4. FAIR VALUE

GAAP guidance regarding fair value measurements address how companies should measure fair value when they are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3 being the lowest priority.

The levels in the hierarchy are defined as follows:

Level 1:

Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in an active market;

Level 2:

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

Level 3:

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company's fixed maturity and equity securities are primarily managed by third party investment asset managers. The investment asset managers obtain prices from nationally recognized pricing services. These services seek to utilize market data and observations in their evaluation process. They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers. The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers. In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices. In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source. No material variances were noted during these price validation procedures. In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value. Due to the unavailability of prices for fifteen private placement securities, the Company valued the fifteen securities at $34,431 thousand at June 30, 2016. Due to the unavailability of prices for two private placement securities, the Company valued the two securities at $3,593 thousand at December 31, 2015.

The Company internally manages a small public equity portfolio which had a fair value at June 30, 2016 and December 31, 2015 of $124,776 thousand and $131,219 thousand, respectively, and all prices were obtained from publically published sources.

Equity securities denominated in U.S. currency with quoted prices in active markets for identical assets are categorized as level 1 since the quoted prices are directly observable. Equity securities traded on foreign exchanges are categorized as level 2 due to the added input of a foreign exchange conversion rate to determine fair or market value. The Company uses foreign currency exchange rates published by nationally recognized sources.

All categories of fixed maturity securities listed in the tables below are generally categorized as level 2, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority. For foreign government securities and foreign corporate securities, the fair values provided by the third party pricing services in local currencies, and where applicable, are converted to U.S. dollars using currency exchange rates from nationally recognized sources.

The fixed maturities with fair values categorized as level 3 result when prices are not available from the nationally recognized pricing services. The asset managers will then obtain non-binding price quotes for the securities from brokers. The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company. If the broker quotes are for foreign denominated securities, the quotes are converted to U.S. dollars using currency exchange rates from nationally recognized sources. In limited circumstances when broker prices are not available for private placements, the Company will value the securities using comparable market information.

The composition and valuation inputs for the presented fixed maturities categories are as follows:

U.S. Treasury securities and obligations of U.S. government agencies and corporations are primarily comprised of U.S. Treasury bonds and the fair value is based on observable market inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields;
Obligations of U.S. states and political subdivisions are comprised of state and municipal bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;
Corporate securities are primarily comprised of U.S. corporate and public utility bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;
Asset-backed and mortgage-backed securities fair values are based on observable inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields and cash flow models using observable inputs such as prepayment speeds, collateral performance and default spreads;
Foreign government securities are comprised of global non-U.S. sovereign bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source;
Foreign corporate securities are comprised of global non-U.S. corporate bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source.

Other invested assets, at fair value, was categorized as Level 3 at June 30, 2016 and December 31, 2015, since it represented a privately placed convertible preferred stock issued by an affiliate. The stock was received in exchange for shares of the Company's parent, which were valued on a public securities exchange on December 21, 2015. The fair value of the preferred stock at June 30, 2016 was determined using a pricing model and at December 31, 2015 represented the original exchange value.

The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:


			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	June 30, 2016		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	391,944	$	-	$	391,944	$	-
Obligations of U.S. States and political subdivisions		749,912		-		749,912		-
Corporate securities		2,066,163		-		2,033,753		32,410
Asset-backed securities		168,913		-		168,913		-
Mortgage-backed securities
Commercial		75,101		-		75,101		-
Agency residential		767,696		-		767,696		-
Non-agency residential		120		-		120		-
Foreign government securities		533,403		-		533,403		-
Foreign corporate securities		1,015,497		-		1,013,476		2,021
Total fixed maturities, market value		5,768,749		-		5,734,318		34,431

Equity securities, fair value		976,879		915,003		61,876		-
Other invested assets, fair value		1,772,458		-		-		1,772,458

There were no transfers between Level 1 and Level 2 for the six months ended June 30, 2016.

The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:


			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	December 31, 2015		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	330,985	$	-	$	330,985	$	-
Obligations of U.S. States and political subdivisions		703,075		-		703,075		-
Corporate securities		1,968,558		-		1,964,625		3,933
Asset-backed securities		144,982		-		144,982		-
Mortgage-backed securities
Commercial		62,446		-		62,446		-
Agency residential		712,298		-		712,298		-
Non-agency residential		150		-		150		-
Foreign government securities		463,074		-		463,074		-
Foreign corporate securities		970,909		-		969,316		1,593
Total fixed maturities, market value		5,356,477		-		5,350,951		5,526

Fixed maturities, fair value		2,102		-		2,102		-
Equity securities, fair value		1,215,377		1,153,310		62,067		-
Other invested assets, fair value		1,773,214		-		-		1,773,214

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:


	Three Months Ended June 30, 2016								Six Months Ended June 30, 2016
	Corporate			Foreign					Corporate			Foreign
(Dollars in thousands)	Securities			Corporate		Total			Securities			Corporate			Total
Beginning balance	$	15,706		$	596	$	16,302		$	3,933		$	1,593		$	5,526
Total gains or (losses) (realized/unrealized)
Included in earnings		(18	)		-		(18	)		(10	)		(997	)		(1,007	)
Included in other comprehensive income (loss)		(27	)		1,425		1,398			(33	)		1,425			1,392
Purchases, issuances and settlements		16,749			-		16,749			28,520			-			28,520
Transfers in and/or (out) of Level 3		-			-		-			-			-			-
Ending balance	$	32,410		$	2,021	$	34,431		$	32,410		$	2,021		$	34,431

The amount of total gains or losses for the period included
in earnings (or changes in net assets) attributable to the
change in unrealized gains or losses relating to assets
still held at the reporting date	$	-		$	-	$	-		$	-		$	(997	)	$	(997	)

(Some amounts may not reconcile due to rounding.)


	Three Months Ended June 30, 2015								Six Months Ended June 30, 2015
	Corporate			Foreign					Corporate						Foreign
(Dollars in thousands)	Securities			Corporate		Total			Securities			CMBS			Corporate		Total
Beginning balance	$	2,653		$	6,125	$	8,778		$	-		$	8,597		$	7,166	$	15,763
Total gains or (losses) (realized/unrealized)
Included in earnings		2			58		60			4			-			115		119
Included in other comprehensive income (loss)		(3	)		1,169		1,166			(2	)		-			71		69
Purchases, issuances and settlements		(12	)		-		(12	)		1,928			-			-		1,928
Transfers in and/or (out) of Level 3		(682	)		485		(197	)		28			(8,597	)		485		(8,084	)
Ending balance	$	1,958		$	7,837	$	9,795		$	1,958		$	-		$	7,837	$	9,795

The amount of total gains or losses for the period
included in earnings (or changes in net assets)
attributable to the change in unrealized gains
or losses relating to assets still held at the
reporting date	$	-		$	-	$	-		$	-		$	-		$	-	$	-

(Some amounts may not reconcile due to rounding.)

The net transfers from level 3, fair value measurements using significant unobservable inputs, of $0 thousand and $8,084 thousand of investments for the six months ended June 30, 2016 and 2015, respectively, primarily relate to securities that were priced using single non-binding broker quotes as of December 31, 2014. The securities were subsequently priced using a recognized pricing service as of June 30, 2015, and were classified as level 2 as of that date.

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs by other invested assets, for the periods indicated:


	Three months ended					Six months ended
	June 30,					June 30,
(Dollars in thousands)	2016			2015		2016			2015
Other invested assets, fair value:
Beginning balance	$	1,773,214		$	-	$	1,773,214		$	-
Total gains or (losses) (realized/unrealized)
Included in earnings		(756	)		-		(756	)		-
Included in other comprehensive income (loss)		-			-		-			-
Purchases, issuances and settlements		-			-		-			-
Transfers in and/or (out) of Level 3		-			-		-			-
Ending balance	$	1,772,458		$	-	$	1,772,458		$	-

The amount of total gains or losses for the period included in earnings
(or changes in net assets) attributable to the change in unrealized
gains or losses relating to assets still held at the reporting date	$	-		$	-	$	-		$	-

(Some amounts may not reconcile due to rounding.)