Credit Losses

12 Months Ended

Dec. 31, 2021

Current Expected Credit Losses

The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) in the first quarter of 2020, which replaced the incurred loss methodology with an expected loss methodology known as the current expected loss methodology, CECL. The measurement of CECL is applicable to financial assets measured at amortized cost, which includes held-to-maturity securities, trade receivables, lease receivables, reinsurance recoverables, financial guarantee contracts, loan commitments, and financial assets with evidence of credit deterioration. Additionally, Topic 326 made changes to the accounting for AFS debt securities. This change requires credit losses to be presented as an allowance rather than as a write-down on AFS debt securities that the Company does not intend to sell or believes that it is more likely than not that it will be required to sell.

Premiums Receivable

Premiums receivable balances are all due within one year or less. The Company currently determines the allowance for premiums receivable based on an internal aging schedule using collectability and historical payment patterns, as well as current and expected future market conditions to determine the appropriateness of the allowance. Historical payment patterns and future market conditions provide the basis for the estimation along with similar risk characteristics and the Company's business strategy, which have not changed significantly over time. The Company will continually assess the historical payment patterns and aging schedule to reflect the differences in our current conditions and future forecasted changes, including any impact from the COVID-19 pandemic. Changes in the allowance for CECL are recorded through underwriting and general and administrative expenses.

The table below shows the changes in the allowance for CECL on premiums receivable.


	Years Ended December 31,
	2021		2020
	(in millions)
Beginning balance of the allowance for CECL on premiums receivable	$	10.8	$	4.6
Current period provision for CECL	10.6		13.0
Write-offs charged against the allowance	(2.5)		(6.8)
Recoveries collected	(8.6)		—
Ending balance of the allowance for CECL on premiums receivable	$	10.3	$	10.8

Reinsurance Recoverable

In assessing an allowance for reinsurance assets, which includes reinsurance recoverables and contingent commission receivables, the Company considers historical information, financial strength of reinsurers, collateralization amounts and ratings to determine the appropriateness of the allowance. Historically, the Company has not experienced a credit loss from reinsurance transactions. In assessing future default, the Company evaluated the CECL allowance under the ratings-based method using the A.M. Best Average Cumulative Net Impairment Rates. Reinsurer ratings are also assessed through this process. Changes in the allowance for CECL are recorded through underwriting and general and administrative expenses.

The table below shows the changes in the allowance for CECL on reinsurance recoverables.


	Years Ended December 31,
	2021		2020
	(in millions)
Beginning balance of the allowance for CECL on reinsurance recoverables	$	0.4	$	—
Current period provision for CECL	0.2		0.4
Ending balance of the allowance for CECL on reinsurance recoverables	$	0.6	$	0.4

Investments

The Company assesses all AFS debt securities in an unrealized loss position for CECL. The Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria is met, the security's amortized cost basis is written down to its fair value. For AFS debt securities that do not meet either criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. Any impairment that has not been recorded through an allowance for credit losses is recognized in Accumulated other

comprehensive income on the Company's Consolidated Balance Sheets. Changes in the allowance for CECL are recorded through realized capital losses.

As of December 31, 2021, the Company established an aggregate allowance for CECL in the amount of $0.2 million. For the Company’s investments in fixed-income debt securities, the allowance for CECL was determined by: (i) observing the credit characteristics of those debt securities that may have demonstrated a credit loss as of that date and by comparing the present value of cash flows expected to be collected to its amortized cost basis; and (ii) observing the credit characteristics of those debt securities that are expected to demonstrate a credit loss in the future by comparing the present value of cash flows expected to be collected to its amortized cost basis. The expected present value of cash flows are calculated using scenario based credit loss models derived from the discounted cash flows under the Comprehensive Capital Analysis Review (CCAR) framework, which is adopted by the Federal Reserve.

As of December 31, 2021, the Company did not intend to sell any of its AFS debt securities in which its amortized cost exceeded its fair value.

Accrued interest receivable on AFS debt securities totaled $14.5 million at December 31, 2021 and is excluded from the estimate of credit losses based on historically timely payments.

The table below shows the changes in the allowance for CECL on AFS securities.


	Years Ended December 31,
	2021		2020
	(in millions)
Beginning balance of the allowance for CECL on AFS securities	$	0.7	$	—
Current period provision for CECL	—		3.1
Reductions in allowance from disposals	(0.2)		(2.4)
Recoveries of amounts previously written off	$	(0.3)	—
Ending balance of the allowance for CECL on AFS securities	$	0.2	$	0.7