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 98.2% of its investment portfolio from an independent pricing service. For a private equity fund that was classified as Level 3 and included in equity securities at September 30, 2018 and December 31, 2017, 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. The fair value of the private equity fund was $1.4 million and $1.5 million at September 30, 2018 and December 31, 2017, respectively.

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 /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 $25.0 million and $19.3 million in commercial mortgage-backed securities at September 30, 2018 and December 31, 2017, respectively.

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 swap: 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 ("CLOs"): 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.

Note receivable: Valued based on observable inputs, such as benchmark yields, and considering any premium or discount for the differential between the stated interest rate and market interest rates, based on quoted market prices of similar instruments.

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 fund: Private equity fund, excluding a private equity fund measured at net asset value ("NAV"), is valued based on underlying investments of the fund or assets similar to such investments in active markets, taking into consideration specific unadjusted broker quotes based on net fund value and unobservable inputs from at least one knowledgeable outside security broker related to liquidity assumptions.

Fair value measurement using NAV practical expedient - The fair value of the Company's investment in private equity fund measured at net asset value is determined using NAV as advised by the external fund manager and the third party administrator. The NAV of the Company's limited partnership interest in this fund is based on the manager's and the administrator's valuation of the underlying holdings in accordance with the fund's governing documents and GAAP. In accordance with applicable accounting guidance, this investment, measured at fair value using the NAV practical expedient, is not classified in the fair value hierarchy. The strategy of the fund is to provide current income to investors by investing mainly in equity tranches and sub-investment grade rated debt tranches of CLO issuers in the new and secondary markets, and equity interests in vehicles established to purchase and warehouse loans in anticipation of a CLO closing or to satisfy regulatory risk retention requirements associated with certain CLOs. The Company has made all of its capital contributions in the fund and had no outstanding unfunded commitments at September 30, 2018 with respect to this fund. The underlying assets of the fund are expected to be liquidated over the period of approximately one to five years from September 30, 2018. The Company does not have the contractual option to redeem but will receive distributions based on the liquidation of the underlying assets and the interest proceeds from the underlying assets. In addition, the Company does not have the ability to withdraw from the fund, or to sell, assign, pledge or transfer its investment, without the consent from the general partner of the fund.

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 or 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:



	September 30, 2018
	Level 1		Level 2		Level 3		Total

	(Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds	$	14,105	$	—	$	—	$	14,105
Municipal securities	—		2,590,847		—		2,590,847
Mortgage-backed securities	—		31,513		—		31,513
Corporate securities	—		119,292		—		119,292
Collateralized loan obligations	—		155,796		—		155,796
Other asset-backed securities	—		41,318		—		41,318
Total fixed maturity securities	14,105		2,938,766		—		2,952,871
Equity securities:
Common stock	583,851		—		—		583,851
Non-redeemable preferred stock	—		33,626		—		33,626
Private equity fund	—		—		1,446		1,446
Private equity fund measured at net asset value ⁽¹⁾							69,464
Total equity securities	583,851		33,626		1,446		688,387
Short-term investments:
Short-term bonds	31,448		24,048		—		55,496
Money market instruments	207,310		—		—		207,310
Total short-term investments	238,758		24,048		—		262,806
Other assets:
Note receivable	—		5,514		—		5,514
Total assets at fair value	$	836,714	$	3,001,954	$	1,446	$	3,909,578
Liabilities
Other liabilities:
Total return swap	$	—	$	961	$	—	$	961
Options sold	589		—		—		589
Total liabilities at fair value	$	589	$	961	$	—	$	1,550



	December 31, 2017
	Level 1		Level 2		Level 3		Total

	(Amounts in thousands)
Assets
Fixed maturity securities:
U.S. government bonds	$	13,236	$	—	$	—	$	13,236
Municipal securities	—		2,556,532		—		2,556,532
Mortgage-backed securities	—		27,165		—		27,165
Corporate securities	—		137,542		—		137,542
Collateralized loan obligations	—		105,202		—		105,202
Other asset-backed securities	—		53,100		—		53,100
Total fixed maturity securities	13,236		2,879,541		—		2,892,777
Equity securities:
Common stock	429,367		—		—		429,367
Non-redeemable preferred stock	—		34,869		—		34,869
Private equity fund	—		—		1,481		1,481
Private equity fund measured at net asset value ⁽¹⁾							71,523
Total equity securities	429,367		34,869		1,481		537,240
Short-term investments:
Short-term bonds	29,998		2,020		—		32,018
Money market instruments	270,693		—		—		270,693
Total short-term investments	300,691		2,020		—		302,711
Other assets:
Note receivable	—		5,565		—		5,565
Total assets at fair value	$	743,294	$	2,921,995	$	1,481	$	3,738,293
Liabilities
Other liabilities:
Total return swap	$	—	$	1,200	$	—	$	1,200
Options sold	123		—		—		123
Total liabilities at fair value	$	123	$	1,200	$	—	$	1,323

__________

⁽¹⁾ The fair value is measured using the NAV practical expedient; therefore, it is not categorized within the fair value hierarchy. The fair value amount is presented in this table to permit reconciliation of the fair value hierarchy to the amounts presented in the Company's consolidated balance sheets.

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



	Private Equity Funds
	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017

	(Amounts in thousands)
Beginning balance	$	1,450		$	8,764		$	1,481		$	9,068
Realized losses included in earnings	(4		)	(80		)	(35		)	(384		)
Ending balance	$	1,446		$	8,684		$	1,446		$	8,684
The amount of total losses for the period included in earnings attributable to assets still held at September 30	$	(4	)	$	(80	)	$	(35	)	$	(384	)

There were no transfers between Levels 1, 2, and 3 of the fair value hierarchy during the nine months ended September 30, 2018 and 2017.

At September 30, 2018, 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:



	September 30, 2018
	Carrying Value		Fair Value		Level 1		Level 2		Level 3

	(Amounts in thousands)
Liabilities
Notes payable:
Unsecured notes	$	371,635	$	361,118	$	—	$	361,118	$	—



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

	(Amounts in thousands)
Liabilities
Notes payable:
Unsecured notes	$	371,335	$	385,583	$	—	$	385,583	$	—

Unsecured Notes

The fair value of the Company’s publicly traded $375 million unsecured notes at September 30, 2018 and December 31, 2017 was based on the spreads above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes.

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