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Investments
 12 Months Ended
Dec. 31, 2021
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)

 

2021

 

 

2020

 

 

2019

 

Interest on fixed income securities

 

$

60,624

 

 

$

59,755

 

 

$

60,364

 

Dividends on equity securities

 

 

11,787

 

 

 

9,728

 

 

 

9,950

 

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

 

 

2,639

 

 

 

3,379

 

 

 

3,674

 

Gross investment income

 

$

75,050

 

 

$

72,862

 

 

$

73,988

 

Less investment expenses

 

 

(6,188

)

 

 

(4,969

)

 

 

(5,118

)

Net investment income

 

$

68,862

 

 

$

67,893

 

 

$

68,870

 

 

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)

 

2021

 

 

2020

 

 

2019

 

Net realized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income:

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

$

1,859

 

 

$

3,872

 

 

$

3,184

 

Equity securities

 

 

62,512

 

 

 

15,796

 

 

 

14,445

 

Other

 

 

(149

)

 

 

(1,783

)

 

 

(109

)

Total net realized gains (losses)

 

$

64,222

 

 

$

17,885

 

 

$

17,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net changes in unrealized gains (losses) on investments:

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

58,459

 

 

$

32,317

 

 

$

78,389

 

Other invested assets

 

 

6,799

 

 

 

(216

)

 

 

(299

)

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

 

$

65,258

 

 

$

32,101

 

 

$

78,090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income:

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

$

(71,538

)

 

$

67,350

 

 

$

83,758

 

Investment in unconsolidated investees

 

 

(3,047

)

 

 

3,444

 

 

 

1,109

 

Other

 

 

44

 

 

 

369

 

 

 

—

 

Total unrealized gains (losses) recognized in other comprehensive earnings

 

$

(74,541

)

 

$

71,163

 

 

$

84,867

 

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

 

$

54,939

 

 

$

121,149

 

 

$

180,477

 

 

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 strong equity market returns.

 

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)

 

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

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

$

196,799

 

 

$

4,368

 

 

$

(2,167

)

 

$

2,201

 

Equities

 

 

62,172

 

 

 

16,938

 

 

 

(2,493

)

 

 

14,445

 

 

 

CALLS/MATURITIES

 

 

 

 

 

Gross Realized

 

 

Net Realized

 

(in thousands)

 

Proceeds

 

 

Gains

 

 

Losses

 

 

Gain (Loss)

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

$

376,751

 

 

$

638

 

 

$

(125

)

 

$

513

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

$

283,107

 

 

$

821

 

 

$

(27

)

 

$

794

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

$

201,698

 

 

$

1,004

 

 

$

(21

)

 

$

983

 

 

FAIR VALUE MEASUREMENTS

 

Assets measured at fair value on a recurring basis as of December 31, 2021 and 2020, are summarized below:

 

 

 

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

 

Other invested assets

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

613,712

 

 

$

2,366,433

 

 

$

43,518

 

 

$

3,023,663

 

 

 

 

2020

 

 

 

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

 

$

—

 

 

$

183,357

 

 

$

—

 

 

$

183,357

 

U.S. agency

 

 

—

 

 

 

32,872

 

 

 

—

 

 

 

32,872

 

Non-U.S. government & agency

 

 

—

 

 

 

10,965

 

 

 

—

 

 

 

10,965

 

Agency MBS

 

 

—

 

 

 

402,071

 

 

 

—

 

 

 

402,071

 

ABS/CMBS/MBS*

 

 

—

 

 

 

218,373

 

 

 

—

 

 

 

218,373

 

Corporate

 

 

—

 

 

 

798,794

 

 

 

17,798

 

 

 

816,592

 

Municipal

 

 

—

 

 

 

532,396

 

 

 

—

 

 

 

532,396

 

Total fixed income securities - available-for-sale

 

$

—

 

 

$

2,178,828

 

 

$

17,798

 

 

$

2,196,626

 

Equity securities

 

 

523,923

 

 

 

83

 

 

 

—

 

 

 

524,006

 

Other invested assets

 

 

6,068

 

 

 

—

 

 

 

—

 

 

 

6,068

 

Total

 

$

529,991

 

 

$

2,178,911

 

 

$

17,798

 

 

$

2,726,700

 

 

*

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

 

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

 

(in thousands)

 

Level 3 Securities

 

Balance as of January 1, 2021

 

$

17,798

 

Net realized and unrealized gains (losses)

 

 

 

 

Included in net earnings as a part of:

 

 

 

 

Net investment income

 

 

(53

)

Net realized gains

 

 

(367

)

Included in other comprehensive earnings

 

 

(170

)

Total net realized and unrealized gains (losses)

 

$

(590

)

Purchases

 

 

26,310

 

Balance as of December 31, 2021

 

$

43,518

 

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

 

$

(367

)

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

 

$

(170

)

 

The amortized cost and estimated fair value of fixed income securities at December 31, 2021, by contractual maturity, are shown as follows:

 

(in thousands)

 

Amortized Cost

 

 

Fair Value

 

Due in one year or less

 

$

57,625

 

 

$

58,134

 

Due after one year through five years

 

 

626,953

 

 

 

647,068

 

Due after five years through 10 years

 

 

537,777

 

 

 

560,653

 

Due after 10 years

 

 

496,778

 

 

 

512,791

 

ABS/CMBS/MBS*

 

 

627,134

 

 

 

631,241

 

Total available-for-sale

 

$

2,346,267

 

 

$

2,409,887

 

 

*

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, 2021 and 2020 are presented in the tables below. Amortized cost does not include the $16.4 million and $14.9 million of accrued interest receivable as of December 31, 2021 and 2020, respectively.

 

 

 

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

 

 

 

2020

 

 

 

 

 

 

 

Allowance

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

for Credit

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(in thousands)

 

Cost

 

 

Losses

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. government

 

$

170,110

 

 

$

—

 

 

$

13,504

 

 

$

(257

)

 

$

183,357

 

U.S. agency

 

 

28,902

 

 

 

—

 

 

 

3,970

 

 

 

—

 

 

 

32,872

 

Non-U.S. government & agency

 

 

10,298

 

 

 

—

 

 

 

667

 

 

 

—

 

 

 

10,965

 

Agency MBS

 

 

384,015

 

 

 

—

 

 

 

18,789

 

 

 

(733

)

 

 

402,071

 

ABS/CMBS/MBS*

 

 

213,223

 

 

 

(17

)

 

 

5,580

 

 

 

(413

)

 

 

218,373

 

Corporate

 

 

753,404

 

 

 

(380

)

 

 

64,501

 

 

 

(933

)

 

 

816,592

 

Municipal

 

 

501,515

 

 

 

—

 

 

 

31,099

 

 

 

(218

)

 

 

532,396

 

Total fixed income

 

$

2,061,467

 

 

$

(397

)

 

$

138,110

 

 

$

(2,554

)

 

$

2,196,626

 

 

*

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, 2021, 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, 2021, approximately 48 percent of the municipal fixed income securities in the investment portfolio were general obligations of state and local governments and the remaining 52 percent were revenue based. Ninety 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

 

We adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which required the recognition of a reversible allowance for credit losses 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, 2021, the discounted cash flow analysis resulted in an allowance for credit losses on 7 securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:

 

 

(in thousands)

 

2021

 

 

2020

 

Beginning balance

 

$

397

 

 

$

—

 

Adoption impact of ASU 2016-13

 

 

-

 

 

$

28

 

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

 

 

4

 

 

 

369

 

Reduction from securities sold during the period

 

 

(4

)

 

 

-

 

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

 

 

44

 

 

 

-

 

Ending balance

 

$

441

 

 

$

397

 

 

No net realized losses were recognized on fixed income securities during 2021 in relation to 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, compared to $0.6 million in 2020. 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, 2021, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 443 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $16.9 million in associated unrealized losses represents 0.7 percent of the fixed income portfolio’s cost basis and 0.5 percent of total invested assets. Isolated to these securities, unrealized losses at the end of 2021 increased compared to the previous year due to increasing interest rates which reduce the fair value of fixed income securities. Of the total 443 securities, 76 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, 2021 and 2020. 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, 2021

 

 

December 31, 2020

 

 

 

 

 

 

 

12 Mos.

 

 

 

 

 

 

 

 

 

 

12 Mos.

 

 

 

 

 

(in thousands)

 

< 12 Mos.

 

 

& Greater

 

 

Total

 

 

< 12 Mos.

 

 

& Greater

 

 

Total

 

U.S. government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

2,942

 

 

$

—

 

 

$

2,942

 

 

$

5,680

 

 

$

—

 

 

$

5,680

 

Amortized cost

 

 

2,986

 

 

 

—

 

 

 

2,986

 

 

 

5,937

 

 

 

—

 

 

 

5,937

 

Unrealized loss

 

$

(44

)

 

$

—

 

 

$

(44

)

 

$

(257

)

 

$

—

 

 

$

(257

)

U.S. agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

1,498

 

 

$

—

 

 

$

1,498

 

 

$

—

 

 

$

—

 

 

$

—

 

Amortized cost

 

 

1,515

 

 

 

—

 

 

 

1,515

 

 

 

—

 

 

 

—

 

 

 

—

 

Unrealized loss

 

$

(17

)

 

$

—

 

 

$

(17

)

 

$

—

 

 

$

—

 

 

$

—

 

Non-U.S. government & agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

4,346

 

 

$

—

 

 

$

4,346

 

 

$

—

 

 

$

—

 

 

$

—

 

Amortized cost

 

 

4,500

 

 

 

—

 

 

 

4,500

 

 

 

—

 

 

 

—

 

 

 

—

 

Unrealized loss

 

$

(154

)

 

$

—

 

 

$

(154

)

 

$

—

 

 

$

—

 

 

$

—

 

Agency MBS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

102,145

 

 

$

62,669

 

 

$

164,814

 

 

$

43,999

 

 

$

—

 

 

$

43,999

 

Amortized cost

 

 

104,336

 

 

 

65,429

 

 

 

169,765

 

 

 

44,732

 

 

 

—

 

 

 

44,732

 

Unrealized loss

 

$

(2,191

)

 

$

(2,760

)

 

$

(4,951

)

 

$

(733

)

 

$

—

 

 

$

(733

)

ABS/CMBS/MBS*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

150,997

 

 

$

3,935

 

 

$

154,932

 

 

$

32,771

 

 

$

16,161

 

 

$

48,932

 

Amortized cost

 

 

153,235

 

 

 

4,036

 

 

 

157,271

 

 

 

33,094

 

 

 

16,251

 

 

 

49,345

 

Unrealized loss

 

$

(2,238

)

 

$

(101

)

 

$

(2,339

)

 

$

(323

)

 

$

(90

)

 

$

(413

)

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

217,791

 

 

$

53,818

 

 

$

271,609

 

 

$

52,655

 

 

$

6,235

 

 

$

58,890

 

Amortized cost

 

 

221,010

 

 

 

55,704

 

 

 

276,714

 

 

 

53,440

 

 

 

6,383

 

 

 

59,823

 

Unrealized loss

 

$

(3,219

)

 

$

(1,886

)

 

$

(5,105

)

 

$

(785

)

 

$

(148

)

 

$

(933

)

Municipal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

162,998

 

 

$

15,037

 

 

$

178,035

 

 

$

25,676

 

 

$

—

 

 

$

25,676

 

Amortized cost

 

 

166,602

 

 

 

15,714

 

 

 

182,316

 

 

 

25,894

 

 

 

—

 

 

 

25,894

 

Unrealized loss

 

$

(3,604

)

 

$

(677

)

 

$

(4,281

)

 

$

(218

)

 

$

—

 

 

$

(218

)

Total fixed income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

642,717

 

 

$

135,459

 

 

$

778,176

 

 

$

160,781

 

 

$

22,396

 

 

$

183,177

 

Amortized cost

 

 

654,184

 

 

 

140,883

 

 

 

795,067

 

 

 

163,097

 

 

 

22,634

 

 

 

185,731

 

Unrealized loss

 

$

(11,467

)

 

$

(5,424

)

 

$

(16,891

)

 

$

(2,316

)

 

$

(238

)

 

$

(2,554

)

 

*

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

 

Other Invested Assets

 

We had $50.5 million of other invested assets at December 31, 2021, compared to $54.2 million at the end of 2020. 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 $16.6 million at December 31, 2021, compared to $20.3 million at December 31, 2020, and recognized a total tax benefit of $3.6 million during 2021, compared to $3.5 million during 2020 and $2.5 million during 2019. Our unfunded commitment for our LIHTC investments totaled $1.4 million at December 31, 2021 and will be paid out in installments through 2035.

 

Our investments in private funds totaled $28.6 million at December 31, 2021, compared to $32.1 million at December 31, 2020, and we had $8.8 million of associated unfunded commitments at December 31, 2021. 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. At December 31, 2020, we had a publicly traded common stock with short-term restrictions that limited our ability to sell the security without prior approval. During 2021, our investment in this security became unrestricted and the investment was included in our equity portfolio as of December 31, 2021.

 

 

Restricted Assets

 

As of December 31, 2021, $64.1 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, 2021.

 

As of December 31, 2021, fixed income securities with a carrying value of $86.2 million were on deposit with regulatory authorities as required by law.