| Investments | INVESTMENTS The following table details the difference between cost or adjusted/amortized cost and estimated fair value, by major investment category, at December 31, 2015 and 2014 : Cost or Adjusted/Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2015 U.S. government and agency securities $ 81,973 $ 148 $ 474 $ 81,647 Foreign governments 2,038 37 — 2,075 States, municipalities and political subdivisions 154,004 2,391 490 155,905 Public utilities 8,398 128 33 8,493 Corporate securities 148,170 880 2,292 146,758 Redeemable preferred stocks 1,832 37 49 1,820 Total fixed maturities 396,415 3,621 3,338 396,698 Mutual Funds 26,357 — 14 26,343 Public utilities 1,342 44 34 1,352 Other common stocks 18,624 2,615 545 20,694 Nonredeemable preferred stocks 2,356 67 6 2,417 Total equity securities 48,679 2,726 599 50,806 Other investments 4,980 230 — 5,210 Total investments $ 450,074 $ 6,577 $ 3,937 $ 452,714 December 31, 2014 U.S. government and agency securities $ 134,601 $ 423 $ 590 $ 134,434 Foreign government 3,275 79 — 3,354 States, municipalities and political subdivisions 90,262 1,866 217 91,911 Public utilities 9,044 217 39 9,222 Corporate securities 111,787 1,409 580 112,616 Redeemable preferred stocks 1,094 9 10 1,093 Total fixed maturities 350,063 4,003 1,436 352,630 Public utilities 1,222 211 — 1,433 Other common stocks 19,560 3,738 250 23,048 Nonredeemable preferred stocks 1,496 17 7 1,506 Total equity securities 22,278 3,966 257 25,987 Other investments 2,749 261 — 3,010 Total investments $ 375,090 $ 8,230 $ 1,693 $ 381,627 When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. We determine the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following tables detail our realized gains (losses) by major investment category for the years ended December 31, 2015 , 2014 and 2013 : 2015 2014 2013 Gains (Losses) Fair Value at Sale Gains (Losses) Fair Value at Sale Gains (Losses) Fair Value at Sale Fixed maturities $ 727 $ 87,141 $ 92 $ 5,598 $ 103 $ 23,187 Equity securities 1,895 7,790 298 111,325 31 155 Total realized gains 2,622 94,931 390 116,923 134 23,342 Fixed maturities (595 ) 38,485 (228 ) 11,389 (261 ) 43,751 Equity securities (1,200 ) 4,172 (182 ) 1,529 (2 ) 28 Total realized losses (1,795 ) 42,657 (410 ) 12,918 (263 ) 43,779 Net realized investment gains (losses) $ 827 $ 137,588 $ (20 ) $ 129,841 $ (129 ) $ 67,121 The table below summarizes our fixed maturities at year end by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of those obligations. December 31, 2015 Cost or Amortized Cost Percent of Total Fair Value Percent of Total Due in one year or less $ 50,080 12.6 % $ 50,135 12.6 % Due after one year through five years 163,917 41.3 % 163,621 41.2 % Due after five years through ten years 131,968 33.3 % 131,678 33.2 % Due after ten years 50,450 12.8 % 51,264 13.0 % Total $ 396,415 100.0 % $ 396,698 100.0 % The following table summarizes our net investment income by major investment category: Year Ended December 31, 2015 2014 2013 Fixed maturities $ 8,092 $ 5,866 $ 3,512 Equity securities 859 734 280 Cash and cash equivalents 25 9 31 Other investments 222 166 48 Other assets 14 20 — Investment income $ 9,212 $ 6,795 $ 3,871 Investment expenses (267 ) (312 ) (206 ) Net investment income $ 8,945 $ 6,483 $ 3,665 Portfolio monitoring We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired. For each fixed income security in an unrealized loss position, we determine if the loss is temporary or other-than-temporary. If our management decides to sell the security or determines that it is more likely than not that we will be required to sell the security before recovery of the cost or amortized cost basis for reasons such as liquidity, contractual or regulatory purposes, then the security's decline in fair value is considered other-than-temporary and is recorded in earnings. If we have not made the decision to sell the fixed income security and it is not more likely than not that we will be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether we expect the security to receive cash flows sufficient to recover the entire cost or amortized cost basis of the security. We calculate the estimated recovery value by discounting the best estimate of future cash flows at the security's original or current effective rate, as appropriate, and compare this to the cost or amortized cost of the security. If we do not expect to receive cash flows sufficient to recover the entire cost or amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income. For equity securities, we consider various factors, including whether we have the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis. If we lack the intent and ability to hold to recovery, or if we believe the recovery period is extended, the equity security's decline in fair value is considered other-than-temporary and is recorded in earnings. Our portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its cost or amortized cost (for fixed income securities) or cost (for equity securities) is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which we may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in our evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other-than-temporary are: (1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; (2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and (3) the length of time and extent to which the fair value has been less than amortized cost or cost. The following table presents an aging of our unrealized investment losses by investment class: Less Than Twelve Months Twelve Months or More Number of Securities* Gross Unrealized Losses Fair Value Number of Securities* Gross Unrealized Losses Fair Value December 31, 2015 U.S. government and agency securities 73 $ 265 $ 44,786 21 $ 209 $ 11,250 States, municipalities and political subdivisions 61 463 56,971 5 27 7,620 Public utilities 8 4 1,961 1 29 1,015 Corporate securities 242 2,025 92,429 9 267 10,047 Redeemable preferred stocks 7 49 746 — — — Total fixed maturities 391 2,806 196,893 36 532 29,932 Mutual Funds 1 14 26,343 — — — Public utilities 4 34 697 — — — Other common stocks 63 497 6,665 3 48 118 Nonredeemable preferred stocks 19 6 1,161 — — — Total equity securities 87 551 34,866 3 48 118 Total 478 $ 3,357 $ 231,759 39 $ 580 $ 30,050 December 31, 2014 U.S. government and agency securities 32 $ 285 $ 36,081 20 $ 305 $ 16,947 States, municipalities and political subdivisions 24 100 22,272 11 117 14,310 Public utilities 1 1 1,274 1 38 1,014 Corporate securities 23 271 23,738 16 309 20,215 Redeemable preferred stocks 4 10 408 — — — Total fixed maturities 84 667 83,773 48 769 52,486 Other common stocks 54 247 3,992 1 3 31 Nonredeemable preferred stocks 4 7 378 — — — Total equity securities 58 254 4,370 1 3 31 Total 142 $ 921 $ 88,143 49 $ 772 $ 52,517 * This amount represents the actual number of discrete securities, not the number of shares of those securities. The numbers are not presented in thousands. During our quarterly evaluations of our securities for impairment, we determined that none of our investments in debt and equity securities that reflected an unrealized loss position were other-than-temporarily impaired. The issuers of our debt securities continue to make interest payments on a timely basis. We do not intend to sell nor is it likely that we would be required to sell the debt securities before we recover our amortized cost basis. All the issuers of the equity securities we own had near-term prospects that indicated we could recover our cost basis, and we also do not intend to sell these securities until their value equals or exceeds their cost. During the years ended December 31, 2015 , 2014 and 2013 , we recorded no other-than-temporary impairment charges related to our equity or debt securities. Fair value measurement Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Audited Consolidated Balance Sheets at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows: Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we can access. Level 2: Assets and liabilities whose values are based on the following: (a) Quoted prices for similar assets or liabilities in active markets; (b) Quoted prices for identical or similar assets or liabilities in markets that are not active; or (c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect our estimates of the assumptions that market participants would use in valuing the assets and liabilities. We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE, NASDAQ, and NYSE MKT. For securities for which quoted prices in active markets are unavailable, we use a third-party pricing service that utilizes quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs to estimate the fair value of those securities for which quoted prices are unavailable. Our estimates of fair value reflect the interest rate environment that existed as of the close of business on December 31, 2015 and 2014 . Changes in interest rates subsequent to December 31, 2015 may affect the fair value of our investments. The fair value for our fixed-maturities is initially calculated by a third-party pricing service. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources, and through the use of proprietary models, produce valuation information in the form of a single fair value for individual fixed income and other securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates, and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial information. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector, and where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience. For our Level 3 assets, our internal pricing methods are primarily based on models using discounted cash flow methodologies that determine a single best estimate of fair value for individual financial instruments. In addition, our models use a discount rate and internally assigned credit ratings as inputs (which are generally consistent with any external ratings) and those we use to report our holdings by credit rating. Market related inputs used in these fair values, which we believe are representative of inputs other market participants would use to determine fair value of the same instruments include: interest rate yield curves, quoted market prices of comparable securities, credit spreads, and other applicable market data. As a result of the significance of non-market observable inputs, including internally assigned credit ratings as described above, judgment is required in developing these fair values. The fair value of these financial assets may differ from the amount actually received if we were to sell the asset. Moreover, the use of different valuation assumptions may have a material effect on the fair values on the financial assets. Any change in the estimated fair value of our securities would impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive income on our Consolidated Balance Sheets. The carrying amounts for the following financial instrument categories approximate their fair values at December 31, 2015 and 2014 because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, and accounts payable and accrued expenses. The carrying amount of notes payable also approximates fair value as the interest rate is variable. The following table presents the fair value measurements of our financial instruments on a recurring basis by level at December 31, 2015 and December 31, 2014 : December 31, 2015 Total Level 1 Level 2 Level 3 U.S. government and agency securities $ 81,647 $ — $ 81,647 $ — Foreign governments 2,075 — 2,075 — States, municipalities and political subdivisions 155,905 — 155,905 — Public utilities 8,493 — 8,493 — Corporate securities 146,758 — 146,758 — Redeemable preferred stocks 1,820 1,820 — — Total fixed maturities 396,698 1,820 394,878 — Mutual Funds 26,343 26,343 — — Public utilities 1,352 1,352 — — Other common stocks 20,694 20,694 — — Nonredeemable preferred stocks 2,417 2,417 — — Total equity securities 50,806 50,806 — — Other investments 5,210 300 3,055 1,855 Total investments $ 452,714 $ 52,926 $ 397,933 $ 1,855 December 31, 2014 U.S. government and agency securities $ 134,434 $ — $ 134,434 $ — Foreign governments 3,354 — 3,354 — States, municipalities and political subdivisions 91,911 — 91,911 — Public utilities 9,222 — 9,222 — Corporate securities 112,616 — 112,616 — Redeemable preferred stocks 1,093 1,093 — — Total fixed maturities 352,630 1,093 351,537 — Public utilities 1,433 1,433 — — Other common stocks 23,048 23,048 — — Nonredeemable preferred stocks 1,506 1,506 — — Total equity securities 25,987 25,987 — — Other investments 3,010 300 739 1,971 Total investments $ 381,627 $ 27,380 $ 352,276 $ 1,971 The table below presents the rollforward of our Level 3 investments held at fair value during the year ended December 31, 2015 : Other Investments December 31, 2014 $ 1,971 Transfers in — Partnership income 101 Return of capital (186 ) Unrealized gains in accumulated other comprehensive income (31 ) December 31, 2015 $ 1,855 We are responsible for the determination of fair value and the supporting assumptions and methodologies. We gain assurance on the overall reasonableness and consistent application of valuation methodologies and inputs and compliance with accounting standards through the execution of various processes and controls designed to provide assurance that our assets and liabilities are appropriately valued. For fair values received from third parties, our processes are designed to provide assurance that the valuation methodologies and inputs are appropriate and consistently applied, the assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. At the end of each quarter, we determine whether we need to transfer the fair values of any securities between levels of the fair value hierarchy and, if so, we report the transfer as of the end of the quarter. During 2015 , we transferred no investments between levels. We used unobservable inputs to derive our estimated fair value for Level 3 investments and the unobservable inputs are significant to the overall fair value measurement. For our investments in U.S. government securities that do not have prices in active markets, agency securities, state and municipal governments, and corporate bonds, we obtain the fair values from Synovus Trust Company, NA, which uses a third-party valuation service. The valuation service calculates prices for our investments in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporate inputs from various sources. The model the valuation service uses to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers. To price corporate bonds and agency securities, the valuation service calculates non-call yield spreads on all issuers, uses option-adjusted yield spreads to account for any early redemption features, then adds final spreads to the U.S. Treasury curve at 3 p.m. (ET) as of quarter end. Since the inputs the valuation service uses in their calculations are not quoted prices in active markets, but are observable inputs, they represent Level 2 inputs. Other investments We acquired investments in limited partnerships, recorded in the other investments line of our Consolidated Balance Sheets, that are currently being accounted for at fair value utilizing a discounted cash flow methodology. The estimated fair value of our investments in the limited partnership interests was $4,910,000 . We have fully funded our investments in DCR Mortgage Partners VI, L.P., DCR Mortgage Partners VII, L.P., and RCH Mortgage Fund VI Investors, LP; however, we are still obligated to fund an additional $995,000 and $950,000 for our investments in Kayne Anderson Senior Credit Fund II, L.P. (Kayne) and Blackstone Alternative Solutions 2015 Trust, respectively. The information presented in the table below is as of December 31, 2015 . Initial Investment Book Value Unrealized Gain Fair Value DCR Mortgage Partners VI, L.P. $ 627 $ 660 $ 208 $ 868 RCH Mortgage Fund VI Investors, LP 1,000 965 22 987 Total Level 3 limited partnership investments 1,627 1,625 230 1,855 Kayne Senior Credit Fund II, L.P. 1,005 1,005 — 1,005 DCR Mortgage Partners VII, L.P. 2,000 2,000 — 2,000 Blackstone Alternative Solutions 2015 Trust 50 50 — 50 Total Level 2 limited partnership investments 3,055 3,055 — 3,055 Total limited partnership investments $ 4,682 $ 4,680 $ 230 $ 4,910 Other short-term investments 300 300 — 300 Total other investments $ 4,982 $ 4,980 $ 230 $ 5,210 On October 20, 2015, we acquired our investment in DCR Mortgage Partners VII, L.P. (DCR VII), a limited partnership, that is currently being accounted for at cost. Our total investment in the partnership is $2,000,000 and we are not required to fund any additional amounts in excess of our initial investment. When the funding for the partnership closes, DCR VII will acquire and manage performing, sub-performing, and non-performing loans secured by income-producing commercial real estate. As the limited partnership was still in the formation phase at December 31, 2015, the cost basis of our investment approximated its fair value. In October 2015, we started funding our investment in Blackstone Alternatives Solution 2015 Trust (BTAS). BTAS is a private placement offered by The Blackstone Group, L.P. (NYSE: BX), a publicly traded investment firm with approximately $336 billion in assets under management. Blackstone is one of the largest independent alternative asset managers in the world providing a broad range of opportunities in four key alternative investment categories: private equity, real estate, credit and hedge funds. BTAS is not a fund of funds and will generally participate directly in deals originated by Blackstone during its three year investment period. All deals will have been evaluated and approved by a Blackstone investment committee providing diversified exposure to private market investments across many of Blackstone’s alternative investment strategies. BTAS invests substantially all of its assets in investments in which other Blackstone investment vehicles, managed accounts or other Blackstone affiliates participate and also generally parallels the Blackstone annual employee investment program. Our investment in BTAS is currently being accounted for at cost. Our total investment in the partnership is $50,000. We are obligated to fund an additional amount of $950,000 to reach our initial $1,000,000 commitment. As the limited partnership is still in the formation phase, the cost basis of our investment approximated its fair value at December 31, 2015. In December 2014, we began funding our investment in the Kayne Anderson Senior Credit Fund II (KSCF). KSCF is a private placement offered by Kayne Anderson Capital Advisors, L.P., an S.E.C. registered investment advisor with approximately $25 billion in assets under management. KSCF will deploy its assets across a variety of loan types with three to five year maturities in senior secured positions to support acquisitions, growth, add-ons, recapitalizations, restructuring and bridge financing. KSCF’s investment strategies include upstream oil and gas companies, energy infrastructure, specialized real estate, middle market credit, growth private equity and distressed municipal opportunities. On September 27, 2013, we acquired our investment in RCH Mortgage Fund VI Investors, LP (RCH). RCH is a limited partnership that acquires and manages performing, sub-performing, and non-performing loans secured by income-producing commercial real estate. On September 25, 2012 , we acquired our investment in DCR Mortgage Partners VI, L.P. (DCR VI). DCR VI is a limited partnership that acquires and manages performing, sub-performing, and non-performing loans secured by income-producing commercial real estate. The following table summarizes the quantitative impact that the significant unobservable inputs used to estimate the fair value of our Level 3 investments has on the estimated fair value of our investments shown in the tables above. Due to Kayne, DCR VII, and Blackstone being carried at cost, we have excluded them from the table below. The DCR VI and RCH investments were valued using a duration of 60 months for both periods presented below. Fair Value Valuation Rate Impact Technique Unobservable Input Adjustment December 31, 2015 DCR VI $ (88 ) Discounted cash flow Discount rate based on D&B paydex scale 2.35% RCH $ (341 ) Discounted cash flow Discount rate based on D&B paydex scale 7.35% December 31, 2014 DCR VI $ (89 ) Discounted cash flow Discount rate based on D&B paydex scale 2.35% RCH $ (292 ) Discounted cash flow Discount rate based on D&B paydex scale 6.10% |
