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 September 30,
	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%