Accounting Developments (Policies)

9 Months Ended

Sep. 30, 2020

Accounting Developments and New Accounting Policies [Abstract]

Allowance for Current Expected Credit Losses

In accordance with the January 1, 2020 implementation of updates to Accounting Standards Codification (ASC) 326 "Financial Instruments - Credit Losses", we have added the following discussion regarding our accounting policies on the allowance for current expected credit losses to our significant accounting policies.

Allowance for Current Expected Credit Losses: We establish an allowance for current expected credit losses on certain of our financial assets, which is deducted from the amortized cost of applicable investments and the gross amount of applicable receivables, to present the net amount we expect to collect on these financial assets. The allowance is forward-looking in nature and is calculated based on considerations regarding both historical events and future expectations. Periodic changes in the allowance are recorded through earnings.

The allowance on our premiums receivable is primarily determined using an aging analysis as well as historical lapse and delinquency rates by line of business, adjusted for key factors that may impact our future expectation of premium receipts such as changes in customer demographics, business practices, economic conditions, and product offerings. We write off premiums receivable amounts when determined to be uncollectible, which is based on various factors, including the aging of premiums receivable past the due date and specific communication with customers. At January 1, 2020 and September 30, 2020, the allowance for expected credit losses on premium receivables was $23.8 million and $41.1 million, respectively, on gross premium receivables of $543.0 million and $597.6 million, respectively. The allowance at January 1, 2020 includes amounts that were previously established at December 31, 2019. The allowance decreased $6.4 million during the three months ended September 30, 2020, primarily due to a decline in the premium receivable balance, an improvement in the age of premiums due to be collected, and premium due write-offs. The allowance increased $17.3 million during the nine months ended September 30, 2020, primarily due to an increase in the premium due balance and the uncertainty of collectability resulting from the impacts of COVID-19, partially offset by premium due write-offs. The primary factors considered in establishing the additional allowance were the recent increase in unemployment levels, state-level requirements regarding billing and administration accommodations, and the general uncertainty around the financial condition of some of our customers.

The allowance for our reinsurance recoverable balance is determined using a probability of default approach which incorporates key inputs and assumptions regarding historical insurer liquidation rates, counterparty credit ratings, and collateral received. Liquidation rates are derived from rating agency studies covering domestic insurers and are based on historical liquidation trends according to their respective credit ratings. When calculating our allowance, we apply these liquidation rates to the net amount of our credit exposure, which considers collateral arrangements such as letters of credit. We evaluate the factors used to determine our allowance on a quarterly basis to consider material changes in our assumptions and make adjustments

accordingly. At both January 1, 2020 and September 30, 2020, the allowance for expected credit losses on reinsurance recoverables was $1.8 million.See Note 4 for discussion on the allowance for current expected credit losses regarding our commercial mortgage loans and the allowance for credit losses for our available-for-sale fixed maturity securities.