Fair Value

6 Months Ended

Jun. 30, 2020

Fair Value [Abstract]

Fair Value

7. 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, $1,023,838 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, were valued by investment managers’ valuation committees and many of these fair values and all of the $4,431 thousand of fixed maturities, fair value 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 $241,580 thousand were valued at either par or amortized cost, which the Company believes approximates fair value. At December 31, 2019, $772,979 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, were valued by investment managers’ valuation committees and a majority of these fair values and all of the $5,826 thousand of fixed maturities, fair value 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 $162,106 thousand were valued 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.

The Company’s liability for equity index put options is categorized as Level 3 since there is no active market for these equity put options. The fair values for these options are calculated by the Company using an industry accepted pricing model, Black-Scholes. The model inputs and assumptions are: risk free interest rates, equity market indexes values, volatilities and dividend yields and duration. The model results are then adjusted for the Company’s credit default swap rate. All of these inputs and assumptions are updated quarterly. One of the option contacts is in British Pound Sterling so the fair value for this contract is converted to U.S. dollars using an exchange rate from a nationally recognized source.

The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods 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	$	1,434,931	$	-	$	1,434,931	$	-
Obligations of U.S. States and political subdivisions		532,281		-		532,281		-
Corporate securities		6,617,788		-		5,895,954		721,834
Asset-backed securities		1,069,558		-		773,828		295,730
Mortgage-backed securities
Commercial		919,796		-		919,796		-
Agency residential		2,089,251		-		2,089,251		-
Non-agency residential		3,111		-		3,111		-
Foreign government securities		1,501,200		-		1,501,200		-
Foreign corporate securities		2,887,343		-		2,881,069		6,274
Total fixed maturities, market value		17,055,259		-		16,031,421		1,023,838
Fixed maturities, fair value		4,431		-		-		4,431
Equity securities, fair value		949,170		875,708		63,585		9,877
Liabilities:
Equity index put option contracts	$	9,088	$	-	$	-	$	9,088

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 and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods 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	$	1,515,803	$	-	$	1,515,803	$	-
Obligations of U.S. States and political subdivisions		536,915		-		536,915		-
Corporate securities		6,374,946		-		5,757,358		617,588
Asset-backed securities		897,333		-		743,692		153,641
Mortgage-backed securities
Commercial		844,557		-		844,557		-
Agency residential		2,198,581		-		2,198,581		-
Non-agency residential		5,703		-		5,703		-
Foreign government securities		1,505,950		-		1,505,950		-
Foreign corporate securities		2,945,156		-		2,943,406		1,750
Total fixed maturities, market value		16,824,944		-		16,051,965		772,979
Fixed maturities, fair value		5,826		-		-		5,826
Equity securities, fair value		931,457		864,584		66,873		-
Liabilities:
Equity index put option contracts	$	5,584	$	-	$	-	$	5,584

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 for fixed maturities, for the periods indicated:

		Total Fixed Maturities, Market Value
	Three Months Ended June 30, 2020								Six Months Ended June 30, 2020
	Corporate		Asset-Backed		Foreign				Corporate		Asset-Backed			Foreign
(Dollars in thousands)	Securities		Securities		Corporate		Total		Securities		Securities			Corporate		Total
Beginning balance fixed maturities at market value	$	713,081	$	238,631	$	-	$	951,712	$	617,588	$	153,641		$	1,750	$	772,979
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		14,345		38,886		5,434		58,665		113,409		139,754			3,684		256,847
Transfers in and/or (out) of Level 3		(4,795)		-		977		(3,818)		(4,795)		-			977		(3,818)
Ending balance	$	721,834	$	295,730	$	6,274	$	1,023,838	$	721,834	$	295,730		$	6,274	$	1,023,838
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 fixed maturities at market value	$	437,826	$	7,298	$	445,124	$	428,215	$	7,744	$	435,959
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)		1,871		-		1,871		2,444		-		2,444
Purchases, issuances and settlements		101,732		(4,967)		96,765		108,370		(5,532)		102,838
Transfers in and/or (out) of Level 3		3,977		-		3,977		1,519		-		1,519
Ending balance	$	542,878	$	2,093	$	544,971	$	542,878	$	2,093	$	544,971
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 market 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)		-		-		-		-
Purchases, issuances and settlements		-		-		-		-
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 market 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 following table presents the activity under Level 3, fair value measurements using significant unobservable inputs for equity securities, for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2020		2019		2020		2019
Common Stock
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 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 investment managers as of December 31, 2018 and were subsequently priced by a recognized pricing service as of June 30, 2019.

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs for equity index put option contracts, for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2020		2019		2020		2019
Liabilities:
Balance, beginning of period	$	20,958	$	8,727	$	5,584	$	11,958
Total (gains) or losses (realized/unrealized)
Included in earnings		(11,869)		(353)		3,504		(3,584)
Included in other comprehensive income (loss)		-		-		-		-
Purchases, issuances and settlements		-		-		-		-
Transfers in and/or (out) of Level 3		-		-		-		-
Balance, end of period	$	9,088	$	8,374	$	9,088	$	8,374
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.)