Note 6. Investments

Available-for-sale securities

The following tables summarize the cost and fair value of our available-for-sale securities:



	At March 31, 2018
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Available-for-sale securities:
U.S. treasury	$	36,740	$	0	$	276	$	36,464
States & political subdivisions	260,153		3,663		2,664		261,152
Foreign government securities	501		0		0		501
Corporate debt securities	302,395		1,008		3,804		299,599
Residential mortgage-backed securities	23,980		357		227		24,110
Commercial mortgage-backed securities	34,663		12		1,000		33,675
Collateralized debt obligations	71,200		206		101		71,305
Other debt securities	2,986		12		0		2,998
Total available-for-sale securities	$	732,618	$	5,258	$	8,072	$	729,804



	At December 31, 2017
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Available-for-sale securities:
U.S. treasury	$	11,873	$	0	$	139	$	11,734
States & political subdivisions	254,533		5,351		620		259,264
Foreign government securities	501		2		0		503
Corporate debt securities	346,759		1,688		1,924		346,523
Residential mortgage-backed securities	25,324		371		124		25,571
Commercial mortgage-backed securities	33,475		26		697		32,804
Collateralized debt obligations	57,838		237		41		58,034
Other debt securities	11,496		32		0		11,528
Total fixed maturities	741,799		7,707		3,545		745,961
Nonredeemable preferred stock - financial services sector	11,719		15		75		11,659
Nonredeemable preferred stock - utilities sector	1,118		0		25		1,093
Total available-for-sale securities	$	754,636	$	7,722	$	3,645	$	758,713

The amortized cost and estimated fair value of available-for-sale securities at March 31, 2018, are shown below by remaining contractual term to maturity. Mortgage-backed securities are allocated based upon stated maturity dates. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	At March 31, 2018
	Amortized		Estimated
(in thousands)	cost		fair value
Due in one year or less	$	96,656	$	96,574
Due after one year through five years	254,866		255,157
Due after five years through ten years	258,775		257,096
Due after ten years	122,321		120,977
Total available-for-sale securities	$	732,618	$	729,804

Available-for-sale securities in a gross unrealized loss position are as follows. Data is provided by length of time for securities in a gross unrealized loss position.



	At March 31, 2018
	Less than 12 months				12 months or longer				Total
(dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		No. of holdings
Available-for-sale securities:
U.S. treasury	$	34,984	$	232	$	1,480	$	44	$	36,464	$	276	5
States & political subdivisions	103,285		1,934		13,896		730		117,181		2,664		59
Corporate debt securities	180,493		3,290		28,812		514		209,305		3,804		438
Residential mortgage-backed securities	4,779		94		6,476		133		11,255		227		14
Commercial mortgage-backed securities	15,108		264		11,816		736		26,924		1,000		23
Collateralized debt obligations	27,463		101		0		0		27,463		101		18
Other debt securities	333		0		0		0		333		0		1
Total available-for-sale securities	$	366,445	$	5,915	$	62,480	$	2,157	$	428,925	$	8,072	558
Quality breakdown of available-for-sale securities:
Investment grade	$	286,647	$	3,671	$	58,721	$	1,693	$	345,368	$	5,364	194
Non-investment grade	79,798		2,244		3,759		464		83,557		2,708		364
Total available-for-sale securities	$	366,445	$	5,915	$	62,480	$	2,157	$	428,925	$	8,072	558



	At December 31, 2017
	Less than 12 months				12 months or longer				Total
(dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		No. of holdings
Available-for-sale securities:
U.S. treasury	$	10,237	$	110	$	1,497	$	29	$	11,734	$	139	4
States & political subdivisions	52,553		288		14,361		332		66,914		620		33
Corporate debt securities	171,154		1,585		31,113		339		202,267		1,924		331
Residential mortgage-backed securities	4,156		29		7,064		95		11,220		124		11
Commercial mortgage-backed securities	10,836		85		11,984		612		22,820		697		19
Collateralized debt obligations	21,598		41		0		0		21,598		41		12
Other debt securities	1,499		0		0		0		1,499		0		1
Total fixed maturities	272,033		2,138		66,019		1,407		338,052		3,545		411
Nonredeemable preferred stock - financial services sector	9,644		25		0		0		9,644		25		1
Nonredeemable preferred stock - utilities sector	1,093		75		0		0		1,093		75		5
Total available-for-sale securities	$	282,770	$	2,238	$	66,019	$	1,407	$	348,789	$	3,645	417
Quality breakdown of fixed maturities:
Investment grade	$	214,586	$	1,064	$	62,193	$	985	$	276,779	$	2,049	158
Non-investment grade	57,447		1,074		3,826		422		61,273		1,496		253
Total fixed maturities	$	272,033	$	2,138	$	66,019	$	1,407	$	338,052	$	3,545	411

The above securities have been evaluated and determined to be temporary impairments for which we expect to recover our entire principal plus interest. The primary components of this analysis include a general review of market conditions and financial performance of the issuer along with the extent and duration at which fair value is less than cost. Any securities that we intend to sell or will more likely than not be required to sell before recovery are included in other-than-temporary impairments, which are recognized in earnings.

Net investment income

Interest and dividend income are recognized as earned and recorded to net investment income. Investment income, net of expenses, was generated from the following portfolios:



	Three months ended March 31,
(in thousands)	2018		2017
Fixed maturities ⁽¹⁾	$	6,110	$	5,904
Equity securities	142		32
Cash equivalents and other	1,008		521
Total investment income	7,260		6,457
Less: investment expenses	440		476
Investment income, net of expenses	$	6,820	$	5,981

(1) Includes interest earned on note receivable from Erie Family Life Insurance Company ("EFL") of $0.4 million in 2018 and 2017.

Realized investment gains (losses)

Realized gains and losses on sales of securities are recognized in income based upon the specific identification method. Realized gains (losses) on investments were as follows:



	Three months ended March 31,
(in thousands)	2018			2017
Available-for-sale securities:
Gross realized gains	$	340		$	580
Gross realized losses	(685		)	(158		)
Net realized (losses) gains on available-for-sale securities	(345		)	422
Equity securities	(120		)	—
Miscellaneous	0			94
Net realized investment (losses) gains	$	(465	)	$	516

The portion of net unrealized losses recognized during the reporting period, related to equity securities still held at the reporting date, is calculated as follows:



	Three months ended March 31,
(in thousands)	2018			2017
Equity securities: ⁽¹⁾
Total net realized losses	$	(120	)	$	—
Less: net losses realized on securities sold	(34		)	—
Net unrealized losses recognized during the period on securities held at reporting date	$	(86	)	$	—

(1) With the adoption of ASU 2016-01, effective January 1, 2018, changes in unrealized gains and losses on equity securities are included in net realized investment gains (losses) in the Statement of Operations. The adoption of this guidance resulted in a reclassification of net unrealized losses of $0.1 million from accumulated other comprehensive loss to retained earnings at January 1, 2018.

There were no other-than-temporary impairments on available-for-sale securities recognized in earnings during the quarter ended March 31, 2018. Other-than-temporary impairments on available-for-sale securities recognized in earnings were $0.1 million for the quarter ended March 31, 2017. We have the intent to sell all credit-impaired available-for-sale debt securities; therefore, the entire amount of the impairment charges were included in earnings and no non-credit impairments were recognized in other comprehensive income.

Limited partnerships

The majority of our limited partnership holdings are considered investment companies where the general partners record assets at fair value. These limited partnerships are recorded using the equity method of accounting and are generally reported on a one-quarter lag; therefore, our year-to-date limited partnership results through March 31, 2018 are comprised of partnership financial results for the fourth quarter of 2017. Given the lag in reporting, our limited partnership results do not reflect the market conditions of the first quarter of 2018. We also own some real estate limited partnerships that do not meet the criteria of an investment company. These partnerships prepare audited financial statements on a cost basis. We have elected to report these limited partnerships under the fair value option, which is based on the NAV from our partner's capital statement reflecting the general partner's estimate of fair value for the fund's underlying assets. Fair value provides consistency in the evaluation and financial reporting for these limited partnerships and limited partnerships accounted for under the equity method. Cash contributions made to and distributions received from the partnerships are recorded in the period in which the transaction occurs.

Amounts included in equity in (losses) earnings of limited partnerships by method of accounting are included below:



	Three months ended March 31,
(in thousands)	2018			2017
Equity in earnings of limited partnerships accounted for under the equity method	$	195		$	250
Change in fair value of limited partnerships accounted for under the fair value option	(387		)	(37		)
Equity in (losses) earnings of limited partnerships	$	(192	)	$	213

The following table summarizes limited partnership investments by sector:



(in thousands)	At March 31, 2018		At December 31, 2017
Private equity	$	31,705	$	31,663
Mezzanine debt	3,288		3,516
Real estate	4,692		5,127
Real estate - fair value option	4,429		4,816
Total limited partnership investments	$	44,114	$	45,122

See also Note 13, "Commitments and Contingencies" for investment commitments related to limited partnerships.