3.Fair Value:

ASC 820 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820, among other things, requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In addition, ASC 820 precludes the use of block discounts when measuring the fair value of instruments traded in an active market, which were previously applied to large holdings of publicly traded equity securities.

We determine the fair value of our financial instruments based on the fair value hierarchy established in ASC 820. In accordance with ASC 820, we utilize the following fair value hierarchy:

Level 1: quoted prices in active markets for identical assets;

Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, inputs of identical assets for less active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument; and

Level 3: inputs to the valuation methodology that are unobservable for the asset or liability.

This hierarchy requires the use of observable market data when available.

Under ASC 820, we determine fair value based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy described above. Fair value measurements for assets and liabilities where there exists limited or no observable market data are calculated based upon our pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other factors as appropriate. These estimated fair values may not be realized upon actual sale or immediate settlement of the asset or liability.

Where quoted prices are available on active exchanges for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include common and preferred stock and the equity warrant classified as Other Investments.

Level 2 investment securities include corporate bonds, collateralized corporate bank loans, municipal bonds, U.S. Treasury securities, other obligations of the U.S. Government and mortgage-backed securities for which quoted prices are not available on active exchanges for identical instruments. We use third party pricing services to determine fair values for each Level 2 investment security in all asset classes. Since quoted prices in active markets for identical assets are not available, these prices are determined using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other things. We have reviewed the processes used by the pricing services and have determined that they result in fair values consistent with the requirements of ASC 820 for Level 2 investment securities. We have not adjusted any prices received from third party pricing services. There were no transfers between Level 1 and Level 2 securities.

In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. Level 3 investments are valued based on the best available data in order to approximate fair value. This data may be internally developed and consider risk premiums that a market participant would require. Investment securities classified within Level 3 include other less liquid investment securities.

The following table presents for each of the fair value hierarchy levels, our assets that are measured at fair value on a recurring basis at December 31, 2018 and December 31, 2017 (in thousands).


	As of December 31, 2018
	Quoted Prices in
	Active Markets for
	Identical Assets		Other Observable		Unobservable
	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
U.S. Treasury securities and obligations of U.S. Government	$	—	$	48,106	$	—	$	48,106
Corporate bonds		—		241,861		291		242,152
Collateralized corporate bank loans		—		126,528		—		126,528
Municipal bonds		—		115,527		—		115,527
Mortgage-backed		—		13,557		—		13,557
Total debt securities		—		545,579		291		545,870
Total equity securities		80,896		—		—		80,896
Total other investments		1,148		—		—		1,148
Total investments	$	82,044	$	545,579	$	291	$	627,914


	As of December 31, 2017
	Quoted Prices in
	Active Markets for
	Identical Assets		Other Observable		Unobservable
	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
U.S. Treasury securities and obligations of U.S. Government	$	—	$	49,947	$	—	$	49,947
Corporate bonds		—		278,760		313		279,073
Collateralized corporate bank loans		—		125,937		—		125,937
Municipal bonds		—		131,433		2,823		134,256
Mortgage-backed		—		16,533		—		16,533
Total debt securities		—		602,610		3,136		605,746
Total equity securities		51,142		—		621		51,763
Total other investments		3,824		—		—		3,824
Total investments	$	54,966	$	602,610	$	3,757	$	661,333

Due to significant unobservable inputs into the valuation model for one corporate bond as of December 31, 2018 and certain municipal bonds, one corporate bond and one equity security as of December 31, 2017, we classified these as level 3 in the fair value hierarchy. The corporate bond classified as level 3 in 2018 and 2017 is a convertible senior note and its fair value was estimated by the sum of the bond value using an income approach discounting the scheduled interest and principal payments and the conversion feature utilizing a binomial lattice model. We also estimated the fair value of the corporate bond utilizing an as-if converted basis into the underlying securities. In 2017, we used an income approach in order to derive an estimated fair value of the municipal bonds classified as Level 3, which included inputs such as expected holding period, benchmark swap rate, benchmark discount rate and a discount rate premium for illiquidity. The equity security classified as Level 3 in the fair value hierarchy in 2017 was an investment in a non-public entity. Given the size of this investment and since there was not an observable market for the security, we estimated its fair value as the fair value on the date we acquired the investment. Significant changes in the unobservable inputs in the fair value measurement of these securities could result in a significant change in the fair value measurement.

The following table summarizes the changes in fair value for all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the year ended December 31, 2018 and 2017 (in thousands).


	2018		2017
Beginning balance as of January 1	$	3,757	$	5,945
Sales		—		—
Settlements		(2,925)		(579)
Purchases		—		775
Issuances		—		—
Total realized/unrealized gains included in net income		80		616
Net gain included in other comprehensive income		—		—
Transfers into Level 3		—		—
Transfers out of Level 3		(621)		(3,000)
Ending balance as of December 31	$	291	$	3,757

The transfer out of Level 3 into Level 1 during 2018 was due to the conversion of a private equity holding to a preferred stock traded on a public exchange. The transfer out of Level 3 into Level 2 during 2017 was due to the successful auction of one auction rate municipal bond that previously had not had a successful auction. We account for transfers as they occur.