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Fair Value of Financial Instruments | 6 Months Ended
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Jun. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | Fair Value of Financial Instruments (a) Fair Values of Financial Instruments Fair Value Measurements — Accounting Standards Codification Topic 820, "Fair Value Measurements and Disclosures" ("ASC 820") defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between open market participants at the measurement date. Additionally, ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs: 5. Fair Value Measurements (continued) •Level 1 — Valuations based on unadjusted quoted market prices for identical assets or liabilities that we have the ability to access. Because valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Examples of assets and liabilities utilizing Level 1 inputs include: U.S. Treasury bonds; •Level 2 — Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severity, etc.) or can be corroborated by observable market data. Examples of assets and liabilities utilizing Level 2 inputs include: U.S. government-sponsored agency securities; non-U.S. government and supranational obligations; commercial mortgage-backed securities ("CMBS"); collateralized loan obligations ("CLO"); corporate and municipal bonds; and •Level 3 — Valuations based on models where significant inputs are not observable. The unobservable inputs reflect our own assumptions about assumptions that market participants would use developed on the basis of the best information available in the particular circumstances. Examples of assets and liabilities utilizing Level 3 inputs include: an investment in preference shares of a start-up insurance producer. The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in the Level 3 hierarchy. The Company uses prices and inputs that are current as at the measurement date. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified between hierarchy levels. For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these in the Level 1 hierarchy. The Company receives the quoted market prices from a third party nationally recognized provider ("the Pricing Service"). When quoted market prices are unavailable, the Company utilizes the Pricing Service to determine an estimate of fair value. The fair value estimates are included in the Level 2 hierarchy. The Company will challenge any prices for its investments which are considered not to be representative of fair value. If quoted market prices and an estimate from the Pricing Service are unavailable, the Company produces an estimate of fair value based on dealer quotations for recent activity in positions with the same or similar characteristics to that being valued. The Company determines whether the fair value estimate is in the Level 2 or Level 3 hierarchy depending on the level of observable inputs available when estimating the fair value. The Company bases its estimates of fair values for assets on the bid price as it represents what a third party market participant would be willing to pay in an orderly transaction. ASC 825, "Disclosure About Fair Value of Financial Instruments", requires all entities to disclose the fair value of their financial instruments for assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value. The following describes the valuation techniques used by the Company to determine the fair value of financial instruments that are measured at fair value on a recurring basis held at June 30, 2021 and December 31, 2020. U.S. government and U.S. agency — Bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Government National Mortgage Association, Federal National Mortgage Association and the Federal Farm Credit Banks Funding Corporation. The fair values of U.S. treasury bonds are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. We believe the market for U.S. treasury bonds is an actively traded market given the high level of daily trading volume. The fair values of U.S. agency bonds are 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. agency bonds are included in the Level 2 fair value hierarchy. Non-U.S. government and supranational bonds — These securities are generally priced by independent pricing services. The Pricing Service may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the Pricing Service typically uses analytical models which may incorporate spreads, interest rate data and market/sector news. As the significant inputs used to price non-U.S. government and supranational bonds are observable market inputs, the fair values of non-U.S. government and supranational bonds are included in the Level 2 fair value hierarchy. Asset-backed securities — These securities comprise commercial mortgage-backed securities ("CMBS") and collateralized loan obligations ("CLO") originated by a variety of financial institutions that on acquisition are rated BBB-/Baa3 or higher. These securities are priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. As the significant inputs used to price the CMBS and CLO are observable market inputs, their fair values are included in the Level 2 fair value hierarchy. Corporate and municipal bonds — Bonds issued by corporations, U.S. state and municipality entities or agencies that on acquisition are rated BBB-/Baa3 or higher. These securities are generally priced by independent pricing services. The credit spreads are sourced from broker/dealers, trade prices and new issue market. Where pricing is unavailable from pricing services, custodian pricing or non-binding quotes are obtained from broker-dealers to estimate fair values. As significant inputs used to price corporate and municipal bonds are observable market inputs, fair values are included in the Level 2 fair value hierarchy. 5. Fair Value Measurements (continued) Equity securities - The fair value of equity securities is primarily priced by pricing services, reflecting the closing price quoted for the final trading day of the period. The common stock is carried at fair value using observable market pricing data and is included in the Level 1 fair value hierarchy. Any unrealized gains or losses on the investment is recorded in net income in the period in which they occur. Other investments — Includes unquoted investments comprised of the following investments: •Private equity investments: These are direct equity investments in common and preferred stock of privately held entities. The fair values are estimated using quarterly financial statements and/or recent private market transactions and thus included under Level 3 of the fair value hierarchy due to unobservable market data used for valuation. •Private credit lending investments: These are privately held equity investments in common stock of entities that lend money valued using the most recently available or quarterly NAV statements as provided by the external fund manager or third-party administrator and therefore measured using the NAV as a practical expedient. •Investment in limited partnerships: These are private equity funds, private equity co-investments with sponsoring entities and investments in real estate limited partnerships and joint ventures. The fair value is estimated based on the most recently available NAV as advised by the external fund manager or third-party administrator. The fair values are therefore measured using the NAV as a practical expedient. •Other investments: These investments are comprised of investments in insurtech and other insurance focused companies. The fair value of these start-up insurance entities are determined using recent private market transactions where applicable and included in the Level 3 fair value hierarchy due to unobservable market data used for valuation. (b) Fair Value Hierarchy The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in ASC 820. The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuation methodology whenever available. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active trading markets and the lowest priority to unobservable inputs that reflect significant market assumptions. 5. Fair Value Measurements (continued) At June 30, 2021 and December 31, 2020, the Company classified financial instruments measured at fair value on a recurring basis in the following valuation hierarchy:
June 30, 2021 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Fair Value Based on NAV Practical Expedient |  | Total Fair Value
Fixed maturities |  |  |  |  |  |  |  |  |  |
U.S. treasury bonds |  | $ | 78,454 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 78,454 |
U.S. agency bonds – mortgage-backed |  | — |  |  | 153,453 |  |  | — |  |  | — |  |  | 153,453 |
Non-U.S. government bonds |  | — |  |  | 3,440 |  |  | — |  |  | — |  |  | 3,440 |
Asset-backed securities |  | — |  |  | 195,292 |  |  | — |  |  | — |  |  | 195,292 |
Corporate bonds |  | — |  |  | 508,046 |  |  | — |  |  | — |  |  | 508,046 |
Equity investments |  | 4,905 |  |  | — |  |  | — |  |  | — |  |  | 4,905 |
Other investments |  | — |  |  | — |  |  | 29,344 |  |  | 22,408 |  |  | 51,752 |
Total |  | $ | 83,359 |  |  | $ | 860,231 |  |  | $ | 29,344 |  |  | $ | 22,408 |  |  | $ | 995,342 |
As a percentage of total assets |  | 3.2 | % |  | 33.0 | % |  | 1.1 | % |  | 0.9 | % |  | 38.2 | %
December 31, 2020 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Fair Value Based on NAV Practical Expedient |  | Total Fair Value
Fixed maturities |  |  |  |  |  |  |  |  |  |
U.S. treasury bonds |  | $ | 94,502 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 94,502 |
U.S. agency bonds – mortgage-backed |  | — |  |  | 281,437 |  |  | — |  |  | — |  |  | 281,437 |
Non-U.S. government bonds |  | — |  |  | 9,708 |  |  | — |  |  | — |  |  | 9,708 |
Asset-backed securities |  | — |  |  | 185,432 |  |  | — |  |  | — |  |  | 185,432 |
Corporate bonds |  | — |  |  | 642,332 |  |  | — |  |  | — |  |  | 642,332 |
Other investments |  | — |  |  | — |  |  | 26,094 |  |  | 4,345 |  |  | 30,439 |
Total |  | $ | 94,502 |  |  | $ | 1,118,909 |  |  | $ | 26,094 |  |  | $ | 4,345 |  |  | $ | 1,243,850 |
As a percentage of total assets |  | 3.2 | % |  | 37.9 | % |  | 0.9 | % |  | 0.1 | % |  | 42.1 | %
The Company utilizes the Pricing Service to assist in determining the fair value of its investments; however, management is ultimately responsible for all fair values presented in the Company’s financial statements. This includes responsibility for monitoring the fair value process, ensuring objective and reliable valuation practices, and pricing of assets and liabilities and use of pricing sources. The Company analyzes and reviews the information and prices received from the Pricing Service to ensure that the prices provided represent a reasonable estimate of fair value. The Pricing Service was utilized to estimate fair value measurements for 99.3% and 99.1% of our fixed maturities at June 30, 2021 and December 31, 2020, respectively. The Pricing Service utilizes market quotations for fixed maturity securities that have quoted market prices in active markets. Since fixed maturities other than U.S. treasury bonds generally do not trade actively on a daily basis, the Pricing Service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing and these have been classified as Level 2 within the fair value hierarchy. At June 30, 2021 and December 31, 2020, approximately 0.7% and 0.9%, respectively, of our fixed maturities were valued using the market approach. At June 30, 2021, one security or $6,545 (2020 - two securities or $10,809) of fixed maturities classified as Level 2 were priced using a quotation from a broker and/or custodian as opposed to the Pricing Service due to lack of information available. At June 30, 2021 and December 31, 2020, the Company has not adjusted any pricing provided to it based on the review performed by its investment managers. During the six months ended June 30, 2021, the Company transferred its equity investment in an insurtech start-up company focused on technological advancement in the automobile insurance industry out of Level 3 within the fair value hierarchy and into Level 1 due to the recent completion of their initial public offering. There were no transfers to or from Level 3 during the six months ended June 30, 2020. 5. Fair Value Measurements (continued) (c) Level 3 Financial Instruments At June 30, 2021, the Company holds Level 3 financial instruments of $29,344 (December 31, 2020 - $26,094) which includes privately held equity investments in common and preferred stock. The fair value of these investments are estimated using quarterly unaudited financial statements or recent private market transactions, where applicable. Due to significant unobservable inputs in these valuations, the Company classifies their fair values as Level 3 within the fair value hierarchy. The following table provides a summary of quantitative information regarding the significant unobservable inputs used in determining the fair value of other investments measured at fair value on a recurring basis under the Level 3 classification at June 30, 2021:
|  | Fair Value |  | Valuation Technique |  | Unobservable Inputs |  | Range
Private equity investments |  | $ | 27,544 |  |  | Quarterly financial statements |  | Estimated maturity dates |  | 1.0 years | to | 3.0 years
Other including start-ups |  | 1,800 |  |  | Recent market transactions |  | Liquidity discount rates |  |  |  |
Total Level 3 investments |  | $ | 29,344 |  |  |  |  |  |  |  |  |
The following table shows the reconciliation of the beginning and ending balances for other investments measured at fair value on a recurring basis using Level 3 inputs for the three and six months ended June 30, 2021 and 2020. The Company includes any related interest and dividend income in net investment income and thus are excluded from the reconciliation in the table below:
|  | For the Three Months Ended June 30, |  | For the Six Months Ended June 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Balance - beginning of period |  | $ | 29,344 |  |  | $ | 1,800 |  |  | $ | 26,094 |  |  | $ | 1,800 |
Purchases |  | — |  |  | 1,000 |  |  | 4,250 |  |  | 1,000 |
Transfers out of Level 3 |  | — |  |  | — |  |  | (1,000) |  |  | — |
Total Level 3 investments - end of period |  | $ | 29,344 |  |  | $ | 2,800 |  |  | $ | 29,344 |  |  | $ | 2,800 |
(d) Financial Instruments Disclosed, But Not Carried, at Fair Value The fair value of financial instruments accounting guidance also applies to financial instruments disclosed, but not carried, at fair value, except for certain financial instruments related to insurance contracts. At June 30, 2021, the carrying values of cash and cash equivalents (including restricted amounts), accrued investment income, reinsurance balances receivable, loan to related party, liability for securities purchased and certain other assets and liabilities approximate fair values due to their inherent short duration. As these financial instruments are not actively traded, their fair values are classified as Level 2. The investments made by direct lending entities are carried at cost less impairment, if any, which approximates fair value. The fair value estimates of these investments are not based on observable market data and, as a result, are classified as Level 3. The fair values of the Senior Notes (as defined in "Note 7 - Long-Term Debt") are based on indicative market pricing obtained from a third-party pricing service which uses observable market inputs, and therefore the fair values of these liabilities are classified as Level 2. The following table presents the respective carrying value and fair value for the Senior Notes as at June 30, 2021 and December 31, 2020:
|  | June 30, 2021 |  | December 31, 2020
|  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Senior Notes - MHLA – 6.625% |  | $ | 110,000 |  |  | $ | 96,976 |  |  | $ | 110,000 |  |  | $ | 90,772 |
Senior Notes - MHNC – 7.75% |  | 152,500 |  |  | 147,925 |  |  | 152,500 |  |  | 132,126 |
Total Senior Notes |  | $ | 262,500 |  |  | $ | 244,901 |  |  | $ | 262,500 |  |  | $ | 222,898 |

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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=123874694&loc=d3e19207-110258 + Details
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