Fair Value Measurements

6 Months Ended

Jun. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

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 June 30, 2019 and December 31, 2018 by level:

(In thousands)	Total		Level 1		Level 2		Level 3
June 30, 2019
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	777,070	$	—	$	777,070	$	—
State and municipal	3,747,823		—		3,747,823		—
Mortgage-backed securities	1,575,866		—		1,575,866		—
Asset-backed securities	2,701,785		—		2,701,760		25
Corporate	4,036,285		—		4,036,285		—
Foreign government	815,424		—		815,424		—
Total fixed maturity securities available for sale	13,654,253		—		13,654,228		25
Equity securities:
Common stocks	140,226		131,242		—		8,984
Preferred stocks	276,362		—		272,426		3,936
Total equity securities	416,588		131,242		272,426		12,920
Arbitrage trading account	533,442		424,030		83,206		26,206
Total	$	14,604,283	$	555,272	$	14,009,860	$	39,151
Liabilities:
Trading account securities sold but not yet purchased	$	159,349	$	144,420	$	213	$	14,716
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 six months ended June 30, 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
Six Months Ended June 30, 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		388			—		—		—		—			—		—		8,984
Preferred stocks	3,945		(9		)	—		—		—		—			—		—		3,936
Total	12,541		379			—		—		—		—			—		—		12,920
Arbitrage trading account	17,308		409			—		—		14,672		(21,072		)	—		14,889		26,206
Total	$	29,948	$	790		$	46	$	—	$	14,672	$	(21,194	)	$	—	$	14,889	$	39,151
Liabilities:
Trading account securities sold but not yet purchased	$	793	$	9,320		$	—	$	—	$	7,609	$	(3,006	)	$	—	$	—	$	14,716
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:
Trading account securities sold but not yet purchased	$	—	$	(67	)	$	—	$	—	$	860	$	—		$	—	$	—	$	793

Transfers into Level 3 represent cases where a publicly traded price was no longer available for a particular investment.

Fair Value of Financial Instruments

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

	June 30, 2019				December 31, 2018
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	13,732,800	$	13,746,972	$	13,606,812	$	13,619,620
Equity securities	416,588		416,588		279,006		279,006
Arbitrage trading account	533,442		533,442		452,548		452,548
Loans receivable	94,697		96,905		94,813		97,073
Cash and cash equivalents	1,258,174		1,258,174		817,602		817,602
Trading account receivables from brokers and clearing organizations	402,361		402,361		347,228		347,228
Liabilities:
Due to broker	39,230		39,230		20,144		20,144
Trading account securities sold but not yet purchased	159,349		159,349		38,120		38,120
Subordinated debentures	907,866		969,172		907,491		840,002
Senior notes and other debt	1,873,799		2,019,430		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.