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Fair Value Measurements
 9 Months Ended
Sep. 30, 2024
Fair Value Disclosures [Abstract]  
Fair Value Measurements
4.
Fair Value Measurements

 

The accounting standards related to fair value measurements define fair value, establish a framework for measuring fair value, outline a fair value hierarchy based on inputs used to measure fair value, and enhance disclosure requirements for fair value measurements. These standards do not change existing guidance as to whether or not an instrument is carried at fair value. The Company has determined that its fair value measurements are in accordance with the requirements of these accounting standards.

 

The Company’s invested assets are carried at their fair value and are categorized based upon a fair value hierarchy:

 

•
Level 1 – inputs utilize quoted prices (unadjusted) in active markets for identical assets that the Company has the ability to access at the measurement date.

 

•
Level 2 – inputs utilize other than quoted prices included in Level 1 that are observable for similar assets, either directly or indirectly.

 

•
Level 3 – inputs are unobservable for the asset, and include situations where there is little, if any, market activity for the asset.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.

 

The following table presents information about the Company’s invested assets measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

 

 

Fair Value Measurements

 

As of September 30, 2024
(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

890,588

 

 

$

—

 

 

$

—

 

 

$

890,588

 

Obligations of states and political subdivisions

 

 

—

 

 

 

17,173

 

 

 

—

 

 

 

17,173

 

Mortgage-backed securities

 

 

—

 

 

 

47,477

 

 

 

—

 

 

 

47,477

 

Commercial mortgage-backed securities

 

 

—

 

 

 

74,226

 

 

 

—

 

 

 

74,226

 

Asset-backed securities

 

 

—

 

 

 

157,668

 

 

 

—

 

 

 

157,668

 

Corporate bonds

 

 

—

 

 

 

147,397

 

 

 

—

 

 

 

147,397

 

Foreign corporate bonds

 

 

—

 

 

 

60,700

 

 

 

—

 

 

 

60,700

 

Total fixed maturities

 

 

890,588

 

 

 

504,641

 

 

 

—

 

 

 

1,395,229

 

Equity securities

 

 

—

 

 

 

12,347

 

 

 

—

 

 

 

12,347

 

Total assets measured at fair value

 

$

890,588

 

 

$

516,988

 

 

$

—

 

 

$

1,407,576

 

 

 

 

Fair Value Measurements

 

As of December 31, 2023
(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

494,223

 

 

$

—

 

 

$

—

 

 

$

494,223

 

Obligations of states and political subdivisions

 

 

—

 

 

 

26,150

 

 

 

—

 

 

 

26,150

 

Mortgage-backed securities

 

 

—

 

 

 

58,927

 

 

 

—

 

 

 

58,927

 

Commercial mortgage-backed securities

 

 

—

 

 

 

79,080

 

 

 

—

 

 

 

79,080

 

Asset-backed securities

 

 

—

 

 

 

202,952

 

 

 

—

 

 

 

202,952

 

Corporate bonds

 

 

—

 

 

 

291,713

 

 

 

—

 

 

 

291,713

 

Foreign corporate bonds

 

 

—

 

 

 

140,748

 

 

 

—

 

 

 

140,748

 

Total fixed maturities

 

 

494,223

 

 

 

799,570

 

 

 

—

 

 

 

1,293,793

 

Equity securities

 

 

—

 

 

 

16,508

 

 

 

—

 

 

 

16,508

 

Total assets measured at fair value

 

$

494,223

 

 

$

816,078

 

 

$

—

 

 

$

1,310,301

 

 

The securities classified as Level 1 in the above tables consist of U.S. treasuries actively traded on an exchange.

 

The securities classified as Level 2 in the above tables consist primarily of fixed maturities and preferred stocks. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities and preferred stocks, security prices are

derived through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. If there are no recent reported trades, matrix or model processes are used to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of asset-backed securities, collateralized mortgage obligations, and mortgage-backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral.

 

The following table presents changes in Level 3 investments measured at fair value on a recurring basis for the quarters and nine months ended September 30, 2024 and 2023:

 

 

 

Quarters Ended
September 30,

 

 

Nine Months Ended
September 30,

 

(Dollars in thousands)

 

2024

 

 

2023

 

 

2024

 

 

2023

 

Beginning balance

 

$

—

 

 

$

3,787

 

 

$

—

 

 

$

4,571

 

Total gains / (losses) (realized / unrealized):

 

 

 

 

 

 

 

 

 

 

 

 

Included in accumulated other comprehensive income (loss)

 

 

—

 

 

 

3

 

 

 

—

 

 

 

10

 

Included in earnings attributable to realized gains / losses

 

 

—

 

 

 

24

 

 

 

—

 

 

 

(148

)

Amortization of bond premium and discount, net

 

 

—

 

 

 

1

 

 

 

—

 

 

 

5

 

Purchases

 

 

—

 

 

 

182

 

 

 

—

 

 

 

295

 

Sales

 

 

—

 

 

 

(428

)

 

 

—

 

 

 

(1,164

)

Ending balance

 

$

—

 

 

$

3,569

 

 

$

—

 

 

$

3,569

 

Gains (losses) included in earnings attributable to the change in unrealized gains (losses) related to assets still held at end of reporting period

 

$

—

 

 

$

31

 

 

$

—

 

 

$

(131

)

There were no transfers into or out of Level 3 during the quarters and nine months ended September 30, 2024 or 2023.

Fair Value of Alternative Investments

 

Other invested assets consist of limited partnerships whose carrying value approximates fair value. The following table provides the fair value and future funding commitments related to these investments at September 30, 2024 and December 31, 2023.

 

 

 

September 30, 2024

 

 

December 31, 2023

 

(Dollars in thousands)

 

Fair Value

 

 

Future Funding
Commitment

 

 

Fair Value

 

 

Future Funding
Commitment

 

European Non-Performing Loan Fund, LP (1)

 

$

3,406

 

 

$

14,214

 

 

$

4,048

 

 

$

14,214

 

Mortgage Debt Fund, LP (2)

 

 

8,588

 

 

 

—

 

 

 

8,172

 

 

 

—

 

Global Debt Fund, LP (3)

 

 

17,465

 

 

 

—

 

 

 

26,016

 

 

 

—

 

Total

 

$

29,459

 

 

$

14,214

 

 

$

38,236

 

 

$

14,214

 

 

(1)
This limited partnership invests in distressed securities and assets through senior and subordinated, secured and unsecured debt and equity, in both public and private large-cap and middle-market companies. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets. As of September 30, 2024, the Company has funded $35.8 million of this commitment leaving $14.2 million as unfunded. Since the investment period has concluded, the Company does not expect any capital calls will be made prospectively.
(2)
This limited partnership invests in REIT qualifying assets such as mortgage loans, investor property loans, and commercial mortgage loans. The Company does not have the ability to sell or transfer its limited partnership interest without consent from the general partner. The Company does not have the contractual option to redeem its limited partnership interest but receives distributions based on the liquidation of the underlying assets.
(3)
This limited partnership invests in performing, stressed or distressed securities and loans across the global fixed income markets. The Company does have the contractual option to withdraw all or a portion of its limited partnership interest by providing notice to the fund. On July 31, 2023, the Company provided the Global Debt Fund, LP with a formal withdrawal request to fully redeem the partnership interest. Partial redemption proceeds of $8.7 million were received during the nine months ended September 30, 2024.

Limited Partnerships with ownership interest exceeding 3%

 

The Company uses the equity method to account for investments in limited partnerships where its ownership interest exceeds 3%. The equity method of accounting for an investment in limited partnerships requires that its cost basis be updated to

account for the income or loss earned on the investment. In the Fair Value of Alternative Investments table above, all of the investments are booked on a one quarter lag due to non-availability of data at the time the financial statements are prepared. The investment income (loss) associated with the limited partnerships whose ownership interest exceeds 3% is reflected in the consolidated statements of operations in the amounts of ($0.2) million and $0.1 million for the quarters ended September 30, 2024 and 2023, respectively, and $0.4 million and $0.8 million for the nine months ended September 30, 2024 and 2023, respectively.

Pricing

 

The Company’s pricing vendors provide prices for all investment categories except for investments in limited partnerships. Two primary vendors are utilized to provide prices for equity and fixed maturity securities.

 

The following is a description of the valuation methodologies used by the Company’s pricing vendors for investment securities carried at fair value:

 

•
Equity security prices are received from primary and secondary exchanges.

 

•
Corporate and agency bonds, as well as preferred stock, are evaluated by utilizing a spread to a benchmark curve. Bonds with similar characteristics are grouped into specific sectors. Inputs for both asset classes consist of trade prices, broker quotes, the new issue market, and prices on comparable securities.

 

•
Data from commercial vendors is aggregated with market information, then converted into an option adjusted spread (“OAS”) matrix and prepayment model used for collateralized mortgage obligations (“CMO”). CMOs are categorized with mortgage-backed securities in the tables listed above. For asset-backed securities, spread data is derived from trade prices, dealer quotations, and research reports. For both asset classes, evaluations utilize standard inputs plus new issue data, and collateral performance. The evaluated pricing models incorporate cash flows, broker quotes, market trades, historical prepayment speeds, and dealer projected speeds.
•
For obligations of state and political subdivisions, an attribute-based modeling system is used. The pricing model incorporates trades, market clearing yields, market color, and fundamental credit research.
•
U.S. treasuries are evaluated by obtaining feeds from a number of live data sources including primary and secondary dealers as well as inter-dealer brokers.
•
For mortgage-backed securities, various external analytical products are utilized and purchased from commercial vendors.

 

The Company performs certain procedures to validate whether the pricing information received from the pricing vendors is reasonable, to ensure that the fair value determination is consistent with accounting guidance, and to ensure that its assets are properly classified in the fair value hierarchy. The Company’s procedures include, but are not limited to:

•
Reviewing periodic reports provided by the Investment Manager that provides information regarding rating changes and securities placed on watch. This procedure allows the Company to understand why a particular security’s market value may have changed or may potentially change.
•
Understanding and periodically evaluating the various pricing methods and procedures used by the Company’s pricing vendors to ensure that investments are properly classified within the fair value hierarchy.
•
On a quarterly basis, the Company corroborates investment security prices received from its pricing vendors by obtaining pricing from a second pricing vendor for a sample of securities.

 

During the quarters and nine months ended September 30, 2024 and 2023, the Company has not adjusted quotes or prices obtained from the pricing vendors.