NOTE 4. FAIR VALUE MEASUREMENT

We obtain values for the majority of our investment securities from pricing services, however, it is ultimately our responsibility to determine whether the values obtained from these service providers are representative of fair value.

To validate the techniques or models used by pricing sources, our review process includes, but is not limited to:

(i)

A review of the validity of the fair market valuation of individual securities deemed as outliers (i.e., vendor price differed significantly from other vendor prices), securities with significant price movements from previous months, securities with stale prices and securities with negative yields.

(ii)

A comparison of the tally of securities priced by certain vendors for significant movements in vendor CUSIP counts.

(iii)

A review of the results of back-testing, including the comparison of executed prices to the historical fair value estimates from the pricing service and documentation to support trades above certain variance thresholds.

(iv)

A review of the Statement on Standards for Attestation Engagements (“SSAE”) No.16 report of our outside investment managers for any exceptions.

(v)

Management also periodically independently prices the portfolio using alternative pricing vendors and investigates variances outside of the established thresholds.

The fair value of our financial instruments is determined based on the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets. Examples are listed equity and fixed income securities traded on an exchange. U.S. Treasury securities are reported as Level 1 and are valued based on unadjusted quoted prices for identical assets in active markets that our Company can access.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Examples are asset-backed and mortgage-backed securities that are similar to other asset-backed or mortgage-backed securities observed in the market. U.S. government agency securities are reported as Level 2 and are valued using yields and spreads that are observable in active markets.

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. An example would be a private placement with minimal liquidity.

Fair value measurements are received from independent pricing service vendors, utilized by our outside investment manager whom we employ to assist us with investment accounting services. This manager utilizes a pricing committee, which oversees the use of one or more independent pricing service vendors. The pricing committee consists of five or more members of the investment management firm, one from senior management and one from the accounting group, with the remainder representing asset class specialists and client strategists. The pricing source for each security is determined in accordance with the pricing source procedures approved by the pricing committee. The investment manager receives supporting documentation from the independent pricing service vendor detailing the inputs, models and processes used in the vendors’ evaluation process to determine the appropriate fair value hierarchy. Any pricing where the input is believed to be unobservable is deemed to be a Level 3 price. Management has reviewed this process by which the manager determines the prices and has obtained alternative pricing to validate a sample of the prices and assess their reasonableness.

The following tables present, for each of the fair value hierarchy levels as defined by the accounting guidance for fair value measurements and described below, our Company’s fixed maturities and equity securities by asset class that are measured at fair value on a recurring basis, as well as the fair value of the 5.75% Senior notes due October 15, 2023 (the “5.75% Senior notes”) carried at amortized cost as of December 31, 2015 and 2014:

	December 31, 2015
amounts in thousands	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	67,394	$	185,488	$	—	$	252,882
States, municipalities and political subdivisions		—		576,859		—		576,859
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		—		379,269		—		379,269
Residential mortgage obligations		—		30,465		—		30,465
Asset-backed securities		—		225,012		—		225,012
Commercial mortgage-backed securities		—		189,713		—		189,713
Subtotal	$	—	$	824,459	$	—	$	824,459
Corporate bonds		—		760,010		—		760,010
Total fixed maturities	$	67,394	$	2,346,816	$	—	$	2,414,210
Equity securities		126,455		178,816		—		305,271
Short-term investments		217,745		—		—		217,745
Total assets measured at fair value	$	411,594	$	2,525,632	$	—	$	2,937,226
Senior notes	$	—	$	282,486	$	—	$	282,486
Total liabilities measured at fair value	$	—	$	282,486	$	—	$	282,486

	December 31, 2014
amounts in thousands	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	146,904	$	251,019	$	—	$	397,923
States, municipalities and political subdivisions		—		541,007		—		541,007
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		—		364,622		—		364,622
Residential mortgage obligations		—		34,087		—		34,087
Asset-backed securities		—		206,413		—		206,413
Commercial mortgage-backed securities		—		206,318		—		206,318
Subtotal	$	—	$	811,440	$	—	$	811,440
Corporate bonds		—		615,564		—		615,564
Total fixed maturities	$	146,904	$	2,219,030	$	—	$	2,365,934
Equity securities		127,183		57,112		—		184,295
Short-term investments		179,506		—		—		179,506
Total assets measured at fair value	$	453,593	$	2,276,142	$	—	$	2,729,735
Senior notes	$	—	$	285,710	$	—	$	285,710
Total liabilities measured at fair value	$	—	$	285,710	$	—	$	285,710

All other financial assets and liabilities including cash, premium receivables, reinsurance recoverables and reinsurance balance payables are carried at cost, which approximates fair value.

Our Company did not have any significant transfers between the Level 1 and Level 2 classifications for the years ended December 31, 2015 and 2014.

As of December 31, 2015 and 2014, our Company did not have any Level 3 assets. During 2014, one security was transferred from Level 3 to Level 2 as our Company was able to obtain a valuation in which all significant inputs to the model were observable in active markets.