Investments

9 Months Ended

Sep. 30, 2021

Investments Debt And Equity Securities [Abstract]

Investments

2. INVESTMENTS

Our investments are primarily composed of fixed income debt securities and common stock equity securities. We carry our equity securities at fair value and categorize all of our debt securities as available-for-sale, which are carried at fair value.

Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date. The following is a summary of the disposition of fixed income and equity securities for the nine-month periods ended September 30, 2021 and 2020:

Sales	Proceeds		Gross Realized					Net Realized
(in thousands)	From Sales		Gains		Losses			Gain (Loss)
2021
Available-for-sale	$	43,041	$	1,476	$	(107	)	$	1,369
Equities		157,973		52,409		(1,787	)		50,622
2020
Available-for-sale	$	68,621	$	4,959	$	(1,518	)	$	3,441
Equities		66,185		22,172		(8,756	)		13,416

Calls/Maturities			Gross Realized					Net Realized
(in thousands)	Proceeds		Gains		Losses			Gain (Loss)
2021
Available-for-sale	$	296,563	$	471	$	(109	)	$	362
2020
Available-for-sale	$	199,036	$	525	$	(10	)	$	515

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 are summarized below:

	As of September 30, 2021
	Fair Value Measurements Using
		Quoted Prices in		Significant Other		Significant
		Active Markets for		Observable		Unobservable
		Identical Assets		Inputs		Inputs
(in thousands)		(Level 1)		(Level 2)		(Level 3)		Total
Fixed income securities - available-for-sale
U.S. government		$	—	$	147,193	$	—	$	147,193
U.S. agency			—		31,625		—		31,625
Non-U.S. government & agency			—		8,521		—		8,521
Agency MBS			—		394,270		—		394,270
ABS/CMBS/MBS*			—		250,558		—		250,558
Corporate			—		906,734		31,536		938,270
Municipal			—		624,232		—		624,232
Total fixed income securities - available-for-sale		$	—	$	2,363,133	$	31,536	$	2,394,669
Equity securities			565,163		75		—		565,238
Other invested assets			—		—		—		—
Total		$	565,163	$	2,363,208	$	31,536	$	2,959,907

	As of December 31, 2020
	Fair Value Measurements Using
		Quoted Prices in		Significant Other		Significant
		Active Markets for		Observable		Unobservable
		Identical Assets		Inputs		Inputs
(in thousands)		(Level 1)		(Level 2)		(Level 3)		Total
Fixed income securities - available-for-sale
U.S. government		$	—	$	183,357	$	—	$	183,357
U.S. agency			—		32,872		—		32,872
Non-U.S. government & agency			—		10,965		—		10,965
Agency MBS			—		402,071		—		402,071
ABS/CMBS/MBS*			—		218,373		—		218,373
Corporate			—		798,794		17,798		816,592
Municipal			—		532,396		—		532,396
Total fixed income securities - available-for-sale		$	—	$	2,178,828	$	17,798	$	2,196,626
Equity securities			523,923		83		—		524,006
Other invested assets			6,068		—		—		6,068
Total		$	529,991	$	2,178,911	$	17,798	$	2,726,700

* Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

The following table summarizes changes in the balance of Regulation D private placement fixed income securities whose fair value was measured using significant unobservable inputs (Level 3).

(in thousands)	Level 3 Securities
Balance as of January 1, 2021	$	17,798
Net realized and unrealized gains (losses)
Included in net earnings as a part of:
Net investment income		(39	)
Net realized gains		(115	)
Included in other comprehensive earnings (loss)		(88	)
Total net realized and unrealized gains (losses)	$	(242	)
Purchases		13,980
Balance as of September 30, 2021	$	31,536
Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in net realized gains	$	(115	)
Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in other comprehensive earnings (loss)	$	(88	)

The amortized cost and fair value of available-for-sale fixed income securities by contractual maturity as of September 30, 2021 were as follows:

	September 30, 2021
(in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	73,089	$	73,903
Due after one year through five years		587,559		614,447
Due after five years through 10 years		551,943		581,761
Due after 10 years		464,725		479,730
ABS/CMBS/MBS*		632,998		644,828
Total available-for-sale	$	2,310,314	$	2,394,669

* Asset-backed, commercial mortgage-backed and mortgage-backed securities

The amortized cost and fair value of available-for-sale securities at September 30, 2021 and December 31, 2020 are presented in the tables below. Amortized cost does not include the $15.9 million and $14.9 million of accrued interest receivable as of September 30, 2021 and December 31, 2020, respectively.

	September 30, 2021
	Cost or		Allowance			Gross		Gross
	Amortized		for Credit			Unrealized		Unrealized			Fair
(in thousands)	Cost		Losses			Gains		Losses			Value
U.S. government	$	139,441	$	—		$	8,549	$	(797	)	$	147,193
U.S. agency		28,844		—			2,781		—			31,625
Non-U.S. government & agency		8,297		—			407		(183	)		8,521
Agency MBS		385,400		—			12,179		(3,309	)		394,270
ABS/CMBS/MBS*		247,598		—			3,915		(955	)		250,558
Corporate		896,178		(226	)		45,230		(2,912	)		938,270
Municipal		604,556		—			23,593		(3,917	)		624,232
Total Fixed Income	$	2,310,314	$	(226	)	$	96,654	$	(12,073	)	$	2,394,669

	December 31, 2020
	Cost or		Allowance			Gross		Gross
	Amortized		for Credit			Unrealized		Unrealized			Fair
(in thousands)	Cost		Losses			Gains		Losses			Value
U.S. government	$	170,110	$	—		$	13,504	$	(257	)	$	183,357
U.S. agency		28,902		—			3,970		—			32,872
Non-U.S. government & agency		10,298		—			667		—			10,965
Agency MBS		384,015		—			18,789		(733	)		402,071
ABS/CMBS/MBS*		213,223		(17	)		5,580		(413	)		218,373
Corporate		753,404		(380	)		64,501		(933	)		816,592
Municipal		501,515		—			31,099		(218	)		532,396
Total Fixed Income	$	2,061,467	$	(397	)	$	138,110	$	(2,554	)	$	2,196,626

* Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

Allowance for Credit Losses and Unrealized Losses on Fixed Income Securities

We adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which required the recognition of a reversable allowance for credit losses on available-for-sale fixed income securities. Available-for-sale securities in the fixed income portfolio are subjected to several criteria to determine if those securities should be included in the allowance for expected credit loss evaluation, including:

• Changes in technology that may impair the earnings potential of the investment,

• The discontinuance of a segment of business that may affect future earnings potential,

• Reduction of or non-payment of interest and/or principal,

• Specific concerns related to the issuer’s industry or geographic area of operation,

• Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and

• Downgrades in credit quality by a major rating agency.

If changes in interest rates and credit spreads do not reasonably explain the unrealized loss for an available-for-sale security or if any of the criteria above indicate a potential credit loss, the security is subjected to a discounted cash flow analysis. Inputs into the discounted cash flow analysis include prepayment assumptions for structured securities, default rates and recoverability rates based on credit rating. The allowance for any security is limited to the amount that the securities fair value is below amortized cost. As of September 30, 2021, the discounted cash flow analysis resulted in an allowance for credit losses on 11 securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2021		2020			2021			2020
Beginning balance	$	204	$	985		$	397		$	—
Adoption impact of ASU 2016-13		-		-			-			28
Increase to allowance from securities for which credit losses were not previously recorded		-		17			-			751
Reduction from securities sold during the period		-		(6	)		-			(116	)
Reductions from intent to sell securities		-		(186	)		-			(186	)
Net increase (decrease) from securities that had an allowance at the beginning of the period		22		(178	)		(171	)		155
Balance as of September 30,	$	226	$	632		$	226		$	632

As of September 30, 2021, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 327 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $12.1 million in associated unrealized losses represents 0.5 percent of the fixed income portfolio’s cost basis and 0.4 percent of total invested assets. Isolated to these securities, unrealized losses increased through the first nine months of 2021, as interest rates increased during the period. Of the total 327 securities, 39 have been in an unrealized loss position for 12 consecutive months or longer. The following table illustrates the total value of fixed income securities that were in an unrealized loss position as of September 30, 2021 and December 31, 2020 after factoring in the allowance for credit losses. All fixed income securities continue to pay the expected coupon payments and we believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position.

	September 30, 2021									December 31, 2020
(in thousands)	< 12 Mos.			12 Mos. & Greater			Total			< 12 Mos.			12 Mos. & Greater			Total
U.S. government
Fair value	$	2,976		$	5,152		$	8,128		$	5,680		$	—		$	5,680
Amortized cost		2,986			5,939			8,925			5,937			—			5,937
Unrealized loss	$	(10	)	$	(787	)	$	(797	)	$	(257	)	$	—		$	(257	)
U.S. agency
Fair value	$	1,003		$	—		$	1,003		$	—		$	—		$	—
Amortized cost		1,003			—			1,003			—			—			—
Unrealized loss	$	—		$	—		$	—		$	—		$	—		$	—
Non-U.S. government
Fair value	$	2,817		$	—		$	2,817		$	—		$	—		$	—
Amortized cost		3,000			—			3,000			—			—			—
Unrealized Loss	$	(183	)	$	—		$	(183	)	$	—		$	—		$	—
Agency MBS
Fair value	$	128,783		$	15,940		$	144,723		$	43,999		$	—		$	43,999
Amortized cost		131,277			16,755			148,032			44,732			—			44,732
Unrealized loss	$	(2,494	)	$	(815	)	$	(3,309	)	$	(733	)	$	—		$	(733	)
ABS/CMBS/MBS*
Fair value	$	92,083		$	3,832		$	95,915		$	32,771		$	16,161		$	48,932
Amortized cost		93,020			3,850			96,870			33,094			16,251			49,345
Unrealized loss	$	(937	)	$	(18	)	$	(955	)	$	(323	)	$	(90	)	$	(413	)
Corporate
Fair value	$	173,508		$	18,574		$	192,082		$	52,655		$	6,235		$	58,890
Amortized cost		175,695			19,299			194,994			53,440			6,383			59,823
Unrealized loss	$	(2,187	)	$	(725	)	$	(2,912	)	$	(785	)	$	(148	)	$	(933	)
Municipal
Fair value	$	154,883		$	11,179		$	166,062		$	25,676		$	—		$	25,676
Amortized cost		158,310			11,669			169,979			25,894			—			25,894
Unrealized loss	$	(3,427	)	$	(490	)	$	(3,917	)	$	(218	)	$	—		$	(218	)
Total fixed income
Fair value	$	556,053		$	54,677		$	610,730		$	160,781		$	22,396		$	183,177
Amortized cost		565,291			57,512			622,803			163,097			22,634			185,731
Unrealized loss	$	(9,238	)	$	(2,835	)	$	(12,073	)	$	(2,316	)	$	(238	)	$	(2,554	)

* Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

The following table shows the composition of the fixed income securities in unrealized loss positions, after factoring in the allowance for credit losses, at September 30, 2021 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings. The vast majority of the securities are rated by S&P and/or Moody’s.

	Equivalent	Equivalent	(dollars in thousands)
NAIC	S&P	Moody’s	Amortized				Unrealized			Percent
Rating	Rating	Rating	Cost		Fair Value		Loss			to Total
1	AAA/AA/A	Aaa/Aa/A	$	491,071	$	480,865	$	(10,206	)		84.6	%
2	BBB	Baa		91,432		90,332		(1,100	)		9.1	%
3	BB	Ba		15,455		15,211		(244	)		2.0	%
4	B	B		23,628		23,131		(497	)		4.1	%
5	CCC	Caa		1,217		1,191		(26	)		0.2	%
6	CC or lower	Ca or lower		-		-		-			0.0	%
		Total	$	622,803	$	610,730	$	(12,073	)		100.0	%

Net Unrealized Gains and Losses on Equity Securities

Net unrealized losses recognized on equity securities still held as of September 30, 2021 were $0.8 million during the third quarter, while net unrealized gains were $80.1 million during the first nine months of 2021. Comparatively, net unrealized

gains recognized on equity securities still held as of September 30, 2020 were $28.7 million during the third quarter, while net unrealized losses were $14.1 million during the first nine months of 2020.

Other Invested Assets

We had $52.5 million of other invested assets at September 30, 2021, compared to $54.2 million at December 31, 2020. Other invested assets include investments in low income housing tax credit partnerships (LIHTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), and investments in private funds. Our LIHTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investment’s net asset value.

Our LIHTC interests had a balance of $17.4 million at September 30, 2021, compared to $20.3 million at December 31, 2020 and recognized a total tax benefit of $0.9 million during the third quarters of 2021 and 2020. For the nine-month period ended September 30, 2021, our LIHTC interests recognized a total benefit of $2.7 million, compared to $2.6 million during the same period of 2020. Our unfunded commitment for our LIHTC investments totaled $2.1 million at September 30, 2021 and will be paid out in installments through 2035.

As of September 30, 2021, $9.1 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides. As of and during the nine-month period ended September 30, 2021, there were no outstanding borrowings with the FHLBC.

Our investments in private funds totaled $31.4 million at September 30, 2021, compared to $32.1 million at December 31, 2020, and we had $9.6 million of associated unfunded commitments at September 30, 2021. Our interest in private funds is generally restricted from being transferred or otherwise redeemed without prior consent by the respective entities and the timed dissolution of the partnerships would trigger redemption. At December 31, 2020, we had a publicly traded common stock with short-term restrictions that limited our ability to sell the security without prior approval. During the first quarter of 2021, our investment in this security became unrestricted and the investment was included in our equity portfolio as of September 30, 2021.

Investments in Unconsolidated Investees

We had $158.7 million of investments in unconsolidated investees at September 30, 2021, compared to $128.4 million at December 31, 2020. Our investments accounted for under the equity method are primarily related to Maui Jim, Inc. (Maui Jim) and Prime Holdings Insurance Services, Inc. (Prime). At September 30, 2021 our investment in Maui Jim was $110.6 million and our investment in Prime was $42.4 million. Other investments in unconsolidated investees totaled $5.7 million at September 30, 2021 and had unfunded commitments of $15.0 million.

Cash

Cash consists of uninvested balances in bank accounts. We had a cash balance of $89.6 million at September 30, 2021, compared to $62.2 million at December 31, 2020.