Fair Value

Financial instruments carried at 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. The outlier review includes securities with price changes that vary from current market conditions or independent third party price sources. 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 March 31, 2019
	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⁾	$	279,956	$	0	$	279,956	$	0
States & political subdivisions ⁽¹⁾	27,452		0		27,452		0
Corporate debt securities	233,017		0		221,494		11,523
Residential mortgage-backed securities	6,571		0		5,656		915
Commercial mortgage-backed securities	48,144		0		46,962		1,182
Collateralized debt obligations	63,932		0		63,932		0
Other debt securities	15,847		0		15,847		0
Total available-for-sale securities	674,919		0		661,299		13,620
Equity securities:
Nonredeemable preferred stock - financial services sector	12,410		1,966		10,444		0
Total equity securities	12,410		1,966		10,444		0
Total	$	687,329	$	1,966	$	671,743	$	13,620



	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


(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 second quarter of 2019. We have currently invested proceeds from these sales primarily in 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 (NAV) practical expedient, which is not required to be categorized in the fair value hierarchy. The fair value of this investment is based on our proportionate share of the NAV from the most recent partners' capital statements received from the general partner, which is generally one quarter prior to our balance sheet date. We consider observable market data and perform a review validating the appropriateness of the NAV at each balance sheet date. Liquidation of this fund was completed in January 2019. There were no unfunded commitments related to the investment at December 31, 2018. During the three months ended March 31, 2019, distributions totaling $3.2 million were received from this investment. During the year ended December 31, 2018, no contributions were made and distributions totaling $1.2 million were received from this investment.

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



	At March 31, 2019
(in thousands)	Total		Level 1		Level 2		Level 3
Available-for-sale securities:
Priced via pricing services	$	673,729	$	0	$	661,299	$	12,430
Priced via market comparables/broker quotes	125		0		0		125
Priced via internal modeling	1,065		0		0		1,065
Total available-for-sale securities	674,919		0		661,299		13,620
Equity securities priced via pricing services	12,410		1,966		10,444		0
Total	$	687,329	$	1,966	$	671,743	$	13,620

Quantitative and Qualitative Disclosures about Unobservable Inputs

The following table presents quantitative information about the significant unobservable inputs utilized in the fair value measurements of Level 3 assets. Level 3 securities where cost is the best estimate of fair value totaled $1.1 million at March 31, 2019 and are excluded from the table below. When a non-binding broker quote was the only input available, the security was classified within Level 3. The quantitative detail of the unobservable inputs is neither provided nor reasonably available to us and therefore has not been included in the table below. These investments totaled $0.1 million at March 31, 2019 and $12.6 million at December 31, 2018. The weighted average is calculated based on estimated fair value.



	At March 31, 2019
(dollars in thousands)	Fair value		Valuation techniques	Unobservable input	Range (basis points)	Weighted average (basis points)	Impact of increase in input on estimated fair value

Corporate debt securities - bank loans	$	11,373	Market approach	Market residual yield ⁽¹⁾	-186 - +1,479	+33	Decrease
Commercial mortgage-backed securities	1,057		Market approach	Credit spread ⁽²⁾	+42 - +275	+181	Decrease


(1)	Values for bank loans classified as Level 3 are determined by our pricing vendor based on model yield curves adjusted for observable inputs. The market residual yield represents a net adjustment to the model yield curve for unobservable input factors.


(2)	Values for commercial mortgage-backed securities classified as Level 3 include adjustments to the base spread over the appropriate U.S. Treasury yield assuming no prepayments until penalty provisions have expired.

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, 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 March 31, 2019
Available-for-sale securities:
Corporate debt securities	$	12,577	$	11		$	268	$	734	$	(431	)	$	4,813	$	(6,449	)	$	11,523
Residential mortgage-backed securities	0		0			0		921		(6		)	0		0			915
Commercial mortgage-backed securities	0		(2		)	0		478		0			706		0			1,182
Total Level 3 available-for-sale securities	$	12,577	$	9		$	268	$	2,133	$	(437	)	$	5,519	$	(6,449	)	$	13,620

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 March 31, 2018
Available-for-sale securities:
Corporate debt securities	$	7,879	$	(9	)	$	5	$	0	$	(493	)	$	2,412	$	(3,485	)	$	6,309
Collateralized debt obligations	2,200		0			7		0		0			0		(2,207		)	0
Total Level 3 available-for-sale securities	$	10,079	$	(9	)	$	12	$	0	$	(493	)	$	2,412	$	(5,692	)	$	6,309


(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.

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:



	Three months ended March 31,
(in thousands)	2019		2018
Available-for-sale securities:
Corporate debt securities	$	157	$	10
Residential mortgage-backed securities	0		—
Commercial mortgage-backed securities	4		—
Net unrealized gains on Level 3 securities held at reporting date	$	161	$	10

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 March 31, 2019				At December 31, 2018
(in thousands)	Carrying value		Fair value		Carrying value		Fair value
Agent loans	$	61,926	$	61,487	$	58,006	$	54,110
Long-term borrowings	99,273		95,958		99,730		94,057