Fair Value

9 Months Ended

Sep. 30, 2020

Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).

The levels in the hierarchy are defined as follows:

Level 1: Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement

Following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy. The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisers and others.

The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company's review process includes, but

is not limited to: (i) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the average number of prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; (iv) a comparison of the fair value estimates to the Company’s knowledge of the current market; (v) a comparison of the pricing services' fair values to other pricing services' fair values for the same investments; and (vi) periodic back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. A price source hierarchy was maintained in order to determine which price source would be used (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value. The Company did not adjust any of the prices obtained from the independent pricing sources at September 30, 2020.

In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Where quotes are unavailable, fair value is determined by the Investment Manager using quantitative and qualitative assessments such as internally modeled values. Of the $26.04 billion of financial assets and liabilities measured at fair value at September 30, 2020, approximately $120.0 million, or 0.5%, were priced using non-binding broker-dealer quotes or modeled valuations. Of the $22.90 billion of financial assets and liabilities measured at fair value at December 31, 2019, approximately $179.6 million, or 0.8%, were priced using non-binding broker-dealer quotes or modeled valuations.

Fixed maturities

The Company uses the market approach valuation technique to estimate the fair value of its fixed maturity securities, when possible. The market approach includes obtaining prices from independent pricing services, such as index providers and pricing vendors, as well as to a lesser extent quotes from broker-dealers. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs

including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.

The following describes the significant inputs generally used to determine the fair value of the Company’s fixed maturity securities by asset class:

•U.S. government and government agencies — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The Company determined that all U.S. Treasuries would be classified as Level 1 securities due to observed levels of trading activity, the high number of strongly correlated pricing quotes received on U.S. Treasuries and other factors. The fair values of U.S. government agency securities are generally determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.

•Corporate bonds — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for corporate bonds are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.

•Mortgage-backed securities — valuations provided by independent pricing services, substantially all through pricing vendors and index providers with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the expected average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.

•Municipal bonds — valuations provided by independent pricing services, with all prices provided

through index providers and pricing vendors. The fair values of these securities are generally determined using spreads obtained from broker-dealers who trade in the relevant security market, trade prices and the new issue market. As the significant inputs used in the pricing process for municipal bonds are observable market inputs, the fair value of these securities are classified within Level 2.

•Commercial mortgage-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for commercial mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.

•Non-U.S. government securities — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally based on international indices or valuation models which include daily observed yield curves, cross-currency basis index spreads and country credit spreads. As the significant inputs used in the pricing process for non-U.S. government securities are observable market inputs, the fair value of these securities are classified within Level 2.

•Asset-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for asset-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.

Equity securities

The Company determined that exchange-traded equity securities would be included in Level 1 as their fair values are based on quoted market prices in active markets. Certain equity securities are included in Level 2 of the valuation hierarchy as the significant inputs used in the pricing process for such securities are observable market inputs. Other equity securities are included in Level 3 due to the lack of an available independent price source for such securities. As the significant inputs used to price these securities are unobservable, the fair value of such securities are classified as Level 3.

Other investments

The Company determined that exchange-traded investments in mutual funds would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other investments also include term loan investments for which fair values are estimated by using quoted prices of term loan investments with similar characteristics, pricing models or matrix pricing. Such investments are generally classified within Level 2. The fair values for certain of the Company’s other investments are determined using net asset values as advised by external fund managers. The net asset value is based on the fund manager’s valuation of the underlying holdings in accordance with the fund’s governing documents. In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. A small number of securities are included in Level 3 due to the lack of an available independent price source for such securities.

Derivative instruments

The Company’s futures contracts, foreign currency forward contracts, interest rate swaps and other derivatives trade in the over-the-counter derivative market. The Company uses the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. As the significant inputs used in the pricing process for these derivative instruments are observable market inputs, the fair value of these securities are classified within Level 2.

Short-term investments

The Company determined that certain of its short-term investments held in highly liquid money market-type funds, Treasury bills and commercial paper would be included in Level 1 as their fair values are based on quoted market prices in active markets. The fair values of other short-term investments are generally determined using the spread above the risk-free yield curve and are classified within Level 2.

The following table presents the Company’s financial assets and liabilities measured at fair value by level at September 30, 2020:


			Estimated Fair Value Measurements Using:
	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured at fair value (1):
Available for sale securities:
Fixed maturities:
Corporate bonds	$	7,965,599	$	—	$	7,965,586	$	13
Mortgage backed securities	717,081		—		716,873		208
Municipal bonds	527,410		—		527,410		—
Commercial mortgage backed securities	374,360		—		374,360		—
U.S. government and government agencies	4,861,349		4,715,551		145,798		—
Non-U.S. government securities	2,302,646		—		2,302,646		—
Asset backed securities	1,767,192		—		1,763,845		3,347
Total	18,515,637		4,715,551		13,796,518		3,568

Short-term investments	2,039,097		2,013,582		25,515		—

Equity securities, at fair value	1,502,015		1,452,713		6,616		42,686





Derivative instruments (4)	130,494		—		130,494		—

Fair value option:
Corporate bonds	780,237		—		779,273		964
Non-U.S. government bonds	44,963		—		44,963		—
Mortgage backed securities	13,026		—		13,026		—
Municipal bonds	—		—		—		—
Commercial mortgage backed securities	1,150		—		1,150		—
Asset backed securities	175,790		—		175,790		—
U.S. government and government agencies	4,363		4,252		111		—
Short-term investments	468,704		360,883		107,821		—
Equity securities	91,445		27,766		156		63,523
Other investments	1,152,517		52,080		1,034,251		66,186
Other investments measured at net asset value (2)	1,017,380
Total	3,749,575		444,981		2,156,541		130,673

Total assets measured at fair value	$	25,936,818	$	8,626,827	$	16,115,684	$	176,927

Liabilities measured at fair value:
Contingent consideration liabilities	$	(630)	$	—	$	—	$	(630)
Securities sold but not yet purchased (3)	(24,909)		—		(24,909)		—
Derivative instruments (4)	(82,457)		—		(82,457)		—
Total liabilities measured at fair value	$	(107,996)	$	—	$	(107,366)	$	(630)

(1) In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See note 7, “—Securities Lending Agreements.”

(2) In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.

(3) Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.

(4) See note 9.

The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31, 2019:


			Estimated Fair Value Measurements Using:
	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured at fair value (1):
Available for sale securities:
Fixed maturities:
Corporate bonds	$	6,406,591	$	—	$	6,397,740	$	8,851
Mortgage backed securities	562,309		—		562,055		254
Municipal bonds	881,926		—		881,926		—
Commercial mortgage backed securities	733,108		—		733,108		—
U.S. government and government agencies	4,916,592		4,805,581		111,011		—
Non-U.S. government securities	2,078,757		—		2,078,757		—
Asset backed securities	1,683,753		—		1,678,791		4,962
Total	17,263,036		4,805,581		12,443,388		14,067

Short-term investments	956,546		904,804		51,742		—

Equity securities, at fair value	850,283		789,596		4,798		55,889





Derivative instruments (4)	48,946		—		48,946		—

Fair value option:
Corporate bonds	488,402		—		487,470		932
Non-U.S. government bonds	50,465		—		50,465		—
Mortgage backed securities	11,947		—		11,947		—
Municipal bonds	377		—		377		—
Commercial mortgage backed securities	1,134		—		1,134		—
Asset backed securities	200,163		—		200,163		—
U.S. government and government agencies	1,962		1,852		110		—
Short-term investments	377,014		333,320		43,694		—
Equity securities	102,697		43,962		641		58,094
Other investments	1,418,273		53,287		1,296,169		68,817
Other investments measured at net asset value (2)	1,011,043
Total	3,663,477		432,421		2,092,170		127,843

Total assets measured at fair value	$	22,782,288	$	6,932,402	$	14,641,044	$	197,799

Liabilities measured at fair value:
Contingent consideration liabilities	$	(7,998)	$	—	$	—	$	(7,998)
Securities sold but not yet purchased (3)	(66,257)		—		(66,257)		—
Derivative instruments (4)	(39,750)		—		(39,750)		—
Total liabilities measured at fair value	$	(114,005)	$	—	$	(106,007)	$	(7,998)

(4) See note 9.

The following table presents a reconciliation of the beginning and ending balances for all financial assets and liabilities measured at fair value on a recurring basis using Level 3 inputs:


	Assets												Liabilities
s	Available For Sale				Fair Value Option						Fair Value
	Structured Securities (1)		Corporate Bonds		Corporate Bonds		Other Investments		Equity Securities		Equity Securities		Contingent Consideration Liabilities
Three Months Ended September 30, 2020
Balance at beginning of period	$	3,450	$	857	$	998	$	46,453	$	61,447	$	51,981	$	(1,250)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)	(75)		(5,872)		(34)		885		2,076		(946)		—
Included in other comprehensive income	191		6,936		—		—		—		—		—
Purchases, issuances, sales and settlements
Purchases	—		—		—		22,436		—		—		—
Issuances	—		—		—		—		—		—		—
Sales	—		—		—		(3,588)		—		(8,349)		—
Settlements	(11)		—		—		—		—		—		620
Transfers in and/or out of Level 3	—		(1,908)		—		—		—		—		—
Balance at end of period	$	3,555	$	13	$	964	$	66,186	$	63,523	$	42,686	$	(630)

Three Months Ended September 30, 2019
Balance at beginning of period	$	290	$	7,642	$	26,103	$	95,273	$	56,145	$	51,212	$	(7,825)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)	—		—		(1,227)		(411)		127		(26)		(79)
Included in other comprehensive income	—		(301)		—		—		—		—		—
Purchases, issuances, sales and settlements
Purchases	—		—		—		3,713		—		12,119		—
Issuances	—		—		—		—		—		—		—
Sales	—		—		(2,097)		(80)		—		(27,982)		—
Settlements	(18)		(456)		—		—		—		—		560
Transfers in and/or out of Level 3	5,449		1,860		—		(13,052)		—		—		—
Balance at end of period	$	5,721	$	8,745	$	22,779	$	85,443	$	56,272	$	35,323	$	(7,344)

Nine Months Ended September 30, 2020
Balance at beginning of year	$	5,216	$	8,851	$	932	$	68,817	$	58,094	$	55,889	$	(7,998)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)	(130)		(5,865)		(34)		(129)		5,429		7,132		(72)
Included in other comprehensive income	(118)		397		—		—		—		—		—
Purchases, issuances, sales and settlements
Purchases	—		—		66		22,460		—		3,464		—
Issuances	—		—		—		—		—		—		—
Sales	—		—		—		(27,946)		—		(23,799)		—
Settlements	(1,413)		(1,462)		—		—		—		—		7,440
Transfers in and/or out of Level 3	—		(1,908)		—		2,984		—		—		—
Balance at end of period	$	3,555	$	13	$	964	$	66,186	$	63,523	$	42,686	$	(630)

Nine Months Ended September 30, 2019
Balance at beginning of year	$	313	$	8,141	$	5,758	$	62,705	$	—	$	—	$	(66,665)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)	1,757		—		(1,566)		(11,727)		127		(26)		(1,410)
Included in other comprehensive income	5		(317)		—		—		—		—		—
Purchases, issuances, sales and settlements
Purchases	—		429		—		3,713		—		12,119		—
Issuances	—		—		—		—		—		—		(548)
Sales	(1,757)		—		(5,332)		(228)		—		(27,982)		—
Settlements	(46)		(1,368)		—		(600)		—		—		61,279
Transfers in and/or out of Level 3	5,449		1,860		23,919		31,580		56,145		51,212		—
Balance at end of period	$	5,721	$	8,745	$	22,779	$	85,443	$	56,272	$	35,323	$	(7,344)

(1) Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.

(2) Gains or losses were included in net realized gains (losses).

Financial Instruments Disclosed, But Not Carried, At Fair Value

The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at September 30, 2020, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

At September 30, 2020, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $2.86 billion and had a fair value of $3.51 billion. At December 31, 2019, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $1.87 billion and had a fair value of $2.34 billion. The fair values of the senior notes were obtained from a third party pricing service and are based on observable market inputs. As such, the fair values of the senior notes are classified within Level 2.