Investments

12 Months Ended

Dec. 31, 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. 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)	2023		2022		2021
Interest on fixed income securities	$	103,446	$	77,164	$	60,624
Dividends on equity securities		12,238		11,912		11,787
Interest on cash, short-term investments and other invested assets		10,940		2,467		2,639
Gross investment income	$	126,624	$	91,543	$	75,050
Less investment expenses		(6,241)		(5,465)		(6,188)
Net investment income	$	120,383	$	86,078	$	68,862

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)	2023		2022		2021
Net realized gains (losses):
Fixed income:
Available-for-sale	$	(3,641)	$	(2,997)	$	1,859
Equity securities		22,232		20,287		62,512
Investment in unconsolidated investees		14,084		570,952		(61)
Other		(157)		273		(88)
Total net realized gains (losses)	$	32,518	$	588,515	$	64,222
Net changes in unrealized gains (losses) on investments:
Equity securities	$	65,655	$	(118,912)	$	58,459
Other invested assets		(868)		(2,125)		6,799
Total unrealized gains (losses) on equity securities recognized in net earnings	$	64,787	$	(121,037)	$	65,258
Fixed income:
Available-for-sale	$	79,782	$	(341,944)	$	(71,538)
Investment in unconsolidated investees		(290)		(10,994)		(3,047)
Other		(33)		(102)		44
Total unrealized gains (losses) recognized in other comprehensive earnings	$	79,459	$	(353,040)	$	(74,541)
Net realized gains (losses) and changes in unrealized gains (losses) on investments	$	176,764	$	114,438	$	54,939

The change in the portfolio’s unrealized gain (loss) position was due to a rally in fixed income securities, as well as strong 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)
2023
Available-for-sale	$	49,960	$	451	$	(2,174)	$	(1,723)
Equities		51,881		23,482		(1,250)		22,232
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

CALLS/MATURITIES			Gross Realized				Net Realized
(in thousands)	Proceeds		Gains		Losses		Gain (Loss)
2023
Available-for-sale	$	506,910	$	39	$	(162)	$	(123)
2022
Available-for-sale	$	1,393,704	$	196	$	(55)	$	141
2021
Available-for-sale	$	376,751	$	638	$	(125)	$	513

FAIR VALUE MEASUREMENTS

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

	2023
	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	$	—	$	308,031	$	—	$	308,031
U.S. agency		—		59,826		—		59,826
Non-U.S. government & agency		—		3,882		—		3,882
Agency MBS		—		425,285		—		425,285
ABS/CMBS/MBS*		—		281,182		—		281,182
Corporate		—		1,164,548		60,471		1,225,019
Municipal		—		552,624		—		552,624
Total fixed income securities - available-for-sale	$	—	$	2,795,378	$	60,471	$	2,855,849
Equity securities		588,416		—		1,625		590,041
Total	$	588,416	$	2,795,378	$	62,096	$	3,445,890

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

	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

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
Included in other comprehensive earnings		2,461
Purchases		7,921
Sales		(3,552)
Balance as of December 31, 2023	$	62,096
Change in unrealized gains during the period for Level 3 assets held at period-end - included in other comprehensive earnings	$	2,461

The amortized cost and estimated fair value of fixed income securities at December 31, 2023, by contractual maturity, are shown as follows:

(in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	157,831	$	156,463
Due after one year through five years		904,769		874,375
Due after five years through 10 years		674,761		654,068
Due after 10 years		548,021		464,476
ABS/CMBS/MBS*		769,009		706,467
Total available-for-sale	$	3,054,391	$	2,855,849

*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, 2023 and 2022 are presented in the tables below. Amortized cost does not include the $23 million and $20 million of accrued interest receivable as of December 31, 2023 and 2022, respectively.

	2023
			Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized
(in thousands)	Cost		Losses		Gains		Losses		Fair Value
U.S. government	$	312,632	$	—	$	1,257	$	(5,858)	$	308,031
U.S. agency		60,763		—		652		(1,589)		59,826
Non-U.S. government & agency		4,800		—		—		(918)		3,882
Agency MBS		460,551		—		2,636		(37,902)		425,285
ABS/CMBS/MBS*		308,458		(3)		611		(27,884)		281,182
Corporate		1,273,187		(303)		8,766		(56,631)		1,225,019
Municipal		634,000		—		2,238		(83,614)		552,624
Total fixed income	$	3,054,391	$	(306)	$	16,160	$	(214,396)	$	2,855,849

	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

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

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, 2023, 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)	2023		2022
Beginning balance	$	339	$	441
Increase to allowance from securities for which credit losses were not previously recorded		71		337
Reduction from securities sold during the period		(154)		(671)
Net increase (decrease) from securities that had an allowance at the beginning of the period		50		232
Ending balance	$	306	$	339

Net realized gains included $2 million of losses 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. In 2022, less than $1 million in such losses were recognized. 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, 2023, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,267 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $214 million in associated unrealized losses represents 7 percent of the fixed income portfolio’s cost basis and 6 percent of total invested assets. Isolated to these securities, unrealized losses at the end of 2023 decreased compared to the previous year due to positive price movements as markets rallied in the later part of 2023. Of the total 1,267 securities, 1,138 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, 2023 and 2022. We believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position.

	December 31, 2023						December 31, 2022
				12 Mos.						12 Mos.
(in thousands)	< 12 Mos.		& Greater		Total		< 12 Mos.		& Greater		Total
U.S. government
Fair value	$	37,718	$	204,556	$	242,274	$	399,361	$	8,828	$	408,189
Amortized cost		37,950		210,182		248,132		407,340		9,720		417,060
Unrealized loss	$	(232)	$	(5,626)	$	(5,858)	$	(7,979)	$	(892)	$	(8,871)
U.S. agency
Fair value	$	8,736	$	29,632	$	38,368	$	32,987	$	2,170	$	35,157
Amortized cost		8,790		31,167		39,957		34,627		2,567		37,194
Unrealized loss	$	(54)	$	(1,535)	$	(1,589)	$	(1,640)	$	(397)	$	(2,037)
Non-U.S. government & agency
Fair value	$	—	$	3,882	$	3,882	$	3,626	$	2,221	$	5,847
Amortized cost		—		4,800		4,800		3,798		3,000		6,798
Unrealized loss	$	—	$	(918)	$	(918)	$	(172)	$	(779)	$	(951)
Agency MBS
Fair value	$	61,196	$	275,707	$	336,903	$	197,252	$	117,851	$	315,103
Amortized cost		61,714		313,091		374,805		212,776		144,544		357,320
Unrealized loss	$	(518)	$	(37,384)	$	(37,902)	$	(15,524)	$	(26,693)	$	(42,217)
ABS/CMBS/MBS*
Fair value	$	12,240	$	211,436	$	223,676	$	96,754	$	136,149	$	232,903
Amortized cost		12,367		239,193		251,560		104,724		163,623		268,347
Unrealized loss	$	(127)	$	(27,757)	$	(27,884)	$	(7,970)	$	(27,474)	$	(35,444)
Corporate
Fair value	$	67,402	$	822,731	$	890,133	$	660,830	$	323,337	$	984,167
Amortized cost		68,345		878,419		946,764		697,437		374,707		1,072,144
Unrealized loss	$	(943)	$	(55,688)	$	(56,631)	$	(36,607)	$	(51,370)	$	(87,977)
Municipal
Fair value	$	61,218	$	391,361	$	452,579	$	228,827	$	204,324	$	433,151
Amortized cost		61,697		474,496		536,193		255,240		280,636		535,876
Unrealized loss	$	(479)	$	(83,135)	$	(83,614)	$	(26,413)	$	(76,312)	$	(102,725)
Total fixed income
Fair value	$	248,510	$	1,939,305	$	2,187,815	$	1,619,637	$	794,880	$	2,414,517
Amortized cost		250,863		2,151,348		2,402,211		1,715,942		978,797		2,694,739
Unrealized loss	$	(2,353)	$	(212,043)	$	(214,396)	$	(96,305)	$	(183,917)	$	(280,222)

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

OTHER INVESTED ASSETS

We had $59 million of other invested assets at December 31, 2023, compared to $48 million at the end of 2022. Other invested assets include investments in low-income housing tax credit partnerships (LIHTC) and historic tax credit partnerships (HTC), membership stock 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 investments’ net asset value.

Our LIHTC interests had a balance of $10 million at December 31, 2023, compared to $13 million at December 31, 2022. Our LIHTC interests recognized amortization of $3 million as a component of income tax expense in 2023, compared to $3 million in 2022 and $3 million in 2021. Additionally, our LIHTC recognized a total tax benefit of $3 million during 2023, compared to $3 million during 2022 and $4 million during 2021. Our unfunded commitment for our LIHTC investments was less than $1 million at December 31, 2023 and will be paid out in installments through 2035.

Our HTC investment had a balance of $13 million at December 31, 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 $6 million was recognized from our HTC investment during 2023,

compared to $5 million during 2022 and $4 million during 2021. Our HTC recognized $4 million of amortization as a component of income tax expense during 2023.

Our investments in private funds totaled $28 million at December 31, 2023 and 2022, and we had $4 million of associated unfunded commitments at December 31, 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.

Restricted Assets

As of December 31, 2023, $59 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, 2023, RLI Insurance Company borrowed $50 million from the FHLBC, which was outstanding as of December 31, 2023.

As of December 31, 2023, fixed income securities with a carrying value of $93 million were on deposit with regulatory authorities as required by law.