Investments

9 Months Ended

Sep. 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 the 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 nine-month periods ended September 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	$	25,983	$	145	$	(1,035)	$	(890)
Equity securities		36,708		15,990		(101)		15,889
2022
Fixed income securities - available-for-sale	$	48,559	$	286	$	(2,481)	$	(2,195)
Equity securities		59,264		20,410		(609)		19,801
Calls/Maturities			Gross Realized				Net Realized
(in thousands)	Proceeds		Gains		Losses		Gain (Loss)
2023
Fixed income securities - available-for-sale	$	434,263	$	38	$	(236)	$	(198)
2022
Fixed income securities - available-for-sale	$	176,991	$	142	$	(55)	$	87

FAIR VALUE MEASUREMENTS

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

	As of September 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	$	—	$	321,611	$	—	$	321,611
U.S. agency		—		48,368		—		48,368
Non-U.S. government & agency		—		3,811		—		3,811
Agency MBS		—		399,381		—		399,381
ABS/CMBS/MBS*		—		265,779		—		265,779
Corporate		—		1,097,093		56,291		1,153,384
Municipal		—		525,293		—		525,293
Total fixed income securities - available-for-sale	$	—	$	2,661,336	$	56,291	$	2,717,627
Equity securities		532,856		—		1,580		534,436
Total	$	532,856	$	2,661,336	$	57,871	$	3,252,063

	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)		(377)
Purchases		5,475
Sales / Calls / Maturities		(2,493)
Balance as of September 30, 2023	$	57,871
Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in other comprehensive earnings (loss)	$	(377)

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

	September 30, 2023
(in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	176,148	$	174,377
Due after one year through five years		909,286		858,578
Due after five years through 10 years		653,649		596,523
Due after 10 years		547,547		422,989
ABS/CMBS/MBS*		760,155		665,160
Total available-for-sale	$	3,046,785	$	2,717,627

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

The amortized cost and fair value of available-for-sale securities at September 30, 2023 and December 31, 2022 are presented in the tables below. Amortized cost does not include the $23 million and $20 million of accrued interest receivable as of September 30, 2023 and December 31, 2022, respectively.

	September 30, 2023
	Cost or		Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized		Fair
(in thousands)	Cost		Losses		Gains		Losses		Value
U.S. government	$	334,650	$	—	$	—	$	(13,039)	$	321,611
U.S. agency		51,477		—		—		(3,109)		48,368
Non-U.S. government & agency		4,800		—		—		(989)		3,811
Agency MBS		457,496		—		7		(58,122)		399,381
ABS/CMBS/MBS*		302,659		(4)		65		(36,941)		265,779
Corporate		1,253,152		(700)		952		(100,020)		1,153,384
Municipal		642,551		—		85		(117,343)		525,293
Total Fixed Income	$	3,046,785	$	(704)	$	1,109	$	(329,563)	$	2,717,627
	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 September 30, 2023, the discounted cash flow analysis resulted in an allowance for credit losses on 19 securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Beginning balance	$	434	$	292	$	339	$	441
Increase to allowance from securities for which credit losses were not previously recorded		281		168		25		292
Reduction from securities sold during the period		—		(166)		—		(619)
Reductions from intent to sell securities		—		—		—		(17)
Net increase (decrease) from securities that had an allowance at the beginning of the period		(11)		33		340		230
Balance as of September 30,	$	704	$	327	$	704	$	327

During the first nine months of 2023, $2 million of realized losses were recognized on fixed income securities for which the cost basis was written down to fair value due to a credit event, restructurings and losses on securities for which we no longer had the intent to hold until recovery. We recognized less than $1 million of losses on securities for which we no longer had the intent to hold until recovery during the first nine months of 2022.

As of September 30, 2023, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,547 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $330 million in associated unrealized losses represents 11 percent of the fixed income portfolio’s cost basis and 10 percent of total invested assets. Isolated to these securities, unrealized losses increased through the first nine months of 2023, as interest rates increased during the period. Of the total 1,547 securities, 1,200 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 September 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.

	September 30, 2023						December 31, 2022
(in thousands)	< 12 Mos.		12 Mos. & Greater		Total		< 12 Mos.		12 Mos. & Greater		Total
U.S. government
Fair value	$	82,683	$	238,928	$	321,611	$	399,361	$	8,828	$	408,189
Amortized cost		86,186		248,464		334,650		407,340		9,720		417,060
Unrealized loss	$	(3,503)	$	(9,536)	$	(13,039)	$	(7,979)	$	(892)	$	(8,871)
U.S. agency
Fair value	$	15,658	$	32,710	$	48,368	$	32,987	$	2,170	$	35,157
Amortized cost		16,304		35,173		51,477		34,627		2,567		37,194
Unrealized loss	$	(646)	$	(2,463)	$	(3,109)	$	(1,640)	$	(397)	$	(2,037)
Non-U.S. government
Fair value	$	—	$	3,811	$	3,811	$	3,626	$	2,221	$	5,847
Amortized cost		—		4,800		4,800		3,798		3,000		6,798
Unrealized Loss	$	—	$	(989)	$	(989)	$	(172)	$	(779)	$	(951)
Agency MBS
Fair value	$	138,173	$	260,503	$	398,676	$	197,252	$	117,851	$	315,103
Amortized cost		143,662		313,136		456,798		212,776		144,544		357,320
Unrealized loss	$	(5,489)	$	(52,633)	$	(58,122)	$	(15,524)	$	(26,693)	$	(42,217)
ABS/CMBS/MBS*
Fair value	$	41,219	$	217,289	$	258,508	$	96,754	$	136,149	$	232,903
Amortized cost		41,882		253,567		295,449		104,724		163,623		268,347
Unrealized loss	$	(663)	$	(36,278)	$	(36,941)	$	(7,970)	$	(27,474)	$	(35,444)
Corporate
Fair value	$	274,290	$	804,638	$	1,078,928	$	660,830	$	323,337	$	984,167
Amortized cost		287,456		891,492		1,178,948		697,437		374,707		1,072,144
Unrealized loss	$	(13,166)	$	(86,854)	$	(100,020)	$	(36,607)	$	(51,370)	$	(87,977)
Municipal
Fair value	$	154,928	$	358,021	$	512,949	$	228,827	$	204,324	$	433,151
Amortized cost		159,582		470,710		630,292		255,240		280,636		535,876
Unrealized loss	$	(4,654)	$	(112,689)	$	(117,343)	$	(26,413)	$	(76,312)	$	(102,725)
Total fixed income
Fair value	$	706,951	$	1,915,900	$	2,622,851	$	1,619,637	$	794,880	$	2,414,517
Amortized cost		735,072		2,217,342		2,952,414		1,715,942		978,797		2,694,739
Unrealized loss	$	(28,121)	$	(301,442)	$	(329,563)	$	(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 September 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	$	2,440,094	$	2,160,142	$	(279,952)	85.0	%
2	BBB	Baa		431,695		388,396		(43,299)	13.1	%
3	BB	Ba		48,627		44,282		(4,345)	1.3	%
4	B	B		29,382		28,045		(1,337)	0.4	%
5	CCC	Caa		2,616		1,986		(630)	0.2	%
6	CC or lower	Ca or lower		—		—		—	0.0	%
		Total	$	2,952,414	$	2,622,851	$	(329,563)	100.0	%

Other Invested Assets

We had $60 million of other invested assets at September 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 $11 million at September 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 third 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 nine-months ended September 30, 2023, our LIHTC interest recognized amortization of $2.3 million and a total benefit of $2.4 million, compared to $2.5 million of amortization and $2.6 million of tax benefit for the same period in 2022. Our unfunded commitment for our LIHTC investments was less than $1 million at September 30, 2023 and will be paid out in installments through 2035.

Our HTC investment had a balance of $14 million at September 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 $1.4 million was recognized from our HTC investment during the third quarter of 2023, compared to $1.3 million in the third quarter of 2022. For the nine-months ended September 30, 2023, our HTC investment recognized a total benefit of $4.3 million, compared to $3.9 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 third quarter of 2023 and $3.4 million of amortization during the first nine months of 2023. Our unfunded commitment for our HTC investment totaled $1 million at September 30, 2023 and is expected be paid during 2023.

As of September 30, 2023, $57 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 September 30, 2023, $50 million of borrowings were outstanding with the FHLBC.

Our investments in private funds totaled $27 million as of September 30, 2023, down from $28 million as of December 31, 2022, and had $5 million of associated unfunded commitments at September 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 $56 million of investments in unconsolidated investees at September 30, 2023, compared to $58 million at December 31, 2022. At September 30, 2023, our investment in Prime Holdings Insurance Services, Inc. (Prime) was $56 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 $18 million and $125 million, respectively, at September 30, 2023, compared to $23 million and $36 million, respectively, at December 31, 2022.