The gross unrealized gains and losses on investments in fixed maturity securities, including redeemable preferred stocks that have characteristics of fixed maturities, and equity securities, including interests in mutual funds, and other invested assets were as follows for the periods indicated.

(1)

Residential mortgage-backed securities consists primarily of obligations of U.S. Government agencies including collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB).

(2)	Equity securities include common stock, preferred stock, mutual funds and interests in mutual funds held to fund the Company’s executive deferred compensation plan.

(3)	The Company’s investment portfolio included 733 and 229 securities in an unrealized loss position at March 31, 2020 and December 31, 2019, respectively.

(4)	Other invested assets are accounted for under the equity method which approximated fair value.

The amortized cost and the estimated fair value of fixed maturity securities, by maturity, are shown below for the period indicated. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	As of March 31, 2020
	Amortized		Estimated
	Cost		Fair Value
Due in one year or less	$	51,519	$	51,881
Due after one year through five years		295,621		287,963
Due after five years through ten years		311,755		305,990
Due after ten years through twenty years		79,555		83,326
Due after twenty years		950		906
Asset-backed securities		420,459		435,389
Totals	$	1,159,859	$	1,165,455

The gross realized losses and gains on sales of investments were as follows for the periods indicated.


	Three Months Ended March 31,
	2020		2019
Gross realized gains
Fixed maturity securities	$	889	$	115
Equity securities		1,576		953
Gross realized losses
Fixed maturity securities		(301)		(667)
Equity securities		(2,795)		(565)
Net realized losses on investments	$	(631)	$	(164)

In the normal course of business, the Company enters into transactions involving various types of financial instruments, including investments in fixed maturities and equity securities. Investment transactions have credit

exposure to the extent that a counter party may default on an obligation to the Company. Credit risk is a consequence of carrying, trading and investing in securities. To manage credit risk, the Company focuses on higher quality fixed income securities, reviews the credit strength of all companies in which it invests, limits its exposure in any one investment and monitors the portfolio quality, taking into account credit ratings assigned by recognized statistical rating organizations.

The following tables as of March 31, 2020 and December 31, 2019 present the gross unrealized losses included in the Company’s investment portfolio and the fair value of those securities aggregated by investment category. The tables also present the length of time that they have been in a continuous unrealized loss position.

As of March 31, 2020

Less than 12 Months

12 Months or More

Total

Estimated

Unrealized

Estimated

Unrealized

Estimated

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

U.S. Treasury securities

—

Obligations of states and political subdivisions

656

—

656

Residential mortgage-backed securities

20,492

195

20,687

103

Commercial mortgage-backed securities

22,272

165

—

22,272

165

Other asset-backed securities

14,840

534

8,202

881

23,042

1,415

Corporate and other securities

233,543

23,185

8,758

1,717

242,301

24,902

Subtotal, fixed maturity securities

291,803

24,017

17,155

2,602

308,958

26,619

Equity securities

67,644

13,991

9,909

3,354

77,553

17,345

Total temporarily impaired securities

359,447

38,008

27,064

5,956

386,511

43,964


	As of December 31, 2019
	Less than 12 Months				12 Months or More				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of states and political subdivisions		—		—		—		—		—		—
Residential mortgage-backed securities		61,933		409		31,655		500		93,588		909
Commercial mortgage-backed securities		36,398		397		866		—		37,264		397
Other asset-backed securities		21,281		64		462		—		21,743		64
Corporate and other securities		26,386		481		13,718		787		40,104		1,268
Subtotal, fixed maturity securities		145,998		1,351		46,701		1,287		192,699		2,638
Equity securities		8,849		391		14,143		972		22,992		1,363
Total temporarily impaired securities	$	154,847	$	1,742	$	60,844	$	2,259	$	215,691	$	4,001

Impairments

Beginning January 1, 2020, ASC 326, Credit Losses: Measurement of Credit Losses on Financial Instruments changed the process by which AFS debt securities are evaluated for impairment, requiring as the standard requires a new impairment model based on expected credit losses rather than incurred credit losses. Under the new guidance, an entity recognizes its estimate of expected credit losses through an allowance account.

For fixed maturities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the credit loss component of the impairment from the amount related to all other factors and reports the credit loss component as credit loss expense. The impairment related to all other factors (non-credit factors) is reported in other comprehensive income. The allowance is adjusted for any additional credit losses and subsequent recoveries. Upon recognizing a credit loss, the cost basis is not adjusted.

For fixed maturities where the Company records a credit loss, a determination is made as to the cause of the impairment and whether the Company expects a recovery in the value. For fixed maturities where the Company expects a recovery in value, the constant effective yield method is utilized, and the investment is amortized to par.

For fixed maturity investments the Company intends to sell or for which it is more likely than not that the Company will be required to sell before an anticipated recovery in value, the full amount of the impairment is included in credit loss expense. The new cost basis of the investment is the previous amortized cost basis less the impairment recognized in credit loss expense. The new cost basis is not adjusted for any subsequent recoveries in fair value.

The Company uses a systematic methodology to evaluate declines in fair values below cost or amortized cost of our investments. Some of the factors considered in assessing impairment of fixed maturities due to credit losses include the extent to which the fair value is less than amortized cost, the financial condition of and the near and long-term prospects of the issuer, whether the debtor is current on its contractually obligated interest and principal payments, changes to the rating of the security by a rating agency, the historical volatility of the fair value of the security and whether it is more like than not that the Company will be required to sell the investment prior to an anticipated recovery in value.

The Company’s analysis of its fixed maturity portfolio at March 31, 2020 concluded that $2,510 of unrealized losses were due to credit factors and were recorded as credit loss expense for the three months ended March 31, 2020. The Company concluded that outside of the securities that were recognized as credit impaired, the unrealized losses recorded on the fixed maturity portfolio at March 31, 2020 resulted from fluctuations in market interest rates and other temporary market conditions as opposed to fundamental changes in the credit quality of the issuers of such securities. Based upon the analysis performed, the Company’s decision to hold these securities, the Company’s current level of liquidity and our history of positive operating cash flows, management believes it is more likely than not that it will not be required to sell any of its securities before the anticipated recovery in the fair value to its amortized cost basis.

During the three months ended March 31, 2019, the company recognized $220 in other-than-temporary impairments under the previous accounting guidance in ASC 320, Investments – Debt and Equity Securities.

The Company holds no subprime mortgage debt securities. All of the Company’s holdings in mortgage-backed securities are either U.S. Government or Agency guaranteed or are rated investment grade by either Moody’s or Standard & Poor’s.

The following table represents a reconciliation of the beginning and ending balances of the allowance for expected credit losses on fixed maturities classified as available for sale.


	Three Months Ended March 31, 2020

	Corporate and other
	securities
Balance January 1, 2020	$	—
Credit losses on securities with no previously recorded credit losses		2,510
Net increases (decreases) in allowance on previously impaired securities		—
Reduction due to sales		—
Writeoffs charged against allowance		—
Recoveries of amounts previously written off		—
Balance March 31, 2020	$	2,510

Net Investment Income

The components of net investment income were as follows:


	Three Months Ended March 31,
	2020		2019
Interest on fixed maturity securities	$	9,759	$	11,127
Dividends on equity securities		1,206		1,082
Equity in earnings of other invested assets		516		282
Interest on other assets		7		9
Total investment income		11,488		12,500
Investment expenses		778		749
Net investment income	$	10,710	$	11,751

Fair Value of Financial Instruments

ASC 820, Fair Value Measurements and Disclosure provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value information. Under ASC 820, 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 (an exit price). ASC 820 establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy in ASC 820 prioritizes fair value measurements into three levels based on the nature of the inputs as follows:

Level 1 — Valuations based on quoted prices in active markets for identical assets and liabilities;

Level 2 — Valuations based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and quoted prices in active markets for similar, but not identical instruments; and

Level 3 — Valuations based on unobservable inputs.

Fair values for the Company’s fixed maturity securities are based on prices provided by its custodian bank and its investment managers. Both the Company’s custodian bank and investment managers use a variety of independent, nationally recognized pricing services to determine market valuations. If the pricing service cannot provide fair value determinations, the Company obtains non-binding price quotes from broker-dealers. A minimum of two quoted prices is obtained for the majority of the Company’s available-for-sale fixed maturity securities in its investment portfolio. The Company uses a third-party pricing service as its primary provider of quoted prices from third-party pricing services and broker-dealers. To provide reasonable assurance of the validity of each price or quote, a secondary third-party pricing service or broker-dealer quote is obtained from the Company’s custodian or investment managers. An examination of the pricing data is then performed for each security. If the variance between the primary and secondary price quotes for a security is within an accepted tolerance level, the quoted price obtained from the Company’s primary source is used for the security. If the variance between the primary and secondary price quotes exceeds an accepted tolerance level, the Company obtains a quote from an alternative source, if possible, and documents and resolves any differences between the pricing sources. In addition, the Company may request that its investment managers and its traders provide input as to which vendor is providing prices that its traders believe are reflective of fair value for the security. Following this process, the Company may decide to value the security in its financial statements using the secondary or alternative source if it believes that pricing is more reflective of the security’s value than the primary pricing provided by its custodian bank. The Company analyzes market valuations received to verify reasonableness, to understand the key assumptions used and their sources, and to determine an appropriate ASC 820 fair value hierarchy level based upon trading activity and the observability of market inputs. Based on this evaluation and investment class analysis, each price is classified into Level 1, 2 or 3.

Fair values of instruments are based on (i) quoted prices in active markets for identical assets (Level 1), (ii) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2) or (iii) valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).

The Company’s Level 1 securities consist of equity securities whose values are based on quoted prices in active markets for identical assets. The Company’s Level 2 securities are comprised of available-for-sale fixed maturity securities whose fair value was determined using observable market inputs. The Company’s Level 3 security consists of an investment in the Federal Home Loan Bank of Boston related to Safety Insurance Company’s membership stock, which is not redeemable in a short-term time frame. Fair values for securities for which quoted market prices were unavailable were estimated based upon reference to observable inputs such as benchmark interest rates, market comparables, and other relevant inputs. Investments valued using these inputs include U.S. Treasury securities, obligations of states and political subdivisions, corporate and other securities, commercial and residential mortgage-backed securities, and other asset-backed securities. Inputs into the fair value application that are utilized by asset class include but are not limited to:

●Obligations of states and political subdivisions: overall credit quality, including assessments of market sectors and the level and variability of sources of payment such as general obligation, revenue or lease; credit support such as insurance, state or local economic and political base, prefunded and escrowed to maturity covenants.

●Corporate and other securities: overall credit quality, the establishment of a risk adjusted credit spread over the applicable risk-free yield curve for discounted cash flow valuations; assessments of the level of industry economic sensitivity, company financial policies, indenture restrictive covenants, and/or security and collateral.

●Residential mortgage-backed securities, U.S. agency pass-throughs, collateralized mortgage obligations (“CMOs”), non U.S. agency CMOs: estimates of prepayment speeds based upon historical prepayment rate trends, underlying collateral interest rates, original weighted average maturity, vintage year, borrower credit quality characteristics, interest rate and yield curve forecasts, U.S. government support programs, tax policies, and delinquency/default trends.

●Commercial mortgage-backed securities: overall credit quality, including assessments of the level and variability of credit support and collateral type such as office, retail, or lodging, predictability of cash flows for the deal structure, prevailing economic market conditions.

●Other asset-backed securities: overall credit quality, estimates of prepayment speeds based upon historical trends and characteristics of underlying loans, including assessments of the level and variability of collateral, revenue generating agreements, area licenses agreements, product sourcing agreements and equipment and property leases.

●Federal Home Loan Bank of Boston (“FHLB-Boston”): value is equal to the cost of the member stock purchased.

In order to ensure the fair value determination is representative of an exit price (consistent with ASC 820), the Company’s procedures for validating quotes or prices obtained from third parties include, but are not limited to, obtaining a minimum of two price quotes for each fixed maturity security if possible, as discussed above, the periodic testing of sales activity to determine if there are any significant differences between the market price used to value the security as of the balance sheet date and the sales price of the security for sales that occurred around the balance sheet date, and the periodic review of reports provided by its external investment manager regarding those securities with

ratings changes and securities placed on its “Watch List.” In addition, valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by the Company’s external investment manager, whose investment professionals are familiar with the securities being priced and the markets in which they trade, to ensure the fair value determination is representative of an exit price (consistent with ASC 820).

All unadjusted estimates of fair value for our fixed maturities priced by the pricing services as described above are included in the amounts disclosed in Level 2. With the exception of the FHLB-Boston security, which is categorized as a Level 3 security, the Company’s entire portfolio was priced based upon quoted market prices or other observable inputs as of March 31, 2020. There were no significant changes to the valuation process during the three months ended March 31, 2020. As of March 31, 2020 and December 31, 2019, no quotes or prices obtained were adjusted by management. All broker quotes obtained were non-binding.

At March 31, 2020 and December 31, 2019, investments in fixed maturities classified as available-for-sale had a fair value which equaled carrying value $1,165,455 and $1,228,040, respectively. We have no short-term investments. The carrying values of cash and cash equivalents and investment income accrued approximated fair value.

The following tables summarize the Company’s total fair value measurements for investments for the periods indicated.

As of March 31, 2020

Total

Level 1 Inputs

Level 2 Inputs

Level 3 Inputs

U.S. Treasury securities

1,883

—

1,883

—

Obligations of states and political subdivisions

233,690

—

233,690

—

Residential mortgage-backed securities

301,017

—

301,017

—

Commercial mortgage-backed securities

109,066

—

109,066

—

Other asset-backed securities

25,307

—

25,307

—

Corporate and other securities

494,492

—

494,492

—

Equity securities

117,082

115,396

—

1,686

Total investment securities

1,282,537

115,396

1,165,455

1,686


	As of December 31, 2019
	Total		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
U.S. Treasury securities	$	1,512	$	—	$	1,512	$	—
Obligations of states and political subdivisions		251,396		—		251,396		—
Residential mortgage-backed securities		307,202		—		307,202		—
Commercial mortgage-backed securities		109,738		—		109,738		—
Other asset-backed securities		36,222		—		36,222		—
Corporate and other securities		521,970		—		521,970		—
Equity securities		144,877		144,361		—		516
Total investment securities	$	1,372,917	$	144,361	$	1,228,040	$	516

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2020 and 2019.

The following table summarizes the changes in the Company’s Level 3 fair value securities for the periods indicated.


	Three Months Ended March 31,
	2020		2019
	Level 3		Level 3
	Fair Value		Fair Value
	Securities		Securities
Balance at beginning of period	$	516	$	680
Net gains and losses included in earnings		—		—
Net gains included in other comprehensive income		—		—
Purchases		1,170		—
Sales		—		(297)
Transfers into Level 3		—		—
Transfers out of Level 3		—		—
Balance at end of period	$	1,686	$	383
Amount of total losses included in earnings attributable to the change in unrealized losses related to assets still held at end of period	$	—	$	—

Transfers in and out of Level 3 are attributable to changes in the ability to observe significant inputs in determining fair value exit pricing. As noted in the table above, no transfers were made in or out of Level 3 during the three months ended March 31, 2020 and 2019. The Company held one Level 3 security at March 31, 2020 and March 31, 2019.

As of March 31, 2020 and December 31, 2019, there were approximately $32,806 and $32,760, respectively, in a real estate investment trust (“REIT”). The REIT is excluded from the fair value hierarchy because the fair value is recorded using the net asset value per share practical expedient. The net asset value per share of this REIT is derived from member ownership in the capital venture to which a proportionate share of independently appraised net assets is attributed. The fair value was determined using the trust’s net asset value obtained from its audited financial statements. The Company is required to submit a request 45 days before a quarter end to dispose of the security.