Note 6. Investments

Available-for-sale securities

The following tables summarize the cost and fair value of our available-for-sale securities. See also Note 5, "Fair Value" for additional fair value disclosures.



	At June 30, 2018
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Available-for-sale securities:
U.S. treasury	$	36,769	$	0	$	327	$	36,442
States & political subdivisions	257,498		3,443		2,450		258,491
Foreign government securities	500		0		1		499
Corporate debt securities	285,639		663		4,296		282,006
Residential mortgage-backed securities	21,739		374		244		21,869
Commercial mortgage-backed securities	32,878		5		607		32,276
Collateralized debt obligations	71,009		103		136		70,976
Other debt securities	2,863		6		0		2,869
Total available-for-sale securities	$	708,895	$	4,594	$	8,061	$	705,428



	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 June 30, 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 June 30, 2018
	Amortized		Estimated
(in thousands)	cost		fair value
Due in one year or less	$	94,467	$	94,408
Due after one year through five years	241,546		242,016
Due after five years through ten years	249,068		246,058
Due after ten years	123,814		122,946
Total available-for-sale securities	$	708,895	$	705,428

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 June 30, 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	$	34,969	$	278	$	1,474	$	49	$	36,443	$	327	5
States & political subdivisions	99,153		1,763		13,871		687		113,024		2,450		57
Foreign government securities	499		1		0		0		499		1		1
Corporate debt securities	194,322		3,740		28,430		556		222,752		4,296		516
Residential mortgage-backed securities	4,526		98		5,416		146		9,942		244		12
Commercial mortgage-backed securities	15,500		301		8,930		306		24,430		607		22
Collateralized debt obligations	28,250		136		0		0		28,250		136		20
Other debt securities	210		0		0		0		210		0		1
Total available-for-sale securities	$	377,429	$	6,317	$	58,121	$	1,744	$	435,550	$	8,061	634
Quality breakdown of available-for-sale securities:
Investment grade	$	269,062	$	3,554	$	54,423	$	1,577	$	323,485	$	5,131	187
Non-investment grade	108,367		2,763		3,698		167		112,065		2,930		447
Total available-for-sale securities	$	377,429	$	6,317	$	58,121	$	1,744	$	435,550	$	8,061	634



	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		75		0		0		9,644		75		5
Nonredeemable preferred stock - utilities sector	1,093		25		0		0		1,093		25		1
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 June 30,				Six months ended June 30,
(in thousands)	2018		2017		2018		2017
Fixed maturities ⁽¹⁾	$	6,263	$	6,220	$	12,373	$	12,124
Equity securities	142		17		284		49
Cash equivalents and other	1,026		395		2,034		916
Total investment income	7,431		6,632		14,691		13,089
Less: investment expenses	327		393		767		869
Investment income, net of expenses	$	7,104	$	6,239	$	13,924	$	12,220

(1) Includes interest earned on note receivable from Erie Family Life Insurance Company ("EFL") of $0.4 million and $0.8 million for the three and six months ended June 30, 2018 and 2017, respectively.

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 June 30,						Six months ended June 30,
(in thousands)	2018			2017			2018			2017
Available-for-sale securities:
Gross realized gains	$	235		$	507		$	575		$	1,087
Gross realized losses	(301		)	(381		)	(986		)	(539		)
Net realized (losses) gains on available-for-sale securities	(66		)	126			(411		)	548
Equity securities	(68		)	—			(188		)	—
Miscellaneous	102			(2		)	102			92
Net realized investment (losses) gains	$	(32	)	$	124		$	(497	)	$	640

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 June 30,					Six months ended June 30,
(in thousands)	2018			2017		2018			2017
Equity securities: ⁽¹⁾
Total net realized losses	$	(68	)	$	—	$	(188	)	$	—
Less: net losses realized on securities sold	0			—		(34		)	—
Net unrealized losses recognized during the period on securities held at reporting date	$	(68	)	$	—	$	(154	)	$	—

(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.

Other-than-temporary impairments on available-for-sale securities recognized in earnings were $0.6 million and $0.1 million for the quarters ended June 30, 2018 and 2017, respectively, and $0.6 million and $0.2 million for the six months ended June 30, 2018 and 2017, respectively. 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 June 30, 2018 are comprised of partnership financial results for the fourth quarter of 2017 and first quarter of 2018. Given the lag in reporting, our limited partnership results do not reflect the market conditions of the second 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 June 30,					Six months ended June 30,
(in thousands)	2018			2017		2018			2017
Equity in (losses) earnings of limited partnerships accounted for under the equity method	$	(216	)	$	149	$	(21	)	$	399
Change in fair value of limited partnerships accounted for under the fair value option	(3		)	0		(390		)	(37		)
Equity in (losses) earnings of limited partnerships	$	(219	)	$	149	$	(411	)	$	362

The following table summarizes limited partnership investments by sector:



(in thousands)	At June 30, 2018		At December 31, 2017
Private equity	$	30,501	$	31,663
Mezzanine debt	2,916		3,516
Real estate	2,482		5,127
Real estate - fair value option	3,752		4,816
Total limited partnership investments	$	39,651	$	45,122

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