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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2020
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements ASC 820, Fair Value Measurements and Disclosures, establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy are defined as follows: Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets. Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs. Level 3 – Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement. In accordance with ASC 820, the Company determines fair value based on the price 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. In determining fair value, the Company uses various methods, including the market, income and cost approaches. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The following section describes the valuation methodologies used by the Company to measure assets and liabilities at fair value, including an indication of the level within the fair value hierarchy in which each asset or liability is generally classified. Available-for-sale investments and equity securities. Available-for-sale investments and equity securities are recorded at fair value on a recurring basis. Available-for-sale investments include fixed maturity securities and short-term investments. Short-term investments include certificates of deposit, commercial paper, discount notes and treasury bills with original maturities of one year or less. Fair value for available-for-sale investments and equity securities are determined by the Company after considering various sources of information, including information provided by a third party pricing service. The pricing service provides prices for substantially all of the Company's fixed maturity securities and equity securities. In determining fair value, the Company generally does not adjust the prices obtained from the pricing service. The Company obtains an understanding of the pricing service's valuation methodologies and related inputs, which include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, duration, credit ratings, estimated cash flows and prepayment speeds. The Company validates prices provided by the pricing service by reviewing prices from other pricing sources and analyzing pricing data in certain instances. The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Level 1 investments include those traded on an active exchange, such as the New York Stock Exchange. Level 2 investments include U.S. Treasury securities, U.S. government-sponsored enterprises, municipal bonds, foreign government bonds, commercial mortgage-backed securities, residential mortgage-backed securities, asset-backed securities and corporate debt securities. Level 3 investments include the Company's investments in certain insurance-linked securities funds managed by Markel CATCo Investment Management Ltd. (MCIM), a consolidated subsidiary, that are not traded on an active exchange, as further described and defined in note 12 (the Markel CATCo Funds), and are valued using unobservable inputs. Fair value for available-for-sale investments and equity securities is measured based upon quoted prices in active markets, if available. Due to variations in trading volumes and the lack of quoted market prices, fixed maturity securities are classified as Level 2 investments. The fair value of fixed maturity securities is normally derived through recent reported trades for identical or similar securities, making adjustments through the reporting date based upon available market observable data described above. If there are no recent reported trades, the fair value of fixed maturity securities may be derived through the use of matrix pricing or model processes, where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Significant inputs used to determine the fair value of obligations of states, municipalities and political subdivisions, corporate bonds and obligations of foreign governments include reported trades, benchmark yields, issuer spreads, bids, offers, credit information and estimated cash flows. Significant inputs used to determine the fair value of commercial mortgage-backed securities, residential mortgage-backed securities and asset-backed securities include the type of underlying assets, benchmark yields, prepayment speeds, collateral information, tranche type and volatility, estimated cash flows, credit information, default rates, recovery rates, issuer spreads and the year of issue. Due to the significance of unobservable inputs required in measuring the fair value of the Company's investments in the Markel CATCo Funds, these investments are classified as Level 3 within the fair value hierarchy. The fair value of the securities are derived using their reported net asset value (NAV) as the primary input, as well as other observable and unobservable inputs as deemed necessary by management. Management has obtained an understanding of the inputs, assumptions, process and controls used to determine NAV, which is calculated by an independent third party. Unobservable inputs to the NAV calculations include assumptions around premium earnings patterns and loss reserve estimates for the underlying securitized reinsurance contracts in which the Markel CATCo Funds invest. Significant unobservable inputs used in the valuation of these investments include an adjustment to include the fair value of the equity that was issued by one of the Markel CATCo Funds in exchange for notes receivable, rather than cash, which is excluded from NAV. The determination of fair value of the securities also considers external market data, including the trading price relative to its NAV of CATCo Reinsurance Opportunities Fund Ltd. (CROF), a comparable security traded on a market operated by the London Stock Exchange and on the Bermuda Stock Exchange. In July 2019, the Markel CATCo Funds were placed into run-off and capital is being returned to investors as it becomes available. However, due to the significant loss events on the underlying securitized reinsurance contracts in 2017 and 2018, portions of the Company's investments may be restricted up to three years. The Company's valuation policies and procedures for Level 3 investments are determined by management. Fair value measurements are analyzed quarterly to ensure the change in fair value from prior periods is reasonable relative to management's understanding of the underlying investments, recent market trends and external market data. Senior long-term debt and other debt. Senior long-term debt and other debt is carried at amortized cost with the estimated fair value disclosed on the consolidated balance sheets. Senior long-term debt and other debt is classified as Level 2 within the fair value hierarchy due to variations in trading volumes and the lack of quoted market prices. Fair value for senior long-term debt and other debt is generally derived through recent reported trades for identical securities, making adjustments through the reporting date, if necessary, based upon available market observable data including U.S. Treasury securities and implied credit spreads. Significant inputs used to determine the fair value of senior long-term debt and other debt include reported trades, benchmark yields, issuer spreads, bids and offers. The following tables present the balances of assets measured at fair value on a recurring basis by level within the fair value hierarchy.
| June 30, 2020 |  |  |  |  |  |
(dollars in thousands) | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |
Investments: |  |  |  |  |  |  |
Fixed maturity securities, available-for-sale: |  |  |  |  |  |  |
U.S. Treasury securities | $ | — |  |  | $ | 354,895 |  |  | $ | — |  |  | $ | 354,895 |
U.S. government-sponsored enterprises | — |  |  | 374,808 |  |  | — |  |  | 374,808 |
Obligations of states, municipalities and political subdivisions | — |  |  | 4,205,455 |  |  | — |  |  | 4,205,455 |
Foreign governments | — |  |  | 1,515,396 |  |  | — |  |  | 1,515,396 |
Commercial mortgage-backed securities | — |  |  | 1,878,978 |  |  | — |  |  | 1,878,978 |
Residential mortgage-backed securities | — |  |  | 907,330 |  |  | — |  |  | 907,330 |
Asset-backed securities | — |  |  | 8,281 |  |  | — |  |  | 8,281 |
Corporate bonds | — |  |  | 815,329 |  |  | — |  |  | 815,329 |
Total fixed maturity securities, available-for-sale | — |  |  | 10,060,472 |  |  | — |  |  | 10,060,472 |
Equity securities: |  |  |  |  |  |  |
Insurance, banks and other financial institutions | 2,014,514 |  |  | — |  |  | 115,648 |  |  | 2,130,162 |
Industrial, consumer and all other | 3,534,085 |  |  | — |  |  | — |  |  | 3,534,085 |
Total equity securities | 5,548,599 |  |  | — |  |  | 115,648 |  |  | 5,664,247 |
Short-term investments, available-for-sale | 823,932 |  |  | 105,340 |  |  | — |  |  | 929,272 |
Total investments | $ | 6,372,531 |  |  | $ | 10,165,812 |  |  | $ | 115,648 |  |  | $ | 16,653,991 |
| December 31, 2019 |  |  |  |  |  |
(dollars in thousands) | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |
Investments: |  |  |  |  |  |  |
Fixed maturity securities, available-for-sale: |  |  |  |  |  |  |
U.S. Treasury securities | $ | — |  |  | $ | 284,786 |  |  | $ | — |  |  | $ | 284,786 |
U.S. government-sponsored enterprises | — |  |  | 342,580 |  |  | — |  |  | 342,580 |
Obligations of states, municipalities and political subdivisions | — |  |  | 4,189,882 |  |  | — |  |  | 4,189,882 |
Foreign governments | — |  |  | 1,542,004 |  |  | — |  |  | 1,542,004 |
Commercial mortgage-backed securities | — |  |  | 1,817,845 |  |  | — |  |  | 1,817,845 |
Residential mortgage-backed securities | — |  |  | 888,073 |  |  | — |  |  | 888,073 |
Asset-backed securities | — |  |  | 11,048 |  |  | — |  |  | 11,048 |
Corporate bonds | — |  |  | 894,691 |  |  | — |  |  | 894,691 |
Total fixed maturity securities, available-for-sale | — |  |  | 9,970,909 |  |  | — |  |  | 9,970,909 |
Equity securities: |  |  |  |  |  |  |
Insurance, banks and other financial institutions | 2,463,190 |  |  | — |  |  | 45,992 |  |  | 2,509,182 |
Industrial, consumer and all other | 5,081,573 |  |  | — |  |  | — |  |  | 5,081,573 |
Total equity securities | 7,544,763 |  |  | — |  |  | 45,992 |  |  | 7,590,755 |
Short-term investments, available-for-sale | 1,093,799 |  |  | 102,449 |  |  | — |  |  | 1,196,248 |
Total investments | $ | 8,638,562 |  |  | $ | 10,073,358 |  |  | $ | 45,992 |  |  | $ | 18,757,912 |
The following table summarizes changes in Level 3 investments measured at fair value on a recurring basis.
| Quarter Ended June 30, |  |  |  | Six Months Ended June 30, |  |
(dollars in thousands) | 2020 |  | 2019 |  | 2020 |  | 2019
Equity securities, beginning of period | $ | 131,307 |  |  | $ | 44,812 |  |  | $ | 45,992 |  |  | $ | 53,728 |
Purchases | — |  |  | 500 |  |  | 90,000 |  |  | 500 |
Sales | (16,529) |  |  | — |  |  | (17,893) |  |  | (6,869) |
Net investment gains (losses) on Level 3 investments | 870 |  |  | (7,324) |  |  | (2,451) |  |  | (9,371) |
Transfers into Level 3 | — |  |  | — |  |  | — |  |  | — |
Transfers out of Level 3 | — |  |  | — |  |  | — |  |  | — |
Equity securities, end of period | $ | 115,648 |  |  | $ | 37,988 |  |  | $ | 115,648 |  |  | $ | 37,988 |
In connection with the run-off of one of the Markel CATCo Funds and to facilitate the return of capital to third party investors, the Company invested $90.0 million in that fund effective January 1, 2020. This investment replaces collateral previously provided by other investors for risk exposures within the underlying reinsurance contracts in which the fund is invested related to loss events that occur after December 31, 2019 and through the expiration of the reinsurance contracts, all of which either had expired or were commuted as of June 30, 2020. Underwriting results for the 2020 loss exposures on these contracts are attributed to the Company through its investment in the fund. The Company did not have any assets or liabilities measured at fair value on a non-recurring basis during the six months ended June 30, 2020 and 2019.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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