DISCLOSURES ABOUT THE FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of the Company’s financial instruments as of June 30, 2018 and December 31, 2017 are summarized in the tables below.



June 30, 2018	Carrying amounts		Estimated fair values
($ in thousands)	Carrying amounts		Estimated fair values
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	7,914	$	7,914
U.S. government-sponsored agencies	296,224		296,224
Obligations of states and political subdivisions	289,730		289,730
Commercial mortgage-backed	75,676		75,676
Residential mortgage-backed	128,530		128,530
Other asset-backed	21,671		21,671
Corporate	421,954		421,954
Total fixed maturity securities available-for-sale	1,241,699		1,241,699

Equity investments, at fair value
Common stocks:
Financial services	47,818		47,818
Information technology	33,801		33,801
Healthcare	29,813		29,813
Consumer staples	12,571		12,571
Consumer discretionary	23,237		23,237
Energy	17,676		17,676
Industrials	24,721		24,721
Other	12,476		12,476
Non-redeemable preferred stocks	19,028		19,028
Investment funds	1,256		1,256
Total equity investments	222,397		222,397

Short-term investments	23,447		23,447

Liabilities:
Surplus notes	25,000		15,505



December 31, 2017	Carrying amounts		Estimated fair values
($ in thousands)	Carrying amounts		Estimated fair values
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,078	$	8,078
U.S. government-sponsored agencies	297,949		297,949
Obligations of states and political subdivisions	307,536		307,536
Commercial mortgage-backed	83,980		83,980
Residential mortgage-backed	119,799		119,799
Other asset-backed	24,114		24,114
Corporate	433,560		433,560
Total fixed maturity securities available-for-sale	1,275,016		1,275,016

Equity securities available-for-sale:
Common stocks:
Financial services	43,522		43,522
Information technology	35,810		35,810
Healthcare	30,595		30,595
Consumer staples	14,127		14,127
Consumer discretionary	20,538		20,538
Energy	16,905		16,905
Industrials	28,489		28,489
Other	16,421		16,421
Non-redeemable preferred stocks	21,708		21,708
Total equity securities available-for-sale	228,115		228,115

Short-term investments	23,613		23,613

Liabilities:
Surplus notes	25,000		16,689

The estimated fair values of fixed maturity and equity securities is based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. At June 30, 2018 and December 31, 2017 the Company held privately placed equity investments (the majority in non-redeemable convertible preferred stocks issued by a start-up technology company that Employers Mutual works with in its data analytics activities). In accordance with the new guidance related to financial instruments that was adopted January 1, 2018, these investments do not have readily determinable fair values. Therefore, the Company has elected to measure these investments at the alternative measurement of cost, adjusted for impairments and observable price changes. No impairment losses or adjustments have been made to these investments, either cumulatively or during the current period, as there have been no indications of impairment or observable price changes. Due to the alternative measurement classification, these investments are excluded from the 2018 disclosures in this footnote, but are included in the 2017 disclosures as a Level 3 fair value measurement carried at cost, which was presumed to approximate fair value.

Short-term investments generally include money market funds, U.S. Treasury bills and commercial paper. Short-term investments are carried at fair value, which approximates cost, due to the highly liquid nature of the securities. Short-term securities are classified as Level 1 fair value measurements when the fair values can be validated by recent trades. When recent trades are not available, fair value is deemed to be the cost basis and the securities are classified as Level 2 fair value measurements.

The estimated fair value of the surplus notes is derived by discounting future expected cash flows at a rate deemed appropriate over a 25-year term (the surplus notes have no stated maturity date, and the interest to be paid is assumed to continue at the current interest rate in place of 2.73 percent).

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 following fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value.



	Level 1 -	Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

	Level 2 -	Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

	Level 3 -	Prices or valuation techniques that require significant unobservable inputs because observable inputs are not available. The unobservable inputs may reflect the Company’s own judgments about the assumptions that market participants would use.

	NAV -	The fair values of investment company limited partnership investments and similar vehicles (referred to as investment funds) are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.

The Company uses an independent pricing source to obtain the estimated fair values of a majority of its securities, subject to an internal validation. The fair values are based on quoted market prices, where available. This is typically the case for equity securities and money market funds, which are accordingly classified as Level 1 fair value measurements. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. Fixed maturity securities, non-redeemable preferred stocks and various short-term investments in the Company’s portfolio may not trade on a daily basis; however, observable inputs are utilized in their valuations, and these securities are therefore classified as Level 2 fair value measurements. Following is a brief description of the various pricing techniques used by the independent pricing source for different asset classes.


•	U.S. Treasury securities (including bonds, notes, and bills) are priced according to a number of live data sources, including active market makers and inter-dealer brokers. Prices from these sources are reviewed based on the sources’ historical accuracy for individual issues and maturity ranges.

•

U.S. government-sponsored agencies and corporate securities (including fixed-rate corporate bonds and medium-term notes) are priced by determining a bullet (non-call) spread scale for each issuer for maturities going out to forty years. These spreads represent credit risk and are obtained from the new issue market, secondary trading, and dealer quotes. An option adjusted spread model is incorporated to adjust spreads of issues that have early redemption features. The final spread is then added to the U.S. Treasury curve.

•

Obligations of states and political subdivisions are priced by tracking and analyzing actively quoted issues and reported trades, material event notices and benchmark yields. Municipal bonds with similar characteristics are grouped together into market sectors, and internal yield curves are constructed daily for these sectors. Individual bond evaluations are extrapolated from these sectors, with the ability to make individual spread adjustments for attributes such as discounts, premiums, alternative minimum tax, and/or whether or not the bond is callable.

•

Mortgage-backed and asset-backed securities are first reviewed for the appropriate pricing speed (if prepayable), spread, yield and volatility. The securities are priced with models using spreads and other information solicited from market buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. To determine a tranche’s price, first the benchmark yield is determined and adjusted for collateral performance, tranche level attributes and market conditions. Then the cash flow for each tranche is generated (using consensus prepayment speed assumptions including, as appropriate, a prepayment projection based on historical statistics of the underlying collateral). The tranche-level yield is used to discount the cash flows and generate the price. Depending on the characteristics of the tranche, a volatility-driven, multi-dimensional single cash flow stream model or an option-adjusted spread model may be used. When cash flows or other security structure or market information is not available, broker quotes may be used.

On a quarterly basis, the Company receives from its independent pricing service a list of fixed maturity securities, if any, that were priced solely from broker quotes. For these securities, fair value may be determined using the broker quotes, or by the Company using similar pricing techniques as the Company’s independent pricing service. Depending on the level of observable inputs, these securities would be classified as Level 2 or Level 3 fair value measurements. At June 30, 2018 and December 31, 2017, the Company had no securities priced solely from broker quotes.

A small number of the Company’s securities are not priced by the independent pricing service. One of these is an equity security that is reported as a Level 3 fair value measurement since no observable inputs are used in its valuation. This security continues to be reported at the fair value obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC). The SVO establishes a per share price for this security based on an annual review of that company’s financial statements, typically performed during the second quarter. The other securities not priced by the Company’s independent pricing service consist of five fixed maturity securities (eight at December 31, 2017). Two of these fixed maturity securities, classified as Level 3 fair value measurements, are corporate securities that convey premium tax benefits and are not publicly traded. The fair values for these securities are based on discounted cash flow analyses. The other fixed maturity securities are classified as Level 2 fair value measurements. The fair values for these fixed maturity securities were obtained from either the SVO, the Company's investment custodian, or the Company's investment department using similar pricing techniques as the Company’s independent pricing service.

Presented in the tables below are the estimated fair values of the Company’s financial instruments as of June 30, 2018 and December 31, 2017.



June 30, 2018					Fair value measurements using
($ in thousands)	Total		Investments measured at net asset value (NAV)		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	7,914	$	—	$	—	$	7,914	$	—
U.S. government-sponsored agencies	296,224		—		—		296,224		—
Obligations of states and political subdivisions	289,730		—		—		289,730		—
Commercial mortgage-backed	75,676		—		—		75,676		—
Residential mortgage-backed	128,530		—		—		128,530		—
Other asset-backed	21,671		—		—		21,671		—
Corporate	421,954		—		—		421,480		474
Total fixed maturity securities available-for-sale	1,241,699		—		—		1,241,225		474

Equity investments, at fair value:
Common stocks:
Financial services	47,818		—		47,818		—		—
Information technology	33,801		—		33,801		—		—
Healthcare	29,813		—		29,813		—		—
Consumer staples	12,571		—		12,571		—		—
Consumer discretionary	23,237		—		23,237		—		—
Energy	17,676		—		17,676		—		—
Industrials	24,721		—		24,721		—		—
Other	12,476		—		12,476		—		—
Non-redeemable preferred stocks	19,028		—		9,396		9,632		—
Investment funds	1,256		1,256		—		—		—
Total equity investments	222,397		1,256		211,509		9,632		—

Short-term investments	23,447		—		23,447		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	15,505		—		—		—		15,505



December 31, 2017					Fair value measurements using
($ in thousands)	Total		Investments measured at net asset value (NAV)		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,078	$	—	$	—	$	8,078	$	—
U.S. government-sponsored agencies	297,949		—		—		297,949		—
Obligations of states and political subdivisions	307,536		—		—		307,536		—
Commercial mortgage-backed	83,980		—		—		83,980		—
Residential mortgage-backed	119,799		—		—		119,799		—
Other asset-backed	24,114		—		—		24,114		—
Corporate	433,560		—		—		432,940		620
Total fixed maturity securities available-for-sale	1,275,016		—		—		1,274,396		620

Equity securities available-for-sale:
Common stocks:
Financial services	43,522		—		43,519		—		3
Information technology	35,810		—		35,810		—		—
Healthcare	30,595		—		30,595		—		—
Consumer staples	14,127		—		14,127		—		—
Consumer discretionary	20,538		—		20,538		—		—
Energy	16,905		—		16,905		—		—
Industrials	28,489		—		28,489		—		—
Other	16,421		—		16,421		—		—
Non-redeemable preferred stocks	21,708		—		9,512		10,196		2,000
Total equity securities available-for-sale	228,115		—		215,916		10,196		2,003

Short-term investments	23,613		—		23,613		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	16,689		—		—		—		16,689

Presented in the table below is a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2018 and 2017. Any unrealized gains or losses on these securities are recognized in other comprehensive income (loss). Any gains or losses from settlements, disposals or impairments of these securities are reported as realized investment gains or losses in net income.



($ in thousands)	Fair value measurements using significant unobservable (Level 3) inputs
Three months ended June 30, 2018	Fixed maturity securities available-for-sale, corporate			Equity securities, financial services			Total
Beginning balance	$	562		$	3		$	565
Settlements	(89		)	—			(89		)
Unrealized gains (losses) included in other comprehensive income (loss)	1			(3		)	(2		)
Balance at June 30, 2018	$	474		$	—		$	474

Six months ended June 30, 2018
Beginning balance	$	620		$	3		$	623
Settlements	(145		)	—			(145		)
Unrealized gains (losses) included in other comprehensive income (loss)	(1		)	(3		)	(4		)
Balance at June 30, 2018	$	474		$	—		$	474



($ in thousands)	Fair value measurements using significant unobservable (Level 3) inputs
Three months ended June 30, 2017	Fixed maturity securities available-for-sale, corporate			Equity securities available-for-sale, financial services		Equity securities available-for-sale, non-redeemable preferred stocks		Total
Beginning balance	$	929		$	3	$	2,000	$	2,932
Settlements	(90		)	—		—		(90		)
Unrealized gains (losses) included in other comprehensive income (loss)	1			—		—		1
Balance at June 30, 2017	$	840		$	3	$	2,000	$	2,843

Six months ended June 30, 2017
Beginning balance	$	982		$	3	$	2,000	$	2,985
Settlements	(140		)	—		—		(140		)
Unrealized gains (losses) included in other comprehensive income (loss)	(2		)	—		—		(2		)
Balance at June 30, 2017	$	840		$	3	$	2,000	$	2,843

There were no transfers into or out of Levels 1 or 2 during the six months ended June 30, 2018 or 2017. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.