Note 5. Fair Value

Our available-for-sale debt securities and equity 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 debt securities and equity 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 virtually all of our prices are obtained from third party sources, we also perform an internal pricing review on outliers, which include securities with price changes inconsistent with 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 market data, and transaction volumes and believe that the prices adequately consider market activity in determining fair value.

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.

Certain assets and liabilities are not carried at fair value on a recurring basis, including agent loans which are included in other assets (see Note 6, "Investments") and long-term borrowings (see Note 7, "Borrowing Arrangements"). Accordingly, such financial instruments are not included in the fair value hierarchy disclosure because they are not subject to re-measurement at fair value. There were no assets and liabilities measured at fair value on a non-recurring basis during the nine months ended September 30, 2018.

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



	At September 30, 2018
	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. treasury	$	36,425	$	0	$	36,425	$	0
States & political subdivisions	256,865		0		256,865		0
Corporate debt securities	277,669		0		269,399		8,270
Residential mortgage-backed securities	2,494		0		2,494		0
Commercial mortgage-backed securities	46,860		0		46,860		0
Collateralized debt obligations	65,294		0		65,294		0
Other debt securities	18,588		0		17,683		905
Total available-for-sale securities	704,195		0		695,020		9,175
Equity securities:
Nonredeemable preferred stock - financial services sector	12,511		1,981		10,530		0
Total equity securities	12,511		1,981		10,530		0
Other limited partnership investments ⁽¹⁾	3,317		—		—		—
Total	$	720,023	$	1,981	$	705,550	$	9,175



	At December 31, 2017
	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. treasury	$	11,734	$	0	$	11,734	$	0
States & political subdivisions	259,264		0		259,264		0
Foreign government securities	503		0		503		0
Corporate debt securities	346,523		0		338,644		7,879
Residential mortgage-backed securities	25,571		0		25,571		0
Commercial mortgage-backed securities	32,804		0		32,804		0
Collateralized debt obligations	58,034		0		55,834		2,200
Other debt securities	11,528		0		11,528		0
Total fixed maturities	745,961		0		735,882		10,079
Nonredeemable preferred stock - financial services sector	11,659		2,015		9,644		0
Nonredeemable preferred stock - utilities sector	1,093		0		1,093		0
Total available-for-sale securities	758,713		2,015		746,619		10,079
Other limited partnership investments ⁽¹⁾	4,816		—		—		—
Total	$	763,529	$	2,015	$	746,619	$	10,079

(1) Other limited partnership 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, 2018 and December 31, 2017. During the nine months ended September 30, 2018, no contributions were made and distributions totaling $1.2 million were received from these investments. During the year ended December 31, 2017, no contributions were made and distributions totaling $0.5 million were received from these investments. There were no unfunded commitments related to the investments as of September 30, 2018 and December 31, 2017.

We review the fair value hierarchy classifications each reporting period. Transfers between hierarchy levels may occur due to changes in available market observable inputs. Transfers into and out of level classifications in 2017 are reported as having occurred at the beginning of the quarter in which the transfers occurred. Effective January 1, 2018, we changed our policy to recognize transfers as occurring at the end of the quarter in which the transfers occurred. This change was applied prospectively due to the immaterial impact on prior year disclosures.

There were no transfers between Level 1 and Level 2 for the three and nine months ended September 30, 2018 and 2017.

Level 3 Assets – 2018 Quarterly Change:



(in thousands)	Beginning balance at June 30, 2018		Included in earnings⁽¹⁾		Included in other comprehensive income		Purchases		Sales			Transfers into Level 3⁽²⁾		Transfers out of Level 3⁽²⁾			Ending balance at September 30, 2018
Available-for-sale securities:
Corporate debt securities	$	11,120	$	3	$	71	$	1,539	$	(1,416	)	$	2,735	$	(5,782	)	$	8,270
Other debt securities	0		0		0		905		0			0		0			905
Total Level 3 available-for-sale securities	$	11,120	$	3	$	71	$	2,444	$	(1,416	)	$	2,735	$	(5,782	)	$	9,175

Level 3 Assets – 2018 Year-to-Date Change:



(in thousands)	Beginning balance at December 31, 2017		Included in earnings⁽¹⁾		Included in other comprehensive income		Purchases		Sales			Transfers into Level 3⁽²⁾		Transfers out of Level 3⁽²⁾			Ending balance at September 30, 2018
Available-for-sale securities:
Corporate debt securities	$	7,879	$	4	$	23	$	4,586	$	(2,381	)	$	10,517	$	(12,358	)	$	8,270
Collateralized debt obligations	2,200		0		7		0		0			0		(2,207		)	0
Other debt securities	0		0		0		905		0			0		0			905
Total Level 3 available-for-sale securities	$	10,079	$	4	$	30	$	5,491	$	(2,381	)	$	10,517	$	(14,565	)	$	9,175

Level 3 Assets – 2017 Quarterly Change:



(in thousands)	Beginning balance at June 30, 2017		Included in earnings⁽¹⁾		Included in other comprehensive income			Purchases		Sales			Transfers into Level 3⁽²⁾		Transfers out of Level 3⁽²⁾			Ending balance at September 30, 2017
Available-for-sale securities:
Corporate debt securities	$	9,295	$	24	$	(60	)	$	539	$	(1,240	)	$	2,633	$	(3,276	)	$	7,915
Total Level 3 available-for-sale securities	$	9,295	$	24	$	(60	)	$	539	$	(1,240	)	$	2,633	$	(3,276	)	$	7,915

Level 3 Assets – 2017 Year-to-Date Change:



(in thousands)	Beginning balance at December 31, 2016		Included in earnings⁽¹⁾		Included in other comprehensive income			Purchases		Sales			Transfers into Level 3⁽²⁾		Transfers out of Level 3⁽²⁾			Ending balance at September 30, 2017
Available-for-sale securities:
Corporate debt securities	$	9,352	$	3	$	(108	)	$	4,520	$	(4,372	)	$	8,444	$	(9,924	)	$	7,915
Total Level 3 available-for-sale securities	$	9,352	$	3	$	(108	)	$	4,520	$	(4,372	)	$	8,444	$	(9,924	)	$	7,915


(1)	These amounts are reported in the Statements of Operations as net investment income and net realized investment gains (losses) for the each of the periods presented above.


(2)	Transfers into and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.

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 broker quotes totaled $9.2 million at September 30, 2018. The unobservable inputs are not reasonably available to us.

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



	At September 30, 2018
(in thousands)	Total		Level 1		Level 2		Level 3
Available-for-sale securities priced via pricing services	$	704,195	$	0	$	695,020	$	9,175
Equity securities priced via pricing services	12,511		1,981		10,530		0
Other limited partnership investments priced via unobservable inputs ⁽¹⁾	3,317		—		—		—
Total	$	720,023	$	1,981	$	705,550	$	9,175

(1)

Other limited partnership investments measured at fair value represent real estate funds included on the Statements of Financial Position as limited partnership investments that are reported under the fair value option using the NAV 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 NAV information provided by the general partner.