Fair Value Measurements

3 Months Ended

Mar. 31, 2023

FASB ASC 820, Fair Value Measurements and Disclosures, establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability.

Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy are defined as follows:

•Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets.

•Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.

•Level 3 – Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement.

In accordance with ASC 820, the Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, including the market, income and cost approaches. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The following section describes the valuation methodologies used by the Company to measure assets and liabilities at fair value, including an indication of the level within the fair value hierarchy in which each asset or liability is generally classified.

Available-for-sale investments and equity securities. Available-for-sale investments and equity securities are recorded at fair value on a recurring basis. Available-for-sale investments include fixed maturity securities and short-term investments. Fair value is determined by the Company after considering various sources of information, including information provided by a third-party pricing service. The pricing service provides prices for substantially all of the Company's fixed maturity securities and equity securities. In determining fair value, the Company generally does not adjust the prices obtained from the pricing service. The Company obtains an understanding of the pricing service's valuation methodologies and related inputs, which include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, duration, credit ratings, estimated cash flows and prepayment speeds. The Company validates prices provided by the pricing service by reviewing prices from other pricing sources and analyzing pricing data in certain instances.

The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Level 1 investments include those traded on an active exchange, such as the New York Stock Exchange. Level 2 investments include U.S. Treasury securities, U.S. government-sponsored enterprises, municipal bonds, foreign government bonds, commercial mortgage-backed securities, residential mortgage-backed securities, asset-backed securities and corporate debt securities. Level 3 investments include the Company's investments in insurance-linked securities funds that are in run-off, which are not traded on an active exchange and are valued using unobservable inputs.

Fair value for available-for-sale investments and equity securities is measured based upon quoted prices in active markets, if available. Due to variations in trading volumes and the lack of quoted market prices, fixed maturity securities are classified as Level 2 investments. The fair value of fixed maturity securities is normally derived through recent reported trades for identical or similar securities, making adjustments through the reporting date based upon available market observable data previously described. If there are no recent reported trades, the fair value of fixed maturity securities may be derived through the use of matrix pricing or model processes, where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Significant inputs used to determine the fair value of obligations of states, municipalities and political subdivisions, corporate bonds and obligations of foreign governments include reported trades, benchmark yields, issuer spreads, bids, offers, credit information and estimated cash flows. Significant inputs used to determine the fair value of commercial mortgage-backed securities, residential mortgage-backed securities and asset-backed securities include the type of underlying assets, benchmark yields, prepayment speeds, collateral information, tranche type and volatility, estimated cash flows, credit information, default rates, recovery rates, issuer spreads and the year of issue.

Senior long-term debt and other debt. Senior long-term debt and other debt is carried at amortized cost with the estimated fair value disclosed on the consolidated balance sheets. Senior long-term debt and other debt is classified as Level 2 within the fair value hierarchy due to variations in trading volumes and the lack of quoted market prices. Fair value is generally derived through recent reported trades, making adjustments through the reporting date, if necessary, based upon available market observable data including U.S. Treasury securities and implied credit spreads. Significant inputs used to determine the fair value of senior long-term debt and other debt include reported trades, benchmark yields, issuer spreads, bids and offers.

The following tables present the balances of assets measured at fair value on a recurring basis by level within the fair value hierarchy.


	March 31, 2023
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Investments:
Fixed maturity securities, available-for-sale:
U.S. Treasury securities	$	—	$	3,005,071	$	—	$	3,005,071
U.S. government-sponsored enterprises	—		868,978		—		868,978
Obligations of states, municipalities and political subdivisions	—		3,837,826		—		3,837,826
Foreign governments	—		1,484,656		—		1,484,656
Commercial mortgage-backed securities	—		1,977,169		—		1,977,169
Residential mortgage-backed securities	—		509,399		—		509,399
Asset-backed securities	—		1,574		—		1,574
Corporate bonds	—		718,445		—		718,445
Total fixed maturity securities, available-for-sale	—		12,403,118		—		12,403,118
Equity securities:
Insurance, banks and other financial institutions	3,005,272		—		853		3,006,125
Industrial, consumer and all other	5,107,351		—		—		5,107,351
Total equity securities	8,112,623		—		853		8,113,476
Short-term investments, available-for-sale	2,316,909		170,592		—		2,487,501
Total investments	$	10,429,532	$	12,573,710	$	853	$	23,004,095


	December 31, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Investments:
Fixed maturity securities, available-for-sale:
U.S. Treasury securities	$	—	$	2,913,959	$	—	$	2,913,959
U.S. government-sponsored enterprises	—		765,538		—		765,538
Obligations of states, municipalities and political subdivisions	—		3,733,183		—		3,733,183
Foreign governments	—		1,306,778		—		1,306,778
Commercial mortgage-backed securities	—		1,940,448		—		1,940,448
Residential mortgage-backed securities	—		526,793		—		526,793
Asset-backed securities	—		1,640		—		1,640
Corporate bonds	—		668,496		—		668,496
Total fixed maturity securities, available-for-sale	—		11,856,835		—		11,856,835
Equity securities:
Insurance, banks and other financial institutions	2,952,689		—		899		2,953,588
Industrial, consumer and all other	4,718,324		—		—		4,718,324
Total equity securities	7,671,013		—		899		7,671,912
Short-term investments, available-for-sale	2,510,164		159,098		—		2,669,262
Total investments	$	10,181,177	$	12,015,933	$	899	$	22,198,009

The following table summarizes changes in Level 3 investments measured at fair value on a recurring basis.


	Three Months Ended March 31,
(dollars in thousands)		2023		2022
Equity securities, beginning of period		$	899	$	56,472
Purchases		—		—
Sales		—		(48,780)
Net investment gains (losses)		(46)		776


Equity securities, end of period		$	853	$	8,468

Previously, Level 3 investments included the Company's investment in an insurance-linked securities fund managed by Markel CATCo Investment Management Ltd. (MCIM). During the first quarter of 2022, the Company's remaining investment was redeemed ($41.3 million) in conjunction with a buy-out transaction that provided for an accelerated return of all remaining capital to investors. See note 11 for further details about the Company's Markel CATCo operations and the buy-out transaction.

The Company did not have any assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2023 and 2022.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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