Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2023

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 appropriate 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, 2022.

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, 2023 and 2022, there were no transfers between Level 1 and Level 2. As of September 30, 2023, Level 3 invested assets comprised 9.2% 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, 2023
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	590.5	$	590.5	$	—	$	588.0	$	2.5
Other, including U.S. Treasury securities	364.8		364.8		44.2		320.6		—
Municipal bonds	1,185.6		1,185.6		—		1,115.9		69.7
Foreign government bonds	24.5		24.5		—		24.5		—
Corporate bonds	1,685.3		1,685.3		10.0		1,370.1		305.2
Other asset-backed securities	1,110.9		1,110.9		—		1,012.9		98.0
Total fixed maturity securities	4,961.6		4,961.6		54.2		4,432.0		475.4
Equity securities	77.0		77.0		17.2		57.6		2.2
Short-term investments	113.5		113.5		113.5		—		—
Other investments	43.1		43.1		—		43.1		—
Totals	$	5,195.2	$	5,195.2	$	184.9	$	4,532.7	$	477.6
Separate Account variable annuity assets(1)	$	2,974.0	$	2,974.0	$	2,974.0	$	—	$	—

Financial Liabilities(2)	$	80.3	$	80.3	$	—	$	2.0	$	78.3

December 31, 2022
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	570.4	$	570.4	$	—	$	567.8	$	2.6
Other, including U.S. Treasury securities	342.6		342.6		24.6		318.0		—
Municipal bonds	1,269.7		1,269.7		—		1,215.3		54.4
Foreign government bonds	33.6		33.6		—		33.6		—
Corporate bonds	1,901.7		1,901.7		12.2		1,628.2		261.3
Other asset-backed securities	1,067.0		1,067.0		—		962.0		105.0
Total fixed maturity securities	5,185.0		5,185.0		36.8		4,724.9		423.3
Equity securities	99.6		99.6		23.3		74.3		2.0
Short-term investments	109.4		109.4		109.4		—		—
Other investments	38.6		38.6		—		38.6		—
Totals	$	5,432.6	$	5,432.6	$	169.5	$	4,837.8	$	425.3
Separate Account (variable annuity) assets(1)	$	2,792.3	$	2,792.3	$	2,792.3	$	—	$	—

Financial Liabilities(2)	$	92.5	$	92.5	$	—	$	1.2	$	91.3

(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.

(2) Represents embedded derivatives related to fixed indexed annuity and indexed universal life products reported in Future policy benefit reserves and Other policyholder funds as well as net MRBs reported in Policyholders' account balances in the Company's Consolidated Balance Sheets.

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, 2023	$	63.9	$	311.5	$	101.4	$	476.8	$	2.0	$	478.8	$	83.6
Transfers into Level 3(3)	—		—		—		—		—		—		—
Transfers out of Level 3(3)	—		(3.7)		—		(3.7)		—		(3.7)		—
Total gains or losses
Net gains/losses included in net income	—		—		—		—		0.2		0.2		(3.2)
Net unrealized gains/losses included in OCI	5.9		(12.8)		2.0		(4.9)		—		(4.9)		0.4
Purchases	—		17.5		1.7		19.2		—		19.2		—
Issuances	—		—		—		—		—		—		2.0
Sales	—		—		—		—		—		—		—
Settlements	—		—		—		—		—		—		—
Paydowns, maturities and distributions	(0.1)		(7.3)		(4.6)		(12.0)		—		(12.0)		(4.5)
Ending balance, September 30, 2023	$	69.7	$	305.2	$	100.5	$	475.4	$	2.2	$	477.6	$	78.3

Beginning balance, January 1, 2023	$	54.4	$	261.3	$	107.6	$	423.3	$	2.0	$	425.3	$	91.3
Transfers into Level 3(3)	—		36.1		0.8		36.9		—		36.9		—
Transfers out of Level 3(3)	—		(3.7)		—		(3.7)		—		(3.7)		—
Total gains or losses
Net gains/losses included in net income	—		—		—		—		0.2		0.2		(5.6)
Net unrealized gains/losses included in OCI	6.5		(14.1)		0.9		(6.7)		—		(6.7)		(0.3)
Purchases	9.5		43.2		1.9		54.6		—		54.6		—
Issuances	—		—				—		—		—		6.3
Sales	—		(7.7)				(7.7)		—		(7.7)		—
Settlements	—		—				—		—		—		—
Paydowns, maturities and distributions	(0.7)		(9.9)		(10.7)		(21.3)		—		(21.3)		(13.4)
Ending balance, September 30, 2023	$	69.7	$	305.2	$	100.5	$	475.4	$	2.2	$	477.6	$	78.3

(1)Represents embedded derivatives related to fixed indexed annuity and indexed universal life products reported in Future policy benefit reserves and Other policyholder funds as well as net MRBs reported in Policyholders' account balances 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, 2023 and 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, 2022	$	51.0	$	270.5	$	97.1	$	418.6	$	1.4	$	420.0	$	97.8
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 gains/losses included in net income	—		—		(0.8)		(0.8)		(0.1)		(0.9)		—
Net investment (gains) losses included in net income related to financial liabilities	—		—		—		—		—		—		(6.3)
Net unrealized 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	$	92.8

Beginning balance, January 1, 2022	$	60.8	$	210.3	$	98.9	$	370.0	$	1.4	$	371.4	$	111.4
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 gains/losses included in net income	—		—		(3.1)		(3.1)		(0.1)		(3.2)		—
Net investment (gains) losses included in net income related to financial liabilities	—		—		—		—		—		—		(13.9)
Net unrealized gains/losses included in OCI	(11.6)		(18.7)		(11.3)		(41.6)		—		(41.6)		(2.4)
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	$	92.8

(1) Represents embedded derivatives related to fixed indexed annuity and indexed universal life products reported in Future policy benefit reserves and Other policyholder funds as well as net MRBs reported in Policyholders' account balances 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 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, 2023, the Company had $0.2 of net gains with respect to Level 3 financial assets. For the three and nine months ended September 30, 2022, the Company had net losses of $0.9 million and $3.2 million, respectively, that were included in net income with respect to Level 3 financial assets.

For the three and nine months ended September 30, 2023, the Company had net gains of $3.2 million and $5.6 million, respectively, that were included in net income and were attributable to changes in the fair value of Level 3 financial liabilities. For the three and nine months ended September 30, 2022, the Company had net gains of $6.3 million and $13.9 million, respectively, that were included in net income and were attributable to changes in the fair value of Level 3 financial liabilities.

Level 3 Assets and Liabilities by Price Source

The table below presents the balances of Level 3 assets and liabilities measured at fair value with their corresponding pricing sources (in millions, 2022 information recast for the adoption of LDTI):


($ in millions)
	Total		Internal		External
September 30, 2023
Financial Assets
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	2.5	$	—	$	2.5
Municipal bonds	69.7		—		69.7
Corporate bonds	305.2		47.4		257.8
Other asset-backed securities	98.0		—		98.0
Total fixed maturity securities	475.4		47.4		428.0
Equity securities	2.2		—		2.2
Totals	$	477.6	$	47.4	$	430.2

Financial Liabilities(1)	$	78.3	$	78.3	$	—

December 31, 2022
Financial Assets
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	2.6	$	—	$	2.6
Municipal bonds	54.4		—		54.4
Corporate bonds	261.3		9.5		251.8
Other asset-backed securities	105.0		—		105.0
Total fixed maturity securities	423.3		9.5		413.8
Equity securities	2.0		—		2.0
Totals	$	425.3	$	9.5	$	415.8

Financial Liabilities(1)	$	91.3	$	91.3	$	—

(1) Represents embedded derivatives related to fixed indexed annuity and indexed universal life products reported in Future policy benefit reserves and Other policyholder funds as well as net MRBs reported in Policyholders' account balances in the Company's Consolidated Balance Sheets.

External pricing sources for securities represent prices from prior transactions or unadjusted third-party pricing information where pricing inputs are not readily available.

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 with Level 3.

($ in millions)

Fair Value

as of

September 30, 2023

Valuation Technique(s)

Unobservable Inputs

Range

(Weighted Average)

and Single Point Best Estimate(1)

Financial Assets

Corporate bonds

47.4

discounted cash flow

yield

8.3% - 17.4%

Financial Liabilities

Derivatives embedded in fixed indexed annuity products

82.8

discounted cash flow

lapse rate

5.4%

mortality multiplier(2)

67.8%

option budget

0.9% - 3.8%

non-performance adjustment(3)

5.0%

Net MRBs

(4.5)

discounted cash flow

lapse rate

5.9%

mortality multiplier(2)

67.8%

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

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

(3) 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, 2022. 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.

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, 2022. 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, 2023
Financial Assets
Other investments	$	181.6	$	185.0	$	—	$	—	$	185.0
Deposit asset on reinsurance	2,515.7		2,070.3		—		—		2,070.3
Financial Liabilities
Investment contract and future policy benefit reserves, fixed annuity contracts	4,920.8		4,821.1		—		—		4,821.1
Investment contract and future policy benefit reserves, account values on life contracts	116.8		112.8		—		—		112.8
Other policyholder funds	915.9		915.9		—		904.9		11.0
Reverse repurchase agreements	0.2		0.4		—		0.4		—
Short-term debt	—		—		—		—		—
Long-term debt	546.1		541.1		—		541.1		—

December 31, 2022
Financial Assets
Other investments	$	167.4	$	170.9	$	—	$	—	$	170.9
Deposit asset on reinsurance	2,516.6		2,207.2		—		—		2,207.2
Financial Liabilities
Investment contract and future policy benefit reserves, fixed annuity contracts	4,988.5		4,901.3		—		—		4,901.3
Investment contract and future policy benefit reserves, account values on life contracts	111.9		107.7		—		—		107.7
Other policyholder funds	863.0		863.0		—		810.7		52.3
Reverse repurchase agreements	70.2		73.3		—		73.3		—
Short-term debt	249.0		249.0		—		—		249.0
Long-term debt	249.0		240.5		—		240.5		—

- 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 + Details