Fair Value Measurements

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 March 31, 2017.

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: 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 $28.6 million and $30.0 million at March 31, 2017 and December 31, 2016, 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 automobile 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.

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.

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 gains (losses) 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, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values:



	March 31, 2017
	Level 1		Level 2		Level 3		Total

	(Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds and agencies	$	12,271	$	—	$	—	$	12,271
Municipal securities	—		2,561,428		—		2,561,428
Mortgage-backed securities	—		37,847		—		37,847
Corporate securities	—		165,761		—		165,761
Collateralized loan obligations	—		89,790		—		89,790
Other asset-backed securities	—		47,190		—		47,190
Equity securities:
Common stock	383,529		—		—		383,529
Non-redeemable preferred stock	—		32,959		—		32,959
Private equity funds	—		—		9,018		9,018
Short-term investments:
Short-term bonds	69,958		20,257		—		90,215
Money market instruments	170,490		—		—		170,490
Total assets at fair value	$	636,248	$	2,955,232	$	9,018	$	3,600,498
Liabilities
Other liabilities:
Total return swaps	$	—	$	1,405	$	—	$	1,405
Options sold	285		—		—		285
Total liabilities at fair value	$	285	$	1,405	$	—	$	1,690



	December 31, 2016
	Level 1		Level 2		Level 3		Total

	(Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds and agencies	$	12,275	$	—	$	—	$	12,275
Municipal securities	—		2,449,292		—		2,449,292
Mortgage-backed securities	—		39,777		—		39,777
Corporate securities	—		189,688		—		189,688
Collateralized loan obligations	—		86,525		—		86,525
Other asset-backed securities	—		36,996		—		36,996
Equity securities:
Common stock	316,450		—		—		316,450
Non-redeemable preferred stock	—		31,809		—		31,809
Private equity fund	—		—		9,068		9,068
Short-term investments:
Short-term bonds	70,393		20,233		—		90,626
Money market instruments	285,054		—		—		285,054
Other assets:
Total return swaps	—		667		—		667
Total assets at fair value	$	684,172	$	2,854,987	$	9,068	$	3,548,227
Liabilities
Other liabilities:
Total return swaps	$	—	$	765	$	—	$	765
Options sold	20		—		—		20
Total liabilities at fair value	$	20	$	765	$	—	$	785

The following table presents a summary of changes in fair value of Level 3 financial assets and financial liabilities:



	Private Equity Fund
	Three Months Ended March 31,
	2017			2016

	(Amounts in thousands)
Beginning balance	$	9,068		$	10,431
Realized (losses) included in earnings	(50		)	(1,440		)
Ending balance	$	9,018		$	8,991
The amount of total losses for the period included in earnings attributable to assets still held at March 31	$	(50	)	$	(1,440	)

There were no transfers between Levels 1, 2, and 3 of the fair value hierarchy during the three months ended March 31, 2017 and 2016.

At March 31, 2017, the Company did not have any nonrecurring fair value measurements of nonfinancial assets or nonfinancial liabilities.

Financial Instruments Disclosed, But Not Carried, at Fair Value

The following tables present the carrying value and fair value of the Company’s financial instruments disclosed, but not carried, at fair value, and the level within the fair value hierarchy at which such instruments are categorized:



	March 31, 2017
	Carrying Value		Fair Value		Level 1		Level 2		Level 3

	(Amounts in thousands)
Liabilities
Notes payable:
Unsecured notes	$	371,044	$	374,633	$	—	$	374,633	$	—



	December 31, 2016
	Carrying Value		Fair Value		Level 1		Level 2		Level 3

	(Amounts in thousands)
Liabilities
Notes payable:
Secured notes	$	140,000	$	140,000	$	—	$	140,000	$	—
Unsecured notes	180,000		180,000		—		180,000		—

Secured Notes

The fair values of the Company’s $120 million secured note and $20 million secured note at December 31, 2016 were estimated based on assumptions and inputs, such as the market value of underlying collateral and reset rates, for similarly termed notes that are observable in the market. In addition, the fair values of these secured notes approximate their carrying values, as the interest rates on these securities are variable and approximate current market interest rates.

Unsecured Notes

The fair value of the Company’s publicly traded $375 million unsecured note at March 31, 2017 was obtained from a third party pricing service and pricing was based on the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes.

The fair value of the Company's $180 million unsecured note at December 31, 2016 was based on the unadjusted quoted price for similar notes in active markets. In addition, the fair value of this unsecured note approximates its carrying value, as the interest rate on this security is variable and approximates current market interest rates.

See Note 11. Notes Payable for additional information on secured and unsecured notes.