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.

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



	At December 31, 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 ⁽¹⁾	$	208,412	$	0	$	208,412	$	0
States & political subdivisions ⁽¹⁾	159,023		0		159,023		0
Corporate debt securities	249,947		0		237,370		12,577
Residential mortgage-backed securities	4,609		0		4,609		0
Commercial mortgage-backed securities	46,515		0		46,515		0
Collateralized debt obligations	64,239		0		64,239		0
Other debt securities	15,778		0		15,778		0
Total available-for-sale securities	748,523		0		735,946		12,577
Equity securities
Nonredeemable preferred stock - financial services sector	11,853		1,809		10,044		0
Total equity securities	11,853		1,809		10,044		0
Other limited partnership investments ⁽²⁾	3,206		—		—		—
Total	$	763,582	$	1,809	$	745,990	$	12,577



	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 ⁽²⁾	4,816		—		—		—
Total	$	763,529	$	2,015	$	746,619	$	10,079


(1)	In the fourth quarter of 2018, we began selling off our municipal bonds as part of a portfolio rebalancing. We intend to sell the remaining municipal bonds in the first half of 2019. We have currently invested proceeds from these sales in short-term U.S. Treasuries.

(2)

The limited partnership investment measured at fair value represents one real estate fund included on the balance sheet as a limited partnership investment 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 investment can never be redeemed with the fund. Instead, distributions are received when liquidation of the underlying assets of the fund occurs. The fair value of this investment 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 partner, 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. During the years ended December 31, 2018 and 2017, no contributions were made and distributions totaling $1.2 million and $0.5 million, respectively, were received from this investment. There were no unfunded commitments related to the investment as of December 31, 2018 and 2017. In 2018, the one remaining real estate fund was in the process of liquidating the underlying assets. Liquidation of the fund was completed in January 2019.

We review the fair value hierarchy classifications each reporting period. Transfers between hierarchy levels may occur due to changes in available market observable inputs.

Level 3 Assets – 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 December 31, 2018
Available-for-sale securities:
Corporate debt securities	$	7,879	$	6	$	(312	)	$	5,550	$	(2,854	)	$	18,232	$	(15,924	)	$	12,577
Collateralized debt obligations	2,200		0		10			905		0			0		(3,115		)	0
Total Level 3 available-for-sale securities	$	10,079	$	6	$	(302	)	$	6,455	$	(2,854	)	$	18,232	$	(19,039	)	$	12,577

Level 3 Assets – 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 December 31, 2017
Available-for-sale securities:
Corporate debt securities	$	9,352	$	(85	)	$	(41	)	$	4,954	$	(5,411	)	$	11,196	$	(12,086	)	$	7,879
Collateralized debt obligations	0		0			0			2,200		0			0		0			2,200
Total Level 3 available-for-sale securities	$	9,352	$	(85	)	$	(41	)	$	7,154	$	(5,411	)	$	11,196	$	(12,086	)	$	10,079


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

The change in unrealized gains or losses included in other comprehensive income related to Level 3 securities held at the reporting date is as follows for the years ended December 31:



(in thousands)	2018			2017		2016
Available-for-sale securities:
Corporate debt securities	$	(554	)	$	—	$	—
Net unrealized losses on Level 3 securities held at reporting date	$	(554	)	$	—	$	—

Quantitative and Qualitative Disclosures about Unobservable Inputs

When a non-binding broker quote was the only input available, the security was classified as Level 3. The quantitative detail of the unobservable inputs is neither provided nor reasonably available to us.

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



(in thousands)	At December 31, 2018
	Total		Level 1		Level 2		Level 3 ⁽¹⁾
Available-for-sale securities:
Priced via pricing services	$	748,480	$	0	$	735,946	$	12,534
Priced via market comparables/broker quotes	43		0		0		43
Total available-for-sale securities	748,523		0		735,946		12,577
Equity securities priced via pricing services	11,853		1,809		10,044		0
Other limited partnership investments priced via unobservable inputs ⁽²⁾	3,206		—		—		—
Total	$	763,582	$	1,809	$	745,990	$	12,577


(1)	Securities classified as Level 3 were priced using non-binding broker quotes.


(2)	Represents one real estate fund included on the Statements of Financial Position as limited partnership investments that is reported under the fair value option using the NAV practical expedient. These amounts are not required to be categorized in the fair value hierarchy.

Financial instruments disclosed, but not carried at fair value

The following table presents the carrying values and fair value measurements, which are categorized as Level 3 in the fair value hierarchy, of financial instruments disclosed, but not carried at fair value:



	At December 31, 2018				At December 31, 2017
(in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Agent loans ⁽¹⁾	$	58,006	$	54,110	$	21,849	$	21,849
Long-term borrowings	99,730		94,057		74,728		72,424


(1)	The fair value of agent loans approximates carrying value at December 31, 2017.