Investments

6 Months Ended

Jun. 30, 2023

Investments Debt And Equity Securities [Abstract]

Investments

2. INVESTMENTS

Our investments are primarily composed of fixed income debt securities and common stock equity securities. We carry our equity securities at fair value and categorize all of our debt securities as available-for-sale, which are carried at fair value.

Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date. The following is a summary of the disposition of fixed income and equity securities for the six-month periods ended June 30, 2023 and 2022:

Sales	Proceeds		Gross Realized				Net Realized
(in thousands)	From Sales		Gains		Losses		Gain (Loss)
2023
Fixed income securities - available-for-sale	$	20,729	$	99	$	(910)	$	(811)
Equity securities		22,029		8,841		(101)		8,740
2022
Fixed income securities - available-for-sale	$	19,390	$	215	$	(432)	$	(217)
Equity securities		53,525		19,244		(15)		19,229
Calls/Maturities			Gross Realized				Net Realized
(in thousands)	Proceeds		Gains		Losses		Gain (Loss)
2023
Fixed income securities - available-for-sale	$	349,734	$	37	$	(43)	$	(6)
2022
Fixed income securities - available-for-sale	$	137,499	$	76	$	(55)	$	21

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 are summarized below:

	As of June 30, 2023
	Quoted Prices in		Significant Other		Significant
	Active 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	$	—	$	315,976	$	—	$	315,976
U.S. agency		—		43,719		—		43,719
Non-U.S. government & agency		—		3,960		—		3,960
Agency MBS		—		372,030		—		372,030
ABS/CMBS/MBS*		—		252,330		—		252,330
Corporate		—		1,095,038		52,466		1,147,504
Municipal		—		553,581		—		553,581
Total fixed income securities - available-for-sale	$	—	$	2,636,634	$	52,466	$	2,689,100
Equity securities		550,986		—		1,580		552,566
Total	$	550,986	$	2,636,634	$	54,046	$	3,241,666

	As of December 31, 2022
	Quoted Prices in		Significant Other		Significant
	Active 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

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

(in thousands)	Level 3 Securities
Balance as of January 1, 2023	$	55,266
Net realized and unrealized gains (losses)
Included in other comprehensive earnings (loss)		551
Sales / Calls / Maturities		(1,771)
Balance as of June 30, 2023	$	54,046
Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in other comprehensive earnings (loss)	$	551

The amortized cost and fair value of available-for-sale fixed income securities by contractual maturity as of June 30, 2023 were as follows:

	June 30, 2023
(in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	195,245	$	193,554
Due after one year through five years		910,005		861,351
Due after five years through 10 years		567,327		529,864
Due after 10 years		573,985		479,971
ABS/CMBS/MBS*		700,358		624,360
Total available-for-sale	$	2,946,920	$	2,689,100

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

The amortized cost and fair value of available-for-sale securities at June 30, 2023 and December 31, 2022 are presented in the tables below. Amortized cost does not include the $22 million and $20 million of accrued interest receivable as of June 30, 2023 and December 31, 2022, respectively.

	June 30, 2023
	Cost or		Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized		Fair
(in thousands)	Cost		Losses		Gains		Losses		Value
U.S. government	$	325,893	$	—	$	—	$	(9,917)	$	315,976
U.S. agency		45,937		—		—		(2,218)		43,719
Non-U.S. government & agency		4,799		—		—		(839)		3,960
Agency MBS		414,503		—		206		(42,679)		372,030
ABS/CMBS/MBS*		285,855		(5)		78		(33,598)		252,330
Corporate		1,227,628		(429)		1,872		(81,567)		1,147,504
Municipal		642,305		—		1,397		(90,121)		553,581
Total Fixed Income	$	2,946,920	$	(434)	$	3,553	$	(260,939)	$	2,689,100
	December 31, 2022
	Cost or		Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized		Fair
(in thousands)	Cost		Losses		Gains		Losses		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

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

Allowance for Credit Losses and Unrealized Losses on Fixed Income Securities

A reversable allowance for credit losses is recognized on available-for-sale fixed income securities. Several criteria are reviewed to determine if securities in the fixed income portfolio 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 security’s fair value is below amortized cost. As of June 30, 2023, the discounted cash flow analysis resulted in an allowance for credit losses on 18 securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2023		2022		2023		2022
Beginning balance	$	465	$	594	$	339	$	441
Increase to allowance from securities for which credit losses were not previously recorded		2		149		25		223
Reduction from securities sold during the period		—		(433)		—		(433)
Reductions from intent to sell securities		—		—		—		(17)
Net increase (decrease) from securities that had an allowance at the beginning of the period		(33)		(18)		70		78
Balance as of June 30,	$	434	$	292	$	434	$	292

During the first six months of 2023, net realized gains included $1.7 million of losses on fixed income securities for which the cost basis was written down to fair value due to a credit event and restructurings. We recognized $0.1 million of losses on securities for which we no longer had the intent to hold until recovery during the first six months of 2022.

As of June 30, 2023, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,474 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $261 million in associated unrealized losses represents 9 percent of the fixed income portfolio’s cost basis and 7 percent of total invested assets. Isolated to these securities, unrealized losses decreased through the first six months of 2023, as credit spreads have tightened modestly while interest rates stayed flat during the period. Of the total 1,474 securities, 995 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 June 30, 2023 and December 31, 2022 after factoring in the allowance for credit losses. 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.

	June 30, 2023						December 31, 2022
(in thousands)	< 12 Mos.		12 Mos. & Greater		Total		< 12 Mos.		12 Mos. & Greater		Total
U.S. government
Fair value	$	220,227	$	95,748	$	315,975	$	399,361	$	8,828	$	408,189
Amortized cost		225,987		99,905		325,892		407,340		9,720		417,060
Unrealized loss	$	(5,760)	$	(4,157)	$	(9,917)	$	(7,979)	$	(892)	$	(8,871)
U.S. agency
Fair value	$	33,951	$	9,768	$	43,719	$	32,987	$	2,170	$	35,157
Amortized cost		34,975		10,962		45,937		34,627		2,567		37,194
Unrealized loss	$	(1,024)	$	(1,194)	$	(2,218)	$	(1,640)	$	(397)	$	(2,037)
Non-U.S. government
Fair value	$	658	$	3,302	$	3,960	$	3,626	$	2,221	$	5,847
Amortized cost		702		4,097		4,799		3,798		3,000		6,798
Unrealized Loss	$	(44)	$	(795)	$	(839)	$	(172)	$	(779)	$	(951)
Agency MBS
Fair value	$	141,545	$	216,878	$	358,423	$	197,252	$	117,851	$	315,103
Amortized cost		146,150		254,952		401,102		212,776		144,544		357,320
Unrealized loss	$	(4,605)	$	(38,074)	$	(42,679)	$	(15,524)	$	(26,693)	$	(42,217)
ABS/CMBS/MBS*
Fair value	$	20,483	$	219,639	$	240,122	$	96,754	$	136,149	$	232,903
Amortized cost		21,028		252,692		273,720		104,724		163,623		268,347
Unrealized loss	$	(545)	$	(33,053)	$	(33,598)	$	(7,970)	$	(27,474)	$	(35,444)
Corporate
Fair value	$	429,215	$	607,324	$	1,036,539	$	660,830	$	323,337	$	984,167
Amortized cost		441,843		676,263		1,118,106		697,437		374,707		1,072,144
Unrealized loss	$	(12,628)	$	(68,939)	$	(81,567)	$	(36,607)	$	(51,370)	$	(87,977)
Municipal
Fair value	$	131,486	$	362,776	$	494,262	$	228,827	$	204,324	$	433,151
Amortized cost		133,340		451,043		584,383		255,240		280,636		535,876
Unrealized loss	$	(1,854)	$	(88,267)	$	(90,121)	$	(26,413)	$	(76,312)	$	(102,725)
Total fixed income
Fair value	$	977,565	$	1,515,435	$	2,493,000	$	1,619,637	$	794,880	$	2,414,517
Amortized cost		1,004,025		1,749,914		2,753,939		1,715,942		978,797		2,694,739
Unrealized loss	$	(26,460)	$	(234,479)	$	(260,939)	$	(96,305)	$	(183,917)	$	(280,222)

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

The following table shows the composition of the fixed income securities in unrealized loss positions, after factoring in the allowance for credit losses, at June 30, 2023 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	$	2,269,819	$	2,052,151	$	(217,668)	83.4	%
2	BBB	Baa		404,162		366,729		(37,433)	14.4	%
3	BB	Ba		45,298		41,464		(3,834)	1.5	%
4	B	B		32,264		30,844		(1,420)	0.5	%
5	CCC	Caa		2,396		1,812		(584)	0.2	%
6	CC or lower	Ca or lower		—		—		—	0.0	%
		Total	$	2,753,939	$	2,493,000	$	(260,939)	100.0	%

Other Invested Assets

We had $61 million of other invested assets at June 30, 2023, compared to $48 million at December 31, 2022. Other invested assets include investments in low income housing tax credit partnerships (LIHTC) and historic tax credit partnerships (HTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), and investments in private funds. Our LIHTC and

HTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC, HTC and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investment’s net asset value.

Our LIHTC interests had a balance of $12 million at June 30, 2023, compared to $13 million on December 31, 2022. Our LIHTC interests recognized amortization of $0.8 million as a component of income tax expense and a total tax benefit of $0.8 million during the second quarter of 2023, compared to $0.8 million of amortization and $0.9 million of tax benefit during the same period in 2022. For the six-months ended June 30, 2023, our LIHTC interest recognized amortization of $1.6 million and a total benefit of $1.6 million, compared to $1.7 million of amortization and $1.7 million of tax benefit for the same period in 2022. Our unfunded commitment for our LIHTC investments totaled $1 million at June 30, 2023 and will be paid out in installments through 2035.

Our HTC investment had a balance of $15 million at June 30, 2023, compared to $11 million at December 31, 2022. Through 2022, the investment was accounted for as an investment in unconsolidated investee. Due to the adoption of ASU 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, the investment was reclassified as an other invested asset during 2023. A total tax benefit of $1.5 million was recognized from our HTC investment during the second quarter of 2023, compared to $1.3 million in the second quarter of 2022. For the six-months ended June 30, 2023, our HTC investment recognized a total benefit of $2.9 million, compared to $2.6 million for the same period in 2022. Our HTC investment recognized $1.1 million of amortization as a component of income tax expense during the second quarter of 2023 and $2.3 million of amortization during the first six months of 2023. Our unfunded commitment for our HTC investment totaled $4 million at June 30, 2023 and is expected be paid during 2023.

As of June 30, 2023, $56 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. As of June 30, 2023, $50 million of borrowings were outstanding with the FHLBC.

Our investments in private funds totaled $27 million as of June 30, 2023, down from $28 million as of December 31, 2022, and had $5 million of associated unfunded commitments at June 30, 2023. 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.

Investments in Unconsolidated Investees

We had $55 million of investments in unconsolidated investees at June 30, 2023, compared to $58 million at December 31, 2022. At June 30, 2023, our investment in Prime Holdings Insurance Services, Inc. (Prime) was $55 million and other investments in unconsolidated investees totaled less than $1 million. Through December 31, 2022, our $11 million HTC investment was accounted for as an unconsolidated investee, but was reclassified as an other invested asset during 2023 due to the adoption of ASU 2023-02.

Cash and Short-Term Investments

Cash consists of uninvested balances in bank accounts. Short-term investments consist of investments with original maturities of 90 days or less, primarily AAA-rated government money market funds. Short-term investments are carried at cost. We had a cash and short-term investment balance of $17 million and $271 million, respectively, at June 30, 2023, compared to $23 million and $36 million, respectively, at December 31, 2022.