XML 27 R11.htm IDEA: XBRL DOCUMENT

Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2023

FAIR VALUE OF FINANCIAL INSTRUMENTS

Current accounting guidance on fair value measurements includes the application of a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Our financial instruments that are recorded at fair value are categorized into a three-level hierarchy, which is based upon the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (i.e., Level 1) and the lowest priority to unobservable inputs (i.e., Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the financial instrument.

Financial instruments recorded at fair value are categorized in the fair value hierarchy as follows:

•Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial instruments that we have the ability to access.

•Level 2: Valuations are based on quoted prices for similar financial instruments, other than quoted prices included in Level 1, in markets that are not active or on inputs that are observable either directly or indirectly for the full term of the financial instrument.

•Level 3: Valuations are based on pricing or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument.

We review our fair value hierarchy categorizations on a quarterly basis at which time the classification of certain financial instruments may change if the input observations have changed. Transfers between levels, if any, are recorded as of the beginning of the reporting period.

To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers with whom we have had several years' experience and who have demonstrated knowledge of the subject security.

In order to determine the proper classification in the fair value hierarchy, we obtain and evaluate the vendors' pricing procedures and inputs used to price the security, which include unadjusted quoted market prices for identical securities, such as a New York Stock Exchange closing price, and quoted prices for identical securities in markets that are not active. For fixed maturity securities, an evaluation of interest rates and yield curves observable at commonly quoted intervals, volatility, prepayment speeds, credit risks and default rates may also be performed. We have determined that these processes and inputs result in fair values and classifications consistent with the applicable accounting guidance on fair value measurements.

When possible, we use quoted market prices to determine the fair value of fixed maturities, equity securities, trading securities and short-term investments. When quoted market prices do not exist, we base estimates of fair value on market information obtained from independent pricing services and brokers or on valuation techniques that are both unobservable and significant to the overall fair value measurement of the financial instrument. Such inputs may reflect management's own assumptions about the assumptions a market participant would use in pricing the financial instrument. Our valuation techniques are discussed in more detail throughout this section.

The mortgage loan portfolio consists entirely of commercial mortgage loans. The fair value of our mortgage loans is determined by modeling performed by our third-party fund manager based on the stated principal and coupon payments provided for in the loan agreements. These cash flows are then discounted using an appropriate risk-adjusted discount rate to determine the security's fair value.

Our other long-term investments consist primarily of our interests in limited liability partnerships that are recorded on the equity method of accounting. The fair value of the partnerships is obtained from the fund managers, which is based on the fair value of the underlying investments held in the partnerships. In management's opinion, these values represent a reasonable estimate of fair value. We have not adjusted the net asset value provided by the fund managers.

For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

The Company formed a rabbi trust in 2014 to fund obligations under the United Fire & Casualty Company Supplemental Executive Retirement and Deferral Plan (the "Executive Retirement Plan"). Within the rabbi trust, corporate-owned life insurance ("COLI") policies are utilized as an investment vehicle and source of funding for the Company's Executive Retirement Plan. The COLI policies invest in mutual funds, which are priced daily by independent sources. As of March 31, 2023, the cash surrender value of the COLI policies was $11,568 which is equal to the fair value measured using Level 2 inputs, based on the underlying assets of the COLI policies, and is included in other assets in the Consolidated Balance Sheets.

Our long-term debt is not carried in the Consolidated Balance Sheet at fair value. The fair value of our long-term debt is estimated using Level 2 inputs based on quoted prices for similar financial instruments. The fair value is estimated using a discounted cash flow analysis.

A summary of the carrying value and estimated fair value of our financial instruments at March 31, 2023 and December 31, 2022 is as follows:


	March 31, 2023				December 31, 2022
	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets
Investments
Fixed maturities:
Available-for-sale securities	$	1,591,348	$	1,591,169	$	1,551,339	$	1,551,336

Equity securities	159,378		159,378		169,106		169,106
Mortgage loans	35,240		37,863		35,302		37,898
Other long-term investments	91,003		91,003		86,276		86,276
Short-term investments	275		275		275		275
Cash and cash equivalents	53,230		53,230		96,650		96,650
Corporate-owned life insurance	11,568		11,568		10,588		10,588
Liabilities
Long Term Debt	37,696		50,000		36,168		50,000

The following tables present the categorization for our financial instruments measured at fair value on a recurring basis. The table includes financial instruments at March 31, 2023 and December 31, 2022:


March 31, 2023			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	14,816	$	—	$	14,816	$	—
U.S. government agency	82,148		—		82,148		—
States, municipalities and political subdivisions
General obligations
Midwest	58,888		—		58,888		—
Northeast	11,476		—		11,476		—
South	63,471		—		63,471		—
West	86,710		—		86,710		—
Special revenue
Midwest	103,010		—		103,010		—
Northeast	54,614		—		54,614		—
South	178,965		—		178,965		—
West	112,902		—		112,902		—
Foreign bonds	34,301		—		34,301		—
Public utilities	135,711		—		135,711		—
Corporate bonds
Energy	34,426		—		34,426		—
Industrials	59,399		—		59,399		—
Consumer goods and services	91,752		—		91,752		—
Health care	30,497		—		30,497		—
Technology, media and telecommunications	63,296		—		63,296		—
Financial services	126,379		—		120,966		5,413
Mortgage-backed securities	23,534		—		23,534		—
Collateralized mortgage obligations
Government national mortgage association	89,503		—		89,503		—
Federal home loan mortgage corporation	81,454		—		81,454		—
Federal national mortgage association	49,771		—		49,771		—
Asset-backed securities	4,325		—		3,474		851

Total Available-for-Sale Fixed Maturities	$	1,591,348	$	—	$	1,585,084	$	6,264

































EQUITY SECURITIES
Common stocks
Public utilities	$	14,200	$	14,200	$	—	$	—
Energy	19,812		19,812		—		—
Industrials	28,536		28,536		—		—
Consumer goods and services	37,262		37,262		—		—
Health care	7,585		7,585		—		—


Technology, media and telecommunications	27,290		27,290		—		—
Financial services	24,693		24,693		—		—

Total Equity Securities	$	159,378	$	159,378	$	—	$	—
Short-Term Investments	$	275	$	275	$	—	$	—
Money Market Accounts	$	17,962	$	17,962	$	—	$	—
Corporate-Owned Life Insurance	$	11,568	$	—	$	11,568	$	—
Total Assets Measured at Fair Value	$	1,780,531	$	177,615	$	1,596,652	$	6,264


December 31, 2022			Fair Value Measurements
Description	Total		Level 1		Level 2		Level 3
AVAILABLE-FOR-SALE
Fixed maturities:
Bonds
U.S. Treasury	$	14,675	$	—	$	14,675	$	—
U.S. government agency	84,406		—		84,406		—
States, municipalities and political subdivisions
General obligations
Midwest	61,113		—		61,113		—
Northeast	15,463		—		15,463		—
South	63,981		—		63,981		—
West	86,545		—		86,545		—
Special revenue
Midwest	102,266		—		102,266		—
Northeast	54,220		—		54,220		—
South	180,857		—		180,857		—
West	112,212		—		112,212		—
Foreign bonds	31,649		—		31,649		—
Public utilities	125,411		—		125,411		—
Corporate bonds
Energy	33,209		—		33,209		—
Industrials	52,842		—		52,842		—
Consumer goods and services	89,941		—		89,941		—
Health care	27,592		—		27,592		—
Technology, media and telecommunications	59,940		—		59,940		—
Financial services	124,292		—		118,617		5,675
Mortgage-backed securities	17,700		—		17,700		—
Collateralized mortgage obligations
Government national mortgage association	84,548		—		84,548		—
Federal home loan mortgage corporation	78,838		—		78,838		—
Federal national mortgage association	45,386		—		45,386		—
Asset-backed securities	4,253		—		3,452		801

Total Available-for-Sale Fixed Maturities	$	1,551,339	$	—	$	1,544,863	$	6,476


EQUITY SECURITIES
Common stocks
Public utilities	$	14,846	$	14,846	$	—	$	—
Energy	19,743		19,743		—		—
Industrials	27,163		27,163		—		—
Consumer goods and services	43,139		43,139		—		—
Health care	7,981		7,981		—		—
Technology, media and telecommunications	28,213		28,213		—		—
Financial services	28,021		28,021		—		—

Total Equity Securities	$	169,106	$	169,106	$	—	$	—
Short-Term Investments	$	275	$	275	$	—	$	—
Money Market Accounts	$	31,289	$	31,289	$	—	$	—
Corporate-Owned Life Insurance	$	10,588	$	—	$	10,588	$	—
Total Assets Measured at Fair Value	$	1,762,597	$	200,670	$	1,555,451	$	6,476

The fair value of securities that are categorized as Level 1 is based on quoted market prices that are readily and regularly available.

We use a market-based approach for valuing all of our Level 2 securities and submit them primarily to a third-party valuation service provider. Any of these securities not valued by this service provider are submitted to another third-party valuation service provider. Both service providers use a market approach to find pricing of similar financial instruments. The market inputs our service providers normally seek to value our securities include the following, listed in approximate order of priority: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The method and inputs for these securities classified as Level 2 are the same regardless of industry category, credit quality, duration, geographical concentration or economic characteristics. For our mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, our service providers use additional market inputs to value these securities, including the following: new issue data, periodic payment information, monthly payment information, collateral performance and real estate analysis from third parties. Our service providers prioritize inputs based on market conditions, and not all inputs listed are available for use in the valuation process for each security on any given day.

At least annually, we review the methodologies and assumptions used by our valuation service providers and verify that they are reasonable and representative of the fair value of the underlying securities held in the investment portfolio. We validate the prices obtained from independent pricing services and brokers prior to their use for reporting purposes by evaluating their reasonableness on a monthly basis. In addition, on a quarterly basis, we also test all securities in the portfolio and independently corroborate the valuations obtained from our third-party valuation service providers. Quarterly, we also perform deep dive analyses of the pricing method used by our third-party valuation service provider by selecting a random sample of securities by asset class and reviewing methodologies. In our opinion, the pricing obtained at March 31, 2023 and December 31, 2022 was reasonable.

For the three-month period ended March 31, 2023, the change in our available-for-sale securities categorized as Level 1 and Level 2 is the result of investment purchases that were made using funds held in our money market accounts, disposals and the change in unrealized gains on both fixed maturities and equity securities.

Securities categorized as Level 3 include holdings in certain private placement fixed maturity and equity securities for which an active market does not currently exist. The fair value of our Level 3 private placement securities is determined by management relying on pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities. However, securities are categorized as Level 3 if these quotes cannot be corroborated by other market observable data due to the unobservable nature of the brokers’ valuation processes.

The following table provides quantitative information about our Level 3 securities at March 31, 2023:

Quantitative Information about Level 3 Fair Value Measurements

Fair Value at

Valuation Technique(s)

Unobservable inputs

Range of weighted average significant unobservable inputs

March 31, 2023

Fixed Maturities corporate

5,413

Discounted cash flow

Discount Rates

3.5% - 7.5%

Fixed Maturities asset-backed securities

851

Discounted cash flow

Probability of default

4% - 6%

The following table provides a summary of the changes in fair value of our Level 3 securities for the three-month period ended March 31, 2023:


	Corporate bonds		Asset-backed securities		Equities		Total
Beginning Balance at January 1, 2023	$	5,675	$	801	$	—	$	6,476

Net unrealized gains (losses)(1)	(262)		50		—		(212)





Ending Balance at March 31, 2023	$	5,413	$	851	$	—	$	6,264

(1) Net unrealized gains (losses) are recorded as a component of comprehensive income.

Commercial Mortgage Loans

The following tables present the carrying value of our commercial mortgage loans and additional information at March 31, 2023 and December 31, 2022:


Commercial Mortgage Loans
	March 31, 2023		December 31, 2022
Loan-to-value	Carrying Value		Carrying Value
Less than 65%	$	29,113	$	29,231
65%-75%	8,799		8,716
Total amortized cost	$	37,912	$	37,947
Allowance for mortgage loan losses	(49)		(49)
Mortgage loans, net	$	37,863	$	37,898


Mortgage Loans by Region
	March 31, 2023				December 31, 2022
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
East North Central	$	3,245	8.6	%	$	3,245	8.6	%
Southern Atlantic	9,351		24.6		9,397		24.7
East South Central	7,719		20.3		7,783		20.5
New England	6,588		17.4		6,588		17.4
Middle Atlantic	6,100		16.1		6,139		16.2
Mountain	1,992		5.3		1,992		5.2
West North Central	2,917		7.7		2,803		7.4
Total mortgage loans at amortized cost	$	37,912	100.0	%	$	37,947	100.0	%


Mortgage Loans by Property Type
	March 31, 2023				December 31, 2022
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
Commercial
Multifamily	$	8,593	22.7	%	$	8,493	22.4	%
Office	11,189		29.4		11,267		29.7
Industrial	10,038		26.5		10,056		26.5
Retail	1,992		5.3		1,992		5.2
Mixed use/Other	6,100		16.1		6,139		16.2
Total mortgage loans at amortized cost	$	37,912	100.0	%	$	37,947	100.0	%


Amortized Cost Basis by Year of Origination and Credit Quality Indicator
	2023		2022		2020		2019		2018		Total
Commercial mortgage loans:
Risk Rating:
1-2 internal grade	$	128	$	101	5,350		$	7,959	$	17,786	$	31,324
3-4 internal grade	—		—		—		—		6,588		6,588
5 internal grade	—		—		—		—		—		—
6 internal grade	—		—		—		—		—		—
7 internal grade	—		—		—		—		—		—
Total commercial mortgage loans	$	128	$	101	$	5,350	$	7,959	$	24,374	$	37,912
Current-period write-offs	—		—		—		—		—		—
Current-period recoveries	—		—		—		—		—		—
Current-period net write-offs	$	—	$	—	$	—	$	—	$	—	$	—

Commercial mortgage loans carrying value excludes accrued interest of $133. As of March 31, 2023, all loan receivables were current, with no delinquencies. The commercial mortgage loans originate with an initial loan-to-value ratio to provide sufficient collateral to absorb losses should a loan be required to foreclose. Mortgage loans are evaluated on a quarterly basis for impairment on an individual basis through a monitoring process and review of key credit indicators, such as economic trends, delinquency rates, property valuations, occupancy and rental rates and loan-to-value ratios. A loan is considered impaired when the Company believes it will not collect the contractual principal and interest set forth in the contractual terms of the loan. An internal grade is assigned to each mortgage loan, with a grade of 1 being the highest and least likely for an impairment and the lowest rating of 7 being the most likely for an impairment. An allowance for mortgage loan losses is established on each loan recognizing a loss for amounts which we believe will not be collected according to the contractual terms of the respective loan agreement. As of March 31, 2023, the Company had an allowance for mortgage loan losses of $49, summarized in the following rollforward:


Rollforward of allowance for mortgage loan losses:
	As of
	March 31, 2023
Beginning balance, January 1, 2023	$	49
Current-period provision for expected credit losses	—


Ending balance of the allowance for mortgage loan losses, March 31, 2023	$	49

- 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