INVESTMENTS

The following table details fixed maturity available-for-sale and equity securities, by major investment category, at June 30, 2018 and December 31, 2017:



	Cost or Adjusted/Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2018
U.S. government and agency securities	$	90,391	$	2	$	1,912	$	88,481
Foreign government	3,002		—		24		2,978
States, municipalities and political subdivisions	161,257		555		1,997		159,815
Public utilities	25,892		17		738		25,171
Corporate securities	290,701		224		6,597		284,328
Mortgage-backed securities	212,320		37		4,711		207,646
Asset backed securities	79,993		2		217		79,778
Redeemable preferred stocks	765		7		87		685
Total fixed maturities	$	864,321	$	844	$	16,283	$	848,882

Mutual funds	$	44,385	$	3,219	$	44	$	47,560
Public utilities	1,946		327		30		2,243
Other common stocks	24,059		8,188		446		31,801
Non-redeemable preferred stocks	1,718		39		16		1,741
Total equity securities	$	72,108	$	11,773	$	536	$	83,345

December 31, 2017
U.S. government and agency securities	$	93,827	$	40	$	1,241	$	92,626
Foreign government	2,022		14		—		2,036
States, municipalities and political subdivisions	200,706		1,929		1,123		201,512
Public utilities	20,215		127		85		20,257
Corporate securities	287,025		1,746		1,209		287,562
Mortgage-backed securities	143,982		235		952		143,265
Asset-backed securities	14,902		23		20		14,905
Redeemable preferred stocks	755		11		74		692
Total fixed maturities	$	763,434	$	4,125	$	4,704	$	762,855

Mutual fund	$	29,079	$	2,845	$	—	$	31,924
Public utilities	1,343		359		—		1,702
Other common stocks	18,856		9,093		47		27,902
Non-redeemable preferred stocks	1,718		53		4		1,767
Total equity securities	$	50,996	$	12,350	$	51	$	63,295

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 six months ended June 30, 2018 and 2017:



	2018					2017
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
Three Months Ended June 30,
Fixed maturities	$	14		$	4,706	$	41		$	6,310
Equity securities	59			207		7			19
Total realized gains	73			4,913		48			6,329
Fixed maturities	(511		)	38,091		(170		)	13,848
Equity securities	—			—		(10		)	100
Total realized losses	(511		)	38,091		(180		)	13,948
Net realized investment gains (losses)	$	(438	)	$	43,004	$	(132	)	$	20,277

Six Months Ended June 30,
Fixed maturities	$	56		$	6,881	$	140		$	18,896
Equity securities	509			1,182		7			19
Total realized gains	565			8,063		147			18,915
Fixed maturities	(792		)	70,319		(620		)	37,396
Equity securities	—			—		(10		)	100
Total realized losses	(792		)	70,319		(630		)	37,496
Net realized investment gains (losses)	$	(227	)	$	78,382	$	(483	)	$	56,411

The table below summarizes our fixed maturities at June 30, 2018 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.



	June 30, 2018
	Cost or Amortized Cost		Percent of Total		Fair Value		Percent of Total
Due in one year or less	$	60,570	7.0	%	$	60,252	7.1	%
Due after one year through five years	321,349		37.2	%	316,312		37.3	%
Due after five years through ten years	179,582		20.8	%	174,875		20.6	%
Due after ten years	10,507		1.2	%	10,020		1.2	%
Asset and mortgage backed securities	292,313		33.8	%	287,423		33.8	%
Total	$	864,321	100.0	%	$	848,882	100.0	%

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Fixed maturities	$	5,392		$	4,087		$	10,204		$	6,585
Equity securities	467			345			930			565
Cash and cash equivalents	617			90			839			160
Other investments	607			109			789			261
Other assets	8			6			15			17
Investment income	7,091			4,637			12,777			7,588
Investment expenses	(246		)	(19		)	(489		)	(269		)
Net investment income	$	6,845		$	4,618		$	12,288		$	7,319

Portfolio monitoring

We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income 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.

Our portfolio monitoring process includes a quarterly review of all fixed-income securities to identify instances where the fair value of a security compared to its cost or amortized cost 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 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
June 30, 2018
U.S. government and agency securities	41	$	547	$	33,151	57	$	1,364	$	53,423
Foreign governments	5	24		2,979		—	—		—
States, municipalities and political subdivisions	145	1,634		113,255		23	363		14,571
Public utilities	43	668		22,118		5	70		986
Corporate securities	521	5,860		240,733		44	737		18,231
Mortgage-backed securities	187	3,923		176,704		60	788		15,118
Asset backed securities	87	214		70,926		5	3		1,249
Redeemable preferred stocks	1	3		122		3	85		304
Total fixed maturities	1,030	12,873		659,988		197	3,410		103,882
Mutual Fund	1	44		14,937		—	—		—
Public utilities	4	30		629		—	—		—
Other common stocks	54	410		5,342		2	36		205
Non-redeemable preferred stocks	12	16		563		—	—		—
Total equity securities	71	500		21,471		2	36		205
Total	1,101	$	13,373	$	681,459	199	$	3,446	$	104,087

December 31, 2017
U.S. government and agency securities	40	$	166	$	26,979	73	$	1,075	$	58,980
States, municipalities and political subdivisions	106	734		91,245		31	389		19,718
Public utilities	16	44		7,052		5	41		1,016
Corporate securities	263	871		134,755		52	338		16,476
Mortgage-backed securities	89	475		76,349		50	477		15,210
Asset-backed securities	18	20		11,682		—	—		—
Redeemable preferred stocks	—	—		—		3	74		303
Total fixed maturities	532	2,310		348,062		214	2,394		111,703
Mutual Funds	1	—		131		—	—		—
Other common stocks	5	47		748		—	—		—
Non-redeemable preferred stocks	4	4		87		—	—		—
Total equity securities	10	51		966		—	—		—
Total	542	$	2,361	$	349,028	214	$	2,394	$	111,703

⁽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 fixed-income 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. Due to the adoption of ASU 2016-01 as of January 1, 2018, equity securities are reported at fair value with changes in fair value recognized in valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales.

During the three and six months ended June 30, 2018 and 2017, 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 our 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 June 30, 2018 and December 31, 2017. Changes in interest rates subsequent to June 30, 2018 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 of the financial assets.

Any change in the estimated fair value of our fixed-income 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 June 30, 2018.

The following table presents the fair value of our financial instruments measured on a recurring basis by level at June 30, 2018 and December 31, 2017:



	Total		Level 1		Level 2		Level 3
June 30, 2018
U.S. government and agency securities	$	88,481	$	—	$	88,481	$	—
Foreign government	2,979		—		2,979		—
States, municipalities and political subdivisions	159,815		—		159,815		—
Public utilities	25,172		—		25,172		—
Corporate securities	284,328		—		284,328		—
Mortgage-backed securities	207,646		—		207,646		—
Asset-backed securities	79,778		—		79,778		—
Redeemable preferred stocks	685		563		122		—
Total fixed maturities	848,884		563		848,321		—
Mutual funds	47,560		47,560		—		—
Public utilities	2,242		2,242		—		—
Other common stocks	31,802		31,802		—		—
Non-redeemable preferred stocks	1,741		1,741		—		—
Total equity securities	83,345		83,345		—		—
Other long-term investments	8,242		300		7,296		646
Total investments	$	940,471	$	84,208	$	855,617	$	646

December 31, 2017
U.S. government and agency securities	$	92,626	$	—	$	92,626	$	—
Foreign government	2,036		—		2,036		—
States, municipalities and political subdivisions	201,512		—		201,512		—
Public utilities	20,257		—		20,257		—
Corporate securities	287,562		—		287,562		—
Mortgage-backed securities	143,265		—		143,265		—
Asset-backed securities	14,905		—		14,905		—
Redeemable preferred stocks	692		692		—		—
Total fixed maturities	762,855		692		762,163		—
Mutual Funds	31,924		31,924		—		—
Public utilities	1,702		1,702		—		—
Other common stocks	27,902		27,902		—		—
Non-redeemable preferred stocks	1,767		1,767		—		—
Total equity securities	63,295		63,295		—		—
Other long-term investments	8,381		300		7,447		634
Total investments	$	834,531	$	64,287	$	769,610	$	634

The table below presents the rollforward of our Level 3 investments held at fair value during the six months ended June 30, 2018:



	Other Investments
December 31, 2017	$	634
Transfers in	—
Partnership income	71
Return of capital	(93		)
Unrealized gains in accumulated other comprehensive income	34
June 30, 2018	$	646

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 quarter ended June 30, 2018, we did not transfer any 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, and 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 its 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 and these investments 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 at June 30, 2018 was $7,942,000. We have fully funded two investments and are still obligated to fund an additional $3,170,000 for the remaining four investments.

The information presented in the table below is as of June 30, 2018:



	Book Value		Unrealized Gain		Unrealized Loss		Fair Value
Limited partnership investments	$	7,584	$	358	$	—	$	7,942
Certificates of deposit	300		—		—		300
Total other investments	$	7,884	$	358	$	—	$	8,242

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. Those limited partnership investments being carried at cost are excluded from the table below. Our investment in DCR Mortgage Partners VI, L.P. (DCR VI) was valued using a duration of 60 months for both periods presented below.



	Fair Value			Valuation		Rate
	Impact			Technique	Unobservable Input	Adjustment
June 30, 2018
DCR VI	$	(32	)	Discounted cash flow	Discount rate based on D&B paydex scale	2.35%

December 31, 2017
DCR VI	$	(37	)	Discounted cash flow	Discount rate based on D&B paydex scale	2.35%

Portfolio loans

At December 31, 2017, we held commercial portfolio loans of $20,000,000. We believe that making sound loans is a necessary and desirable means of employing funds available for investment. Recognizing our obligation to our stockholders, management is expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. These were short-term collateralized loans (less than one year), which were repaid in full in April 2018, primarily from cash flows of the borrowers.