| Investments | INVESTMENTS The following table details the difference between cost or adjusted/amortized cost and estimated fair value, by major investment category, at September 30, 2016 and December 31, 2015 : Cost or Adjusted/Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value September 30, 2016 U.S. government and agency securities $ 121,952 $ 1,014 $ 197 $ 122,769 Foreign government 2,032 84 — 2,116 States, municipalities and political subdivisions 169,433 3,723 166 172,990 Public utilities 7,292 237 2 7,527 Corporate securities 161,957 3,911 24 165,844 Redeemable preferred stocks 1,441 55 74 1,422 Total fixed maturities 464,107 9,024 463 472,668 Mutual fund 20,036 — — 20,036 Public utilities 1,342 182 — 1,524 Other common stocks 19,803 3,811 408 23,206 Non-redeemable preferred stocks 2,913 97 28 2,982 Total equity securities 44,094 4,090 436 47,748 Other long-term investments 5,438 273 21 5,690 Total investments $ 513,639 $ 13,387 $ 920 $ 526,106 December 31, 2015 U.S. government and agency securities $ 81,973 $ 148 $ 474 $ 81,647 Foreign government 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 fund 26,357 — 14 26,343 Public utilities 1,342 44 34 1,352 Other common stocks 18,624 2,615 545 20,694 Non-redeemable preferred stocks 2,356 67 6 2,417 Total equity securities 48,679 2,726 599 50,806 Other long-term investments 4,980 230 — 5,210 Total investments $ 450,074 $ 6,577 $ 3,937 $ 452,714 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 table details our realized gains (losses) by major investment category for the three and nine month periods ended September 30, 2016 and 2015 : 2016 2015 Gains (Losses) Fair Value at Sale Gains (Losses) Fair Value at Sale Three Months Ended September 30, Fixed maturities $ 508 $ 11,009 $ 315 $ 24,168 Equity securities — — 778 2,469 Total realized gains 508 11,009 1,093 26,637 Fixed maturities (396 ) 7,635 (95 ) 4,131 Equity securities (6 ) 17 (675 ) 2,106 Total realized losses (402 ) 7,652 (770 ) 6,237 Net realized investment gains (losses) $ 106 $ 18,661 $ 323 $ 32,874 Nine Months Ended September 30, Fixed maturities $ 1,806 $ 47,391 $ 542 $ 45,392 Equity securities 24 10,769 817 3,441 Total realized gains 1,830 58,160 1,359 48,833 Fixed maturities (1,170 ) 20,663 (364 ) 22,159 Equity securities (182 ) 17,025 (683 ) 2,264 Total realized losses (1,352 ) 37,688 (1,047 ) 24,423 Net realized investment gains (losses) $ 478 $ 95,848 $ 312 $ 73,256 The table below summarizes our fixed maturities at September 30, 2016 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. September 30, 2016 Cost or Amortized Cost Percent of Total Fair Value Percent of Total Due in one year or less $ 33,218 7.2 % $ 33,232 7.0 % Due after one year through five years 250,847 54.0 253,958 53.7 Due after five years through ten years 131,831 28.4 135,305 28.6 Due after ten years 48,211 10.4 50,173 10.7 Total $ 464,107 100.0 % $ 472,668 100.0 % The following table summarizes our net investment income by major investment category: Three Months Ended September 30, Nine Months Ended 2016 2015 2016 2015 Fixed maturities $ 2,251 $ 2,078 $ 6,693 $ 5,879 Equity securities 259 222 726 656 Cash, cash equivalents and short-term investments 38 4 87 9 Other investments 110 105 266 171 Other assets 5 4 14 10 Investment income 2,663 2,413 7,786 6,725 Investment expenses (155 ) (92 ) (360 ) (181 ) Net investment income $ 2,508 $ 2,321 $ 7,426 $ 6,544 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 needs or contractual or regulatory requirements, 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 uncertain whether or not 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 September 30, 2016 U.S. government and agency securities 75 $ 197 $ 51,848 — $ — $ — States, municipalities and political subdivisions 53 166 42,276 — — — Public utilities 4 2 651 — — — Corporate securities 48 14 9,925 3 10 3,038 Redeemable preferred stocks 3 36 312 2 38 230 Total fixed maturities 183 415 105,012 5 48 3,268 Other common stocks 31 269 5,486 17 139 1,887 Non-redeemable preferred stocks 5 8 835 7 20 379 Total equity securities 36 277 6,321 24 159 2,266 Other long-term investments 1 21 987 — — — Total 220 $ 713 $ 112,320 29 $ 207 $ 5,534 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 Non-redeemable 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 * 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 or limited partnership investments 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. The near-term prospects of all the issuers of the equity securities we own indicate we could recover our cost basis, and we also do not intend to sell these securities until their value equals or exceeds their cost. The limited partnership continues to make interest payments on a timely basis and we do not intend to sell nor is it likely that we would be required to sell our investment in the partnership before we recover our amortized cost. During the three and nine months ended September 30, 2016 and 2015 , we recorded no other-than-temporary impairment charges. Fair value measurement Fair value is defined as the price that would be received on the sale of 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 Unaudited 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 September 30, 2016 and December 31, 2015 . Changes in interest rates subsequent to September 30, 2016 may affect the fair value of our investments. The fair value of 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 Unaudited Consolidated Balance Sheet as of September 30, 2016 . The following table presents the fair value of our financial instruments measured on a recurring basis by level at September 30, 2016 and December 31, 2015 : Total Level 1 Level 2 Level 3 September 30, 2016 U.S. government and agency securities $ 122,769 $ — $ 122,769 $ — Foreign government 2,116 — 2,116 — States, municipalities and political subdivisions 172,990 — 172,990 — Public utilities 7,527 — 7,527 — Corporate securities 165,844 — 165,844 — Redeemable preferred stocks 1,422 1,422 — — Total fixed maturities 472,668 1,422 471,246 — Mutual fund 20,036 20,036 — — Public utilities 1,524 1,524 — — Other common stocks 23,206 23,206 — — Non-redeemable preferred stocks 2,982 2,982 — — Total equity securities 47,748 47,748 — — Other long-term investments 5,690 300 3,635 1,755 Total investments $ 526,106 $ 49,470 $ 474,881 $ 1,755 December 31, 2015 U.S. government and agency securities $ 81,647 $ — $ 81,647 $ — Foreign government 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 — — Non-redeemable preferred stocks 2,417 2,417 — — Total equity securities 50,806 50,806 — — Other long-term investments 5,210 300 3,055 1,855 Total investments $ 452,714 $ 52,926 $ 397,933 $ 1,855 The table below presents the rollforward of our Level 3 investments held at fair value during the nine months ended September 30, 2016 : Other Investments December 31, 2015 $ 1,855 Transfers in — Partnership income 115 Return of capital (237 ) Unrealized gains in accumulated other comprehensive income 22 September 30, 2016 $ 1,755 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 the first nine months of 2016 , 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 our investment custodians, which use 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 Unaudited 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 $5,390,000 . We have fully funded our investments in DCR Mortgage Partners VI, L.P. (DCR VI), DCR Mortgage Partners VII, L.P. (DCR VII), and RCH Mortgage Fund VI Investors, L.P. (RCH); however, we are still obligated to fund an additional $511,000 and $780,000 for our investments in Kayne Anderson Senior Credit Fund II, L.P. (Kayne) and Blackstone Alternative Solutions 2015 Trust (Blackstone), respectively. The information presented in the table below is as of September 30, 2016 . Initial Investment Book Value Unrealized Gains (Losses) Fair Value DCR Mortgage Partners VI, L.P. $ 450 $ 495 $ 273 $ 768 RCH Mortgage Fund VI Investors, LP 1,000 1,008 (21 ) 987 Total Level 3 limited partnership investments 1,450 1,503 252 1,755 Kayne Senior Credit Fund II, L.P. 1,489 1,366 — 1,366 DCR Mortgage Partners VII, L.P. 2,000 2,049 — 2,049 Blackstone Alternative Solutions 2015 Trust 220 220 — 220 Total Level 2 limited partnership investments 3,709 3,635 — 3,635 Total limited partnership investments $ 5,159 $ 5,138 $ 252 $ 5,390 Other short-term investments 300 300 — 300 Total other investments $ 5,459 $ 5,438 $ 252 $ 5,690 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 on 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 September 30, 2016 DCR VI $ (65 ) 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, 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% |
