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Investments
 12 Months Ended
Dec. 31, 2018
Investments [Abstract]  
Investments
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 December 31, 2018
(in thousands)
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. Treasury (1)
 
$
208,610

 
$
18

 
$
216

 
$
208,412

States & political subdivisions (1)
 
157,003

 
2,020

 
0

 
159,023

Corporate debt securities
 
259,362

 
139

 
9,554

 
249,947

Residential mortgage-backed securities
 
4,603

 
38

 
32

 
4,609

Commercial mortgage-backed securities
 
47,022

 
80

 
587

 
46,515

Collateralized debt obligations
 
65,039

 
30

 
830

 
64,239

Other debt securities
 
15,756

 
33

 
11

 
15,778

Total available-for-sale securities
 
$
757,395

 
$
2,358

 
$
11,230

 
$
748,523


  (1)
In the fourth quarter of 2018, we began selling off our municipal bonds as part of a portfolio rebalancing. We intend to sell the remaining municipal bonds in the first half of 2019. We have currently invested proceeds from these sales in short-term U.S. Treasuries.
 
 
 
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 December 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 December 31, 2018
(in thousands)
 
Amortized
 
Estimated
 
 
cost
 
fair value
Due in one year or less
 
$
263,957

 
$
263,837

Due after one year through five years
 
163,276

 
160,504

Due after five years through ten years
 
217,659

 
212,692

Due after ten years
 
112,503

 
111,490

Total available-for-sale securities(1)
 
$
757,395

 
$
748,523


(1) The contractual maturities of our municipal bond portfolio are included in the table. However, given our intent to sell this portfolio, municipal bond securities are classified as current assets in our Statements of Financial Position at December 31, 2018.
 
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 December 31, 2018
(dollars in thousands)
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
No. of
 
 
value
 
losses
 
value
 
losses
 
value
 
losses
 
holdings
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
129,474

 
$
19

 
$
11,656

 
$
197

 
$
141,130

 
$
216

 
7

Corporate debt securities
 
157,300

 
6,866

 
86,586

 
2,688

 
243,886

 
9,554

 
635

Residential mortgage-backed securities
 
777

 
6

 
1,618

 
26

 
2,395

 
32

 
3

Commercial mortgage-backed securities
 
17,624

 
175

 
16,997

 
412

 
34,621

 
587

 
30

Collateralized debt obligations
 
55,246

 
826

 
1,248

 
4

 
56,494

 
830

 
39

Other debt securities
 
8,213

 
11

 
0

 
0

 
8,213

 
11

 
7

Total available-for-sale securities
 
$
368,634

 
$
7,903

 
$
118,105

 
$
3,327

 
$
486,739

 
$
11,230

 
721

Quality breakdown of available-for-sale securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Investment grade
 
$
242,821

 
$
1,295

 
$
98,118

 
$
1,641

 
$
340,939

 
$
2,936

 
147

Non-investment grade
 
125,813

 
6,608

 
19,987

 
1,686

 
145,800

 
8,294

 
574

Total available-for-sale securities
 
$
368,634

 
$
7,903

 
$
118,105

 
$
3,327

 
$
486,739

 
$
11,230

 
721


 
 
 
 
At December 31, 2017
(dollars in thousands)
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
No. of
 
 
value
 
losses
 
value
 
losses
 
value
 
losses
 
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
Investment income, net of expenses, was generated from the following portfolios for the years ended December 31:
(in thousands)
 
2018
 
2017
 
2016
Fixed maturities (1)
 
$
24,978

 
$
23,587

 
$
20,175

Equity securities
 
628

 
82

 
171

Cash equivalents and other
 
5,628

 
2,486

 
1,391

Total investment income
 
31,234

 
26,155

 
21,737

Less: investment expenses
 
1,025

 
1,516

 
1,179

Investment income, net of expenses
 
$
30,209

 
$
24,639

 
$
20,558


(1)
Includes interest earned on note receivable from Erie Family Life Insurance Company ("EFL") of $1.6 million in 2018 and $1.7 million in 2017 and 2016.
 
Realized investment (losses) gains
Realized (losses) gains on investments were as follows for the years ended December 31:
(in thousands)
 
2018
 
2017
 
2016
Available-for-sale securities:
 
 
 
 
 
 
Gross realized gains
 
$
1,892

 
$
2,996

 
$
2,112

Gross realized losses
 
(3,189
)
 
(1,756
)
 
(2,147
)
Net realized (losses) gains on available-for-sale securities
 
(1,297
)
 
1,240

 
(35
)
Equity securities
 
(819
)
 
—

 
—

Common stock trading securities
 
—

 
0

 
707

Other
 
106

 
94

 
0

Net realized investment (losses) gains
 
$
(2,010
)
 
$
1,334

 
$
672




The portion of net unrealized losses recognized during the reporting period related to equity securities held at the reporting date is calculated as follows for the years ended December 31:
(in thousands)
 
2018
 
2017
 
2016
Equity securities: (1)
 
 
 
 
 
 
Net losses recognized during the period
 
$
(819
)
 
$
—

 
$
—

Less: net losses recognized on securities sold
 
(86
)
 
—

 
—

Net unrealized losses recognized on securities held at reporting date
 
$
(733
)
 
$
—

 
$
—


(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 $1.6 million, $0.2 million and $0.4 million for the years ended December 31, 2018, 2017 and 2016, 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.  See also Note 2, "Significant Accounting Policies".

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 December 31, 2018 are comprised of partnership financial results for the fourth quarter of 2017 and the first, second and third quarters of 2018.  Given the lag in reporting, our limited partnership results do not reflect the market conditions of the fourth quarter of 2018.  We also own one real estate limited partnership that does not meet the criteria of an investment company. This partnership prepares audited financial statements on a cost basis. We have elected to report this limited partnership 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 this limited partnership 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.
Equity in (losses) earnings of limited partnerships by method of accounting were as follows for the years ended December 31:
(in thousands)
 
2018
 
2017
 
2016
Equity in (losses) earnings of limited partnerships - equity method
 
$
(448
)
 
$
1,925

 
$
6,273

Change in fair value of limited partnerships - fair value option
 
(374
)
 
876

 
752

Equity in (losses) earnings of limited partnerships
 
$
(822
)
 
$
2,801

 
$
7,025




The following table summarizes limited partnership investments by sector at December 31:
(in thousands)
 
2018
 
2017
Private equity
 
$
28,271

 
$
31,663

Mezzanine debt
 
1,152

 
3,516

Real estate
 
2,192

 
5,127

Real estate - fair value option
 
3,206

 
4,816

Total limited partnership investments
 
$
34,821

 
$
45,122



See also Note 16, "Commitments and Contingencies", for investment commitments related to limited partnerships.