2. INVESTMENTS

A summary of net investment income is as follows:


NET INVESTMENT INCOME
(in thousands)	2015		2014		2013
Interest on fixed income securities	$	48,064	$	48,757	$	45,870
Dividends on equity securities		11,407		11,962		11,865
Interest on cash and short-term investments		11		7		23
Gross investment income	$	59,482	$	60,726	$	57,758
Less investment expenses		(4,838)		(5,118)		(4,995)
Net investment income	$	54,644	$	55,608	$	52,763

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)	2015		2014		2013
Net realized gains (losses):
Fixed income:
Available-for-sale	$	10,832	$	3,955	$	1,338
Held-to-maturity		—		4		9
Equity securities		22,107		29,468		21,533
Sale of subsidiary (RLI Indemnity Company)*		6,698		—		—
Other		192		(1,245)		(844)
Total	$	39,829	$	32,182	$	22,036

Net changes in unrealized gains (losses) on investments:
Fixed income:
Available-for-sale	$	(26,929)	$	37,880	$	(75,228)
Equity securities		(44,120)		17,300		64,305
Investment in unconsolidated investees		(1,886)		(787)		(50)
Total	$	(72,935)	$	54,393	$	(10,973)
Net realized gains (losses) and changes in unrealized gains (losses) on investments	$	(33,106)	$	86,575	$	11,063

*See note 13 for further discussion on the sale of RLI Indemnity Company.

During 2015, we recorded $39.8 million in net realized gains, along with a change in net unrealized losses of $72.9 million. The majority of our net realized gains were due to sales of equity securities while the change in unrealized gains was due to increased credit spreads in the corporate fixed income sector as well as price declines in the equity portfolio. For 2015, the net realized gains (losses) and changes in unrealized gains (losses) on investments totaled $(33.1) 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)
2015
Available-for-sale	$	436,680	$	14,691	$	(4,067)	$	10,624
Held-to-maturity		—		—		—		—
Trading		—		—		—		—
Equities		53,110		25,985		(3,878)		22,107
2014
Available-for-sale	$	342,308	$	7,208	$	(3,664)	$	3,544
Held-to-maturity		654		4		—		4
Trading		—		—		—		—
Equities		72,869		29,794		(326)		29,468
2013
Available-for-sale	$	173,694	$	3,561	$	(2,597)	$	964
Held-to-maturity		—		—		—		—
Trading		—		—		—		—
Equities		73,982		21,542		(9)		21,533


							Net
CALLS/MATURITIES			Gross Realized				Realized
(in thousands)	Proceeds		Gains		Losses		Gain (Loss)
2015
Available-for-sale	$	156,980	$	217	$	(9)	$	208
Held-to-maturity		—		—		—		—
Trading		—		—		—		—
2014
Available-for-sale	$	101,517	$	414	$	(3)	$	411
Held-to-maturity		—		—		—		—
Trading		—		—		—		—
2013
Available-for-sale	$	224,620	$	379	$	(5)	$	374
Held-to-maturity		11,090		9		—		9
Trading		1		—		—		—

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of December 31, 2015, 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
Available-for-sale securities:
U.S. government	$	—	$	43,543	$	—	$	43,543
U.S. agency		—		15,740		—		15,740
Non-U.S. govt. & agency		—		4,478		—		4,478
Agency MBS		—		254,892		—		254,892
ABS/CMBS*		—		91,948		—		91,948
Corporate		—		517,109		—		517,109
Municipal		—		610,400		—		610,400
Equity		375,424		—		—		375,424
Total available-for-sale securities	$	375,424	$	1,538,110	$	—	$	1,913,534

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

Assets measured at fair value on a recurring basis as of December 31, 2014, 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
Available-for-sale securities:
U.S. government	$	—	$	33,788	$	—	$	33,788
U.S. agency		—		6,747		—		6,747
Non-U.S. govt. & agency		—		10,665		—		10,665
Agency MBS		—		264,468		—		264,468
ABS/CMBS*		—		135,304		—		135,304
Corporate		—		562,690		—		562,690
Municipal		—		481,425		—		481,425
Equity		410,642		—		—		410,642
Total available-for-sale securities	$	410,642	$	1,495,087	$	—	$	1,905,729

*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, 2015 and 2014. Additionally, there were no securities transferred in or out of levels 1 or 2 during 2015 or 2014.

The amortized cost and estimated fair value of fixed income securities at December 31, 2015, by contractual maturity, are shown as follows:


(in thousands)	Amortized Cost		Fair Value
Available-for-sale
Due in one year or less	$	9,529	$	9,643
Due after one year through five years		275,198		276,100
Due after five years through 10 years		565,477		572,675
Due after 10 years		326,333		332,852
Mtge/ABS/CMBS*		341,619		346,840
Total available-for-sale	$	1,518,156	$	1,538,110

*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, 2015, the net unrealized appreciation of available-for-sale fixed income and equity securities totaled $192.9 million pretax. At December 31, 2014, the net unrealized appreciation of available-for-sale fixed maturities and equity securities totaled $264.0 million pretax.

In addition, the following table is a schedule of amortized costs and estimated fair values of investments in fixed income and equity securities as of December 31, 2015 and 2014:


2015	Amortized				Gross Unrealized
(in thousands)	Cost		Fair Value		Gains		Losses
Available-for-sale:
U.S. government	$	43,597	$	43,543	$	58	$	(112)
U.S. agency		15,481		15,740		306		(47)
Non-U.S. govt. & agency		5,035		4,478		—		(557)
Agency MBS		250,060		254,892		6,451		(1,619)
ABS/CMBS*		91,559		91,948		995		(606)
Corporate		523,351		517,109		8,565		(14,807)
Municipal		589,073		610,400		21,375		(48)
Total fixed income	$	1,518,156	$	1,538,110	$	37,750	$	(17,796)
Equity securities		202,437		375,424		174,443		(1,456)
Total available-for-sale	$	1,720,593	$	1,913,534	$	212,193	$	(19,252)

Held-to-maturity	$	—	$	—	$	—	$	—

Trading**	$	—	$	—	$	—	$	—
Total	$	1,720,593	$	1,913,534	$	212,193	$	(19,252)

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

**Trading securities are carried at fair value with unrealized gains (losses) included in earnings


2014	Amortized				Gross Unrealized
(in thousands)	Cost		Fair Value		Gains		Losses
Available-for-sale:
U.S. government	$	33,668	$	33,788	$	131	$	(11)
U.S. agency		6,385		6,747		362		—
Non-U.S. govt. & agency		9,862		10,665		803		—
Agency MBS		256,443		264,468		9,401		(1,376)
ABS/CMBS*		133,894		135,304		1,821		(411)
Corporate		543,183		562,690		23,697		(4,190)
Municipal		464,769		481,425		16,789		(133)
Total fixed income	$	1,448,204	$	1,495,087	$	53,004	$	(6,121)
Equity securities		193,535		410,642		218,105		(998)
Total available-for-sale	$	1,641,739	$	1,905,729	$	271,109	$	(7,119)

Held-to-maturity	$	—	$	—	$	—	$	—

Trading**	$	—	$	—	$	—	$	—
Total	$	1,641,739	$	1,905,729	$	271,109	$	(7,119)

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

**Trading securities are carried at fair value with unrealized gains (losses) included in earnings

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

Gross unrealized losses in the collateralized securities bond portfolio increased to $2.2 million in 2015 as spreads widened 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 a loss at December 31, 2015, 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, 2015.

Corporate Bonds

Gross unrealized losses in the corporate bond portfolio increased to $14.8 million in 2015 from $4.2 million at the end of 2014 as credit spreads widened during the year. While these unrealized losses are not due to credit-specific defaults, the energy and materials sectors continue to experience higher risk premiums due to declines in commodity prices. The corporate bond portfolio has an overall rating of BBB+.

Municipal Bonds

As of December 31, 2015, municipal bonds totaled $610.4 million with gross unrealized losses of less than $0.1 million. As of December 31, 2015, approximately 47 percent of the municipal fixed income securities in the investment portfolio were general obligations of state and local governments and the remaining 53 percent were revenue based. Ninety-two 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 $0.5 million to $1.5 million in 2015. Given our intent to hold and expectation of recovery to cost within a reasonable period of time, we do not consider any of our equities to be other-than-temporarily impaired.

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.

Part of our evaluation of whether particular securities are other-than-temporarily impaired involves assessing whether we have both the intent and ability to continue to hold equity securities in an unrealized loss position. For fixed income securities, 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 securities that were in an unrealized loss position as of December 31, 2015, and December 31, 2014. The table segregates the securities based on type, noting the fair value, cost (or 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, 2015						December 31, 2014
			12 Mos.						12 Mos. &
(in thousands)	< 12 Mos.		& Greater		Total		< 12 Mos.		Greater		Total
U.S. Government
Fair value	$	36,000	$	—	$	36,000	$	4,416	$	—	$	4,416
Cost or amortized cost		36,112		—		36,112		4,427		—		4,427
Unrealized Loss	$	(112)	$	—	$	(112)	$	(11)	$	—	$	(11)

U.S. Agency
Fair value	$	8,070	$	—	$	8,070	$	—	$	—	$	—
Cost or amortized cost		8,117		—		8,117		—		—		—
Unrealized Loss	$	(47)	$	—	$	(47)	$	—	$	—	$	—

Non-U.S. Government
Fair value	$	4,478	$	—	$	4,478	$	—	$	—	$	—
Cost or amortized cost		5,035		—		5,035		—		—		—
Unrealized Loss	$	(557)	$	—	$	(557)	$	—	$	—	$	—

Agency MBS
Fair value	$	100,424	$	18,520	$	118,944	$	12,840	$	61,534	$	74,374
Cost or amortized cost		101,473		19,090		120,563		12,947		62,803		75,750
Unrealized Loss	$	(1,049)	$	(570)	$	(1,619)	$	(107)	$	(1,269)	$	(1,376)

ABS/CMBS*
Fair value	$	51,091	$	8,364	$	59,455	$	63,782	$	11,616	$	75,398
Cost or amortized cost		51,562		8,499		60,061		64,084		11,725		75,809
Unrealized Loss	$	(471)	$	(135)	$	(606)	$	(302)	$	(109)	$	(411)

Corporate
Fair value	$	275,404	$	15,174	$	290,578	$	123,617	$	14,488	$	138,105
Cost or amortized cost		285,515		19,870		305,385		127,634		14,661		142,295
Unrealized Loss	$	(10,111)	$	(4,696)	$	(14,807)	$	(4,017)	$	(173)	$	(4,190)

Municipal
Fair value	$	8,462	$	2,418	$	10,880	$	12,382	$	19,019	$	31,401
Cost or amortized cost		8,504		2,424		10,928		12,411		19,123		31,534
Unrealized Loss	$	(42)	$	(6)	$	(48)	$	(29)	$	(104)	$	(133)

Subtotal, fixed income
Fair value	$	483,929	$	44,476	$	528,405	$	217,037	$	106,657	$	323,694
Cost or amortized cost		496,318		49,883		546,201		221,503		108,312		329,815
Unrealized Loss	$	(12,389)	$	(5,407)	$	(17,796)	$	(4,466)	$	(1,655)	$	(6,121)

Equity securities
Fair value	$	16,476	$	—	$	16,476	$	10,837	$	—	$	10,837
Cost or amortized cost		17,932		—		17,932		11,835		—		11,835
Unrealized Loss	$	(1,456)	$	—	$	(1,456)	$	(998)	$	—	$	(998)

Total
Fair value	$	500,405	$	44,476	$	544,881	$	227,874	$	106,657	$	334,531
Cost or amortized cost		514,250		49,883		564,133		233,338		108,312		341,650
Unrealized Loss	$	(13,845)	$	(5,407)	$	(19,252)	$	(5,464)	$	(1,655)	$	(7,119)

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

As of December 31, 2015, we held six equity securities that were in unrealized loss positions. The total unrealized loss on these securities was $1.5 million. In considering both the significance and duration of the unrealized loss position, we have no equity securities in an unrealized loss position of greater than 20 percent for more than six consecutive months.

The fixed income portfolio contained 472 securities in an unrealized loss position as of December 31, 2015. Of these 472 securities, 44 have been in an unrealized loss position for 12 consecutive months or longer and represent $5.4 million in unrealized losses. All fixed income securities in the investment portfolio 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, 2015 and 2014. We did not recognize any impairment losses during 2015, 2014 or 2013.

As required by law, certain fixed maturity investments amounting to $25.4 million at December 31, 2015, were on deposit with either regulatory authorities or banks.

Other Invested Assets

Other invested assets shown on the balance sheet as of December 31, 2015 include investments in low income housing tax credit (LIHTC) partnerships, membership stock in the Federal Home Loan Bank of Chicago (FHLBC) and an investment in a real estate fund. During 2015, we recorded an additional $5.0 million interest in a low income housing tax credit partnership. Our LIHTC interests had a balance of $14.0 million at December 31, 2015 compared to $9.8 million at December 31, 2014 and recognized a total tax benefit of $1.1 million during 2015 compared to $0.2 million during 2014. During the fourth quarter of 2015 we invested $5.0 million in a real estate fund. Our investment in FHLBC stock totaled $1.6 million at the end of 2015 compared to $1.8 million at the end of the prior year.