Fair Value Measurements

9 Months Ended

Sep. 30, 2017

The Company’s fixed maturity and equity securities classified as available for sale and its trading account securities are carried at fair value. Fair value is defined as “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.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 - Quoted prices for similar assets or valuations based on inputs that are observable.

Level 3 - Estimates of fair value based on internal pricing methodologies using unobservable inputs. Unobservable inputs are only used to measure fair value to the extent that observable inputs are not available.

Substantially, all of the Company’s fixed maturity securities were priced by independent pricing services. The prices provided by the independent pricing services are estimated based on observable market data in active markets utilizing pricing models and processes, which may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, sector groupings, matrix pricing and reference data. The pricing services may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs are available for each security evaluation on any given day. The pricing services used by the Company have indicated that they will only produce an estimate of fair value if objectively verifiable information is available. The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness and periodically performs independent price tests of a sample of securities to ensure proper valuation.

If prices from independent pricing services are not available for fixed maturity securities, the Company estimates the fair value. For Level 2 securities, the Company utilizes pricing models and processes which may include benchmark yields, sector groupings, matrix pricing, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bids, offers and reference data. Where broker quotes are used, the Company generally requests two or more quotes and sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. The Company generally does not adjust quotes received from brokers. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial projections, credit quality and business developments of the issuer and other relevant information.

For Level 3 securities, the Company generally uses a discounted cash flow model to estimate the fair value of fixed maturity securities. The cash flow models are based upon assumptions as to prevailing credit spreads, interest rate and interest rate volatility, time to maturity and subordination levels. Projected cash flows are discounted at rates that are adjusted to reflect illiquidity, where appropriate.

The following tables present the assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 by level:



(In thousands)	Total		Level 1		Level 2		Level 3
September 30, 2017
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	411,605	$	—	$	411,605	$	—
State and municipal	4,413,169		—		4,413,169		—
Mortgage-backed securities	1,320,119		—		1,320,119		—
Asset-backed securities	2,388,618		—		2,388,444		174
Corporate	4,320,374		—		4,320,374		—
Foreign government	940,409		—		940,409		—
Total fixed maturity securities available for sale	13,794,294		—		13,794,120		174
Equity securities available for sale:
Common stocks	419,520		410,133		—		9,387
Preferred stocks	194,505		—		190,649		3,856
Total equity securities available for sale	614,025		410,133		190,649		13,243
Arbitrage trading account	488,238		275,818		212,420		—
Total	$	14,896,557	$	685,951	$	14,197,189	$	13,417
Liabilities:
Trading account securities sold but not yet purchased	$	44,937	$	44,851	$	86	$	—

December 31, 2016
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	513,802	$	—	$	513,802	$	—
State and municipal	4,519,503		—		4,519,503		—
Mortgage-backed securities	1,189,645		—		1,189,645		—
Asset-backed securities	1,907,860		—		1,907,677		183
Corporate	4,068,527		—		4,068,527		—
Foreign government	902,805		—		902,805		—
Total fixed maturity securities available for sale	13,102,142		—		13,101,959		183
Equity securities available for sale:
Common stocks	445,858		429,647		7,457		8,754
Preferred stocks	223,342		—		219,680		3,662
Total equity securities available for sale	669,200		429,647		227,137		12,416
Arbitrage trading account	299,999		224,623		75,376		—
Total	$	14,071,341	$	654,270	$	13,404,472	$	12,599
Liabilities:
Trading account securities sold but not yet purchased	$	51,179	$	51,089	$	90	$	—

There were no significant transfers between Levels 1 and 2 during the nine months ended September 30, 2017 or during the year ended December 31, 2016.

The following tables summarize changes in Level 3 assets and liabilities for the nine months ended September 30, 2017 and for the year ended December 31, 2016:



	Gains (Losses) Included in:
(In thousands)	Beginning Balance		Earnings (Losses)			Other Comprehensive Income (Loss)		Impairments		Purchases		(Sales)			Paydowns / Maturities			Transfers		Ending Balance
																		In / (Out)
Nine months ended September 30, 2017:
Assets:
Fixed maturities securities available for sale:
Asset-backed securities	$	183	$	2		$	32	$	—	$	—	$	(43	)	$	—		$	—	$	174
Corporate	—		—			—		—		—		—			—			—		—
Total	183		2			32		—		—		(43		)	—			—		174
Equity securities available for sale:
Common stocks	8,754		—			633		—		—		—			—			—		9,387
Preferred stocks	3,662		19			—		—		175		—			—			—		3,856
Total	12,416		19			633		—		175		—			—			—		13,243
Arbitrage trading account	—		8			—		—		—		(8		)	—			—		—
Total	$	12,599	$	29		$	665	$	—	$	175	$	(51	)	$	—		$	—	$	13,417


Year ended December 31, 2016:
Assets:
Fixed maturities securities available for sale:
Asset-backed securities	$	199	$	3		$	16	$	—	$	—	$	—		$	(35	)	$	—	$	183
Corporate	154		177			—		—		—		(331		)	—			—		—
Total	353		180			16		—		—		(331		)	(35		)	—		183
Equity securities available for sale:
Common stocks	7,829		—			160		—		765		—			—			—		8,754
Preferred stocks	3,624		38			—		—		—		—			—			—		3,662
Total	11,453		38			160		—		765		—			—			—		12,416
Arbitrage trading account	176		(176		)	—		—		—		—			—			—		—
Total	$	11,982	$	42		$	176	$	—	$	765	$	(331	)	$	(35	)	$	—	$	12,599

During the nine months ended September 30, 2017 and for the year ended December 31, 2016, there were no transfers out of Level 3.

Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:



	September 30, 2017				December 31, 2016
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	13,873,690	$	13,890,354	$	13,190,668	$	13,204,814
Equity securities available for sale	614,025		614,025		669,200		669,200
Arbitrage trading account	488,238		488,238		299,999		299,999
Loans receivable	74,229		76,615		106,798		108,299
Cash and cash equivalents	773,997		773,997		795,285		795,285
Trading account receivables from brokers and clearing organizations	297,208		297,208		484,593		484,593
Liabilities:
Due to broker	58,973		58,973		19,416		19,416
Trading account securities sold but not yet purchased	44,937		44,937		51,179		51,179
Subordinated debentures	728,071		728,291		727,630		687,504
Senior notes and other debt	1,759,929		1,946,700		1,760,595		1,914,727

The estimated fair values of the Company’s fixed maturity securities, equity securities available for sale and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 16 above. The fair value of loans receivable are estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics, which is considered a Level 2 input. The fair value of the senior notes and other debt and the subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input.

- 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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