Fair Value Measurements

3 Months Ended

Mar. 31, 2018

The Company’s fixed maturity securities, equity securities and arbitrage 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 March 31, 2018 and December 31, 2017 by level:



(In thousands)	Total		Level 1		Level 2		Level 3
March 31, 2018
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	479,909	$	—	$	479,909	$	—
State and municipal	4,311,524		—		4,311,524		—
Mortgage-backed securities	1,386,997		—		1,386,997		—
Asset-backed securities	2,101,691		—		2,101,528		163
Corporate	4,110,701		—		4,110,701		—
Foreign government	873,079		—		873,079		—
Total fixed maturity securities available for sale	13,263,901		—		13,263,738		163
Equity securities:
Common stocks	320,435		311,329		—		9,106
Preferred stocks	175,599		—		164,756		10,843
Total equity securities	496,034		311,329		164,756		19,949
Arbitrage trading account	744,859		434,470		306,547		3,842
Total	$	14,504,794	$	745,799	$	13,735,041	$	23,954
Liabilities:
Trading account securities sold but not yet purchased	$	29,453	$	29,444	$	9	$	—

December 31, 2017
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	377,740	$	—	$	377,740	$	—
State and municipal	4,445,094		—		4,445,094		—
Mortgage-backed securities	1,299,931		—		1,299,931		—
Asset-backed securities	2,111,544		—		2,111,372		172
Corporate	4,389,112		—		4,389,112		—
Foreign government	848,497		—		848,497		—
Total fixed maturity securities available for sale	13,471,918		—		13,471,746		172
Equity securities:
Common stocks	352,204		342,834		—		9,370
Preferred stocks	224,443		—		213,600		10,843
Total equity securities	576,647		342,834		213,600		20,213
Arbitrage trading account	617,649		471,420		146,229		—
Total	$	14,666,214	$	814,254	$	13,831,575	$	20,385
Liabilities:
Trading account securities sold but not yet purchased	$	64,358	$	64,358	$	—	$	—

There were no significant transfers between Levels 1 and 2 during the three months ended March 31, 2018 or during the year ended December 31, 2017.

The following tables summarize changes in Level 3 assets and liabilities for the three months ended March 31, 2018 and for the year ended December 31, 2017:



	Gains (Losses) Included in:
(In thousands)	Beginning Balance		Earnings (Losses)			Other Comprehensive Income (Loss)		Impairments		Purchases		(Sales)			Paydowns / Maturities		Transfers		Ending Balance
																	In / (Out)
Three Months Ended March 31, 2018
Assets:
Fixed maturities securities available for sale:
Asset-backed securities	$	172	$	2		$	4	$	—	$	—	$	(15	)	$	—	$	—	$	163
Total	172		2			4		—		—		(15		)	—		—		163
Equity securities:
Common stocks	9,370		(264		)	—		—		—		—			—		—		9,106
Preferred stocks	10,843		—			—		—		—		—			—		—		10,843
Total	20,213		(264		)	—		—		—		—			—		—		19,949
Arbitrage trading account	—		(40		)	—		—		3,882		—			—		—		3,842
Total	$	20,385	$	(302	)	$	4	$	—	$	3,882	$	(15	)	$	—	$	—	$	23,954


Year ended December 31, 2017
Assets:
Fixed maturities securities available for sale:
Asset-backed securities	$	183	$	3		$	34	$	—	$	—	$	(48	)	$	—	$	—	$	172
Total	183		3			34		—		—		(48		)	—		—		172
Equity securities:
Common stocks	8,754		—			616		—		—		—			—		—		9,370
Preferred stocks	3,662		8			—		—		7,173		—			—		—		10,843
Total	12,416		8			616		—		7,173		—			—		—		20,213
Arbitrage trading account	—		8			—		—		—		(8		)	—		—		—
Total	$	12,599	$	19		$	650	$	—	$	7,173	$	(56	)	$	—	$	—	$	20,385

During the three months ended March 31, 2018 and for the year ended December 31, 2017, 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:



	March 31, 2018				December 31, 2017
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	13,343,132	$	13,356,305	$	13,551,250	$	13,566,976
Equity securities	496,034		496,034		576,647		576,647
Arbitrage trading account	744,859		744,859		617,649		617,649
Loans receivable	75,902		78,238		79,684		82,047
Cash and cash equivalents	956,603		956,603		950,471		950,471
Trading account receivables from brokers and clearing organizations	26,667		26,667		189,280		189,280
Liabilities:
Due to broker	74,450		74,450		15,920		15,920
Trading account securities sold but not yet purchased	29,453		29,453		64,358		64,358
Subordinated debentures	897,426		929,948		728,218		769,060
Senior notes and other debt	1,782,139		1,921,635		1,769,052		1,945,313

The estimated fair values of the Company’s fixed maturity securities, equity securities and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 15 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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