Investments

6 Months Ended

Jun. 30, 2020

3. INVESTMENTS

Effective January 1, 2020, the Company adopted ASU 2016-13 which provides guidance on the accounting for fixed maturity securities. The guidance requires the Company to record allowances for credit losses for securities that are deemed to have valuation deterioration due to credit risk issues. The initial table below presents the amortized cost, allowance for credit losses, gross unrealized appreciation/(depreciation) and market value of fixed maturity securities as of June 30, 2020 in accordance with ASU 2016-13 guidance. The second table presents the amortized cost, gross unrealized appreciation/(depreciation), market value and other-than-temporary impairments (“OTTI”) in AOCI as of December 31, 2019, in accordance with previously applicable guidance

	At June 30, 2020
	Amortized		Allowances for		Unrealized		Unrealized		Market
(Dollars in thousands)	Cost		Credit Losses		Appreciation		Depreciation		Value
Fixed maturity securities
U.S. Treasury securities and obligations of U.S. government agencies and corporations	$	741,244	$	-	$	31,740	$	-	$	772,984
Obligations of U.S. states and political subdivisions		507,475		-		27,597		(3,789)		531,283
Corporate securities		2,935,665		(19,398)		135,213		(51,922)		2,999,558
Asset-backed securities		991,779		-		14,504		(21,500)		984,783
Mortgage-backed securities
Commercial		348,329		-		33,506		(788)		381,047
Agency residential		604,360		-		33,190		(349)		637,201
Non-agency residential		509		-		-		(3)		506
Foreign government securities		636,346		-		38,578		(5,034)		669,890
Foreign corporate securities		892,075		(527)		57,601		(7,024)		942,125
Total fixed maturity securities	$	7,657,782	$	(19,925)	$	371,929	$	(90,409)	$	7,919,377

	At December 31, 2019
	Amortized		Unrealized		Unrealized		Market		OTTI in AOCI
(Dollars in thousands)	Cost		Appreciation		Depreciation		Value		(a)
Fixed maturity securities
U.S. Treasury securities and obligations of U.S. government agencies and corporations	$	768,374	$	10,128	$	(987)	$	777,515	$	-
Obligations of U.S. states and political subdivisions		506,347		29,651		(87)		535,911		-
Corporate securities		2,777,097		70,898		(26,438)		2,821,557		245
Asset-backed securities		761,607		5,659		(1,309)		765,957		-
Mortgage-backed securities
Commercial		311,961		17,242		(154)		329,049		-
Agency residential		625,612		19,395		(320)		644,687		-
Non-agency residential		1,638		-		-		1,638		-
Foreign government securities		646,149		18,908		(7,050)		658,007		27
Foreign corporate securities		935,640		31,257		(9,139)		957,758		333
Total fixed maturity securities	$	7,334,425	$	203,138	$	(45,484)	$	7,492,079	$	605

^(a) Represents the amount of OTTI recognized in AOCI. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

The amortized cost and market value of fixed maturity securities are shown in the following tables by contractual maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately.

	At June 30, 2020				At December 31, 2019
	Amortized		Market		Amortized		Market
(Dollars in thousands)	Cost		Value		Cost		Value
Fixed maturity securities – available for sale
Due in one year or less	$	716,996	$	714,607	$	569,506	$	563,730
Due after one year through five years		2,773,635		2,866,814		2,919,966		2,963,903
Due after five years through ten years		1,615,652		1,735,868		1,541,695		1,602,642
Due after ten years		606,522		598,551		602,440		620,473
Asset-backed securities		991,779		984,783		761,607		765,957
Mortgage-backed securities
Commercial		348,329		381,047		311,961		329,049
Agency residential		604,360		637,201		625,612		644,687
Non-agency residential		509		506		1,638		1,638
Total fixed maturity securities	$	7,657,782	$	7,919,377	$	7,334,425	$	7,492,079

The changes in net unrealized appreciation (depreciation) for the Company’s investments are derived from the following sources for the periods as indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2020		2019		2020		2019
Increase (decrease) during the period between the market value and cost of investments carried at market value, and deferred taxes thereon:
Fixed maturity securities	$	311,927	$	93,919	$	123,520	$	204,828
Fixed maturity securities, other-than-temporary impairment		-		(368)		-		(700)
Change in unrealized appreciation (depreciation), pre-tax		311,927		93,551		123,520		204,128
Deferred tax benefit (expense)		(64,834)		(19,675)		(26,065)		(42,889)
Deferred tax benefit (expense), other-than-temporary impairment		-		77		-		147
Change in unrealized appreciation (depreciation), net of deferred taxes, included in stockholder's equity	$	247,093	$	73,953	$	97,455	$	161,386

The Company reviews all of its fixed maturity, available for sale securities whose fair value has fallen below their amortized cost at the time of review. The Company then assesses whether the decline in value is temporary or credit related. In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information. Generally, a change in a security’s value caused by a change in the market, interest rate or foreign exchange environment does not constitute a credit impairment, but rather a temporary decline in market value. Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income (loss). If the Company intends to sell the security or is more likely than not to sell the security, the Company records the entire fair value adjustment in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss). If the Company determines that the decline is credit related and the Company does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, the Company establishes a credit allowance equal to the estimated credit loss and is recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss). The amount of the allowance for a given security will generally be the difference between a discounted cash flow model and the Company’s carrying value. The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets. We will adjust the credit allowance account for future changes in credit loss estimates for a security and record this adjustment through net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss).

The Company does not create an allowance for uncollectible interest. If interest is not received when due, the interest receivable is immediately reversed and no additional interest is accrued. If future interest is received that has not been accrued, it is recorded as income at that time.

Prior to the adoption of ASU 2016-13 effective January 1, 2020, estimated credit losses were recorded as adjustments to the carrying value of the security and any subsequent improvement in market value were recorded through other comprehensive income.

The Company’s assessments are based on the issuers’ current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company’s asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected prepayments for pass-through security types.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:

	Duration of Unrealized Loss at June 30, 2020 By Security Type
	Less than 12 months				Greater than 12 months				Total
			Gross				Gross				Gross
	Market		Unrealized		Market		Unrealized		Market		Unrealized
(Dollars in thousands)	Value		Depreciation		Value		Depreciation		Value		Depreciation
Fixed maturity securities - available for sale
Obligations of U.S. states and political subdivisions		70,056		(3,564)		3,331		(225)		73,387		(3,789)
Corporate securities		423,967		(20,116)		122,165		(31,806)		546,132		(51,922)
Asset-backed securities		437,211		(16,250)		129,870		(5,250)		567,081		(21,500)
Mortgage-backed securities
Commercial		31,984		(756)		3,303		(32)		35,287		(788)
Agency residential		23,621		(342)		1,166		(7)		24,787		(349)
Non-agency residential		161		(2)		344		(1)		505		(3)
Foreign government securities		51,453		(506)		41,802		(4,528)		93,255		(5,034)
Foreign corporate securities		90,660		(2,151)		38,483		(4,873)		129,143		(7,024)
Total fixed maturity securities	$	1,129,113	$	(43,687)	$	340,464	$	(46,722)	$	1,469,577	$	(90,409)

	Duration of Unrealized Loss at June 30, 2020 By Maturity
	Less than 12 months				Greater than 12 months				Total
			Gross				Gross				Gross
	Market		Unrealized		Market		Unrealized		Market		Unrealized
(Dollars in thousands)	Value		Depreciation		Value		Depreciation		Value		Depreciation
Fixed maturity securities
Due in one year or less	$	32,323	$	(473)	$	52,176	$	(8,444)	$	84,499	$	(8,917)
Due in one year through five years		340,168		(12,125)		94,125		(6,849)		434,293		(18,974)
Due in five years through ten years		154,542		(6,913)		2,842		(659)		157,384		(7,572)
Due after ten years		109,103		(6,826)		56,638		(25,480)		165,741		(32,306)
Asset-backed securities		437,211		(16,250)		129,870		(5,250)		567,081		(21,500)
Mortgage-backed securities		55,766		(1,100)		4,813		(40)		60,579		(1,140)
Total fixed maturity securities	$	1,129,113	$	(43,687)	$	340,464	$	(46,722)	$	1,469,577	$	(90,409)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2020 were $1,469,577 thousand and $90,409 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at June 30, 2020, did not exceed 0.1% of the overall market value of the Company’s fixed maturity securities. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $43,687 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities and asset backed securities. Of these unrealized losses, $25,991 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $46,722 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities, foreign government securities and asset backed securities. Of these unrealized losses $15,488 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. There was no gross unrealized depreciation for mortgage-backed securities related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis. In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

	Duration of Unrealized Loss at December 31, 2019 By Security Type
	Less than 12 months				Greater than 12 months				Total
			Gross				Gross				Gross
	Market		Unrealized		Market		Unrealized		Market		Unrealized
(Dollars in thousands)	Value		Depreciation		Value		Depreciation		Value		Depreciation
Fixed maturity securities - available for sale
U.S. Treasury securities and obligations of U.S. government agencies and corporations	$	8,997	$	(141)	$	203,780	$	(846)	$	212,777	$	(987)
Obligations of U.S. states and political subdivisions		4,600		(38)		4,518		(49)		9,118		(87)
Corporate securities		334,973		(5,186)		230,679		(21,252)		565,652		(26,438)
Asset-backed securities		159,695		(887)		76,351		(422)		236,046		(1,309)
Mortgage-backed securities
Commercial		13,083		(87)		16,374		(67)		29,457		(154)
Agency residential		19,019		(82)		17,147		(238)		36,166		(320)
Non-agency residential		-		-		690		-		690		-
Foreign government securities		113,256		(858)		109,953		(6,192)		223,209		(7,050)
Foreign corporate securities		105,551		(1,260)		121,710		(7,879)		227,261		(9,139)
Total fixed maturity securities	$	759,174	$	(8,539)	$	781,202	$	(36,945)	$	1,540,376	$	(45,484)

	Duration of Unrealized Loss at December 31, 2019 By Maturity
	Less than 12 months				Greater than 12 months				Total
			Gross				Gross				Gross
	Market		Unrealized		Market		Unrealized		Market		Unrealized
(Dollars in thousands)	Value		Depreciation		Value		Depreciation		Value		Depreciation
Fixed maturity securities
Due in one year or less	$	34,542	$	(1,067)	$	188,755	$	(6,411)	$	223,297	$	(7,478)
Due in one year through five years		226,521		(2,554)		357,728		(11,562)		584,249		(14,116)
Due in five years through ten years		251,967		(3,292)		43,129		(6,785)		295,096		(10,077)
Due after ten years		54,347		(570)		81,028		(11,460)		135,375		(12,030)
Asset-backed securities		159,695		(887)		76,351		(422)		236,046		(1,309)
Mortgage-backed securities		32,102		(169)		34,211		(305)		66,313		(474)
Total fixed maturity securities	$	759,174	$	(8,539)	$	781,202	$	(36,945)	$	1,540,376	$	(45,484)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2019 were $1,540,376 thousand and $45,484 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2019, did not exceed 0.2% of the overall market value of the Company’s fixed maturity securities. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $8,539 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities. Of these unrealized losses, $5,645 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $36,945 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities and foreign government securities. Of these unrealized losses $16,976 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. There was no gross unrealized depreciation for mortgage-backed securities related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

The components of net investment income are presented in the tables below for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2020		2019		2020		2019
Fixed maturities	$	74,897	$	65,374	$	148,985	$	132,428
Equity securities		2,024		2,319		3,616		3,750
Short-term investments and cash		578		3,169		2,148		5,905
Other invested assets
Limited partnerships		(40,465)		15,116		(33,469)		23,171
Dividends from preferred shares of affiliate		7,758		7,758		15,516		15,516
Other		(2,962)		3,299		(16,034)		6,279
Gross investment income before adjustments		41,830		97,035		120,762		187,049
Funds held interest income (expense)		901		1,445		4,158		4,326
Interest income from Parent		1,281		-		2,563		-
Gross investment income		44,012		98,480		127,483		191,375
Investment expenses		(8,859)		(7,771)		(18,129)		(16,132)
Net investment income	$	35,153	$	90,709	$	109,354	$	175,243

(Some amounts may not reconcile due to rounding.)

The Company records results from limited partnership investments on the equity method of accounting with changes in value reported through net investment income. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag. If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company identifies the decline.

The Company had contractual commitments to invest up to an additional $1,040,369 thousand in limited partnerships and private placement loans at June 30, 2020. These commitments will be funded when called in accordance with the partnership and loan agreements, which have investment periods that expire, unless extended, through 2026.

The Company participates in a private placement liquidity sweep facility (“the facility”). The primary purpose of the facility is to enhance the Company’s return on its short-term investments and cash positions. The facility invests in high quality, short-duration securities and permits daily liquidity. The Company consolidates its participation in the facility. As of June 30, 2020, the market value of investments in the facility consolidated within the Company’s balance sheets was $340,950 thousand.

Other invested assets, at fair value, as of June 30, 2020 and December 31, 2019, were comprised of preferred shares held in Preferred Holdings, an affiliated company.

The components of net realized capital gains (losses) are presented in the table below for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2020		2019		2020		2019
Fixed maturity securities, market value:
Allowances for credit losses	$	(7,826)	$	-	$	(19,925)	$	-
Other-than-temporary impairments		-		(4,929)		-		(7,219)
Gains (losses) from sales		1,963		(2,313)		(18,974)		1,113
Fixed maturity securities, fair value:
Gains (losses) from sales		-		356		-		356
Gains (losses) from fair value adjustments		(272)		-		(1,395)		13
Equity securities, fair value:
Gains (losses) from sales		16,274		(1,314)		(11,328)		3,730
Gains (losses) from fair value adjustments		148,205		25,829		26,536		103,675
Other invested assets		1,292		(152)		(1,035)		244
Other invested assets, fair value:
Gains (losses) from fair value adjustments		(639,058)		125,024		(196,579)		175,651
Short-term investment gains (losses)		62		62		207		56
Total net realized capital gains (losses)	$	(479,360)	$	142,563	$	(222,493)	$	277,619

	Roll Forward of Allowance for Credit Losses
	Three Months Ended June 30, 2020								Six Months Ended June 30, 2020
			Foreign		Foreign						Foreign		Foreign
	Corporate		Government		Corporate				Corporate		Government		Corporate
	Securities		Securities		Securities		Total		Securities		Securities		Securities		Total
Beginning Balance	$	(11,468)	$	(70)	$	(561)	$	(12,099)	$	-	$	-	$	-	$	-
Credit losses on securities where credit
losses were not previously recorded		(10,355)		-		-		(10,355)		(21,823)		(70)		(561)		(22,454)
Increases in allowance on previously
impaired securities		(555)		-		(211)		(766)		(555)		-		(211)		(766)
Decreases in allowance on previously
impaired securities		1,238		-		116		1,354		1,238		-		116		1,354
Reduction in allowance due to disposals		1,742		70		129		1,941		1,742		70		129		1,941

Balance as of June 30, 2020	$	(19,398)	$	-	$	(527)	$	(19,925)	$	(19,398)	$	-	$	(527)	$	(19,925)

The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) fair value re-measurements, allowances for credit losses per ASU 2016-13 and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis in prior years as displayed in the table above. The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2020		2019		2020		2019
Proceeds from sales of fixed maturity securities	$	173,479	$	403,419	$	337,723	$	2,007,308
Gross gains from sales		8,755		3,133		10,601		11,237
Gross losses from sales		(6,792)		(5,090)		(29,575)		(9,768)

Proceeds from sales of equity securities	$	8,842	$	79,735	$	213,003	$	148,973
Gross gains from sales		18,172		2,577		20,753		8,248
Gross losses from sales		(1,898)		(3,891)		(32,081)		(4,518)