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INVESTMENTS
 9 Months Ended
Sep. 30, 2017
INVESTMENTS  
INVESTMENTS

2.    INVESTMENTS

 

Our investments are primarily composed of fixed income debt securities and common stock equity securities. As disclosed in our 2016 Annual Report on Form 10-K, we present all of our investments as available-for-sale, which are carried at fair value. When available, we obtain quoted market prices to determine fair value for our investments. If a quoted market price is not available, fair value is estimated using a secondary pricing source or using quoted market prices of similar securities. We have no investment securities for which fair value is determined using Level 3 inputs as defined in note 3 to the unaudited condensed consolidated interim financial statements, “Fair Value Measurements.”

 

Available-for-Sale Securities

 

The amortized cost and fair value of available-for-sale securities at September 30, 2017 and December 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,  2017

 

    

Cost or

    

Gross

    

Gross

    

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Asset Class

    

Cost

    

Gains

    

Losses

    

Value

U.S. government

 

$

88,660

 

$

159

 

$

(374)

 

$

88,445

U.S. agency

 

 

13,482

 

 

350

 

 

(86)

 

 

13,746

Non-U.S. govt. & agency

 

 

9,497

 

 

185

 

 

(46)

 

 

9,636

Agency MBS

 

 

330,257

 

 

4,254

 

 

(2,953)

 

 

331,558

ABS/CMBS*

 

 

74,589

 

 

616

 

 

(216)

 

 

74,989

Corporate

 

 

532,893

 

 

14,496

 

 

(2,034)

 

 

545,355

Municipal

 

 

630,943

 

 

20,238

 

 

(1,352)

 

 

649,829

Total Fixed Income

 

$

1,680,321

 

$

40,298

 

$

(7,061)

 

$

1,713,558

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

$

189,212

 

$

205,693

 

$

(1,692)

 

$

393,213

*Non-agency asset-backed and commercial mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,  2016

 

    

Cost or

    

Gross

    

Gross

    

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Asset Class

    

Cost

    

Gains

    

Losses

    

Value

U.S. government

 

$

77,054

 

$

88

 

$

(579)

 

$

76,563

U.S. agency

 

 

5,473

 

 

340

 

 

 -

 

 

5,813

Non-U.S. govt. & agency

 

 

9,517

 

 

 2

 

 

(368)

 

 

9,151

Agency MBS

 

 

283,002

 

 

4,635

 

 

(3,568)

 

 

284,069

ABS/CMBS*

 

 

93,791

 

 

676

 

 

(557)

 

 

93,910

Corporate

 

 

503,041

 

 

10,996

 

 

(5,670)

 

 

508,367

Municipal

 

 

624,349

 

 

9,575

 

 

(6,588)

 

 

627,336

Total Fixed Income

 

$

1,596,227

 

$

26,312

 

$

(17,330)

 

$

1,605,209

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

$

187,573

 

$

182,912

 

$

(1,266)

 

$

369,219

*Non-agency asset-backed and commercial mortgage-backed

 

The following table presents the amortized cost and fair value of available-for-sale debt securities by contractual maturity dates as of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

September 30,  2017

Available-for-sale

 

Amortized

 

Fair

(in thousands)

    

Cost

    

Value

Due in one year or less

 

$

21,240

 

$

20,984

Due after one year through five years

 

 

339,233

 

 

346,408

Due after five years through 10 years

 

 

571,384

 

 

586,385

Due after 10 years

 

 

343,618

 

 

353,234

Mtge/ABS/CMBS*

 

 

404,846

 

 

406,547

Total available-for-sale

 

$

1,680,321

 

$

1,713,558

*Mortgage-backed, asset-backed and commercial mortgage-backed

 

Unrealized Losses

 

We conduct and document periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other-than-temporary. The following tables are used as part of our impairment analysis and illustrate the total value of securities that were in an unrealized loss position as of September 30, 2017 and December 31, 2016. The tables segregate the securities based on type, noting the fair value, cost (or amortized cost) and unrealized loss on each category of investment as well as in total. The tables further classify the securities based on the length of time they have been in an unrealized loss position. As of September 30, 2017 unrealized losses, as shown in the following tables, were 0.4 percent of total invested assets. Unrealized losses decreased through the first nine months of 2017, as interest rates declined slightly from the end of 2016, which increased the fair value of securities held in the fixed income portfolio.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,  2017

 

December 31,  2016

(in thousands)

    

< 12 Mos.

    

12 Mos. & 
Greater

    

Total

    

< 12 Mos.

    

12 Mos. & 
Greater

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

54,686

 

$

3,008

 

$

57,694

 

$

48,500

 

$

 —

 

$

48,500

Cost or amortized cost

 

 

55,028

 

 

3,040

 

 

58,068

 

 

49,079

 

 

 —

 

 

49,079

Unrealized Loss

 

$

(342)

 

$

(32)

 

$

(374)

 

$

(579)

 

$

 —

 

$

(579)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

7,921

 

$

 —

 

$

7,921

 

$

 —

 

$

 —

 

$

 —

Cost or amortized cost

 

 

8,007

 

 

 —

 

 

8,007

 

 

 —

 

 

 —

 

 

 —

Unrealized Loss

 

$

(86)

 

$

 —

 

$

(86)

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

1,973

 

$

1,865

 

$

3,838

 

$

7,647

 

$

 —

 

$

7,647

Cost or amortized cost

 

 

1,988

 

 

1,896

 

 

3,884

 

 

8,015

 

 

 —

 

 

8,015

Unrealized Loss

 

$

(15)

 

$

(31)

 

$

(46)

 

$

(368)

 

$

 —

 

$

(368)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency MBS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

156,908

 

$

56,025

 

$

212,933

 

$

175,858

 

$

5,737

 

$

181,595

Cost or amortized cost

 

 

158,567

 

 

57,319

 

 

215,886

 

 

179,238

 

 

5,925

 

 

185,163

Unrealized Loss

 

$

(1,659)

 

$

(1,294)

 

$

(2,953)

 

$

(3,380)

 

$

(188)

 

$

(3,568)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ABS/CMBS*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

22,971

 

$

15,577

 

$

38,548

 

$

48,907

 

$

5,272

 

$

54,179

Cost or amortized cost

 

 

23,032

 

 

15,732

 

 

38,764

 

 

49,372

 

 

5,364

 

 

54,736

Unrealized Loss

 

$

(61)

 

$

(155)

 

$

(216)

 

$

(465)

 

$

(92)

 

$

(557)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

58,328

 

$

24,028

 

$

82,356

 

$

144,353

 

$

15,535

 

$

159,888

Cost or amortized cost

 

 

58,881

 

 

25,509

 

 

84,390

 

 

146,979

 

 

18,579

 

 

165,558

Unrealized Loss

 

$

(553)

 

$

(1,481)

 

$

(2,034)

 

$

(2,626)

 

$

(3,044)

 

$

(5,670)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

61,840

 

$

54,964

 

$

116,804

 

$

250,930

 

$

 —

 

$

250,930

Cost or amortized cost

 

 

62,387

 

 

55,769

 

 

118,156

 

 

257,518

 

 

 —

 

 

257,518

Unrealized Loss

 

$

(547)

 

$

(805)

 

$

(1,352)

 

$

(6,588)

 

$

 —

 

$

(6,588)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal, fixed income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

364,627

 

$

155,467

 

$

520,094

 

$

676,195

 

$

26,544

 

$

702,739

Cost or amortized cost

 

 

367,890

 

 

159,265

 

 

527,155

 

 

690,201

 

 

29,868

 

 

720,069

Unrealized Loss

 

$

(3,263)

 

$

(3,798)

 

$

(7,061)

 

$

(14,006)

 

$

(3,324)

 

$

(17,330)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

8,696

 

$

4,506

 

$

13,202

 

$

7,438

 

$

1,973

 

$

9,411

Cost or amortized cost

 

 

9,716

 

 

5,178

 

 

14,894

 

 

8,029

 

 

2,648

 

 

10,677

Unrealized Loss

 

$

(1,020)

 

$

(672)

 

$

(1,692)

 

$

(591)

 

$

(675)

 

$

(1,266)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

373,323

 

$

159,973

 

$

533,296

 

$

683,633

 

$

28,517

 

$

712,150

Cost or amortized cost

 

 

377,606

 

 

164,443

 

 

542,049

 

 

698,230

 

 

32,516

 

 

730,746

Unrealized Loss

 

$

(4,283)

 

$

(4,470)

 

$

(8,753)

 

$

(14,597)

 

$

(3,999)

 

$

(18,596)

* Non-agency asset-backed and commercial mortgage-backed

 

The following table shows the composition of the fixed income securities in unrealized loss positions at September 30, 2017 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings. The vast majority of the securities are rated by S&P and/or Moody’s.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equivalent

 

Equivalent

 

(dollars in thousands)

 

 

 

NAIC

    

S&P

    

Moody’s

 

Amortized

    

    

 

    

Unrealized

 

Percent

 

Rating

    

Rating

    

Rating

    

Cost

    

Fair Value

    

Loss

    

to Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

AAA/AA/A

 

Aaa/Aa/A

 

$

483,555

 

$

478,024

 

$

(5,531)

 
78.3

%

2

 

BBB

 

Baa

 

 

27,896

 

 

27,669

 

 

(227)

 
3.2

%

3

 

BB

 

Ba

 

 

5,693

 

 

5,639

 

 

(54)

 
0.8

%

4

 

B

 

B

 

 

7,945

 

 

7,171

 

 

(774)

 
11.0

%

5

 

CCC or lower

 

Caa or lower

 

 

2,066

 

 

1,591

 

 

(475)

 
6.7

%

6

 

 

 

 

 

 

—

 

 

—

 

 

—

 

—

 

 

 

 

 

Total

 

$

527,155

 

$

520,094

 

$

(7,061)

 
100.0

%

 

Evaluating Investments for OTTI

 

The fixed income portfolio contained 288 securities in an unrealized loss position as of September 30, 2017. The $7.1 million in associated unrealized losses for these 288 securities represents 0.4 percent of the fixed income portfolio’s cost basis. Of these 288 securities, 89 have been in an unrealized loss position for 12 consecutive months or longer. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Any credit-related impairment related to fixed income securities we do not plan to sell and for which we are not more likely than not to be required to sell is recognized in net earnings, with the non-credit related impairment recognized in comprehensive earnings. Based on our analysis, our fixed income portfolio is of high credit quality and we believe we will recover the amortized cost basis of our fixed income securities. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. In the first nine months of 2017, we recognized $2.1 million in other-than-temporary impairment (OTTI) charges in earnings on two fixed income securities that we no longer had the intent to hold. Comparatively, we recognized $0.1 million in OTTI losses in earnings on a fixed income security that we no longer had the intent to hold in same period in 2016. There were no OTTI losses recognized in other comprehensive earnings on the fixed income portfolio for the periods presented.

 

As of September 30, 2017, we held six common stock securities that were in an unrealized loss position. The unrealized loss on these securities was $1.7 million. Based on our analysis, we believe each security will recover in a reasonable period of time and we have the intent and ability to hold them until recovery. Two equity securities have been in an unrealized loss position for 12 consecutive months or longer. There were no OTTI losses recognized in the periods presented on the equity portfolio.

 

Other Invested Assets

 

Other invested assets include investments in three low income housing tax credit partnerships (LIHTC), carried at amortized cost, membership in the Federal Home Loan Bank of Chicago (FHLBC), carried at cost, an investment in a real estate fund, carried at cost, and an investment in a business development company (BDC), carried at fair value. Due to the nature of the LIHTC and our membership in the FHLBC, their carrying amounts approximate fair value. Our LIHTC interests had a balance of $16.0 million at September 30, 2017, compared to $17.5 million at December 31, 2016 and recognized a total tax benefit of $0.6 million during the third quarter of 2017 compared to $0.4 million during the third quarter of 2016. For the nine-month periods ended September 30, 2017 and 2016, our LIHTC interests recognized a total benefit of $1.9 million and $1.2 million, respectively. Our investment in FHLBC stock totaled $1.0 million at September 30, 2017, compared to $1.6 million at December 31, 2016. As of September 30, 2017, $9.6 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides. No assets were pledged as collateral as of December 31, 2016. As of and during the nine month period ending September 30, 2017, there were no outstanding borrowings with the FHLBC. Our investment in the real estate fund was carried at $3.1 million which approximated fair value at September 30, 2017, compared to a carrying value of $5.0 million which approximated fair value at December 31, 2016. During 2017, we made an investment in a BDC which had a fair value of $6.0 million at September 30, 2017. The investment in the BDC is restricted from being transferred until after a qualified IPO unless prior consent is provided by the BDC. Our unfunded commitments related to this investment totaled $19.1 million at September 30, 2017. Additionally, we had a $15.0 million unfunded commitment related to an investment in a global credit fund at September 30, 2017.

 

Cash and Short-term Investments

 

Cash consists of uninvested balances in bank accounts. We had a cash balance of $26.9 million at September 30, 2017, compared to $18.3 million at the end of 2016. Short-term investments of $11.9 million and $5.0 million at September 30, 2017 and December 31, 2016, respectively, are carried at cost, which approximates fair value.