2. INVESTMENTS

A summary of net investment income is as follows:


NET INVESTMENT INCOME
(in thousands)	2018		2017		2016
Interest on fixed income securities	$	54,491	$	48,343	$	46,834
Dividends on equity securities		9,814		10,506		10,929
Interest on cash, short-term investments and other invested assets		2,309		945		120
Gross investment income	$	66,614	$	59,794	$	57,883
Less investment expenses		(4,529)		(4,918)		(4,808)
Net investment income	$	62,085	$	54,876	$	53,075

Pretax net realized investment gains (losses) and net changes in unrealized gains (losses) on investments for the years ended December 31 are summarized as follows:


REALIZED/UNREALIZED GAINS
(in thousands)	2018		2017		2016
Net realized gains (losses):
Fixed income:
Available-for-sale	$	(2,018)	$	859	$	4,314
Available-for-sale OTTI		(217)		(2,559)		(95)
Equity securities		69,868		10,282		38,709
Other		(4,226)		(4,171)		(8,283)
Total	$	63,407	$	4,411	$	34,645

Net changes in unrealized gains (losses) on investments:
Fixed income:
Available-for-sale	$	(41,778)	$	16,846	$	(10,972)
Equity securities		(98,380)		36,844		8,659
Other invested assets		(355)		29		—
Investment in unconsolidated investees		(1,257)		604		522
Total	$	(141,770)	$	54,323	$	(1,791)
Net realized gains (losses) and changes in unrealized gains (losses) on investments	$	(78,363)	$	58,734	$	32,854

During 2018, we recorded $63.4 million in net realized gains, which included $4.4 million of other non-cash realized losses from goodwill and definite-lived intangible impairments. In addition, we recorded a change in net unrealized losses of $141.8 million. The majority of our net realized gains were due to sales of equity securities. The change in unrealized gain/loss position was due to the realization of gains in the course of selling equity securities and the price decline in both equities and bonds during 2018. For 2018, the net realized gains (losses) and changes in unrealized gains (losses) on investments totaled $(78.4) million.

The following is a summary of the disposition of fixed income securities and equities for the years ended December 31, with separate presentations for sales and calls/maturities.


							Net
SALES	Proceeds		Gross Realized				Realized
(in thousands)	From Sales		Gains		Losses		Gain (Loss)
2018
Available-for-sale	$	394,318	$	3,131	$	(5,349)	$	(2,218)
Equities		147,838		71,065		(1,197)		69,868
2017
Available-for-sale	$	169,002	$	2,406	$	(1,670)	$	736
Equities		36,573		13,178		(2,896)		10,282
2016
Available-for-sale	$	329,091	$	7,158	$	(3,287)	$	3,871
Equities		89,909		39,668		(959)		38,709


							Net
CALLS/MATURITIES			Gross Realized				Realized
(in thousands)	Proceeds		Gains		Losses		Gain (Loss)
2018
Available-for-sale	$	187,380	$	311	$	(111)	$	200
2017
Available-for-sale	$	195,617	$	262	$	(139)	$	123
2016
Available-for-sale	$	141,255	$	445	$	(2)	$	443

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of December 31, 2018, are summarized below:


			Significant
	Quoted in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Fixed income securities - available-for-sale
U.S. government	$	—	$	200,229	$	—	$	200,229
U.S. agency		—		31,904		—		31,904
Non-U.S. govt. & agency		—		7,639		—		7,639
Agency MBS		—		395,253		—		395,253
ABS/CMBS*		—		136,723		—		136,723
Corporate		—		668,679		—		668,679
Municipal		—		320,088		—		320,088
Total fixed income securities - available-for-sale	$	—	$	1,760,515	$	—	$	1,760,515
Equity securities		339,985		498		—		340,483
Total	$	339,985	$	1,761,013	$	—	$	2,100,998

*Non-agency asset-backed & commercial mortgage-backed

Assets measured at fair value on a recurring basis as of December 31, 2017, are summarized below:


			Significant
	Quoted in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Fixed income securities - available-for-sale
U.S. government	$	—	$	91,689	$	—	$	91,689
U.S. agency		—		18,778		—		18,778
Non-U.S. govt. & agency		—		7,588		—		7,588
Agency MBS		—		328,471		—		328,471
ABS/CMBS*		—		70,526		—		70,526
Corporate		—		519,022		—		519,022
Municipal		—		636,165		—		636,165
Total fixed income securities - available-for-sale	$	—	$	1,672,239	$	—	$	1,672,239
Equity securities		400,492		—		—		400,492
Total	$	400,492	$	1,672,239	$	—	$	2,072,731

*Non-agency asset-backed & commercial mortgage-backed

As noted in the previous tables, we did not have any assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2018 and 2017. Additionally, there were no securities transferred in or out of levels 1 or 2 during 2018 or 2017.

The amortized cost and estimated fair value of fixed income securities at December 31, 2018, by contractual maturity, are shown as follows:


(in thousands)	Amortized Cost		Fair Value
Available-for-sale
Due in one year or less	$	41,319	$	41,333
Due after one year through five years		411,153		410,680
Due after five years through 10 years		615,061		608,115
Due after 10 years		168,716		168,412
Mtge/ABS/CMBS*		540,216		531,975
Total available-for-sale	$	1,776,465	$	1,760,515

*Mortgage-backed, asset-backed & commercial mortgage-backed

Expected maturities may differ from contractual maturities due to call provisions on some existing securities. At December 31, 2018, the net unrealized losses of available-for-sale fixed income securities totaled $16.0 million pretax. At December 31, 2017, the net unrealized appreciation of available-for-sale fixed maturities securities totaled $25.8 million pretax.

In addition, the following table is a schedule of amortized costs and estimated fair values of investments in fixed income securities as of December 31, 2018 and 2017:


2018	Amortized				Gross Unrealized
(in thousands)	Cost		Fair Value		Gains		Losses
Available-for-sale
U.S. government	$	199,982	$	200,229	$	1,232	$	(985)
U.S. agency		31,716		31,904		403		(215)
Non-U.S. govt. & agency		8,170		7,639		—		(531)
Agency MBS		402,992		395,253		1,709		(9,448)
ABS/CMBS*		137,224		136,723		375		(876)
Corporate		681,909		668,679		2,894		(16,124)
Municipal		314,472		320,088		6,926		(1,310)
Total fixed income	$	1,776,465	$	1,760,515	$	13,539	$	(29,489)


2017	Amortized				Gross Unrealized
(in thousands)	Cost		Fair Value		Gains		Losses
Available-for-sale
U.S. government	$	92,561	$	91,689	$	23	$	(895)
U.S. agency		18,541		18,778		347		(110)
Non-U.S. govt. & agency		7,501		7,588		143		(56)
Agency MBS		329,129		328,471		3,420		(4,078)
ABS/CMBS*		70,405		70,526		436		(315)
Corporate		508,128		519,022		12,575		(1,681)
Municipal		620,146		636,165		17,272		(1,253)
Total fixed income	$	1,646,411	$	1,672,239	$	34,216	$	(8,388)

*Non-agency asset-backed & commercial mortgage-backed

Mortgage-Backed, Commercial Mortgage-Backed and Asset-Backed Securities

Gross unrealized losses in the collateralized securities bond portfolio increased to $10.3 million in 2018 as interest rates increased during the year. All of our collateralized securities carry the highest credit rating by one or more major rating agencies and continue to pay according to contractual terms.

For all fixed income securities at an unrealized loss at December 31, 2018, we believe it is probable that we will receive all contractual payments in the form of principal and interest. In addition, we are not required to, nor do we intend to, sell these investments prior to recovering the entire amortized cost basis of each security, which may be at maturity. We do not consider these investments to be other-than-temporarily impaired at December 31, 2018.

Corporate Bonds

Gross unrealized losses in the corporate bond portfolio increased to $16.1 million in 2018 from $1.7 million at the end of 2017 as interest rates and credit spreads increased during the year. The corporate bond portfolio has an overall rating of A-.

Municipal Bonds

As of December 31, 2018, municipal bonds totaled $320.1 million with gross unrealized losses of $1.3 million, the same as the previous year. As of December 31, 2018, approximately 42 percent of the municipal fixed income securities in the investment portfolio were general obligations of state and local governments and the remaining 58 percent were revenue based. Eighty-five percent of our municipal fixed income securities were rated AA or better while 99 percent were rated A or better.

Equity Securities

Our equity portfolio consists of common stocks and exchange traded funds (ETF). Gross unrealized losses in the equity portfolio increased $9.2 million to $10.1 million in 2018 as equity markets declined during the year.

Impairment Analysis

Under current accounting standards, an OTTI write-down of debt securities, where fair value is below amortized cost, is triggered by circumstances where: (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income.

As part of our evaluation of whether particular securities are other-than-temporarily impaired, we consider our intent to sell a security (which is determined on a security-by-security basis) and whether it is more likely than not we will be required to sell the security before the recovery of our amortized cost basis. Significant changes in these factors could result in a charge to net earnings for impairment losses. Impairment losses result in a reduction of the underlying investment’s cost basis.

The following table is also used as part of our impairment analysis and displays the total value of debt securities that were in an unrealized loss position as of December 31, 2018, and December 31, 2017. The table segregates the securities based on type, noting the fair value, amortized cost and unrealized loss on each category of investment as well as in total. The table further classifies the securities based on the length of time they have been in an unrealized loss position.


	December 31, 2018						December 31, 2017
			12 Mos.						12 Mos.
(in thousands)	< 12 Mos.		& Greater		Total		< 12 Mos.		& Greater		Total
U.S. Government
Fair value	$	7,249	$	76,073	$	83,322	$	58,009	$	30,888	$	88,897
Amortized cost		7,270		77,037		84,307		58,443		31,349		89,792
Unrealized Loss	$	(21)	$	(964)	$	(985)	$	(434)	$	(461)	$	(895)

U.S. Agency
Fair value	$	—	$	8,843	$	8,843	$	10,917	$	—	$	10,917
Amortized cost		—		9,058		9,058		11,027		—		11,027
Unrealized Loss	$	—	$	(215)	$	(215)	$	(110)	$	—	$	(110)

Non-U.S. Government
Fair value	$	5,432	$	2,207	$	7,639	$	—	$	1,840	$	1,840
Amortized cost		5,571		2,599		8,170		—		1,896		1,896
Unrealized Loss	$	(139)	$	(392)	$	(531)	$	—	$	(56)	$	(56)

Agency MBS
Fair value	$	25,345	$	261,325	$	286,670	$	122,130	$	111,306	$	233,436
Amortized cost		25,486		270,632		296,118		123,559		113,955		237,514
Unrealized Loss	$	(141)	$	(9,307)	$	(9,448)	$	(1,429)	$	(2,649)	$	(4,078)

ABS/CMBS*
Fair value	$	46,918	$	32,137	$	79,055	$	23,406	$	21,587	$	44,993
Amortized cost		47,146		32,785		79,931		23,491		21,817		45,308
Unrealized Loss	$	(228)	$	(648)	$	(876)	$	(85)	$	(230)	$	(315)

Corporate
Fair value	$	306,177	$	147,751	$	453,928	$	86,946	$	28,600	$	115,546
Amortized cost		315,428		154,624		470,052		87,736		29,491		117,227
Unrealized Loss	$	(9,251)	$	(6,873)	$	(16,124)	$	(790)	$	(891)	$	(1,681)

Municipal
Fair value	$	6,036	$	55,681	$	61,717	$	71,059	$	60,049	$	131,108
Amortized cost		6,052		56,975		63,027		71,534		60,827		132,361
Unrealized Loss	$	(16)	$	(1,294)	$	(1,310)	$	(475)	$	(778)	$	(1,253)

Total fixed income
Fair value	$	397,157	$	584,017	$	981,174	$	372,467	$	254,270	$	626,737
Amortized cost		406,953		603,710		1,010,663		375,790		259,335		635,125
Unrealized Loss	$	(9,796)	$	(19,693)	$	(29,489)	$	(3,323)	$	(5,065)	$	(8,388)

*Non-agency asset-backed & commercial mortgage-backed

The fixed income portfolio contained 777 securities in an unrealized loss position as of December 31, 2018. Of these 777 securities, 302 have been in an unrealized loss position for 12 consecutive months or longer and represent $19.7 million in unrealized losses. All fixed income securities continue to pay the expected coupon payments under the contractual terms of the securities. Credit-related impairments on fixed income securities that we do not plan to sell, and for which we are not more likely than not to be required to sell, are recognized in net earnings. Any non-credit related impairment is recognized in comprehensive earnings. Based on our analysis, our fixed income portfolio is of a high credit quality and we believe we will recover the amortized cost basis of our fixed income securities. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. There were no OTTI losses recognized in other comprehensive earnings in the periods presented. Key factors that we consider in the evaluation of credit quality include:

Changes in technology that may impair the earnings potential of the investment,

The discontinuance of a segment of business that may affect future earnings potential,

Reduction or elimination of dividends,

Specific concerns related to the issuer’s industry or geographic area of operation,

Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and

Downgrades in credit quality by a major rating agency.

Based on our analysis, we concluded that the securities in an unrealized loss position were not other-than-temporarily impaired at December 31, 2018 and 2017. There were $0.2 million, $2.6 million and $0.1 million in losses associated with OTTI of securities in 2018, 2017 and 2016, respectively.

Unrealized Gains and Losses on Equity Securities

Unrealized gains (losses) recognized during 2018 on equity securities still held as of December 31, 2018 were $(28.7) million. Unrealized gains (losses) recognized during 2017 on equity securities still held as of December 31, 2017 were $47.2 million.

Other Invested Assets

We had $51.5 million of other invested assets at December 31, 2018, compared to $33.8 million at the end of 2017. Other invested assets include investments in low income housing tax credit (LIHTC) partnerships, membership stock in the Federal Home Loan Bank of Chicago (FHLBC) and investments in private funds. Our LIHTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investment’s net asset value.

Our LIHTC interests had a balance of $20.3 million at December 31, 2018 compared to $15.5 million at December 31, 2017 and recognized a total tax benefit of $2.2 million during 2018 compared to $2.4 million during 2017 and $1.9 million during 2016. Our unfunded commitment for our LIHTC investments totaled $7.4 million at December 31, 2018 and will be paid out in installments through 2025.

We had $18.8 million of unfunded commitments related to our investments in private funds at December 31, 2018. Additionally, our interest in these investments is generally restricted from being transferred or otherwise redeemed without prior consent by the respective entities. An initial public offering would allow for the transfer of interest in some situations, while the timed dissolution of the partnership would trigger redemption in others.

Restricted Assets

As of December 31, 2018, $16.1 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of the FHLBC stock provides. As of and during year ended December 31, 2018, there were no outstanding borrowings with the FHLBC.

As of December 31, 2018, fixed income securities with a carrying value of $59.2 million were on deposit with regulatory authorities as required by law.