Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2022

The Company is required to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the Company’s insurance contracts other than annuity contracts (which are investment contracts) and EMA limited partnership interests are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.

Information regarding the three-level fair value hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at each reporting date is included in Part II - Item 8, Note 4 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Financial Instruments Measured and Carried at Fair Value on a Recurring Basis

The following table presents the Company's fair value hierarchy for financial assets and financial liabilities measured and carried at fair value on a recurring basis. During the nine months ended September 30, 2022 and 2021, there were no transfers between Level 1 and Level 2. At September 30, 2022, Level 3 invested assets comprised 7.4% of the Company’s total investment portfolio at fair value.


($ in millions)	Carrying Amount		Fair Value		Fair Value Measurements at Reporting Date Using
					Level 1		Level 2		Level 3
September 30, 2022
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	579.1	$	579.1	$	—	$	576.5	$	2.6
Other, including U.S. Treasury securities	342.8		342.7		24.5		318.2		—
Municipal bonds	1,307.9		1,307.9		—		1,254.6		53.3
Foreign government bonds	35.4		35.5		—		35.5		—
Corporate bonds	1,927.8		1,927.8		12.8		1,675.2		239.8
Other asset-backed securities	1,079.1		1,079.1		—		974.5		104.6
Total fixed maturity securities	5,272.1		5,272.1		37.3		4,834.5		400.3
Equity securities	113.8		113.8		22.4		89.4		2.0
Short-term investments	51.4		51.4		49.0		2.4		—
Other investments	34.0		34.0		—		34.0		—
Totals	$	5,471.3	$	5,471.3	$	108.7	$	4,960.3	$	402.3
Separate Account variable annuity assets(1)	$	2,599.6	$	2,599.6	$	2,599.6	$	—	$	—
Financial Liabilities
Investment contract and policy reserves, embedded derivatives	$	0.4	$	0.4	$	—	$	0.4	$	—
Other policyholder funds, embedded derivatives	$	89.9	$	89.9	$	—	$	—	$	89.9

December 31, 2021
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	662.5	$	662.5	$	—	$	662.5	$	—
Other, including U.S. Treasury securities	365.9		365.9		17.7		348.2		—
Municipal bonds	1,703.4		1,703.4		—		1,642.6		60.8
Foreign government bonds	43.6		43.6		—		43.6		—
Corporate bonds	2,388.7		2,388.7		14.9		2,163.5		210.3
Other asset-backed securities	1,075.2		1,075.2		—		976.3		98.9
Total fixed maturity securities	6,239.3		6,239.3		32.6		5,836.7		370.0
Equity securities	147.2		147.2		35.2		110.6		1.4
Short-term investments	157.8		157.8		157.8		—		—
Other investments	43.6		43.6		—		43.6		—
Totals	$	6,587.9	$	6,587.9	$	225.6	$	5,990.9	$	371.4
Separate Account (variable annuity) assets(1)	$	3,441.0	$	3,441.0	$	3,441.0	$	—	$	—
Financial Liabilities
Investment contract and policy reserves, embedded derivatives	$	2.1	$	2.1	$	—	$	2.1	$	—
Other policyholder funds, embedded derivatives	$	106.6	$	106.6	$	—	$	—	$	106.6

(1) Separate Account variable annuity assets represent contractholder funds invested in various actively traded mutual funds that have daily quoted net asset values that are readily determinable for identical assets that the Company can access. Separate Account variable annuity liabilities are equal to the estimated fair value of the Separate Account variable annuity assets.

Changes in Level 3 Fair Value Measurements

The reconciliation for all financial assets and financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) were as follows:


($ in millions)	Financial Assets												Financial Liabilities(1)
	Municipal Bonds		Corporate Bonds		Mortgage-Backed and Other Asset- Backed Securities(2)		Total Fixed Maturity Securities		Equity Securities		Total
Beginning balance, July 1, 2022	$	51.0	$	270.5	$	97.1	$	418.6	$	1.4	$	420.0	$	93.2
Transfers into Level 3(3)	—		20.5		12.2		32.7		0.8		33.5		—
Transfers out of Level 3(3)	—		(34.8)		—		(34.8)		—		(34.8)		—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—		—		(0.8)		(0.8)		(0.1)		(0.9)		—
Net investment (gains) losses included in net income related to financial liabilities	—		—		—		—		—		—		(4.6)
Net unrealized investment gains (losses) included in OCI	(5.3)		(7.4)		(3.9)		(16.6)		—		(16.6)		—
Purchases	0.2		8.4		7.9		16.5		—		16.5		—
Issuances	—		—		—		—		—		—		2.7
Sales	—		—		—		—		—		—		—
Settlements	—		—		—		—		—		—		—
Paydowns, maturities and distributions	7.4		(17.4)		(5.3)		(15.3)		(0.1)		(15.4)		(1.4)
Ending balance, September 30, 2022	$	53.3	$	239.8	$	107.2	$	400.3	$	2.0	$	402.3	$	89.9

Beginning balance, January 1, 2022	$	60.8	$	210.3	$	98.9	$	370.0	$	1.4	$	371.4	$	106.6
Transfers into Level 3(3)	—		144.0		34.5		178.5		0.8		179.3		—
Transfers out of Level 3(3)	(3.2)		(34.9)		(4.8)		(42.9)		—		(42.9)		—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—		—		(3.1)		(3.1)		(0.1)		(3.2)		—
Net investment (gains) losses included in net income related to financial liabilities	—		—		—		—		—		—		(14.4)
Net unrealized investment gains (losses) included in OCI	(11.6)		(18.7)		(11.3)		(41.6)		—		(41.6)		—
Purchases	0.2		13.3		7.9		21.4		—		21.4		—
Issuances	—		—		—		—		—		—		4.8
Sales	—		—		(2.1)		(2.1)		—		(2.1)		—
Settlements	—		—		—		—		—		—		—
Paydowns, maturities and distributions	7.1		(74.2)		(12.8)		(79.9)		(0.1)		(80.0)		(7.1)
Ending balance, September 30, 2022	$	53.3	$	239.8	$	107.2	$	400.3	$	2.0	$	402.3	$	89.9

(1)Represents embedded derivatives, all related to the Company's fixed indexed annuity products, reported in Other policyholder funds in the Company's Consolidated Balance Sheets.

(2)Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other asset-backed securities.

(3)Transfers into and out of Level 3 during the three and nine months ended September 30, 2022 were related to changes in the primary pricing source and changes in observability of external information used in determining fair value. The Company's policy is to recognize transfers into and out of the levels as having occurred at the end of the reporting period in which the transfers were determined.


($ in millions)	Financial Assets												Financial Liabilities(1)
	Municipal Bonds		Corporate Bonds		Mortgage-Backed and Other Asset- Backed Securities(2)		Total Fixed Maturity Securities		Equity Securities		Total
Beginning balance, July 1, 2021	$	58.6	$	150.5	$	115.5	$	324.6	$	0.3	$	324.9	$	108.9
Transfers into Level 3(3)	—		55.7		4.0		59.7		—		59.7		—
Transfers out of Level 3(3)	—		—		—		—		—		—		—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—		—		(6.6)		(6.6)		0.1		(6.5)		—
Net investment (gains) losses included in net income related to financial liabilities	—		—		—		—		—		—		0.7
Net unrealized investment gains (losses) included in OCI	(0.3)		(0.1)		6.6		6.2		—		6.2		—
Purchases	—		—		—		—		—		—		—
Issuances	—		—		—		—		—		—		1.4
Sales	—		—		—		—		—		—		—
Settlements	—		—		—		—		—		—		—
Paydowns, maturities and distributions	(0.1)		(1.1)		(21.0)		(22.2)		—		(22.2)		(4.3)
Ending balance, September 30, 2021	$	58.2	$	205.0	$	98.5	$	361.7	$	0.4	$	362.1	$	106.7

Beginning balance, January 1, 2021	$	59.6	$	155.8	$	139.4	$	354.8	$	0.3	$	355.1	$	104.5
Transfers into Level 3(3)	—		108.3		10.2		118.5		—		118.5		—
Transfers out of Level 3(3)	—		(56.7)		(19.2)		(75.9)		—		(75.9)		—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—		—		(7.7)		(7.7)		0.1		(7.6)		—
Net investment (gains) losses included in net income related to financial liabilities	—		—		—		—		—		—		8.2
Net unrealized investment gains (losses) included in OCI	(0.9)		1.0		8.7		8.8		—		8.8		—
Purchases	—		—		—		—		—		—		—
Issuances	—		—		—		—		—		—		3.3
Sales	—		—		—		—		—		—		—
Settlements	—		—		—		—		—		—		—
Paydowns, maturities and distributions	(0.5)		(3.4)		(32.9)		(36.8)		—		(36.8)		(9.3)
Ending balance, September 30, 2021	$	58.2	$	205.0	$	98.5	$	361.7	$	0.4	$	362.1	$	106.7

(1) Represents embedded derivatives, all related to the Company's fixed indexed annuity products, reported in Other policyholder funds in the Company's Consolidated Balance Sheets.

(2) Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other asset-backed securities.

(3) Transfers into and out of Level 3 during the three and nine months ended September 30, 2021 were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company's policy is to recognize transfers into and out of the levels as having occurred at the end of the reporting period in which the transfers were determined.

For the three and nine months ended September 30, 2022, the Company had net investment losses of $0.9 million and $3.2 million that were included in net income and were primarily attributable to credit loss impairments for Level 3 financial assets. For the three and nine months ended September 30, 2022, the Company had net investment gains of $4.6 million and $14.4 million that were included in net income and were attributable to changes in the fair value of Level 3 financial liabilities.

Quantitative Information about Level 3 Fair Value Measurements

The following table provides quantitative information about the significant unobservable inputs for recurring fair value measurements categorized within Level 3.

($ in millions)

Financial
Assets

Fair Value at

September 30, 2022

Valuation Technique(s)

Unobservable Inputs

Range

(Weighted Average)

and Single Point Best Estimate(1)

Municipal bonds

53.3

discounted cash flow

option adjusted spread

330 - 446 bps

Corporate bonds

239.8

discounted cash flow

N spread(2)

363 bps

discounted cash flow

T spread(3)

16 - 403 bps

discounted cash flow

yield

3.8% - 11.2%

discounted cash flow

exit cap rate

6.2%

discounted cash flow

occupancy rate

31.0% - 100.0%

discounted cash flow

option adjusted spread

242 - 393 bps

discounted cash flow

weighted average cost of capital

5.0%

discounted cash flow

discount rate

11.3% - 12.0%

market comparable

EV / Fwd EBITDA (x)

5.1x

Mortgage-backed and other asset-backed securities

107.2

discounted cash flow

discount margin

30.4%

discounted cash flow

discount rate

16.0% - 21.0%

discounted cash flow

median comparable yield

17.2% - 33.1%

discounted cash flow

yield

7.0% - 7.4%

discounted cash flow

LIBOR

1.0%

discounted cash flow

PDI spread

6.8%

discounted cash flow

SBL spread

4.5%

discounted cash flow

weighting

17.0% - 83.0%

discounted cash flow

CPR

20.0%

discounted cash flow

default rate annual

4.0%

discounted cash flow

recovery

65.0%

discounted cash flow

N spread

463 bps

discounted cash flow

T Spread

226 bps

Equity securities

2.0

black-scholes

volatility

low 32.0% - high 47.0%

($ in millions)

Financial
Liabilities

Fair Value at

September 30, 2022

Valuation Technique(s)

Unobservable Inputs

Range

(Weighted Average)

and Single Point Best Estimate(1)

Derivatives
embedded in
fixed indexed annuity products

89.9

discounted cash flow

lapse rate

5.3%

mortality multiplier(4)

66.8%

option budget

0.9% - 3.3%

non-performance adjustment(5)

5.0%

(1) When a range of unobservable inputs is not readily available, the Company uses a single point best estimate.

(2) "N spread" is the interpolated weighted average life point on the swap curve.

(3) "T spread" is a specific point on the OTR curve.

(4) Mortality multiplier is applied to the Annuity 2000 table.

(5) Determined as a percentage of the risk-free rate.

The valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets and financial liabilities classified as Level 3 are subject to the control processes as described in Part II - Item 8, Note 4 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Generally, valuation techniques for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as those used for fixed maturity securities.

The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturity and equity securities included in Level 3 include: benchmark yield, liquidity premium, estimated cash flows, prepayment and default speeds, spreads, weighted average life and credit rating. Significant spread widening in isolation will adversely impact the overall valuation, while significant tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.

Financial Instruments Not Carried at Fair Value

The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. These financial assets and financial liabilities are further described in Part II - Item 8, Note 4 in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The following table presents the carrying amount, fair value and fair value hierarchy of these financial assets and financial liabilities.


($ in millions)	Carrying Amount		Fair Value		Fair Value Measurements at Reporting Date Using
					Level 1		Level 2		Level 3
September 30, 2022
Financial Assets
Other investments	$	169.1	$	172.5	$	—	$	—	$	172.5
Deposit asset on reinsurance	2,525.6		2,164.9		—		—		2,164.9
Financial Liabilities
Investment contract and policy reserves, fixed annuity contracts	5,005.8		5,068.8		—		—		5,068.8
Investment contract and policy reserves, account values on life contracts	109.5		119.3		—		—		119.3
Other policyholder funds	910.8		910.8		—		857.9		52.9
Short-term debt	249.0		249.0		—		—		249.0
Long-term debt	248.9		249.5		—		249.5		—

December 31, 2021
Financial Assets
Other investments	$	148.8	$	152.4	$	—	$	—	$	152.4
Deposit asset on reinsurance	2,481.5		2,935.1		—		—		2,935.1
Financial Liabilities
Investment contract and policy reserves, fixed annuity contracts	4,941.3		5,004.9		—		—		5,004.9
Investment contract and policy reserves, account values on life contracts	105.4		115.4		—		—		115.4
Other policyholder funds	839.3		839.3		—		782.8		56.5
Short-term debt	249.0		249.0		—		—		249.0
Long-term debt	253.6		277.4		—		277.4		—

- 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.

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