INVESTMENTS

The following table details the difference between cost or adjusted/amortized cost and estimated fair value, by major investment category, at September 30, 2017 and December 31, 2016:



	Cost or Adjusted/Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2017
U.S. government and agency securities	$	204,132	$	618	$	1,294	$	203,456
Foreign government	2,025		32		—		2,057
States, municipalities and political subdivisions	194,327		2,249		429		196,147
Public utilities	19,601		205		51		19,755
Corporate securities	277,481		2,692		580		279,593
Asset backed securities	16,711		11		8		16,714
Redeemable preferred stocks	1,097		29		63		1,063
Total fixed maturities	715,374		5,836		2,425		718,785
Mutual funds	28,949		858		—		29,807
Public utilities	1,342		300		—		1,642
Other common stocks	19,804		7,790		149		27,445
Non-redeemable preferred stocks	2,750		56		61		2,745
Total equity securities	52,845		9,004		210		61,639
Other long-term investments	7,835		322		—		8,157
Total investments	$	776,054	$	15,162	$	2,635	$	788,581

December 31, 2016
U.S. government and agency securities	$	151,656	$	189	$	1,893	$	149,952
Foreign government	2,031		30		—		2,061
States, municipalities and political subdivisions	170,636		1,027		2,551		169,112
Public utilities	7,687		116		73		7,730
Corporate securities	164,424		1,238		1,126		164,536
Redeemable preferred stocks	1,182		5		62		1,125
Total fixed maturities	497,616		2,605		5,705		494,516
Public utilities	1,343		164		—		1,507
Other common stocks	19,815		4,552		319		24,048
Non-redeemable preferred stocks	2,916		10		83		2,843
Total equity securities	24,074		4,726		402		28,398
Other long-term investments	5,493		267		27		5,733
Total investments	$	527,183	$	7,598	$	6,134	$	528,647

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, 2017 and 2016:



	2017					2016
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
Three Months Ended September 30,
Fixed maturities	$	123		$	11,368	$	508		$	11,009
Equity securities	1			156		—			—
Total realized gains	124			11,524		508			11,009
Fixed maturities	(195		)	10,517		(396		)	7,635
Equity securities	—			—		(6		)	17
Total realized losses	(195		)	10,517		(402		)	7,652
Net realized investment gains (losses)	$	(71	)	$	22,041	$	106		$	18,661

Nine Months Ended September 30,
Fixed maturities	$	263		$	30,264	$	1,806		$	47,391
Equity securities	8			175		24			10,769
Total realized gains	271			30,439		1,830			58,160
Fixed maturities	(815		)	47,913		(1,170		)	20,663
Equity securities	(10		)	100		(182		)	17,025
Total realized losses	(825		)	48,013		(1,352		)	37,688
Net realized investment gains (losses)	$	(554	)	$	78,452	$	478		$	95,848

The table below summarizes our fixed maturities at September 30, 2017 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 maturities of those obligations.



	September 30, 2017
	Cost or Amortized Cost		Percent of Total		Fair Value		Percent of Total
Due in one year or less	$	50,426	7.0	%	$	50,362	7.0	%
Due after one year through five years	332,620		46.5	%	334,135		46.5	%
Due after five years through ten years	192,314		26.9	%	194,266		27.0	%
Due after ten years	17,043		2.4	%	17,089		2.4	%
Asset and mortgage backed securities	122,971		17.2	%	122,933		17.1	%
Total	$	715,374	100.0	%	$	718,785	100.0	%

The following table summarizes our net investment income by major investment category:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Fixed maturities	$	4,111		$	2,251		$	10,696		$	6,693
Equity securities	375			259			940			726
Cash and cash equivalents	285			38			445			87
Other investments	124			110			385			266
Other assets	6			5			23			14
Investment income	4,901			2,663			12,489			7,786
Investment expenses	(213		)	(155		)	(482		)	(360		)
Net investment income	$	4,688		$	2,508		$	12,007		$	7,426

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, 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 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 or 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 information relevant to the collectability or recovery of the security that is reasonably available. 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⁽¹⁾	Gross Unrealized Losses		Fair Value		Number of Securities⁽¹⁾	Gross Unrealized Losses		Fair Value
September 30, 2017
U.S. government and agency securities	147	$	741	$	81,333	57	$	553	$	36,900
States, municipalities and political subdivisions	62	274		50,719		23	155		16,625
Public utilities	9	24		3,966		4	27		625
Corporate securities	152	515		77,334		21	65		3,531
Asset backed securities	16	8		10,367		—	—		—
Redeemable preferred stocks	—	—		—		3	63		308
Total fixed maturities	386	1,562		223,719		108	863		57,989
Other common stocks	9	87		765		4	62		429
Non-redeemable preferred stocks	5	6		347		6	55		877
Total equity securities	14	93		1,112		10	117		1,306
Total	400	$	1,655	$	224,831	118	$	980	$	59,295

December 31, 2016
U.S. government and agency securities	186	$	1,893	$	111,216	—	$	—	$	—
States, municipalities and political subdivisions	201	2,551		136,360		—	—		—
Public utilities	8	73		2,222		—	—		—
Corporate securities	215	1,100		88,605		1	26		1,021
Redeemable preferred stocks	7	62		764		—	—		—
Total fixed maturities	617	5,679		339,167		1	26		1,021
Other common stocks	16	140		2,450		17	179		1,732
Non-redeemable preferred stocks	12	52		1,830		7	31		369
Total equity securities	28	192		4,280		24	210		2,101
Other long-term investments	1	27		987		—	—		—
Total	646	$	5,898	$	344,434	25	$	236	$	3,122

⁽¹⁾ This amount represents the actual number of discrete securities, not the number of shares or units 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. 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.

During the three and nine months ended September 30, 2017 and 2016, we recorded no other-than-temporary impairment charges.

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 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, 2017 and December 31, 2016. Changes in interest rates subsequent to September 30, 2017 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, 2017.

The following table presents the fair value of our financial instruments measured on a recurring basis by level at September 30, 2017 and December 31, 2016:



	Total		Level 1		Level 2		Level 3
September 30, 2017
U.S. government and agency securities	$	203,456	$	—	$	203,456	$	—
Foreign government	2,057		—		2,057		—
States, municipalities and political subdivisions	196,147		—		196,147		—
Public utilities	19,755		—		19,755		—
Corporate securities	279,593		—		279,593		—
Asset backed securities	16,714		—		16,714		—
Redeemable preferred stocks	1,063		1,063		—		—
Total fixed maturities	718,785		1,063		717,722		—
Mutual funds	29,807		29,807		—		—
Public utilities	1,642		1,642		—		—
Other common stocks	27,445		27,445		—		—
Non-redeemable preferred stocks	2,745		2,745		—		—
Total equity securities	61,639		61,639		—		—
Other long-term investments	8,157		300		7,173		684
Total investments	$	788,581	$	63,002	$	724,895	$	684

December 31, 2016
U.S. government and agency securities	$	149,952	$	—	$	149,952	$	—
Foreign government	2,061		—		2,061		—
States, municipalities and political subdivisions	169,112		—		169,112		—
Public utilities	7,730		—		7,730		—
Corporate securities	164,536		—		164,536		—
Redeemable preferred stocks	1,125		1,125		—		—
Total fixed maturities	494,516		1,125		493,391		—
Public utilities	1,507		1,507		—		—
Other common stocks	24,048		24,048		—		—
Non-redeemable preferred stocks	2,843		2,843		—		—
Total equity securities	28,398		28,398		—		—
Other long-term investments	5,733		300		3,735		1,698
Total investments	$	528,647	$	29,823	$	497,126	$	1,698

The table below presents the rollforward of our Level 3 investments held at fair value during the nine months ended September 30, 2017:



	Other Investments
December 31, 2016	$	1,698
Transfers in	—
Transfers out	(990		)
Partnership income	35
Return of capital	(141		)
Unrealized gains in accumulated other comprehensive income	82
September 30, 2017	$	684

We are responsible for the determination of fair value and the supporting assumptions and methodologies. We have implemented a system of 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 2017, we transferred one investment from a Level 3 to a Level 2 investment, due to changes in the availability of market observable inputs. 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 $7,857,000. We have fully funded our investments in DCR Mortgage Partners VI, L.P. (DCR VI) and DCR Mortgage Partners VII, L.P. (DCR VII); however, we are still obligated to fund an additional $316,000, $802,000, and $495,000 for our investments in Kayne Anderson Senior Credit Fund II, L.P. (Kayne II), Kayne Anderson Senior Credit Fund III, L.P. (Kayne III), and Blackstone Alternative Solutions 2015 Trust (Blackstone), respectively. The information presented in the table below is as of September 30, 2017.



	Initial Investment		Book Value		Unrealized Gain		Unrealized Loss		Fair Value
DCR Mortgage Partners VI, L.P.	$	301	$	362	$	322	$	—	$	684
Total Level 3 limited partnership investments	301		362		322		—		684
DCR Mortgage Partners VII, L.P.	4,000		4,056		—		—		4,056
Kayne Senior Credit Fund II, L.P.	1,684		1,444		—		—		1,444
Kayne Senior Credit Fund III, L.P.	1,198		1,198		—		—		1,198
Blackstone Alternative Solutions 2015 Trust	505		475		—		—		475
Total Level 2 limited partnership investments	7,387		7,173		—		—		7,173
Total limited partnership investments	$	7,688	$	7,535	$	322	$	—	$	7,857
Other short-term investments	300		300		—		—		300
Total other investments	$	7,988	$	7,835	$	322	$	—	$	8,157

The following table summarizes the quantitative impact that the significant unobservable inputs used to estimate the fair value of our Level 3 investment has on the estimated fair value on our investment shown in the tables above. Due to Kayne II, Kayne III, DCR VII, and Blackstone being carried at cost, we have excluded them from the table below. The DCR VI investment was valued using a duration of 60 months for both periods presented below.



	Fair Value			Valuation		Rate
	Impact			Technique	Unobservable Input	Adjustment
September 30, 2017
DCR VI	$	(44	)	Discounted cash flow	Discount rate based on D&B paydex scale	2.35%

December 31, 2016
DCR VI	$	(56	)	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%