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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2020
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements Recurring fair value measurements The following describes the valuation methodologies generally used by the independent pricing sources, or by us, to measure financial instruments at fair value, including the general classification of such financial instruments pursuant to the valuation hierarchy. Level 1 measurements
• | Fixed income securities: Consist of primarily U.S. Treasury securities with valuations derived from quoted prices for identical instruments in active markets that we can access.
• | Equity securities: Consist of actively traded, exchange-listed equity securities, including exchange traded funds (“ETFs”), with valuations derived from quoted prices for identical assets in active markets that we can access.
• | Other: Includes money market funds and treasury bills with valuations derived from quoted prices for identical assets in active markets that we can access.
Level 2 measurements
• | Fixed income securities:
Corporate Debt & U.S. Government and Agency Bonds are valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the valuation process. Obligations of U.S. States & Political Subdivisions are valued by tracking, capturing, and analyzing quotes for active issues and trades reported via the Municipal Securities Rulemaking Board records. Daily briefings and reviews of current economic conditions, trading levels, spread relationships, and the slope of the yield curve provide further data for evaluation. Residential Mortgage-Backed Securities ("RMBS") are valued by monitoring interest rate movements, and other pertinent data daily. Incoming market data is enriched to derive spread, yield and/or price data as appropriate, enabling known data points to be extrapolated for valuation application across a range of related securities. Commercial Mortgage-Backed Securities ("CMBS") are valued using techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. Evaluation uses regular reviews of the inputs for securities covered, including executed trades, broker quotes, credit information, collateral attributes and/or cash flow waterfall as applicable. Asset-Backed Securities ("ABS") are valued using spreads and other information solicited from market buy-and-sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. Cash flows are generated for each tranche, benchmark yields are determined, and deal collateral performance and tranche level attributes including trade activity, bids, and offers are applied, resulting in tranche specific prices. Collateralized loan obligations ("CLOs") are valued by evaluating manager rating, seniority in the capital structure, assumptions about prepayment, default and recovery and their impact on cash flow generation. Loan level net asset values are determined and aggregated for tranches and as a final step prices are checked against available recent trade activity. Level 3 measurements
• | Real estate acquired is valued at the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the appraised value is based upon our historical sales experience adjusted for current trends.
Assets measured at fair value, by hierarchy level, as of June 30, 2020 and December 31, 2019 are shown in tables 8.1a and 8.1b below. The fair value of the assets is estimated using the process described above, and more fully in Note 3 - “Significant Accounting Policies” of the notes to the consolidated financial statements in our 2019 Annual Report on Form 10-K.
Assets carried at fair value by hierarchy level as of June 30, 2020
Table | 8.1a |  |  |  |  |  |  |  |
(In thousands) |  | Total Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 348,617 |  |  | $ | 164,052 |  |  | $ | 184,565 |  |  | $ | — |
Obligations of U.S. states and political subdivisions |  | 1,788,977 |  |  | — |  |  | 1,788,977 |  |  | — |
Corporate debt securities |  | 2,646,831 |  |  | — |  |  | 2,646,831 |  |  | — |
ABS |  | 199,556 |  |  | — |  |  | 199,556 |  |  | — |
RMBS |  | 299,492 |  |  | — |  |  | 299,492 |  |  | — |
CMBS |  | 273,899 |  |  | — |  |  | 273,899 |  |  | — |
CLOs |  | 304,890 |  |  | — |  |  | 304,890 |  |  | — |
Total fixed income securities |  | 5,862,262 |  |  | 164,052 |  |  | 5,698,210 |  |  | — |
Equity securities |  | 17,953 |  |  | 17,953 |  |  | — |  |  | — |
Other (1) |  | 362,417 |  |  | 362,417 |  |  | — |  |  | — |
Real estate acquired (2) |  | 1,963 |  |  | — |  |  | — |  |  | 1,963 |
Total |  | $ | 6,244,595 |  |  | $ | 544,422 |  |  | $ | 5,698,210 |  |  | $ | 1,963 |
Assets carried at fair value by hierarchy level as of December 31, 2019
Table | 8.1b |  |  |  |  |  |  |  |
(In thousands) |  | Total Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 196,203 |  |  | $ | 34,240 |  |  | $ | 161,963 |  |  | $ | — |
Obligations of U.S. states and political subdivisions |  | 1,653,865 |  |  | — |  |  | 1,653,865 |  |  | — |
Corporate debt securities |  | 2,785,122 |  |  | — |  |  | 2,785,122 |  |  | — |
ABS |  | 229,664 |  |  | — |  |  | 229,664 |  |  | — |
RMBS |  | 268,586 |  |  | — |  |  | 268,586 |  |  | — |
CMBS |  | 278,986 |  |  | — |  |  | 278,986 |  |  | — |
CLOs |  | 325,466 |  |  | — |  |  | 325,466 |  |  | — |
Total fixed income securities |  | 5,737,892 |  |  | 34,240 |  |  | 5,703,652 |  |  | — |
Equity securities |  | 17,328 |  |  | 17,328 |  |  | — |  |  | — |
Other (1) |  | 164,693 |  |  | 164,693 |  |  | — |  |  | — |
Real estate acquired (2) |  | 7,252 |  |  | — |  |  | — |  |  | 7,252 |
Total |  | $ | 5,927,165 |  |  | $ | 216,261 |  |  | $ | 5,703,652 |  |  | $ | 7,252 |
(1) | Includes money market funds included in “Cash and Cash Equivalents” and “Restricted Cash and Cash Equivalents” on the consolidated balance sheets.
(2) | Real estate acquired through claim settlement, which is held for sale, is reported in “Other assets” on the consolidated balance sheets.
Certain financial instruments, including insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level 2) approximated their fair values. Additional fair value disclosures related to our investment portfolio are included in Note 7 – “Investments.” Reconciliations of Level 3 assets For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three and six months ended June 30, 2020 and 2019 is shown in tables 8.2a through 8.2d below. There were no losses included in earnings for those periods attributable to the change in unrealized losses on assets still held at the end of the applicable period.
Fair value roll-forward for financial instruments classified as Level 3 for the three months ended June 30, 2020
Table | 8.2a |  |  |  |
(In thousands) |  | Fixed income |  | Real Estate Acquired
Balance at March 31, 2020 |  | $ | — |  |  | $ | 6,226 |
Purchases |  | — |  |  | 1,806 |
Sales |  | — |  |  | (6,526 | )
Included in earnings and reported as losses incurred, net |  | — |  |  | 457 |
Balance at June 30, 2020 |  | $ | — |  |  | $ | 1,963 |
Fair value roll-forward for financial instruments classified as Level 3 for the six months ended June 30, 2020
Table | 8.2b |  |  |  |
(In thousands) |  | Fixed income |  | Real Estate Acquired
Balance at December 31, 2019 |  | $ | — |  |  | $ | 7,252 |
Purchases |  | — |  |  | 5,921 |
Sales |  | — |  |  | (11,725 | )
Included in earnings and reported as losses incurred, net |  | — |  |  | 515 |
Balance at June 30, 2020 |  | $ | — |  |  | $ | 1,963 |
Fair value roll-forward for financial instruments classified as Level 3 for the three months ended June 30, 2019
Table | 8.2c |  |  |  |
(In thousands) |  | Fixed income |  | Real Estate Acquired
Balance at March 31, 2019 |  | $ | — |  |  | $ | 11,639 |
Purchases |  | — |  |  | 7,107 |
Sales |  | — |  |  | (8,152 | )
Included in earnings and reported as losses incurred, net |  | — |  |  | (344 | )
Balance at June 30, 2019 |  | $ | — |  |  | $ | 10,250 |
Fair value roll-forward for financial instruments classified as Level 3 for the six months ended June 30, 2019
Table | 8.2d |  |  |  |
(In thousands) |  | Fixed income |  | Real Estate Acquired
Balance at December 31, 2018 |  | $ | 13 |  |  | $ | 14,535 |
Purchases |  | — |  |  | 15,191 |
Sales |  | (13 | ) |  | (19,024 | )
Included in earnings and reported as losses incurred, net |  | — |  |  | (452 | )
Balance at June 30, 2019 |  | $ | — |  |  | $ | 10,250 |
Financial assets and liabilities not measured at fair value Other invested assets include an investment in FHLB stock that is carried at cost, which due to restrictions that require it to be redeemed or sold only to the security issuer at par value, approximates fair value. The fair value of other invested assets is categorized as Level 2. Financial liabilities include our outstanding debt obligations. The fair values of our 5.75% Notes and 9% Debentures were based on observable market prices. The fair value of the FHLB Advance was estimated using cash flows discounted at current incremental borrowing rates for similar borrowing arrangements. In all cases the fair values of the financial liabilities below are categorized as Level 2. Table 8.3 presents the carrying value and fair value of our financial assets and liabilities disclosed, but not carried, at fair value at June 30, 2020 and December 31, 2019.
Financial assets and liabilities not measured at fair value
Table | 8.3 |  |  |  |  |  |  |  |
|  | June 30, 2020 |  | December 31, 2019
(In thousands) |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Financial assets |  |  |  |  |  |  |  |
Other invested assets |  | $ | 3,100 |  |  | $ | 3,100 |  |  | $ | 3,100 |  |  | $ | 3,100 |
Financial liabilities |  |  |  |  |  |  |  |
FHLB Advance |  | $ | 155,000 |  |  | $ | 161,773 |  |  | $ | 155,000 |  |  | $ | 156,422 |
5.75% Senior Notes |  | 421,443 |  |  | 441,545 |  |  | 420,867 |  |  | 471,827 |
9% Convertible Junior Subordinated Debentures |  | 256,872 |  |  | 305,562 |  |  | 256,872 |  |  | 346,289 |
Total financial liabilities |  | $ | 833,315 |  |  | $ | 908,880 |  |  | $ | 832,739 |  |  | $ | 974,538 |

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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