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Investments
12 Months Ended
Dec. 31, 2022
Investments Debt And Equity Securities [Abstract]  
Investments

2.

INVESTMENTS

Our investments are primarily composed of fixed income debt securities and common stock equity securities. All of our debt securities are classified as available-for-sale, which are carried at fair value. Our equity portfolio consists of common stocks and exchange traded funds (ETF), which are carried at fair value.

A summary of net investment income is as follows:

(in thousands)

 

2022

 

2021

 

2020

Interest on fixed income securities

 

$

77,164

 

$

60,624

 

$

59,755

Dividends on equity securities

11,912

11,787

9,728

Interest on cash, short-term investments and other invested assets

2,467

2,639

3,379

Gross investment income

$

91,543

$

75,050

$

72,862

Less investment expenses

(5,465)

(6,188)

(4,969)

Net investment income

 

$

86,078

$

68,862

$

67,893

Pretax net realized gains (losses) and net changes in unrealized gains (losses) on investments for the years ended December 31 are summarized below.

(in thousands)

 

2022

 

2021

 

2020

Net realized gains (losses):

Fixed income:

Available-for-sale

$

(2,997)

$

1,859

$

3,872

Equity securities

20,287

62,512

15,796

Investment in unconsolidated investees

570,952

(61)

(187)

Other

273

(88)

(1,596)

Total net realized gains (losses)

$

588,515

$

64,222

$

17,885

Net changes in unrealized gains (losses) on investments:

Equity securities

$

(118,912)

$

58,459

$

32,317

Other invested assets

(2,125)

6,799

(216)

Total unrealized gains (losses) on equity securities recognized in net earnings

$

(121,037)

$

65,258

$

32,101

Fixed income:

Available-for-sale

$

(341,944)

$

(71,538)

$

67,350

Investment in unconsolidated investees

(10,994)

(3,047)

3,444

Other

(102)

44

369

Total unrealized gains (losses) recognized in other comprehensive earnings

$

(353,040)

$

(74,541)

$

71,163

Net realized gains (losses) and changes in unrealized gains (losses) on investments

$

114,438

$

54,939

$

121,149

The change in unrealized gain (loss) position was due to an increase in interest rates, decreasing the fair value of fixed income securities, as well as a decline in equity market returns during the year.

The following is a summary of the disposition of fixed income securities and equities for the years ended December 31, with separate presentations for sales and calls/maturities:

SALES

Gross Realized

Net Realized

(in thousands)

 

Proceeds

 

Gains

 

Losses

 

Gain (Loss)

2022

Available-for-sale

$

51,355

$

287

$

(2,849)

$

(2,562)

Equities

62,212

21,623

(1,336)

20,287

2021

Available-for-sale

$

65,262

$

2,161

$

(815)

$

1,346

Equities

180,256

64,298

(1,786)

62,512

2020

Available-for-sale

$

84,697

$

5,454

$

(1,777)

$

3,677

Equities

79,368

25,338

(9,542)

15,796

CALLS/MATURITIES

Gross Realized

Net Realized

(in thousands)

 

Proceeds

 

Gains

 

Losses

 

Gain (Loss)

2022

Available-for-sale

$

1,393,704

$

196

$

(55)

$

141

2021

Available-for-sale

$

376,751

$

638

$

(125)

$

513

2020

Available-for-sale

$

283,107

$

821

$

(27)

$

794

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of December 31, 2022 and 2021, are summarized below:

2022

Quoted in Active

Significant Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

(in thousands)

 

 (Level 1)

 

(Level 2)

 

(Level 3)

 

Total

Fixed income securities - available-for-sale

U.S. government

$

$

454,021

$

$

454,021

U.S. agency

73,063

73,063

Non-U.S. government & agency

5,847

5,847

Agency MBS

331,806

331,806

ABS/CMBS/MBS*

240,736

240,736

Corporate

980,676

53,654

1,034,330

Municipal

527,147

527,147

Total fixed income securities - available-for-sale

$

$

2,613,296

$

53,654

$

2,666,950

Equity securities

496,731

39

1,612

498,382

Total

$

496,731

$

2,613,335

$

55,266

$

3,165,332

*

Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

2021

Quoted in Active

Significant Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

(in thousands)

 

 (Level 1)

 

(Level 2)

 

(Level 3)

 

Total

Fixed income securities - available-for-sale

U.S. government

$

$

134,554

$

$

134,554

U.S. agency

32,760

32,760

Non-U.S. government & agency

8,481

8,481

Agency MBS

367,187

367,187

ABS/CMBS/MBS*

264,054

264,054

Corporate

913,577

43,518

957,095

Municipal

645,756

645,756

Total fixed income securities - available-for-sale

$

$

2,366,369

$

43,518

$

2,409,887

Equity securities

613,712

64

613,776

Total

$

613,712

$

2,366,433

$

43,518

$

3,023,663

*

Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

The following table summarizes changes in the balance of Regulation D private placement securities whose fair value was measured using significant unobservable inputs (Level 3).

(in thousands)

 

Level 3 Securities

Balance as of January 1, 2022

$

43,518

Net realized and unrealized gains (losses)

Included in net earnings as a part of:

Net investment income

(693)

Net realized gains

(432)

Included in other comprehensive earnings

(7,291)

Total net realized and unrealized gains (losses)

$

(8,416)

Purchases

21,261

Transfers out of Level 3

(1,097)

Balance as of December 31, 2022

$

55,266

Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in net realized gains

$

(432)

Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in other comprehensive earnings

$

(7,291)

The amortized cost and estimated fair value of fixed income securities at December 31, 2022, by contractual maturity, are shown as follows:

(in thousands)

 

Amortized Cost

 

Fair Value

Due in one year or less 

$

332,951

$

331,761

Due after one year through five years

916,676

873,530

Due after five years through 10 years

522,104

474,025

Due after 10 years

523,729

415,092

ABS/CMBS/MBS*

649,813

572,542

Total available-for-sale

$

2,945,273

$

2,666,950

*Asset-backed, commercial mortgage-backed and mortgage-backed securities

Expected maturities may differ from contractual maturities due to call provisions on some existing securities.

The amortized cost and fair value of available-for-sale securities at December 31, 2022 and 2021 are presented in the tables below. Amortized cost does not include the $20.2 million and $16.4 million of accrued interest receivable as of December 31, 2022 and 2021, respectively.

2022

Allowance

 

Gross

 

Gross

Amortized

for Credit

Unrealized

Unrealized

(in thousands)

 

Cost

 

Losses

 

Gains

 

Losses

 

Fair Value

U.S. government

$

462,884

$

$

8

$

(8,871)

$

454,021

U.S. agency

75,074

26

(2,037)

73,063

Non-U.S. government & agency

6,798

(951)

5,847

Agency MBS

373,687

336

(42,217)

331,806

ABS/CMBS/MBS*

276,126

(8)

62

(35,444)

240,736

Corporate

1,122,097

(331)

541

(87,977)

1,034,330

Municipal

628,607

1,265

(102,725)

527,147

Total fixed income

$

2,945,273

$

(339)

$

2,238

$

(280,222)

$

2,666,950

2021

Allowance

 

Gross

 

Gross

Amortized

for Credit

Unrealized

Unrealized

(in thousands)

 

Cost

 

Losses

 

Gains

 

Losses

 

Fair Value

U.S. government

$

127,752

$

$

6,846

$

(44)

$

134,554

U.S. agency

30,403

2,374

(17)

32,760

Non-U.S. government & agency

8,297

338

(154)

8,481

Agency MBS

362,861

9,277

(4,951)

367,187

ABS/CMBS/MBS*

264,273

2,120

(2,339)

264,054

Corporate

925,394

(441)

37,247

(5,105)

957,095

Municipal

627,287

22,750

(4,281)

645,756

Total fixed income

$

2,346,267

$

(441)

$

80,952

$

(16,891)

$

2,409,887

*

Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

Asset-Backed, Commercial Mortgage-Backed and Mortgage-Backed Securities

Eighty-three percent of our collateralized securities carry the highest credit rating by one or more major rating agencies and continue to pay according to contractual terms.

For all fixed income securities at an unrealized loss at December 31, 2022, we believe it is probable that we will receive all contractual payments in the form of principal and interest. In addition, we are not required to, nor do we intend to, sell these investments prior to recovering the entire amortized cost basis of each security, which may be at maturity.

Municipal Bonds

As of December 31, 2022, approximately 46 percent of the municipal fixed income securities in the investment portfolio were general obligations of state and local governments and the remaining 54 percent were revenue based. Eighty-eight percent of our municipal fixed income securities were rated AA or better while 99 percent were rated A or better.

ALLOWANCE FOR CREDIT LOSSES AND UNREALIZED LOSSES ON FIXED INCOME SECURITIES

A reversible allowance for credit losses is required to be recognized on available-for-sale fixed income securities. Available-for-sale securities in the fixed income portfolio are subjected to several criteria to determine if those securities should be included in the allowance for expected credit loss evaluation, including:

Changes in technology that may impair the earnings potential of the investment,

The discontinuance of a segment of business that may affect future earnings potential,

Reduction of or non-payment of interest and/or principal,

Specific concerns related to the issuer’s industry or geographic area of operation,

Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and

Downgrades in credit quality by a major rating agency.

If changes in interest rates and credit spreads do not reasonably explain the unrealized loss for an available-for-sale security, or if any of the criteria above indicate a potential credit loss, the security is subjected to a discounted cash flow analysis. Inputs into the discounted cash flow analysis include prepayment assumptions for structured securities, default rates and recoverability rates based on credit rating. The allowance for any security is limited to the amount that the fair value is below amortized cost. As of December 31, 2022, the discounted cash flow analysis resulted in an allowance for credit losses on 14 securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:

(in thousands)

 

2022

 

2021

Beginning balance

$

441

$

397

Increase to allowance from securities for which credit losses were not previously recorded

337

4

Reduction from securities sold during the period

(671)

(4)

Net increase (decrease) from securities that had an allowance at the beginning of the period

232

44

Ending balance

$

339

$

441

Net realized gains included $0.1 million of losses on fixed income securities for which we no longer had the intent to hold until recovery and for which the cost basis was written down to fair value. No such losses were recognized in 2021. All fixed income securities continue to pay the expected coupon payments. We believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position.

As of December 31, 2022, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,473 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $280.2 million in associated unrealized losses represents 9.5 percent of the fixed income portfolio’s cost basis and 8.6 percent of total invested assets. Isolated to these securities, unrealized losses at the end of 2022 increased compared to the previous year due to increasing interest rates which reduce the fair value of fixed income securities. Of the total 1,473 securities, 518 have been in an unrealized loss position for 12 consecutive months or longer. The following table illustrates the total value of fixed income securities that were in an unrealized loss position as of December 31, 2022 and 2021. All fixed income securities continue to pay the expected coupon payments and we believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position.

December 31, 2022

December 31, 2021

 

 

12 Mos.

 

 

 

12 Mos.

 

(in thousands)

 

< 12 Mos.

 

& Greater

 

Total

 

< 12 Mos.

 

& Greater

 

Total

U.S. government

Fair value

$

399,361

$

8,828

$

408,189

$

2,942

$

$

2,942

Amortized cost

407,340

9,720

417,060

2,986

2,986

Unrealized loss

$

(7,979)

$

(892)

$

(8,871)

$

(44)

$

$

(44)

U.S. agency

Fair value

$

32,987

$

2,170

$

35,157

$

1,498

$

$

1,498

Amortized cost

34,627

2,567

37,194

1,515

1,515

Unrealized loss

$

(1,640)

$

(397)

$

(2,037)

$

(17)

$

$

(17)

Non-U.S. government & agency

Fair value

$

3,626

$

2,221

$

5,847

$

4,346

$

$

4,346

Amortized cost

3,798

3,000

6,798

4,500

4,500

Unrealized loss

$

(172)

$

(779)

$

(951)

$

(154)

$

$

(154)

Agency MBS

Fair value

$

197,252

$

117,851

$

315,103

$

102,145

$

62,669

$

164,814

Amortized cost

212,776

144,544

357,320

104,336

65,429

169,765

Unrealized loss

$

(15,524)

$

(26,693)

$

(42,217)

$

(2,191)

$

(2,760)

$

(4,951)

ABS/CMBS/MBS*

Fair value

$

96,754

$

136,149

$

232,903

$

150,997

$

3,935

$

154,932

Amortized cost

104,724

163,623

268,347

153,235

4,036

157,271

Unrealized loss

$

(7,970)

$

(27,474)

$

(35,444)

$

(2,238)

$

(101)

$

(2,339)

Corporate

Fair value

$

660,830

$

323,337

$

984,167

$

217,791

$

53,818

$

271,609

Amortized cost

697,437

374,707

1,072,144

221,010

55,704

276,714

Unrealized loss

$

(36,607)

$

(51,370)

$

(87,977)

$

(3,219)

$

(1,886)

$

(5,105)

Municipal

Fair value

$

228,827

$

204,324

$

433,151

$

162,998

$

15,037

$

178,035

Amortized cost

255,240

280,636

535,876

166,602

15,714

182,316

Unrealized loss

$

(26,413)

$

(76,312)

$

(102,725)

$

(3,604)

$

(677)

$

(4,281)

Total fixed income

Fair value

$

1,619,637

$

794,880

$

2,414,517

$

642,717

$

135,459

$

778,176

Amortized cost

1,715,942

978,797

2,694,739

654,184

140,883

795,067

Unrealized loss

$

(96,305)

$

(183,917)

$

(280,222)

$

(11,467)

$

(5,424)

$

(16,891)

*

Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

OTHER INVESTED ASSETS

We had $47.9 million of other invested assets at December 31, 2022, compared to $50.5 million at the end of 2021. Other invested assets include investments in low-income housing tax credit (LIHTC) partnerships, membership stock in the Federal Home Loan Bank of Chicago (FHLBC) and investments in private funds. Our LIHTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investments’ net asset value.

Our LIHTC interests had a balance of $13.5 million at December 31, 2022, compared to $16.6 million at December 31, 2021, and recognized a total tax benefit of $3.4 million during 2022, compared to $3.6 million during 2021 and $3.5 million during 2020. Our unfunded commitment for our LIHTC investments totaled $1.3 million at December 31, 2022 and will be paid out in installments through 2035.

Our investments in private funds totaled $28.4 million at December 31, 2022, compared to $28.6 million at December 31, 2021, and we had $4.9 million of associated unfunded commitments at December 31, 2022. Our interest in private funds is generally restricted from being transferred or otherwise redeemed without prior consent by the respective entities and the timed dissolution of the partnerships would trigger redemption.

Restricted Assets

As of December 31, 2022, $57.3 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of the FHLBC stock provides. On November 10, 2021 RLI Insurance Company borrowed $50.0 million from the FHLBC, which was outstanding as of December 31, 2022.

As of December 31, 2022, fixed income securities with a carrying value of $88.6 million were on deposit with regulatory authorities as required by law.