Fair Value

6 Months Ended

Jun. 30, 2020

5. FAIR VALUE

GAAP guidance regarding fair value measurements address how companies should measure fair value when they are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3 being the lowest priority.

The levels in the hierarchy are defined as follows:

Level 1:

Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in an active market;

Level 2:

Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;

Level 3:

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company’s fixed maturity and equity securities are primarily managed by third party investment asset managers. The investment asset managers managing publicly traded securities obtain prices from nationally recognized pricing services. These services seek to utilize market data and observations in their evaluation process. They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers. The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers. In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices. In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source. No material variances were noted during these price validation procedures. In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value. At June 30, 2020, $953,190 thousand of fixed maturities, market value and $4,431 thousand of fixed maturities, fair value were fair valued using unobservable inputs. The majority of the fixed maturities, market value, $782,259 thousand and all of the $4,431 thousand of fixed maturities, fair value, were valued by investment managers’ valuation committees and many of these fair values were substantiated by valuations from independent third parties. The Company has procedures in place to review and evaluate these independent third party valuations. The remaining Level 3 fixed maturities of $170,931 thousand were fair valued by the Company at either par or amortized cost, which the Company believes approximates fair value. At December 31, 2019, $702,331 thousand of fixed maturities, market value and $5,826 thousand of fixed maturities, fair value were fair valued using unobservable inputs. The majority of the fixed maturities, market value, $610,873 thousand and all of the $5,826 thousand of fixed maturities, fair value, were valued by investment managers’ valuation committees and a majority of these fair values were substantiated by valuations from independent third parties. The remaining Level 3 fixed maturities of $91,458 thousand were fair valued by the Company at either par or amortized cost, which the Company believes approximates fair value.

The Company internally manages a public equity portfolio which had a fair value at June 30, 2020 and December 31, 2019 of $365,554 thousand and $170,888 thousand, respectively, and all prices were obtained from publicly published sources.

Equity securities denominated in U.S. currency with quoted prices in active markets for identical assets are categorized as Level 1 since the quoted prices are directly observable. Equity securities traded on foreign exchanges are categorized as Level 2 due to the added input of a foreign exchange conversion rate to determine fair or market value. The Company uses foreign currency exchange rates published by nationally recognized sources. During the three months ended June 30, 2020, the Company purchased preferred stock in a private entity and these are categorized as Level 3.

All categories of fixed maturity securities listed in the tables below are generally categorized as Level 2, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority. For foreign government securities and foreign corporate securities, the fair values provided by the third party pricing services in local currencies, and where applicable, are converted to U.S. dollars using currency exchange rates from nationally recognized sources.

The fixed maturities with fair values categorized as Level 3 result when prices are not available from the nationally recognized pricing services.

The composition and valuation inputs for the presented fixed maturities categories are as follows:

U.S. Treasury securities and obligations of U.S. government agencies and corporations are primarily comprised of U.S. Treasury bonds and the fair value is based on observable market inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields;

Obligations of U.S. states and political subdivisions are comprised of state and municipal bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

Corporate securities are primarily comprised of U.S. corporate and public utility bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

Asset-backed and mortgage-backed securities fair values are based on observable inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields and cash flow models using observable inputs such as prepayment speeds, collateral performance and default spreads;

Foreign government securities are comprised of global non-U.S. sovereign bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source;

Foreign corporate securities are comprised of global non-U.S. corporate bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source.

Other invested assets, at fair value, were categorized as Level 3 at June 30, 2020 and December 31, 2019, since it represented a privately placed convertible preferred stock issued by an affiliate. The stock was received in exchange for shares of the Company’s parent. The 25 year redeemable, convertible preferred stock with a 1.75% coupon is valued using a pricing model. The pricing model includes observable inputs such as the U.S. Treasury yield curve rate T note constant maturity 10 year and the swap rate on the Company’s June 1, 2044, 4.868% senior notes, with adjustments to reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset.

The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	June 30, 2020		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of U.S. government agencies and corporations	$	772,984	$	-	$	772,984	$	-
Obligations of U.S. States and political subdivisions		531,283		-		531,283		-
Corporate securities		2,999,558		-		2,348,372		651,186
Asset-backed securities		984,783		-		689,053		295,730
Mortgage-backed securities
Commercial		381,047		-		381,047		-
Agency residential		637,201		-		637,201		-
Non-agency residential		506		-		506		-
Foreign government securities		669,890		-		669,890		-
Foreign corporate securities		942,125		-		935,851		6,274
Total fixed maturities, market value		7,919,377		-		6,966,187		953,190

Fixed maturities, fair value		4,431		-		-		4,431
Equity securities, fair value		789,819		740,197		39,745		9,877
Other invested assets, fair value		1,786,003		-		-		1,786,003

There were no transfers between Level 1 and Level 2 for the six months ended June 30, 2020.

The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated.

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(Dollars in thousands)	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of U.S. government agencies and corporations	$	777,515	$	-	$	777,515	$	-
Obligations of U.S. States and political subdivisions		535,911		-		535,911		-
Corporate securities		2,821,557		-		2,274,618		546,939
Asset-backed securities		765,957		-		612,316		153,641
Mortgage-backed securities
Commercial		329,049		-		329,049		-
Agency residential		644,687		-		644,687		-
Non-agency residential		1,638		-		1,638		-
Foreign government securities		658,007		-		658,007		-
Foreign corporate securities		957,758		-		956,007		1,751
Total fixed maturities, market value		7,492,079		-		6,789,748		702,331

Fixed maturities, fair value		5,826		-		-		5,826
Equity securities, fair value		764,049		719,548		44,501		-
Other invested assets, fair value		1,982,582		-		-		1,982,582

In addition, $224,467 thousand and $209,578 thousand of investments within other invested assets on the consolidated balance sheets as of June 30, 2020 and December 31, 2019, respectively, are not included within the fair value hierarchy tables as the assets are measured at NAV as a practical expedient to determine fair value.

The following tables present the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:

	Total Fixed Maturities, Market Value
	Three Months Ended June 30, 2020								Six Months Ended June 30, 2020
	Corporate		Asset		Foreign				Corporate		Foreign		Foreign
(Dollars in thousands)	Securities		Backed Securities		Corporate		Total		Securities		Corporate		Corporate		Total
Beginning balance	$	642,432	$	238,631	$	-	$	881,063	$	546,939	$	153,641	$	1,751	$	702,331
Total gains or (losses) (realized/unrealized)
Included in earnings		(248)		121		(97)		(224)		(462)		125		(97)		(434)
Included in other comprehensive income (loss)		(549)		18,092		(40)		17,503		(3,906)		2,210		(40)		(1,736)
Purchases, issuances and settlements		14,346		38,886		5,434		58,666		113,410		139,754		3,683		256,847
Transfers in and/or (out) of Level 3		(4,795)		-		977		(3,818)		(4,795)		-		977		(3,818)
Ending balance	$	651,186	$	295,730	$	6,274	$	953,190	$	651,186	$	295,730	$	6,274	$	953,190
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	-	$	-	$	-	$	-	$	(539)	$	-	$	-	$	(539)

(Some amounts may not reconcile due to rounding.)

	Total Fixed Maturities, Market Value
	Three Months Ended June 30, 2019						Six Months Ended June 30, 2019
	Corporate		Foreign				Corporate		Foreign
(Dollars in thousands)	Securities		Corporate		Total		Securities		Corporate		Total
Beginning balance	$	367,178	$	7,298	$	374,476	$	376,250	$	7,744	$	383,994
Total gains or (losses) (realized/unrealized)
Included in earnings		(2,528)		(238)		(2,766)		2,330		(119)		2,211
Included in other comprehensive income (loss)		1,870		-		1,870		2,444		-		2,444
Purchases, issuances and settlements		101,732		(4,967)		96,765		89,686		(5,532)		84,154
Transfers in and/or (out) of Level 3		3,977		-		3,977		1,519		-		1,519
Ending balance	$	472,229	$	2,093	$	474,322	$	472,229	$	2,093	$	474,322
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	-	$	-	$	-	$	-	$	-	$	-

(Some amounts may not reconcile due to rounding.)

	Total Fixed Maturities, Fair Value
	Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
	Foreign				Foreign
(Dollars in thousands)	Corporate		Total		Corporate		Total
Beginning balance fixed maturities at fair value	$	4,703	$	4,703	$	5,826	$	5,826
Total gains or (losses) (realized/unrealized)
Included in earnings		(272)		(272)		(1,395)		(1,395)
Included in other comprehensive income (loss)		-		-		-		-
Transfers in and/or (out) of Level 3		-		-		-		-
Ending balance	$	4,431	$	4,431	$	4,431	$	4,431
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	-	$	-	$	-	$	-

(Some amounts may not reconcile due to rounding.)

	Total Fixed Maturities, Fair Value
	Three Months Ended June 30, 2019				Six Months Ended June 30, 2019
	Foreign				Foreign
(Dollars in thousands)	Corporate		Total		Corporate		Total
Beginning balance fixed maturities at fair value	$	2,350	$	2,350	$	2,337	$	2,337
Total gains or (losses) (realized/unrealized)
Included in earnings		356		356		369		369
Included in other comprehensive income (loss)		-		-		-		-
Purchases, issuances and settlements		(2,706)		(2,706)		(2,706)		(2,706)
Transfers in and/or (out) of Level 3		-		-		-		-
Ending balance	$	-	$	-	$	-	$	-
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	-	$	-	$	-	$	-

(Some amounts may not reconcile due to rounding.)

The net transfers to/(from) level 3, fair value measurements using significant unobservable inputs for fixed maturities, market value were ($3,818) thousand for both the three and six months ended June 30, 2020 and were $3,977 thousand and $1,519 thousand for the three and six months ended June 30, 2019, respectively. The transfers during 2020 were related to securities that were priced using investment managers as of December 31, 2019 and were subsequently priced by a recognized pricing service as of June 30, 2020. The transfers during 2019 were related to securities that were priced using a recognized pricing service as of December 31, 2018 and were subsequently priced by investment managers as of June 30, 2019.

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs by equity securities, for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2020		2019		2020		2019
Equity securities
Balance, beginning of period	$	-	$	-	$	-	$	-
Total (gains) or losses (realized/unrealized)
Included in earnings		-		-		-		-
Included in other comprehensive income (loss)		-		-		-		-
Purchases, issuances and settlements		9,877		-		9,877		-
Transfers in and/or (out) of Level 3		-		-		-		-
Balance, end of period	$	9,877	$	-	$	9,877	$	-

The amount of total gains or losses for the period included in earnings
(or changes in net assets) attributable to the change in unrealized
gains or losses relating to liabilities still held at the reporting date	$	-	$	-	$	-	$	-

(Some amounts may not reconcile due to rounding.)

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs by other invested assets, for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2020		2019		2020		2019
Other invested assets, fair value:
Beginning balance	$	2,425,061	$	1,767,963	$	1,982,582	$	1,717,336
Total gains or (losses) (realized/unrealized)
Included in earnings		(639,058)		125,025		(196,579)		175,652
Included in other comprehensive income (loss)		-		-		-		-
Purchases, issuances and settlements		-		-		-		-
Transfers in and/or (out) of Level 3		-		-		-		-
Ending balance	$	1,786,003	$	1,892,988	$	1,786,003	$	1,892,988
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	-	$	-	$	-	$	-

(Some amounts may not reconcile due to rounding.)

- 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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