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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2022
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. •Fixed income securities: U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies: Securities with valuations derived from quoted prices for identical instruments in active markets that we can access are categorized in Level 1 of the fair value hierarchy. Securities valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information in the valuation process are categorized as Level 2 of the fair value hierarchy. Corporate Debt Bonds are valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the valuation process. These securities are generally categorized in Level 2 of the fair value hierarchy. 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. These securities are generally categorized in Level 2 of the fair value hierarchy. 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. These securities are generally categorized in Level 2 of the fair value hierarchy. 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. These securities are generally categorized in Level 2 of the fair value hierarchy. 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. These securities are generally categorized in Level 2 of the fair value hierarchy. 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. These securities are generally categorized in Level 2 of the fair value hierarchy. Foreign government debt is valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the valuation process. These securities are generally categorized in Level 2 of the fair value hierarchy. Commercial Paper, which has an original maturity greater than 90 days, is valued using market data for comparable instruments of similar maturity and average yields. These securities are generally categorized in Level 2 of the fair value hierarchy. •Equity securities: Consist of actively traded, exchange-listed equity securities, including exchange traded funds (“ETFs”) and Bond Mutual Funds, with valuations derived from quoted prices for identical assets in active markets that we can access. These securities are valued in Level 1 of the fair value hierarchy. •Cash Equivalents: Consists of money market funds and treasury bills with valuations derived from quoted prices for identical assets in active markets that we can access. These securities are valued in level 1 of the fair value hierarchy. Instruments in this category valued using market data for comparable instruments are classified as level 2 in the fair value hierarchy. Assets measured at fair value, by hierarchy level, as of June 30, 2022 and December 31, 2021 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” to the consolidated financial statements in our 2021 Annual Report on Form 10-K.
Assets carried at fair value by hierarchy level as of June 30, 2022
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 |  | $ | 117,319 |  |  | $ | 105,652 |  |  | $ | 11,667 |  |  | $ | — |
Obligations of U.S. states and political subdivisions |  | 2,293,134 |  |  | — |  |  | 2,293,134 |  |  | — |
Corporate debt securities |  | 2,375,053 |  |  | — |  |  | 2,375,053 |  |  | — |
ABS |  | 103,268 |  |  | — |  |  | 103,268 |  |  | — |
RMBS |  | 222,549 |  |  | — |  |  | 222,549 |  |  | — |
CMBS |  | 266,611 |  |  | — |  |  | 266,611 |  |  | — |
CLOs |  | 327,411 |  |  | — |  |  | 327,411 |  |  | — |
Foreign government debt |  | 3,746 |  |  | — |  |  | 3,746 |  |  | — |
Commercial paper |  | 3,729 |  |  | — |  |  | 3,729 |  |  | — |
Total fixed income securities |  | 5,712,820 |  |  | 105,652 |  |  | 5,607,168 |  |  | — |
Equity securities |  | 14,481 |  |  | 14,481 |  |  | — |  |  | — |
Cash equivalents |  | 399,062 |  |  | 394,273 |  |  | 4,789 |  |  | — |
Total |  | $ | 6,126,363 |  |  | $ | 514,406 |  |  | $ | 5,611,957 |  |  | $ | — |
Assets carried at fair value by hierarchy level as of December 31, 2021
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 |  | $ | 133,407 |  |  | $ | 102,153 |  |  | $ | 31,254 |  |  | $ | — |
Obligations of U.S. states and political subdivisions |  | 2,534,653 |  |  | — |  |  | 2,534,653 |  |  | — |
Corporate debt securities |  | 2,765,982 |  |  | — |  |  | 2,765,982 |  |  | — |
ABS |  | 150,710 |  |  | — |  |  | 150,710 |  |  | — |
RMBS |  | 309,110 |  |  | — |  |  | 309,110 |  |  | — |
CMBS |  | 319,130 |  |  | — |  |  | 319,130 |  |  | — |
CLOs |  | 360,939 |  |  | — |  |  | 360,939 |  |  | — |
Foreign government debt |  | 13,650 |  |  | — |  |  | 13,650 |  |  | — |
Total fixed income securities |  | 6,587,581 |  |  | 102,153 |  |  | 6,485,428 |  |  | — |
Equity securities |  | 16,068 |  |  | 16,068 |  |  | — |  |  | — |
Cash equivalents |  | 254,230 |  |  | 254,230 |  |  | — |  |  | — |
Total |  | $ | 6,857,879 |  |  | $ | 372,451 |  |  | $ | 6,485,428 |  |  | $ | — |
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.” In addition to the assets carried at fair value discussed above, we have embedded derivatives carried at fair value related to our Home Re Transactions that are classified as Other liabilities or Other assets in our consolidated balance sheets. The changes in the fair value of the embedded derivatives are reported within Net gains (losses) on investments and other financial instruments on the Consolidated Statement of Operations. The estimated fair value related to our embedded derivatives reflects the present value impact of the variation in investment income on the assets held by the reinsurance trusts and the contractual reference rate on the Home Re Transactions used to calculate the reinsurance premiums we will pay. These liabilities or assets are categorized in Level 3 of the fair value hierarchy. At June 30, 2022 and December 30, 2021, the fair value of the embedded derivatives was a liability of $5.0 million and $1.8 million, respectively. (See Note 4 - "Reinsurance" for more information about our reinsurance programs.) Real estate acquired through claim settlement is carried at fair values and is reported in “Other assets” on the consolidated balance sheet. These assets are categorized as Level 3 of the fair value hierarchy. Activity related to the Level 3 assets and liabilities (including realized and unrealized gains and losses, purchases and sales) were immaterial for the three and six months ended June 30, 2022 and 2021. 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% and 5.25% Notes and 9% Debentures were based on observable market prices. In all cases the fair values of the financial liabilities below are categorized as Level 2. Table 8.2 presents the carrying value and fair value of our financial assets and liabilities disclosed, but not carried, at fair value at June 30, 2022 and December 31, 2021.
Financial assets and liabilities not measured at fair value
Table | 8.2 |  |  |  |  |  |  |  |
|  | June 30, 2022 |  | December 31, 2021
(In thousands) |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Financial assets |  |  |  |  |  |  |  |
Other invested assets |  | $ | 850 |  |  | $ | 850 |  |  | $ | 3,100 |  |  | $ | 3,100 |
Financial liabilities |  |  |  |  |  |  |  |
FHLB Advance |  | — |  |  | — |  |  | 155,000 |  |  | 157,585 |
5.75% Senior Notes |  | 241,583 |  |  | 248,191 |  |  | 241,255 |  |  | 256,213 |
5.25% Senior Notes |  | 640,989 |  |  | 583,044 |  |  | 640,253 |  |  | 686,875 |
9% Convertible Junior Subordinated Debentures |  | 35,339 |  |  | 47,197 |  |  | 110,204 |  |  | 151,000 |
Total financial liabilities |  | $ | 917,911 |  |  | $ | 878,432 |  |  | $ | 1,146,712 |  |  | $ | 1,251,673 |

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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 https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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