Fair Value Measurement

The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount 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 using the exit price. Accordingly, when market observable data are not readily available, the Company’s own assumptions are used to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the level of judgment associated with inputs used to measure their fair values and the level of market price observability, as follows:



Level 1	Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date.
Level 2	Pricing inputs are other than quoted prices in active markets, which are based on the following: • Quoted prices for similar assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in non-active markets; or • Either directly or indirectly observable inputs as of the reporting date.
Level 3	Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation.

In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.

The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer.

Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities

The Company’s fair value measurements are based on the market approach, which utilizes market transaction data for the same or similar instruments.

The Company obtained unadjusted fair values on 99.7% of its portfolio from an independent pricing service. For 0.3% of its portfolio, classified as Level 3, the Company obtained specific unadjusted broker quotes based on net fund value and, to a lesser extent, unobservable inputs from at least one knowledgeable outside security broker to determine the fair value as of September 30, 2015.

Level 1 Measurements - Fair values of financial assets and financial liabilities are obtained from an independent pricing service, and are based on unadjusted quoted prices for identical assets or liabilities in active markets. Additional pricing services and closing exchange values are used as a comparison to ensure that reasonable fair values are used in pricing the investment portfolio.

U.S. government bonds and agencies/Short-term bonds: Valued using unadjusted quoted market prices for identical assets in active markets.

Common stock: Comprised of actively traded, exchange listed U.S. and international equity securities and valued based on unadjusted quoted prices for identical assets in active markets.

Money market instruments: Valued based on unadjusted quoted prices for identical assets in active markets.

Options sold/Purchased options: Comprised of free-standing exchange listed derivatives that are actively traded and valued based on unadjusted quoted prices for identical instruments in active markets.

Level 2 Measurements - Fair values of financial assets and financial liabilities are obtained from an independent pricing service or outside brokers, and are based on prices for similar assets or liabilities in active markets or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. Additional pricing services are used as a comparison to ensure reliable fair values are used in pricing the investment portfolio.

Municipal securities: Valued based on models or matrices using inputs such as quoted prices for identical or similar assets in active markets.

Mortgage-backed securities: Comprised of securities that are collateralized by residential and commercial mortgage loans valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets. The Company had holdings of $49.9 million and $32.5 million at September 30, 2015 and December 31, 2014, respectively, in commercial mortgage-backed securities.

Corporate securities/Short-term bonds: Valued based on a multi-dimensional model using multiple observable inputs, such as benchmark yields, reported trades, broker/dealer quotes and issue spreads, for identical or similar assets in active markets.

Non-redeemable preferred stock: Valued based on observable inputs, such as underlying and common stock of same issuer and appropriate spread over a comparable U.S. Treasury security, for identical or similar assets in active markets.

Total return swaps: Valued based on multi-dimensional models using inputs such as interest rate yield curves, underlying debt/credit instruments and the appropriate benchmark spread for similar assets in active markets, observable for substantially the full term of the contract.

Collateralized loan obligations: Valued based on underlying debt instruments and the appropriate benchmark spread for similar assets in active markets.

Other asset-backed securities: Comprised of securities that are collateralized by non-mortgage assets, such as auto loans, valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets.

Secured notes payable: Valued based on underlying collateral and reset rates for similarly termed notes that are observable in the market.

Unsecured notes payable: Valued based on the unadjusted quoted price for similar notes in active markets.

Level 3 Measurements - Fair values of financial assets are based on inputs that are both unobservable and significant to the overall fair value measurement, including any items in which the evaluated prices obtained elsewhere were deemed to be of a distressed trading level.

Collateralized debt obligations/Private equity funds: Valued based on underlying debt/credit instruments and the appropriate benchmark spread for similar assets in active markets; taking into consideration unobservable inputs related to liquidity assumptions.

The Company’s financial instruments at fair value are reflected in the consolidated balance sheets on a trade-date basis. Related unrealized gains or losses are recognized in net realized investment (losses) gains in the consolidated statements of operations. Fair value measurements are not adjusted for transaction costs.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:



	September 30, 2015
	Level 1		Level 2		Level 3		Total
	(Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds and agencies	$	25,150	$	0	$	—	$	25,150
Municipal securities	—		2,495,881		—		2,495,881
Mortgage-backed securities	—		63,045		—		63,045
Corporate securities	—		248,246		—		248,246
Collateralized loan obligations	—		49,665		—		49,665
Other asset-backed securities	—		4,877		—		4,877
Equity securities:
Common stock:
Public utilities	64,324		—		—		64,324
Banks, trusts and insurance companies	11,700		—		—		11,700
Industrial and other	186,172		—		—		186,172
Non-redeemable preferred stock	—		24,795		—		24,795
Private equity funds	—		0		11,696		11,696
Short-term investments:
Short-term bonds	59,996		2,005		—		62,001
Money market instruments	100,834		0		—		100,834
Total assets at fair value	$	448,176	$	2,888,514	$	11,696	$	3,348,386
Liabilities
Notes payable:
Secured Notes	$	—	$	140,000	$	—	$	140,000
Unsecured Notes	—		150,000		—		150,000
Other liabilities:
Total return swaps	—		6,059		—		6,059
Options sold	266		0		—		266
Total liabilities at fair value	$	266	$	296,059	$	—	$	296,325



	December 31, 2014
	Level 1		Level 2		Level 3		Total
	(Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds and agencies	$	16,108	—		—		$	16,108
Municipal securities	—		2,275,455		—		2,275,455
Mortgage-backed securities	—		47,691		—		47,691
Corporate securities	—		256,930		—		256,930
Collateralized loan obligations	—		22,216		—		22,216
Equity securities:
Common stock:
Public utilities	105,485		—		—		105,485
Banks, trusts and insurance companies	9,757		—		—		9,757
Energy and other	257,356		—		—		257,356
Non-redeemable preferred stock	—		28,563		—		28,563
Private equity fund	—		—		11,719		11,719
Short-term investments:
Short-term bonds	69,999		18,362		—		88,361
Money market instruments	284,181		—		—		284,181
Total assets at fair value	$	742,886	$	2,649,217	$	11,719	$	3,403,822
Liabilities
Notes payable:
Secured Notes	$	—	$	140,000	$	—	$	140,000
Unsecured Notes	—		150,000		—		150,000
Other liabilities:
Total return swaps	—		4,025		—		4,025
Options sold	194		—		—		194
Total liabilities at fair value	$	194	$	294,025	$	—	$	294,219

The following tables present a summary of changes in fair value of Level 3 financial assets and financial liabilities held at fair value:



	Three Months Ended September 30,
	2015			2014
	Private Equity Fund			Private Equity Fund
	(Amounts in thousands)
Beginning Balance	$	13,745		$	12,966
Realized losses included in earnings	(2,049		)	(296		)
Settlement	—			—
Ending Balance	$	11,696		$	12,670
The amount of total losses for the period included in earnings attributable to assets still held at September 30	$	(2,049	)	$	(296	)



	Nine Months Ended September 30,
	2015			2014
	Private Equity Fund			Collateralized Debt Obligations			Private Equity Fund
	(Amounts in thousands)
Beginning Balance	$	11,719		$	4,302		$	12,548
Realized (losses) gains included in earnings	(2,910		)	(755		)	122
Reclassification from other assets	2,911			—			—
Sales	—			(3,547		)	—
Settlement	(24		)	—			—
Ending Balance	$	11,696		$	0		$	12,670
The amount of total (losses) gains for the period included in earnings attributable to assets still held at September 30	$	(2,910	)	$	—		$	122

There were no transfers between Levels 1, 2, and 3 of the fair value hierarchy during the nine months ended September 30, 2015 and 2014.

At September 30, 2015, the Company did not have any nonrecurring fair value measurements of nonfinancial assets or nonfinancial liabilities.