Fair Value Measurements

3 Months Ended

Mar. 31, 2019

The Company’s fixed maturity available for sale securities, equity securities and its 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, 2019 and December 31, 2018 by level:



(In thousands)	Total		Level 1		Level 2		Level 3
March 31, 2019
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	738,663	$	—	$	738,663	$	—
State and municipal	3,826,863		—		3,826,863		—
Mortgage-backed securities	1,580,710		—		1,580,710		—
Asset-backed securities	2,630,799		—		2,630,774		25
Corporate	3,973,932		—		3,973,932		—
Foreign government	811,074		—		811,074		—
Total fixed maturity securities available for sale	13,562,041		—		13,562,016		25
Equity securities:
Common stocks	136,099		127,311		—		8,788
Preferred stocks	205,882		—		201,937		3,945
Total equity securities	341,981		127,311		201,937		12,733
Arbitrage trading account	504,633		367,564		133,481		3,588
Total	$	14,408,655	$	494,875	$	13,897,434	$	16,346
Liabilities:
Trading account securities sold but not yet purchased	$	58,148	$	58,148	$	—	$	—


December 31, 2018
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	702,240	$	—	$	702,240	$	—
State and municipal	3,872,598		—		3,872,598		—
Mortgage-backed securities	1,594,546		—		1,594,546		—
Asset-backed securities	2,438,747		—		2,438,648		99
Corporate	4,111,311		—		4,111,311		—
Foreign government	808,735		—		808,735		—
Total fixed maturity securities available for sale	13,528,177		—		13,528,078		99
Equity securities:
Common stocks	98,192		89,596		—		8,596
Preferred stocks	180,814		—		176,869		3,945
Total equity securities	279,006		89,596		176,869		12,541
Arbitrage trading account	452,548		353,335		81,905		17,308
Total	$	14,259,731	$	442,931	$	13,786,852	$	29,948
Liabilities:
Trading account securities sold but not yet purchased	$	38,120	$	37,327	$	—	$	793

The following tables summarize changes in Level 3 assets and liabilities for the three months ended March 31, 2019 and for the year ended December 31, 2018:



	Gains (Losses) Included in:
(In thousands)	Beginning Balance		Earnings (Losses)			Other Comprehensive Income (Loss)		Impairments		Purchases		(Sales)			Paydowns / Maturities		Transfers In / (Out)		Ending Balance
(In thousands)	Beginning Balance		Earnings (Losses)			Other Comprehensive Income (Loss)		Impairments		Purchases		(Sales)			Paydowns / Maturities		Transfers In / (Out)		Ending Balance
Three Months Ended March 31, 2019
Assets:
Fixed maturities securities available for sale:
Asset-backed securities	$	99	$	2		$	46	$	—	$	—	$	(122	)	$	—	$	—	$	25
Total	99		2			46		—		—		(122		)	—		—		25
Equity securities:
Common stocks	8,596		191			—		—		—		—			—		1		8,788
Preferred stocks	3,945		—			—		—		—		—			—		—		3,945
Total	12,541		191			—		—		—		—			—		1		12,733
Arbitrage trading account	17,308		158			—		—		—		(17,386		)	—		3,508		3,588
Total	$	29,948	$	351		$	46	$	—	$	—	$	(17,508	)	$	—	$	3,509	$	16,346

Liabilities:
Trading account securities sold but not yet purchased	$	793	$	60		$	—	$	—	$	2,087	$	(2,940	)	$	—	$	—	$	—
Year Ended December 31, 2018
Assets:
Fixed maturities securities available for sale:
Asset-backed securities	$	172	$	(2	)	$	46	$	—	$	—	$	(117	)	$	—	$	—	$	99
Total	172		(2		)	46		—		—		(117		)	—		—		99
Equity securities:
Common stocks	9,370		(548		)	—		—		—		(227		)	—		1		8,596
Preferred stocks	10,843		100			—		—				(6,998		)	—		—		3,945
Total	20,213		(448		)	—		—		—		(7,225		)	—		1		12,541
Arbitrage trading account	—		(6		)	—		—		11,523		(11		)	—		5,802		17,308
Total	$	20,385	$	(456	)	$	46	$	—	$	11,523	$	(7,353	)	$	—	$	5,803	$	29,948
Liabilities:

Transfers into Level 3 represent cases where a publicly traded price was no longer available or a publicly traded price became available.Fair Value of Financial Instruments

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



	March 31, 2019				December 31, 2018
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	13,640,669	$	13,654,337	$	13,606,812	$	13,619,620
Equity securities	341,981		341,981		279,006		279,006
Arbitrage trading account	504,633		504,633		452,548		452,548
Loans receivable	95,557		97,791		94,813		97,073
Cash and cash equivalents	937,428		937,428		817,602		817,602
Trading account receivables from brokers and clearing organizations	322,925		322,925		347,228		347,228
Due from broker	1,868		1,868		—		—
Liabilities:
Due to broker	—		—		20,144		20,144
Trading account securities sold but not yet purchased	58,148		58,148		38,120		38,120
Subordinated debentures	907,679		945,746		907,491		840,002
Senior notes and other debt	1,875,018		1,985,431		1,882,028		1,968,996

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. 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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