FAIR VALUE OF FINANCIAL INSTRUMENTS

Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.

Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:


•	Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.


•	Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.


•	Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument.

We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed. Transfers between levels, if any, are recorded as of the beginning of the reporting period.

To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years experience and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.

In order to determine the proper classification in the fair value hierarchy for each security where the price is obtained from an independent pricing service, we obtain and evaluate the vendors' pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.

When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument. Our valuation techniques are discussed in more detail throughout this section.

The fair value of our mortgage loans is determined by modeling performed by us based on the stated principal and coupon payments provided for in the loan agreements. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value, which is a Level 3 fair value measurement.

The fair value of our policy loans is equivalent to carrying value, which is a reasonable estimate of fair value and is classified as Level 2. We do not make policy loans for amounts in excess of the cash surrender value of the related policy. In all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies or by the policyholders' account balance for non-traditional policies.

Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management's opinion, these values represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund managers.

For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Supplemental Executive Retirement and Deferral Plan (the "Executive Retirement Plan"). Within the rabbi trust, corporate-owned life insurance ("COLI") policies are utilized as an investment vehicle and source of funding for the Company's Executive Retirement Plan. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of March 31, 2018, the cash surrender value of the COLI policies was $4,404, which is equal to the fair value measured using Level 2 inputs, based on the underlying assets of the COLI policies, and is included in other assets in the Consolidated Balance Sheets.

Policy reserves are developed and recorded for deferred annuities, which is an interest-sensitive product, and income annuities. The fair value of the reserve liability for these annuity products is based upon an estimate of the discounted pretax cash flows that are forecast for the underlying business, which is a Level 3 fair value measurement. We base the discount rate on the current U.S. Treasury spot yield curve, which is then risk-adjusted for nonperformance risk and, for interest-sensitive business and market risk factors. The risk-adjusted discount rate is developed using interest rates that are available in the market and representative of the risks applicable to the underlying business.

A summary of the carrying value and estimated fair value of our financial instruments from continuing operations at March 31, 2018 and December 31, 2017 is as follows:



	March 31, 2018				December 31, 2017
	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments
Fixed maturities:
Held-to-maturity securities	$	150	$	150	$	150	$	150
Available-for-sale securities	1,563,996		1,563,996		1,535,070		1,535,070
Trading securities	15,379		15,379		16,842		16,842
Equity securities	280,362		280,362		287,344		287,344
Other long-term investments	44,998		44,998		49,352		49,352
Short-term investments	175		175		175		175
Cash and cash equivalents	316,852		316,852		95,562		95,562
Corporate-owned life insurance	4,404		4,404		4,029		4,029

A summary of the carrying value and estimated fair value of our financial instruments from discontinued operations at March 31, 2018 and December 31, 2017 is as follows:



	March 31, 2018				December 31, 2017
	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments
Fixed maturities:
Held-to-maturity securities	$	—	$	—	$	34	$	34
Available-for-sale securities	—		—		1,430,025		1,430,025
Equity securities:
Available-for-sale securities	—		—		23,653		23,653
Mortgage loans	—		—		3,594		3,435
Policy loans	—		—		5,815		5,815
Other long-term investments	—		—		16,437		16,437
Cash and cash equivalents	—		—		15,851		15,851
Liabilities
Policy reserves
Annuity (accumulations) ⁽¹⁾	$	—	$	—	$	591,702	$	611,866
Annuity (benefit payments)	—		—		147,038		93,560

Note: The sale of our life insurance business was completed on March 30, 2018.

The following tables present the categorization for our financial instruments measured at fair value on a recurring basis. The table includes financial instruments from both continuing and discontinued operations at March 31, 2018 and December 31, 2017:



March 31, 2018			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	15,726	$	—	$	15,726	$	—
U.S. government agency	134,429		—		134,429		—
States, municipalities and political subdivisions
General obligations
Midwest	105,335		—		105,335		—
Northeast	46,404		—		46,404		—
South	133,719		—		133,719		—
West	112,331		—		112,331		—
Special revenue
Midwest	144,130		—		144,130		—
Northeast	63,058		—		63,058		—
South	248,060		—		248,060		—
West	148,465		—		148,465		—
Foreign bonds	10,982		—		10,982		—
Public utilities	47,641		—		47,641		—
Corporate bonds
Energy	22,445		—		22,445		—
Industrials	32,987		—		32,987		—
Consumer goods and services	30,970		—		30,970		—
Health care	12,226		—		12,226		—
Technology, media and telecommunications	15,256		—		15,256		—
Financial services	54,512		—		54,412		100
Mortgage-backed securities	8,682		—		8,682		—
Collateralized mortgage obligations
Government national mortgage association	72,194		—		72,194		—
Federal home loan mortgage corporation	54,829		—		54,829		—
Federal national mortgage association	46,146		—		46,146		—
Asset-backed securities	3,469		—		2,837		632
Total Available-for-Sale Fixed Maturities	$	1,563,996	$	—	$	1,563,264	$	732
TRADING
Fixed maturities:
Bonds
Corporate bonds
Industrials	$	1,968	$	—	$	1,968	$	—
Consumer goods and services	1,846		—		1,846		—
Health care	3,739		—		3,739		—



Technology, media and telecommunications	2,212		—		2,212		—
Financial services	2,133		—		2,133		—
Redeemable preferred stocks	3,481		3,481		—		—
Total Trading Securities	$	15,379	$	3,481	$	11,898	$	—
EQUITY SECURITIES
Common stocks
Public utilities	$	15,095	$	15,095	$	—	$	—
Energy	12,782		12,782		—		—
Industrials	58,724		58,724		—		—
Consumer goods and services	24,414		24,414		—		—
Health care	39,025		39,025		—		—
Technology, media and telecommunications	14,410		14,410		—		—
Financial services	111,761		111,761		—		—
Nonredeemable preferred stocks	4,151		3,331		—		820
Total Equity Securities	$	280,362	$	279,542	$	—	$	820
Short-Term Investments	$	175	$	175	$	—	$	—
Money Market Accounts	$	285,804	$	285,804	$	—	$	—
Corporate-Owned Life Insurance	$	4,404	$	—	$	4,404	$	—
Total Assets Measured at Fair Value	$	2,150,120	$	569,002	$	1,579,566	$	1,552



December 31, 2017			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	16,891	$	—	$	16,891	$	—
U.S. government agency	122,168		—		122,168		—
States, municipalities and political subdivisions
General obligations
Midwest	109,696		—		109,696		—
Northeast	48,641		—		48,641		—
South	141,519		—		141,519		—
West	113,011		—		113,011		—
Special revenue
Midwest	158,744		—		158,744		—
Northeast	79,760		—		79,760		—
South	263,512		—		263,512		—
West	158,307		—		158,307		—
Foreign bonds	52,753		—		52,753		—
Public utilities	209,144		—		209,144		—
Corporate bonds
Energy	95,053		—		95,053		—
Industrials	221,707		—		221,707		—
Consumer goods and services	186,257		—		185,589		668
Health care	75,408		—		75,408		—
Technology, media and telecommunications	148,979		—		148,979		—
Financial services	283,151		—		275,474		7,677
Mortgage-backed securities	13,691		—		13,691		—
Collateralized mortgage obligations
Government national mortgage association	157,483		—		157,483		—
Federal home loan mortgage corporation	199,152		—		199,152		—
Federal national mortgage association	105,432		—		105,432		—
Asset-backed securities	4,636		—		3,989		647
Total Available-for-Sale Fixed Maturities	$	2,965,095	$	—	$	2,956,103	$	8,992
Equity securities:
Common stocks
Public utilities	$	22,439	$	22,439	$	—	$	—
Energy	14,565		14,565		—		—
Industrials	66,519		66,517		2		—
Consumer goods and services	25,688		25,688		—		—
Health care	40,103		40,103		—		—
Technology, media and telecommunications	17,508		17,508		—		—
Financial services	116,447		116,447		—		—



Nonredeemable preferred stocks	1,297		415		—		882
Total Available-for-Sale Equity Securities	$	304,566	$	303,682	$	2	$	882
Total Available-for-Sale Securities	$	3,269,661	$	303,682	$	2,956,105	$	9,874
TRADING
Fixed maturities:
Bonds
Corporate bonds
Industrials	$	2,220	$	—	$	2,220	$	—
Consumer goods and services	1,535		—		1,535		—
Health care	3,741		—		3,741		—
Technology, media and telecommunications	1,221		—		1,221		—
Financial services	5,566		—		5,566		—
Redeemable preferred stocks	2,559		2,559		—		—
Equity securities:
Public utilities	874		874		—		—
Energy	190		190		—		—
Industrials	989		989		—		—
Consumer goods and services	1,314		1,314		—		—
Health care	325		325		—		—
Financial services	198		198		—		—
Nonredeemable preferred stocks	2,541		2,541		—		—
Total Trading Securities	$	23,273	$	8,990	$	14,283	$	—
Short-Term Investments	$	175	$	175	$	—	$	—
Money Market Accounts	$	16,824	$	16,824	$	—	$	—
Corporate-Owned Life Insurance	$	4,029	$	—	$	4,029	$	—
Total Assets Measured at Fair Value	$	3,313,962	$	329,671	$	2,974,417	$	9,874

The following tables are a reconciliation for both continuing and discontinued operations of the presentation of the categorization for our financial instruments measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017:



March 31, 2018			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Continuing operations	$	1,563,996	$	—	$	1,563,264	$	732
Discontinued operations	—		—		—		—
Total Available-for-Sale Fixed Maturities	$	1,563,996	$	—	$	1,563,264	$	732
TRADING
Fixed maturities:
Continuing operations	$	15,379	$	3,481	$	11,898	$	—
Discontinued operations	—		—		—		—
Total Trading Securities	$	15,379	$	3,481	$	11,898	$	—
EQUITY SECURITIES
Continuing operations	$	280,362	$	279,542	$	—	$	820
Discontinued operations	—		—		—		—
Total Equity Securities	$	280,362	$	279,542	$	—	$	820
SHORT-TERM INVESTMENTS
Continuing operations	$	175	$	175	$	—	$	—
Discontinued operations	—		—		—		$	—
Short-Term Investments	$	175	$	175	$	—	$	—
MONEY MARKET ACCOUNTS
Continuing operations	$	285,804	$	285,804	$	—	$	—
Discontinued operations	—		—		—		—
Money Market Accounts	$	285,804	$	285,804	$	—	$	—
CORPORATE-OWNED LIFE INSURANCE
Continuing operations	$	4,404	$	—	$	4,404	$	—
Discontinued operations	—		—		—		—
Corporate-Owned Life Insurance	$	4,404	$	—	$	4,404	$	—
Total Assets Measured at Fair Value	$	2,150,120	$	569,002	$	1,579,566	$	1,552

Note: The sale of our life insurance business was completed on March 30, 2018.



December 31, 2017			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Continuing operations	$	1,535,070	$	—	$	1,534,323	$	747
Discontinued operations	1,430,025		—		1,421,780		8,245
Total Available-for-Sale Fixed Maturities	$	2,965,095	$	—	$	2,956,103	$	8,992
Equity securities:
Continuing operations	$	280,913	$	280,031	$	—	$	882
Discontinued operations	23,653		23,651		2		—
Total Equity Securities	$	304,566	$	303,682	$	2	$	882
Total Available-for-Sale Securities	$	3,269,661	$	303,682	$	2,956,105	$	9,874
TRADING
Fixed maturities:
Continuing operations	$	16,842	$	2,559	$	14,283	$	—
Discontinued operations	—		—		—		—
Equity securities:
Continuing operations	6,431		6,431		—		—
Discontinued operations	—		—		—		—
Total Trading Securities	$	23,273	$	8,990	$	14,283	$	—
SHORT-TERM INVESTMENTS
Continuing operations	$	175	$	175	$	—	$	—
Discontinued operations	—		—		—		—
Short-Term Investments	$	175	$	175	$	—	$	—
MONEY MARKET ACCOUNTS
Continuing operations	$	6,147	$	6,147	$	—	$	—
Discontinued operations	10,677		10,677		—		—
Money Market Accounts	$	16,824	$	16,824	$	—	$	—
CORPORATE-OWNED LIFE INSURANCE
Continuing operations	$	4,029	$	—	$	4,029	$	—
Discontinued operations	—		—		—		—
Corporate-Owned Life Insurance	$	4,029	$	—	$	4,029	$	—
Total Assets Measured at Fair Value	$	3,313,962	$	329,671	$	2,974,417	$	9,874

The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.

We use a market-based approach for valuing all of our Level 2 securities and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the valuation process for each security on any given day.

At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. Our validation process includes a review for unusual fluctuations. Unusual fluctuations outside of our expectations are independently corroborated with additional third-party sources that use similar valuation techniques as discussed above. In addition, we also randomly select securities and independently corroborate the valuations obtained from our third-party valuation service providers. In our opinion, the pricing obtained at March 31, 2018 and December 31, 2017 was reasonable.

For the three-month period ended March 31, 2018, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities. During the three-month period ended March 31, 2018, there were no securities transferred between Level 1 and Level 2.

Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers’ valuation processes. If pricing cannot be obtained from these sources, which occurs on a limited basis, management will perform a discounted cash flow analysis, using an appropriate risk-adjusted discount rate, on the underlying security to estimate fair value. During the three-month period ended March 31, 2018, there were no securities transferred in or out of Level 3.

The following table provides a summary of the changes in fair value of our Level 3 securities from continuing operations for the three-month period ended March 31, 2018:



	States, municipalities and political subdivisions		Corporate bonds		Asset-backed securities			Equities			Total
Balance at January 1, 2018	$	—	$	100	$	647		$	882		$	1,629
Net unrealized gains (losses)⁽¹⁾	—				(15		)	(62		)	(77		)
Balance at March 31, 2018	$	—	$	100	$	632		$	820		$	1,552

(1) Net unrealized gains (losses) are recorded as a component of comprehensive income.

The fixed maturities reported as disposals relate to the receipt of principal on calls or sinking fund bonds, in accordance with the indentures.