Fair Value Measurements

12 Months Ended

Dec. 31, 2022

FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company is responsible for the determination of fair value of financial assets and liabilities, including the supporting assumptions and methodologies, and uses independent third-party valuation service providers, broker quotes and internal pricing methodologies to determine fair values. The Company obtains or estimates only one single quote or price for each financial instrument. The Company uses a hierarchical framework for inputs to determine fair value which prioritizes the use of observable inputs and minimizes the use of unobservable inputs. Additionally, the Company categorizes fair value measurements based on the lowest level of input that is considered to be significant to the entire measurement.

The Company classifies its investments in Fixed Maturities as available for sale and reports these investments at fair value. The Company reports equity investments with readily determinable fair values as Equity Securities at Fair Value. Certain investments that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy, but are presented in the following two tables to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets.

NOTE 12. FAIR VALUE MEASUREMENTS (Continued)

The valuation of assets and liabilities measured at fair value in the Company’s Consolidated Balance Sheets at December 31, 2022 is summarized below. The Company has no material liabilities that are measured and reported at fair value.


DOLLARS IN MILLIONS	Fair Value Measurements								Total Fair Value
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Measured at Net Asset Value
Assets:
Fixed Maturities:
U.S. Government and Government Agencies and Authorities	$	103.6	$	424.4	$	—	$	—	$	528.0
States and Political Subdivisions	—		1,568.9		—		—		1,568.9
Foreign Governments	—		4.1		—		—		4.1
Corporate Securities:
Bonds and Notes	—		3,323.4		216.0		—		3,539.4
Redeemable Preferred Stocks	—		1.2		6.8		—		8.0
Collateralized Loan Obligations	—		953.9		—		—		953.9
Other Mortgage- and Asset-backed	—		287.4		5.1		—		292.5
Total Investments in Fixed Maturities	103.6		6,563.3		227.9		—		6,894.8
Equity Securities at Fair Value:
Preferred Stocks:
Finance, Insurance and Real Estate	—		29.0		—		—		29.0
Other Industries	—		9.2		1.6		—		10.8
Common Stocks:
Finance, Insurance and Real Estate	0.9		—		—		—		0.9
Other Industries	0.3		0.4		0.5		—		1.2
Other Equity Interests:
Exchange Traded Funds	12.2		—		—		—		12.2
Limited Liability Companies and Limited Partnerships	—		—		—		189.1		189.1
Total Investments in Equity Securities at Fair Value	13.4		38.6		2.1		189.1		243.2
Convertible Securities at Fair Value	—		43.3		—		—		43.3
Other Liabilities:
Derivative Instruments Not Designated as Hedges	—		1.7		—		—		1.7
Total Assets	$	117.0	$	6,646.9	$	230.0	$	189.1	$	7,183.0
Liabilities:
Accrued Expenses and Other Liabilities:
Derivative Instruments Designated as Cash Flow Hedges	$	—	(0.4)		$	—	$	—	$	(0.4)
Total Liabilities	$	—	$	(0.4)	$	—	$	—	$	(0.4)

NOTE 12. FAIR VALUE MEASUREMENTS (Continued)

The valuation of assets measured at fair value in the Company’s Consolidated Balance Sheets at December 31, 2021 is summarized below.


DOLLARS IN MILLIONS	Fair Value Measurements								Total Fair Value
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Measured at Net Asset Value
Assets:
Fixed Maturities:
U.S. Government and Government Agencies and Authorities	$	132.8	$	504.6	$	—	$	—	$	637.4
States and Political Subdivisions	—		1,890.1		—		—		1,890.1
Foreign Governments	—		5.5		—		—		5.5
Corporate Securities:
Bonds and Notes	—		4,150.1		236.8		—		4,386.9
Redeemable Preferred Stocks	—		1.3		6.1		—		7.4
Collateralized Loan Obligations	—		752.1		—		—		752.1
Other Mortgage- and Asset-backed	—		300.5		7.0		—		307.5
Total Investments in Fixed Maturities	132.8		7,604.2		249.9		—		7,986.9
Equity Securities at Fair Value:
Preferred Stocks:
Finance, Insurance and Real Estate	—		34.2		—		—		34.2
Other Industries	—		16.1		1.5		—		17.6
Common Stocks:

Finance, Insurance and Real Estate	18.9		—		—		—		18.9
Other Industries	2.9		—		—		—		2.9
Other Equity Interests:
Exchange Traded Funds	432.0		—		—		—		432.0
Limited Liability Companies and Limited Partnerships	—		—		—		325.0		325.0
Total Investments in Equity Securities at Fair Value	453.8		50.3		1.5		325.0		830.6


Other Investments:
Convertible Securities at Fair Value	—		46.4		—		—		46.4


Total Assets	$	586.6	$	7,700.9	$	251.4	$	325.0	$	8,863.9
Liabilities:
Accrued Expenses and Other Liabilities:
Derivative Instruments Designated as Cash Flow Hedges	$	—	$	—	$	—	$	—	$	—
Total Liabilities	$	—	$	—	$	—	$	—	$	—

NOTE 12. FAIR VALUE MEASUREMENTS (Continued)

The Company’s investments in Fixed Maturities that are classified as Level 1 primarily consist of U.S. Treasury Bonds and Notes. The Company’s investments in Equity Securities at Fair Value that are classified as Level 1 consist of either investments in publicly-traded common stocks or exchange traded funds. The Company’s investments in Fixed Maturities that are classified as Level 2 primarily consist of investments in corporate bonds, obligations of states and political subdivisions, collateralized loan obligations, and mortgage-backed securities of U.S. government agencies. The Company’s investments in Equity Securities at Fair Value that are classified as Level 2 primarily consist of investments in preferred stocks. The Company’s Derivative Instruments Designated as Fair Value Hedges that are classified as Level 2 primarily consist of hedges against the Company’s available for sale debt securities portfolio. The Company uses a leading, nationally recognized provider of market data and analytics to price the vast majority of the Company’s Level 2 measurements. The provider utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information. Because many fixed maturity securities do not trade on a daily basis, the provider’s evaluated pricing applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. In addition, the provider uses model processes to develop prepayment and interest rate scenarios. The pricing provider’s models and processes also take into account market convention. For each asset class, teams of its evaluators gather information from market sources and integrate relevant credit information, perceived market movements and sector news into the evaluated pricing applications and models. The Company generally validates the measurements obtained from its primary pricing provider by comparing them with measurements obtained from one additional pricing provider that provides either prices from recent market transactions, quotes in inactive markets or evaluations based on its own proprietary models.

The Company investigates significant differences related to the values provided. On completion of its investigation, management exercises judgment to determine the price selected and whether adjustments, if any, to the price obtained from the Company’s primary pricing provider would warrant classification of the price as Level 3. In instances where a measurement cannot be obtained from either pricing provider, the Company generally will evaluate bid prices from one or more binding quotes obtained from market makers to value investments in inactive markets and classified by the Company as Level 2. The Company generally classifies securities when it receives non-binding quotes or indications as Level 3 securities unless the Company can validate the quote or indication against recent transactions in the market.

The table below presents quantitative information about the significant unobservable inputs utilized by the Company in determining fair values for fixed maturity investments in corporate securities classified as Level 3 at December 31, 2022.


DOLLARS IN MILLIONS	Unobservable Input	Total Fair Value		Range of Unobservable Inputs					Weighted-average Yield
Investment-grade	Market Yield	$	56.5	4.6	%	-	14.5	%	9.2	%
Non-investment-grade:
Senior Debt	Market Yield	72.9		4.6		-	36.7		10.9
Junior Debt	Market Yield	42.1		8.8		-	22.5		15.1
Other	Various	56.4
Total Level 3 Fixed Maturity Investments		$	227.9


DOLLARS IN MILLIONS	Unobservable Input	Total Fair Value		Range of Unobservable Inputs					Weighted-average Yield
Investment-grade	Market Yield	$	87.9	2.3	%	-	10.3	%	5.4	%
Non-investment-grade:
Senior Debt	Market Yield	76.1		5.1		-	20.2		8.5
Junior Debt	Market Yield	53.9		6.0		-	27.5		15.0
Other	Various	32.0
Total Level 3 Fixed Maturity Investments		$	249.9

NOTE 12. FAIR VALUE MEASUREMENTS (Continued)

For an investment in a fixed maturity security, an increase in the yield used to determine the fair value of the security will decrease the fair value of the security. A decrease in the yield used to determine fair value will increase the fair value of the security, but for callable securities the fair value increase is generally limited to par, unless the security is currently callable at a premium.

Information by security type pertaining to the changes in the fair value of the Company’s investments classified as Level 3 for the year ended December 31, 2022 is presented below.


DOLLARS IN MILLIONS	Fixed Maturities				Equity Securities
	Corporate Bonds and Notes		Redeemable Preferred Stocks			Other Mortgage- and Asset- backed		Preferred and Common Stocks		Total
Balance at Beginning of Year	$	236.8	$	6.1		$	7.0	$	1.5	$	251.4
Total Losses:
Included in Consolidated Statements of (Loss) Income	(12.7)		—			—		—		(12.7)
Included in Other Comprehensive (Loss) Income	(19.2)		(1.3)			(1.9)		(0.2)		(22.6)
Purchases	107.8		2.0			—		2.7		112.5
Settlements	—		—			—		—		—
Sales	(114.1)		—			—		(1.9)		(116.0)
Transfers into Level 3	23.1		—			—		—		23.1
Transfers out of Level 3	(5.7)		—			—		—		(5.7)
Balance at End of Year	$	216.0	$	6.8		$	5.1	$	2.1	$	230.0

The transfers into and out of Level 3 were due to changes in the availability of market observable inputs.

Information by security type pertaining to the changes in the fair value of the Company’s investments classified as Level 3 for the year ended December 31, 2021 is presented below.


DOLLARS IN MILLIONS	Fixed Maturities						Equity Securities				Total
	Corporate Bonds and Notes		Redeemable Preferred Stocks		Collateralized Loan Obligations		Other Mortgage- and Asset- backed		Preferred and Common Stocks
Balance at Beginning of Year	$	433.0	$	6.2	$	—	$	10.0	$	—		$	449.2
Total Gains (Losses):
Included in Consolidated Statements of (Loss) Income	2.8		—		—		—		—			2.8
Included in Other Comprehensive (Loss) Income	1.2		(0.1)		0.1		(0.5)		0.7			1.4
Purchases	104.6		—		17.7		16.2		1.7			140.2
Settlements	—		—		—		(0.1)		—			(0.1)
Sales	(128.1)		—		(10.0)		(0.2)		—			(138.3)
Transfers into Level 3	8.1		—		10.0		—		1.7			19.8
Transfers out of Level 3	(184.8)		—		(17.8)		(18.4)		(2.6)			(223.6)
Balance at End of Year	$	236.8	$	6.1	$	—	$	7.0	$	1.5		$	251.4

The transfers into and out of Level 3 were due to changes in the availability of market observable inputs.

NOTE 12. FAIR VALUE MEASUREMENTS (Continued)

The table below shows investments reported at fair value using NAV and their unfunded commitments by asset class as of December 31, 2022 and 2021, respectively.


Dollars in Millions	December 31, 2022				December 31, 2021
Asset Class	Fair Value Using NAV		Unfunded Commitments		Fair Value Using NAV		Unfunded Commitments
Reported as Equity Method Limited Liability Investments:
Mezzanine Debt	$	114.3	$	51.6	$	120.0	$	43.3
Senior Debt	21.6		42.0		27.5		46.7
Distressed Debt	9.4		—		21.7		100.1
Secondary Transactions	9.3		1.7		11.7		8.3
Hedge Fund	0.5		—		8.7		—
Leveraged Buyout	8.9		0.6		8.7		0.1
Growth Equity	1.2		—		0.7		—
Real Estate	43.3		—		29.9		—
Other	8.5		—		13.0		—
Total Equity Method Limited Liability Investments	217.0		95.9		241.9		198.5

Reported as Other Equity Interests at Fair Value:
Mezzanine Debt	106.0		56.0		129.3		53.7
Senior Debt	21.9		6.0		29.9		15.1
Distressed Debt	12.5		13.0		44.9		20.0
Secondary Transactions	3.5		4.2		4.0		6.8
Hedge Funds	18.1		—		82.7		—
Leveraged Buyout	21.6		9.0		32.2		6.0
Growth Equity	5.4		7.9		2.0		0.7
Other	0.1		0.2		—		—
Total Reported as Other Equity Interests at Fair Value	189.1		96.3		325.0		102.3

Reported as Equity Securities at Modified Cost:
Other	8.3		—		7.7		—
Total Reported as Equity Securities at Modified Cost	8.3		—		7.7		—


Total Investments in Limited Liability Companies and Limited Partnerships	$	414.4	$	192.2	$	574.6	$	300.8

At December 31, 2022, the Company had unfunded commitments to invest an additional $192.2 million in certain limited liability investment companies and limited partnerships that will be included in Other Equity Interests and Equity Method Limited Liability Investments if funded.

The fund investments included above (excluding Hedge Funds) are not redeemable, because distributions from the funds will be received when underlying investments of the funds are liquidated. The funds are generally expected to have approximately 10 year lives at their inception, but these lives may be extended at the fund manager’s discretion, typically in one or two-year increments.

The hedge fund investments included above, which are carried at fair value, are generally redeemable subject to the redemption notices period. The majority of the hedge fund investments are redeemable monthly or quarterly.

NOTE 12. FAIR VALUE MEASUREMENTS (Continued)

The following table includes information related to the Company’s investments in certain private equity funds or hedge funds that calculate a net asset value per share:


Asset Class						Investment Category Includes
Mezzanine Debt						Funds with investments in junior or subordinated debt and potentially minority equity securities issued by private companies.
Senior Debt						Funds with investments in senior or first lien debt and potentially minority equity securities typically issued by private companies.
Distressed Debt						Funds with debt or minority equity investments that are made opportunistically in companies that are in or near default or under financial strain with potential to have an active role in restructuring company.
Secondary Transactions						Funds that focus on purchasing third party fund interests from investors seeking liquidity within their own portfolio.
Hedge Fund						Funds that focus primarily on investing in public securities with strategy of generating uncorrelated returns to the public markets.
Leveraged Buyout						Funds with control equity investments in more mature, positive cash flowing, private companies that are typically purchased with the use of financial leverage.
Growth Equity						Funds that invest in early or venture stage companies with high growth potential with view towards generating realizations through sale or initial public offering (“IPO”) of company.
Real Estate						Funds with investments in multi-family housing properties.
Other						Consists of direct investments of preferred equity or minority common equity investments into private companies structured as limited partnerships or limited liability companies.

Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value.


	December 31, 2022				December 31, 2021
(Dollars in Millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Loans to Policyholders	$	283.4	$	283.4	$	286.2	$	286.2
Short-term Investments	278.4		278.4		284.1		284.1
Mortgage Loans	91.1		91.1		96.8		96.8
Company-Owned Life Insurance	586.5		586.5		448.1		448.1
Equity Securities at Modified Cost	38.4		38.4		32.3		32.3
Financial Liabilities:
Long-term Debt	$	1,386.9	$	1,195.1	$	1,121.9	$	1,152.1
Policyholder Obligations	601.0		601.0		401.9		401.9

Loans to policyholders are carried at unpaid principal balance which approximates fair value and are categorized as Level 3 within the fair value hierarchy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of payments, the Company believes the carrying value of policy loans approximates fair value. The fair value measurement of Short-term Investments is estimated using inputs that are considered either Level 1 or Level 2 measurements. The Mortgage Loans fair value measurement is considered equal to amortized cost given the short-term nature of the investments. The fair value measurement of Equity Securities at Modified Cost is estimated using inputs that are considered Level 3 measurements. The cash surrender value of Company-Owned Life Insurance approximates fair value. The fair value of Long-term Debt is estimated using quoted prices for similar liabilities in markets that are not active. The inputs used in the valuation are considered Level 2 measurements. Policyholder Obligations presented in the preceding table consist of advances from the FHLB of Chicago, and the inputs used in the valuation are considered Level 2 measurements.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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