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Fair Value (Tables)

9 Months Ended

Sep. 30, 2019

Schedule of Fair Value Measurements on a Recurring Basis by Asset Class and Level of Input

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



	September 30, 2019
(in thousands)	Total		Level 1		Level 2		Level 3
Available-for-sale securities:
Corporate debt securities ⁽¹⁾	$	434,206	$	3,214	$	423,934	$	7,058
Residential mortgage-backed securities⁽¹⁾	107,235		0		107,235		0
Commercial mortgage-backed securities⁽¹⁾	63,182		0		58,475		4,707
Collateralized debt obligations	70,818		0		68,518		2,300
Other debt securities	5,192		0		5,192		0
Total available-for-sale securities	680,633		3,214		663,354		14,065
Equity securities - nonredeemable preferred stock:⁽¹⁾
Financial services sector	47,753		25,003		22,750		0
Industrial sector	2,842		0		2,842		0
Utilities sector	2,571		521		2,050		0
Energy sector	1,886		0		1,886		0
Total equity securities	55,052		25,524		29,528		0
Total	$	735,685	$	28,738	$	692,882	$	14,065



	December 31, 2018
(in thousands)	Total		Level 1		Level 2		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 and invested proceeds in short-term U.S. Treasuries. In 2019, proceeds from selling off the remaining municipal bond portfolio and short-term U.S. Treasuries were reinvested in corporate debt, structured and equity securities.

(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 and a final distribution totaling $3.2 million was received. There were no unfunded commitments related to the investment at December 31, 2018. During the year ended December 31, 2018, no contributions were made and distributions totaling $1.2 million were received from this investment.

Schedule of Fair Value Measurements on a Recurring Basis by Pricing Source and Quantitative and Qualitative Disclosures about Unobservable Inputs

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



	September 30, 2019
(in thousands)	Total		Level 1		Level 2		Level 3
Available-for-sale securities priced using:
Pricing services	$	677,683	$	3,214	$	662,854	$	11,615
Market comparables/broker quotes	2,800		0		500		2,300
Internal modeling	150		0		0		150
Total available-for-sale securities	680,633		3,214		663,354		14,065
Equity securities priced using pricing services	55,052		25,524		29,528		0
Total	$	735,685	$	28,738	$	692,882	$	14,065

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 $0.2 million at September 30, 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 $2.4 million at September 30, 2019 and $12.6 million at December 31, 2018. The weighted average is calculated based on estimated fair value.



	September 30, 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	$	6,827	Syndicated loan model	Market residual yield ⁽¹⁾	-536 - +1290	+87	Decrease
Commercial mortgage-backed securities	4,707		Relative value pricing model	Credit spread ⁽²⁾	+35 - +83	+57	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.

Schedule of Roll Forward of Level 3 Fair Value Measurements on a Recurring Basis and Change in Unrealized Gains or Losses in OCI Related to Level 3 Securities

Level 3 Assets – 2019 Quarterly Change:



(in thousands)	Beginning balance at June 30, 2019		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, 2019
Available-for-sale securities:
Corporate debt securities	$	6,373	$	16		$	(92	)	$	549	$	(507	)	$	1,850	$	(1,131	)	$	7,058
Commercial mortgage-backed securities	2,551		(6		)	2			0		(3		)	2,846		(683		)	4,707
Collateralized debt obligations	0		0			0			2,300		0			0		0			2,300
Total Level 3 available-for-sale securities	$	8,924	$	10		$	(90	)	$	2,849	$	(510	)	$	4,696	$	(1,814	)	$	14,065

Level 3 Assets – 2019 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 September 30, 2019
Available-for-sale securities:
Corporate debt securities	$	12,577	$	7	$	199		$	1,283	$	(6,779	)	$	9,244	$	(9,473	)	$	7,058
Residential mortgage-backed securities	0		4		15			921		(32		)	0		(908		)	0
Commercial mortgage-backed securities	0		7		(6		)	478		(1,068		)	6,103		(807		)	4,707
Collateralized debt obligations	0		0		0			2,300		0			0		0			2,300
Total Level 3 available-for-sale securities	$	12,577	$	18	$	208		$	4,982	$	(7,879	)	$	15,347	$	(11,188	)	$	14,065

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


(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 September 30,					Nine months ended September 30,
(in thousands)	2019			2018		2019		2018
Available-for-sale securities:
Corporate debt securities	$	(100	)	$	66	$	112	$	38
Commercial mortgage-backed securities	7			—		132		—
Other debt securities	—			0		—		0
Net unrealized (losses) gains on Level 3 securities held at reporting date	$	(93	)	$	66	$	244	$	38

Schedule of 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 as of:



	September 30, 2019				December 31, 2018
(in thousands)	Carrying value		Fair value		Carrying value		Fair value
Agent loans	$	68,660	$	69,194	$	58,006	$	54,110
Long-term borrowings	98,568		107,169		99,730		94,057