Fair Value Measurements

The following table presents the carrying amounts and estimated fair values of our financial instruments as of September 30, 2014 and December 31, 2013:



	September 30, 2014			December 31, 2013
($ in thousands)	Carrying Amount		Fair Value	Carrying Amount	Fair Value
Financial Assets
Fixed income securities:
HTM	$	336,082	354,190	392,879	416,981
AFS	3,967,638		3,967,638	3,715,536	3,715,536
Equity securities, AFS	211,266		211,266	192,771	192,771
Short-term investments	181,593		181,593	174,251	174,251
Financial Liabilities
Notes payable:
2.90% borrowings from FHLBI	13,000		13,085	13,000	13,319
1.25% borrowings from FHLBI	45,000		45,220	45,000	45,259
7.25% Senior Notes	49,896		56,970	49,916	50,887
6.70% Senior Notes	99,398		110,310	99,498	98,247
5.875% Senior Notes	185,000		179,598	185,000	146,298
Total notes payable	$	392,294	405,183	392,414	354,010

The fair values of our financial assets and liabilities are generated using various valuation techniques and are placed into the fair value hierarchy considering the following: (i) the highest priority is given to quoted prices in active markets for identical assets (Level 1); (ii) the next highest priority is given to quoted prices in markets that are not active or inputs that are observable either directly or indirectly, including quoted prices for similar assets in markets that are not active and other inputs that can be derived principally from, or corroborated by, observable market data for substantially the full term of the assets (Level 2); and (iii) the lowest priority is given to unobservable inputs supported by little or no market activity and that reflect our assumptions about the exit price, including assumptions that market participants would use in pricing the asset (Level 3). An asset or liability's classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. Transfers between levels in the fair value hierarchy are recognized at the end of the reporting period.

For a discussion of the techniques used to value our financial assets and liabilities, refer to Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of our 2013 Annual Report.

The following tables provide quantitative disclosures of our financial assets that were measured at fair value at September 30, 2014 and December 31, 2013:



September 30, 2014			Fair Value Measurements Using
($ in thousands)	Assets Measured at Fair Value at 9/30/2014		Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1)¹	Significant Other Observable Inputs (Level 2)¹	Significant Unobservable Inputs (Level 3)
Description
Measured on a recurring basis:
AFS:
U.S. government and government agencies	$	151,689	51,467	100,222	—
Foreign government	27,867		—	27,867	—
Obligations of states and political subdivisions	1,229,234		—	1,229,234	—
Corporate securities	1,763,230		—	1,763,230	—
ABS	146,966		—	146,966	—
CMBS	165,518		—	165,518	—
RMBS	483,134		—	483,134	—
Total AFS fixed income securities	3,967,638		51,467	3,916,171	—
Equity securities	211,266		208,366	—	2,900
Total AFS Securities	4,178,904		259,833	3,916,171	2,900
Short-term investments	181,593		181,593	—	—
Total assets measured at fair value	$	4,360,497	441,426	3,916,171	2,900


¹	There were no transfers of securities between Level 1 and Level 2.



December 31, 2013			Fair Value Measurements Using
($ in thousands)	Assets Measured at Fair Value at 12/31/13		Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)¹	Significant Other Observable Inputs (Level 2)¹	Significant Unobservable Inputs (Level 3)
Description
Measured on a recurring basis:
AFS:
U.S. government and government agencies	$	173,375	52,153	121,222	—
Foreign government	30,615		—	30,615	—
Obligations of states and political subdivisions	951,624		—	951,624	—
Corporate securities	1,734,883		—	1,734,883	—
ABS	140,896		—	140,896	—
CMBS	171,284		—	171,284	—
RMBS	512,859		—	512,859	—
Total AFS fixed income securities	3,715,536		52,153	3,663,383	—
Equity securities	192,771		189,871	—	2,900
Total AFS Securities	3,908,307		242,024	3,663,383	2,900
Short-term investments	174,251		174,251	—	—
Total assets measured at fair value	$	4,082,558	416,275	3,663,383	2,900


¹	There were no transfers of securities between Level 1 and Level 2.

There were no changes in the fair value of securities measured using Level 3 prices during Nine Months 2014. The following table provides a summary of these changes during full year 2013:



December 31, 2013
($ in thousands)	Government			Corporate			ABS			CMBS			Equity			Receivable for Proceeds Related to Sale of Selective HR Solutions ("Selective HR")			Total
Fair value, December 31, 2012	$	19,789		2,946			6,068			7,162			3,607			2,705			42,277
Total net (losses) gains for the period included in:
OCI¹	(537		)	(7		)	(74		)	772			3,935			—			4,089
Net income^2,3	(76		)	—			—			361			—			(1,480		)	(1,195		)
Purchases	—			—			—			—			—			—			—
Sales	—			—			—			—			—			—			—
Issuances	—			—			—			—			—			—			—
Settlements	(1,847		)	(168		)	—			(2,420		)	—			(225		)	(4,660		)
Transfers into Level 3	—			—			—			—			—			—			—
Transfers out of Level 3	(17,329		)	(2,771		)	(5,994		)	(5,875		)	(4,642		)	(1,000		)	(37,611		)
Fair value, December 31, 2013	$	—		$	—		$	—		$	—		$	2,900		$	—		$	2,900

¹Amounts are reported in “Unrealized holding (losses) gains arising during period” on the Consolidated Statements of Comprehensive Income in our 2013 Annual Report.

²Amounts are reported in “Net realized gains” for realized gains and losses and “Net investment income earned” for amortization of securities on the Consolidated Statements of Income in our 2013 Annual Report.

³For the receivable related to the sale of Selective HR, amounts in "Loss on disposal of discontinued operations, net of tax" relate to an impairment charge and amounts in "Other income" relate to interest accretion on the Consolidated Statements of Income in our 2013 Annual Report.

As discussed in Note 2. "Summary of Significant Accounting Policies," in Item 8. "Financial Statements and Supplementary Data." in our 2013 Annual Report, the fair value of our Level 3 fixed income securities is typically obtained through non-binding broker quotes based on unobservable inputs, which we review for reasonableness. There were no fixed income securities measured using Level 3 inputs at September 30, 2014 and December 31, 2013. However, in 2013, fixed income securities with a fair value of $32.0 million were transferred out of Level 3 during the year due to the availability of Level 2 pricing at December 31, 2013 that was not available previously.

Equity securities with a fair value of $2.9 million were measured using Level 3 inputs at September 30, 2014 and at December 31, 2013. An equity security with a fair value of $4.6 million was transferred out of Level 3 during 2013 due to the availability of Level 2 pricing at the date of transfer. In addition, the receivable related to the sale of Selective HR was settled during 2013 and as a result was also transferred out of Level 3.

The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair value at September 30, 2014 and December 31, 2013:



September 30, 2014			Fair Value Measurements Using
($ in thousands)	Assets/ Liabilities Disclosed at Fair Value at 9/30/2014		Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Financial Assets
HTM:
Foreign government	$	5,407	—	5,407	—
Obligations of states and political subdivisions	317,609		—	317,609	—
Corporate securities	22,726		—	22,726	—
ABS	3,124		—	3,124	—
CMBS	5,324		—	5,324	—
Total HTM fixed income securities	$	354,190	—	354,190	—
Financial Liabilities
Notes payable:
2.90% borrowings from FHLBI	$	13,085	—	13,085	—
1.25% borrowings from FHLBI	45,220		—	45,220	—
7.25% Senior Notes	56,970		—	56,970	—
6.70% Senior Notes	110,310		—	110,310	—
5.875% Senior Notes	179,598		179,598	—	—
Total notes payable	$	405,183	179,598	225,585	—



December 31, 2013			Fair Value Measurements Using
($ in thousands)	Assets/ Liabilities Disclosed at Fair Value at 12/31/2013		Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Financial Assets
HTM:
Foreign government	$	5,591	—	5,591	—
Obligations of states and political subdivisions	369,756		—	369,756	—
Corporate securities	30,274		—	30,274	—
ABS	3,415		—	3,415	—
CMBS	7,945		—	7,945	—
Total HTM fixed income securities	$	416,981	—	416,981	—
Financial Liabilities
Notes payable:
2.90% borrowings from FHLBI	$	13,319	—	13,319	—
1.25% borrowings from FHLBI	45,259		—	45,259	—
7.25% Senior Notes	50,887		—	50,887	—
6.70% Senior Notes	98,247		—	98,247	—
5.875% Senior Notes	146,298		146,298	—	—
Total notes payable	$	354,010	146,298	207,712	—