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Fair Value

12 Months Ended

Dec. 31, 2019

Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).

The levels in the hierarchy are defined as follows:


Level 1:	Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets


Level 2:	Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument


Level 3:	Inputs to the valuation methodology are unobservable and significant to the fair value measurement

Following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy. The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisers and others.

The Company determines the existence of an active market based on its judgment as to whether transactions for the financial

instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to: (i) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; (iv) a comparison of the fair value estimates to the Company’s knowledge of the current market; (v) a comparison of the pricing services' fair values to other pricing services' fair values for the same investments; and (vi) periodic back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. A price source hierarchy was maintained in order to determine which price source would be used (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value.

In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Of the $22.9 billion of financial assets and liabilities measured at fair value at December 31, 2019, approximately $179.6 million, or 0.8%, were priced using non-binding broker-dealer quotes. Of the $20.4 billion of financial assets and liabilities measured at fair value at December 31, 2018, approximately $217.9 million, or 1.1%, were priced using non-binding broker-dealer quotes.

Fixed maturities

The Company uses the market approach valuation technique to estimate the fair value of its fixed maturity securities, when possible. The market approach includes obtaining prices from independent pricing services, such as index providers and pricing vendors, as well as to a lesser extent quotes from broker-dealers. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing

source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value. The following describes the significant inputs generally used to determine the fair value of the Company’s fixed maturity securities by asset class:

•U.S. government and government agencies — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The Company determined that all U.S. Treasuries would be classified as Level 1 securities due to observed levels of trading activity, the high number of strongly correlated pricing quotes received on U.S. Treasuries and other factors. The fair values of U.S. government agency securities are generally determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.

•Corporate bonds — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for corporate bonds are observable market inputs, the fair value of these securities are classified within Level 2. During 2019, the Company transferred $25.8 million of corporate bonds from Level 2 to Level 3 based on a review of the pricing of such securities, as described above.

•Mortgage-backed securities — valuations provided by independent pricing services, substantially all through pricing vendors and index providers with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the expected average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.

• Municipal bonds — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally determined using spreads obtained from broker-dealers who trade in the relevant security market, trade prices and the new issue market. As the significant inputs used in the pricing process for municipal bonds are observable market

inputs, the fair value of these securities are classified within Level 2.

•Commercial mortgage-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for commercial mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.

•Non-U.S. government securities — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally based on international indices or valuation models which include daily observed yield curves, cross-currency basis index spreads and country credit spreads. As the significant inputs used in the pricing process for non-U.S. government securities are observable market inputs, the fair value of these securities are classified within Level 2.

•Asset-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for asset-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.

Equity securities

The Company determined that exchange-traded equity securities would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other equity securities are included in Level 2 of the valuation hierarchy. A small number of securities are included in Level 3 due to the lack of an available independent price source for such securities. As the significant inputs used to price these securities are unobservable, the fair value of such securities are classified as Level 3. During the 2019 second quarter, the Company transferred $107.4 million of equity securities from Level 2 to Level 3 based on a review of the pricing of such securities, as described above.

Other investments

The Company determined that exchange-traded investments would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other investments also include term loan investments for which fair values are estimated by using quoted prices of term loan investments with similar characteristics, pricing models or matrix pricing. Such investments are generally classified within Level 2. A small number of securities are included in Level 3 due to the lack of an available independent price source for such securities. During 2019, the Company transferred $31.6 million of other investments from Level 2 to Level 3 based on a review of the pricing of such securities, as described above.

Derivative instruments

The Company’s futures contracts, foreign currency forward contracts, interest rate swaps and other derivatives trade in the over-the-counter derivative market. The Company uses the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. As the significant inputs used in the pricing process for these derivative instruments are observable market inputs, the fair value of these securities are classified within Level 2.

Short-term investments

The Company determined that certain of its short-term investments held in highly liquid money market-type funds, Treasury bills and commercial paper would be included in Level 1 as their fair values are based on quoted market prices in active markets. The fair values of other short-term investments are generally determined using the spread above the risk-free yield curve and are classified within Level 2.

Contingent consideration liabilities

Contingent consideration liabilities (included in ‘other liabilities’ in the consolidated balance sheets) include amounts related to the Company’s 2014 acquisition of CMG Mortgage Insurance Company and its affiliated mortgage insurance companies (the “CMG Entities”) and other acquisitions. Such amounts are remeasured at fair value at each balance sheet date with changes in fair value recognized in ‘net realized gains (losses).’ To determine the fair value of contingent consideration liabilities, the Company estimates future payments using an income approach based on modeled inputs which include a weighted average cost of capital. The Company determined that contingent consideration liabilities would be included within Level 3.

The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31, 2019:



				Fair Value Measurement Using:
	Estimated Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets measured at fair value (1):
Available for sale securities:
Fixed maturities:
Corporate bonds	$	6,406,591		$	—	$	6,397,740		$	8,851
Mortgage backed securities	562,309			—		562,055			254
Municipal bonds	881,926			—		881,926			—
Commercial mortgage backed securities	733,108			—		733,108			—
U.S. government and government agencies	4,916,592			4,805,581		111,011			—
Non-U.S. government securities	2,078,757			—		2,078,757			—
Asset backed securities	1,683,753			—		1,678,791			4,962
Total	17,263,036			4,805,581		12,443,388			14,067

Short-term investments	956,546			904,804		51,742			—

Equity securities, at fair value	850,283			789,596		4,798			55,889

Derivative instruments (4)	48,946			—		48,946			—

Fair value option:
Corporate bonds	488,402			—		487,470			932
Non-U.S. government bonds	50,465			—		50,465			—
Mortgage backed securities	11,947			—		11,947			—
Municipal bonds	377			—		377			—
Commercial mortgage backed securities	1,134			—		1,134			—
Asset backed securities	200,163			—		200,163			—
U.S. government and government agencies	1,962			1,852		110			—
Short-term investments	377,014			333,320		43,694			—
Equity securities	102,697			43,962		641			58,094
Other investments	1,418,273			53,287		1,296,169			68,817
Other investments measured at net asset value (2)	1,011,043
Total	3,663,477			432,421		2,092,170			127,843

Total assets measured at fair value	$	22,782,288		$	6,932,402	$	14,641,044		$	197,799

Liabilities measured at fair value:
Contingent consideration liabilities	$	(7,998	)	$	—	$	—		$	(7,998	)
Securities sold but not yet purchased (3)	(66,257		)	—		(66,257		)	—
Derivative instruments (4)	(39,750		)	—		(39,750		)	—
Total liabilities measured at fair value	$	(114,005	)	$	—	$	(106,007	)	$	(7,998	)


(1)	In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See Note 8.

(2)

In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.


(3)	Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.


(4)	See Note 10.

The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31, 2018:



				Fair Value Measurement Using:
	Estimated Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets measured at fair value (1):
Available for sale securities:
Fixed maturities:
Corporate bonds	$	5,537,548		$	—	$	5,529,407		$	8,141
Mortgage backed securities	541,193			—		540,884			309
Municipal bonds	1,013,395			—		1,013,395			—
Commercial mortgage backed securities	729,442			—		729,438			4
U.S. government and government agencies	3,758,698			3,657,181		101,517			—
Non-U.S. government securities	1,771,338			—		1,771,338			—
Asset backed securities	1,600,896			—		1,600,896			—
Total	14,952,510			3,657,181		11,286,875			8,454

Equity securities	353,794			321,927		31,867			—

Short-term investments	955,880			875,881		79,999			—

Derivative instruments (4)	73,893			—		73,893			—

Fair value option:
Corporate bonds	852,585			—		846,827			5,758
Non-U.S. government bonds	79,066			—		79,066			—
Mortgage backed securities	16,731			—		16,731			—
Municipal bonds	7,144			—		7,144			—
Commercial mortgage backed securities	—			—		—			—
Asset backed securities	178,790			—		178,790			—
U.S. government and government agencies	111,246			111,138		108			—
Short-term investments	322,177			278,579		43,598			—
Equity securities	103,893			48,827		55,066			—
Other investments	1,254,220			39,107		1,152,408			62,705
Other investments measured at net asset value (2)	1,057,719
Total	3,983,571			477,651		2,379,738			68,463

Total assets measured at fair value	$	20,319,648		$	5,332,640	$	13,852,372		$	76,917

Liabilities measured at fair value:
Contingent consideration liabilities	$	(66,665	)	$	—	$	—		$	(66,665	)
Securities sold but not yet purchased (3)	(7,790		)	—		(7,790		)	—
Derivative instruments (4)	(20,664		)	—		(20,664		)	—
Total liabilities measured at fair value	$	(95,119	)	$	—	$	(28,454	)	$	(66,665	)


(1)	In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See Note 8.

(2)


(3)	Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.


(4)	See Note 10.

The following table presents a reconciliation of the beginning and ending balances for all financial assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for 2019 and 2018:



				Assets														Liabilities
	Available For Sale						Fair Value Option								Fair Value
	Structured Securities (1)			Corporate Bonds			Corporate Bonds			Other Investments			Equity Securities		Equity Securities			Contingent Consideration Liabilities
Year Ended December 31, 2019
Balance at beginning of year	$	313		$	8,141		$	5,758		$	62,705		$	—	$	—		$	(66,665	)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)	1,760			2			(162		)	(8,119		)	1,949		(3,418		)	(1,478		)
Included in other comprehensive income	3			(267		)	—			—			—		—			—
Purchases, issuances, sales and settlements
Purchases	—			881			—			3,746			—		36,077			—
Issuances	—			—			—			—			—		—			(548		)
Sales	(1,757		)	—			(28,583		)	(20,495		)	—		(27,982		)	—
Settlements	(552		)	(1,766		)	—			(600		)	—		—			60,693
Transfers in and/or out of Level 3	5,449			1,860			23,919			31,580			56,145		51,212			—
Balance at end of year	$	5,216		$	8,851		$	932		$	68,817		$	58,094	$	55,889		$	(7,998	)

Year Ended December 31, 2018
Balance at beginning of year	$	5,927		$	9,460		$	12,217		$	59,167		$	—	$	—		$	(60,996	)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)	4			(1		)	(334		)	(1,416		)	—		—			(5,669		)
Included in other comprehensive income	(11		)	(296		)	—			—			—		—			—
Purchases, issuances, sales and settlements
Purchases	—			802			—			6,250			—		—			—
Issuances	—			—			—			—			—		—			—
Sales	(5,003		)	—			—			(296		)	—		—			—
Settlements	(604		)	(1,824		)	(6,125		)	(1,000		)	—		—			—
Transfers in and/or out of Level 3	—			—			—			—			—		—			—
Balance at end of year	$	313		$	8,141		$	5,758		$	62,705		$	—	$	—		$	(66,665	)


(1)	Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.


(2)	Gains or losses were included in net realized gains (losses).

Financial Instruments Disclosed, But Not Carried, At Fair Value

The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at December 31, 2019, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

At December 31, 2019, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $1.87 billion and had a fair value of $2.34 billion. At December 31, 2018, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $1.73 billion and had a fair value of $1.88 billion. The fair values of the senior notes were obtained from

a third party pricing service and are based on observable market inputs. As such, the fair value of the senior notes is classified within Level 2.

Fair Value Measurements on a Non-Recurring Basis

The Company measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include investments accounted for using the equity method, certain other investments, goodwill and intangible assets, and long-lived assets. The Company uses a variety of techniques to measure the fair value of these assets when appropriate, as described below:

Investments accounted for using the equity method. When the Company determines that the carrying value of these assets may

not be recoverable, the Company records the assets at fair value with the loss recognized in income. In such cases, the Company measures the fair value of these assets using the techniques discussed above in “—Fair Value Measurements on a Recurring Basis.”

Goodwill and Intangible Assets. The Company tests goodwill and intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. When the Company determines goodwill and intangible assets may be impaired, the Company uses techniques including discounted expected future cash flows, to measure fair value.

Long-Lived Assets. The Company tests its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of a long-lived asset may not be recoverable.