs

When a non-binding broker quote was the only input available, the security was classified within Level 3. Use of non-binding brokers quotes totaled $15.3 million at September 30, 2016. The unobservable inputs are not reasonably available to us.

The following table presents our fair value measurements on a recurring basis by pricing source:



(in thousands)	At September 30, 2016
	Total		Level 1		Level 2		Level 3
Fixed maturities:
Priced via pricing services	$	689,205	$	0	$	679,955	$	9,250
Priced via market comparables/broker quotes	6,150		0		90		6,060
Total fixed maturities	695,355		0		680,045		15,310
Common stock:
Priced via pricing services	9,020		9,020		0		0
Total common stock	9,020		9,020		0		0
Other investments:
Priced via unobservable inputs ⁽¹⁾	3,964		—		—		—
Total other investments	3,964		—		—		—
Total	$	708,339	$	9,020	$	680,045	$	15,310

(1)

Other investments measured at fair value represent real estate funds included on the balance sheet as limited partnership investments that are reported under the fair value option using the net asset value practical expedient. These amounts are not required to be categorized in the fair value hierarchy. The fair value of these investments is based on the net asset value (NAV) information provided by the general partner.

There were no assets measured at fair value on a nonrecurring basis during the nine months ended September 30, 2016.