Investments

12 Months Ended

Dec. 31, 2015

Investments

4. Investments

The amortized cost and estimated fair value of investments were as follows as of December 31, 2015 and 2014:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Other than temporary impairments recognized in AOCI (1)
As of December 31, 2015
Fixed maturities:
U.S. treasury and agency obligations	$	106,303	$	1,140	$	(321	)	$	107,122	$	—
Obligations of states and political subdivisions		203,121		2,576		(457	)		205,240		—
Mortgage-backed securities		157,753		2,113		(743	)		159,123		—
Asset-backed securities		261,008		435		(1,421	)		260,022		(9	)
Commercial mortgage-backed securities		142,742		—		(2,352	)		140,390		—
Corporate bonds		334,720		685		(3,294	)		332,111		—
Foreign corporate bonds		102,686		194		(739	)		102,141		—
Total fixed maturities		1,308,333		7,143		(9,327	)		1,306,149		(9	)
Common stock		100,157		16,118		(5,960	)		110,315		—
Other invested assets		32,592		—		—			32,592		—
Total	$	1,441,082	$	23,261	$	(15,287	)	$	1,449,056	$	(9	)

(1) Represents the total amount of other than temporary impairment losses relating to factors other than credit losses recognized in accumulated other comprehensive income (“AOCI”).

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Other than temporary impairments recognized in AOCI (1)
As of December 31, 2014
Fixed maturities:
U.S. treasury and agency obligations	$	78,569	$	2,281	$	(83	)	$	80,767	$	—
Obligations of states and political subdivisions		188,452		3,718		(697	)		191,473		—
Mortgage-backed securities		205,814		3,709		(764	)		208,759		(4	)
Asset-backed securities		177,853		713		(303	)		178,263		(13	)
Commercial mortgage-backed securities		133,984		21		(847	)		133,158		—
Corporate bonds		380,704		3,421		(709	)		383,416		—
Foreign corporate bonds		107,572		625		(558	)		107,639		—
Total fixed maturities		1,272,948		14,488		(3,961	)		1,283,475		(17	)
Common stock		99,297		25,689		(2,938	)		122,048		—
Other invested assets		33,174		489		—			33,663		—
Total	$	1,405,419	$	40,666	$	(6,899	)	$	1,439,186	$	(17	)

(1) Represents the total amount of other than temporary impairment losses relating to factors other than credit losses recognized in accumulated other comprehensive income (“AOCI”).

Excluding U.S. treasuries and agency bonds, the Company did not hold any debt or equity investments in a single issuer that was in excess of 5% and 4% of shareholders’ equity at December 31, 2015 and 2014, respectively.

The amortized cost and estimated fair value of the Company’s fixed maturities portfolio classified as available for sale at December 31, 2015, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)	Amortized Cost		Estimated Fair Value
Due in one year or less	$	107,010	$	107,582
Due in one year through five years		595,977		594,859
Due in five years through ten years		38,048		38,016
Due in ten years through fifteen years		1,738		2,137
Due after fifteen years		4,057		4,020
Mortgage-backed securities		157,753		159,123
Asset-backed securities		261,008		260,022
Commercial mortgage-backed securities		142,742		140,390
Total	$	1,308,333	$	1,306,149

The following table contains an analysis of the Company’s securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of December 31, 2015:

	Less than 12 months					12 months or longer (1)					Total
(Dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fixed maturities:
U.S. treasury and agency obligations	$	79,496	$	(321	)	$	—	$	—		$	79,496	$	(321	)
Obligations of states and political subdivisions		49,708		(373	)		7,732		(84	)		57,440		(457	)
Mortgage-backed securities		63,759		(743	)		—		—			63,759		(743	)
Asset-backed securities		203,381		(1,404	)		4,843		(17	)		208,224		(1,421	)
Commercial mortgage-backed securities		118,813		(2,005	)		21,577		(347	)		140,390		(2,352	)
Corporate bonds		211,364		(3,269	)		2,120		(25	)		213,484		(3,294	)
Foreign corporate bonds		63,860		(697	)		5,129		(42	)		68,989		(739	)
Total fixed maturities		790,381		(8,812	)		41,401		(515	)		831,782		(9,327	)
Common stock		36,798		(5,960	)		—		—			36,798		(5,960	)
Total	$	827,179	$	(14,772	)	$	41,401	$	(515	)	$	868,580	$	(15,287	)

(1) Fixed maturities in a gross unrealized loss position for twelve months or longer are primarily comprised of non-credit losses on investment grade securities where management does not intend to sell, and it is more likely than not that the Company will not be forced to sell the security before recovery. The Company has analyzed these securities and has determined that they are not other than temporarily impaired.

The following table contains an analysis of the Company’s securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of December 31, 2014:

	Less than 12 months					12 months or longer (1)					Total
(Dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fixed maturities:
U.S. treasury and agency obligations	$	11,728	$	(9	)	$	3,343	$	(74	)	$	15,071	$	(83	)
Obligations of states and political subdivisions		28,684		(314	)		28,061		(383	)		56,745		(697	)
Mortgage-backed securities		2,818		(7	)		51,203		(757	)		54,021		(764	)
Asset-backed securities		92,123		(283	)		1,683		(20	)		93,806		(303	)
Commercial mortgage-backed securities		92,664		(525	)		26,280		(322	)		118,944		(847	)
Corporate bonds		144,505		(656	)		3,216		(53	)		147,721		(709	)
Foreign corporate bonds		60,518		(558	)		—		—			60,518		(558	)
Total fixed maturities		433,040		(2,352	)		113,786		(1,609	)		546,826		(3,961	)
Common stock		20,002		(2,808	)		1,577		(130	)		21,579		(2,938	)
Total	$	453,042	$	(5,160	)	$	115,363	$	(1,739	)	$	568,405	$	(6,899	)

(1) Fixed maturities in a gross unrealized loss position for twelve months or longer are primarily comprised of non-credit losses on investment grade securities where management does not intend to sell, and it is more likely than not that the Company will not be forced to sell the security before recovery. The Company has analyzed these securities and has determined that they are not other than temporarily impaired.

Subject to the risks and uncertainties in evaluating the potential impairment of a security’s value, the impairment evaluation conducted by the Company as of December 31, 2015 concluded the unrealized losses discussed above are not other than temporary impairments. The impairment evaluation process is discussed in the “Investment” section of Note 2 (“Summary of Significant Accounting Policies”).

The following is a description, by asset type, of the methodology and significant inputs that the Company used to measure the amount of credit loss recognized in earnings, if any:

U.S. treasury and agency obligations—As of December 31, 2015, gross unrealized losses related to U.S. treasury and agency obligations were $0.321 million. All unrealized losses have been in an unrealized loss position for less than 12 months and are rated AA+ or better. Macroeconomic and market analysis is conducted in evaluating these securities. The analysis is driven by moderate interest rate anticipation, yield curve management, and security selection.

Obligations of states and political subdivisions—As of December 31, 2015, gross unrealized losses related to obligations of states and political subdivisions were $0.457 million. Of this amount, $0.084 million have been in an unrealized loss position for twelve months or greater and are rated A or better. All factors that influence performance of the municipal bond market are considered in evaluating these securities. The aforementioned factors include investor expectations, supply and demand patterns, and current versus historical yield and spread relationships. The analysis relies on the output of fixed income credit analysts, as well as dedicated municipal bond analysts who perform extensive in-house fundamental analysis on each issuer, regardless of their rating by the major agencies.

Mortgage-backed securities (“MBS”)—As of December 31, 2015, gross unrealized losses related to mortgage-backed securities were $0.743 million. All unrealized losses have been in an unrealized loss position for less than 12 months and are rated investment grade. Mortgage-backed securities are modeled to project principal losses under downside, base, and upside scenarios for the economy and home prices. The primary assumption that drives the security and loan level modeling is the Home Price Index (“HPI”) projection. The model first projects HPI at the national level, then at the zip-code level based on the historical relationship between the individual zip code HPI and the national HPI. The model utilizes loan level data and borrower characteristics including FICO score, geographic location, original and current loan size, loan age, mortgage rate and type (fixed rate / interest-only / adjustable rate mortgage), issuer / originator, residential type (owner occupied / investor property), dwelling type (single family / multi-family), loan purpose, level of documentation, and delinquency status as inputs. The model also includes the explicit treatment of silent second liens, utilization of loan modification history, and the application of roll rate adjustments.

Asset backed securities (“ABS”)—As of December 31, 2015, gross unrealized losses related to asset backed securities were $1.421 million. Of this amount, $0.017 million have been in an unrealized loss position for twelve months or greater and are rated AAA. The weighted average credit enhancement for the Company’s asset backed portfolio is 23.4. This represents the percentage of pool losses that can occur before an asset backed security will incur its first dollar of principal losses. Every ABS transaction is analyzed on a stand-alone basis. This analysis involves a thorough review of the collateral, prepayment, and structural risk in each transaction. Additionally, the analysis includes an in-depth credit analysis of the originator and servicer of the collateral. The analysis projects an expected loss for a deal given a set of assumptions specific to the asset type. These assumptions are used to calculate at what level of losses the deal will incur its first dollar of principal loss. The major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal and interest.

Commercial mortgage-backed securities (“CMBS”)—As of December 31, 2015, gross unrealized losses related to the CMBS portfolio were $2.352 million. Of this amount, $0.347 million have been in an unrealized loss position for twelve months or greater and are rated AA or better. The weighted average credit enhancement for the Company’s CMBS portfolio is 35.6. This represents the percentage of pool losses that can occur before a mortgage-backed security will incur its first dollar of principal loss. For the Company’s CMBS portfolio, a loan level analysis is utilized where every underlying CMBS loan is re-underwritten based on a set of assumptions reflecting expectations for the future path of the economy. In the analysis, the focus is centered on stressing the significant variables that influence commercial loan defaults and collateral losses in CMBS deals. These variables include: (1) a projected drop in occupancies; (2) capitalization rates that vary by property type and are forecasted to return to more normalized levels as the capital markets repair and capital begins to flow again; and (3) property value stress testing using projected property performance and projected capitalization rates. Term risk is triggered if the projected debt service coverage rate falls below 1x. Balloon risk is triggered if a property’s projected performance does not satisfy new, tighter mortgage standards.

Corporate bonds—As of December 31, 2015, gross unrealized losses related to corporate bonds were $3.294 million. Of this amount, $0.025 million have been in an unrealized loss position for twelve months or greater and are rated BBB or better. The analysis for this sector includes maintaining detailed financial models that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, the issuer’s current competitive position, its vulnerability to changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default.

Foreign bonds—As of December 31, 2015, gross unrealized losses related to foreign bonds were $0.739 million. Of this amount, $0.042 million have been in an unrealized loss position for twelve months or greater and are rated A. For this sector, detailed financial models are maintained that include a projection of each issuer’s future financial performance, including prospective debt servicing capabilities, capital structure composition, and the value of the collateral. The analysis incorporates the macroeconomic environment, industry conditions in which the issuer operates, the issuer’s current competitive position, its vulnerability to changes in the competitive and regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection. Part of the process also includes running downside scenarios to evaluate the expected likelihood of default as well as potential losses in the event of default.

Common stock—As of December 31, 2015, gross unrealized losses related to common stock were $5.960 million. All unrealized losses have been in an unrealized loss position for less than 12 months. To determine if an other than temporary impairment of an equity security has occurred, the Company considers, among other things, the severity and duration of the decline in fair value of the equity security. The Company also examines other factors to determine if the equity security could recover its value in a reasonable period of time.

The Company recorded the following other than temporary impairments (“OTTI”) on its investment portfolio for the years ended December 31, 2015, 2014, and 2013:

	Years Ended December 31,
(Dollars in thousands)	2015			2014			2013
Fixed maturities:
OTTI losses, gross	$	(24	)	$	(31	)	$	(280	)
Portion of loss recognized in other comprehensive income (pre-tax)		—			—			—
Net impairment losses on fixed maturities recognized in earnings		(24	)		(31	)		(280	)
Equity securities		(7,311	)		(470	)		(959	)
Total	$	(7,335	)	$	(501	)	$	(1,239	)

The following table is an analysis of the credit losses recognized in earnings on fixed maturities held by the Company as of December 31, 2015, 2014, and 2013 for which a portion of the OTTI loss was recognized in other comprehensive income.

	Years Ended December 31,
(Dollars in thousands)	2015			2014			2013
Balance at beginning of period	$	50		$	54		$	86
Additions where no OTTI was previously recorded		—			—			—
Additions where an OTTI was previously recorded		—			—			—
Reductions for securities for which the company intends to sell or more likely than not will be required to sell before recovery		—			—			—
Reductions reflecting increases in expected cash flows to be collected		—			—			—
Reductions for securities sold during the period		(19	)		(4	)		(32	)
Balance at end of period	$	31		$	50		$	54

Accumulated Other Comprehensive Income, Net of Tax

Accumulated other comprehensive income, net of tax, as of December 31, 2015 and 2014 was as follows:

(Dollars in thousands)	December 31,
	2015			2014
Net unrealized gains (losses) from:
Fixed maturities	$	(2,184	)	$	10,527
Common stock		10,158			22,751
Other		—			369
Deferred taxes		(3,896	)		(10,263	)
Accumulated other comprehensive income, net of tax	$	4,078		$	23,384

The following tables present the changes in accumulated other comprehensive income, net of tax, by component for the years ended December 31, 2015 and 2014:

Year Ended December 31, 2015 (Dollars in thousands)	Unrealized Gains and Losses on Available for Sale Securities, Net of Tax			Foreign Currency Items, Net of Tax			Accumulated Other Comprehensive Income, Net of Tax
Beginning balance	$	23,647		$	(263	)	$	23,384
Other comprehensive income (loss) before reclassification		(17,065	)		(256	)		(17,321	)
Amounts reclassified from accumulated other comprehensive income (loss)		(2,382	)		397			(1,985	)
Other comprehensive income (loss)		(19,447	)		141			(19,306	)
Ending balance	$	4,200		$	(122	)	$	4,078

Year Ended December 31, 2014 (Dollars in thousands)	Unrealized Gains and Losses on Available for Sale Securities, Net of Tax			Foreign Currency Items, Net of Tax			Accumulated Other Comprehensive Income, Net of Tax
Beginning balance	$	53,950		$	78		$	54,028
Other comprehensive income (loss) before reclassification		6,820			(287	)		6,533
Amounts reclassified from accumulated other comprehensive income (loss)		(37,123	)		(54	)		(37,177	)
Other comprehensive income (loss)		(30,303	)		(341	)		(30,644	)
Ending balance	$	23,647		$	(263	)	$	23,384

The reclassifications out of accumulated other comprehensive income for the years ended December 31, 2015 and 2014 were as follows:

		Amounts Reclassified from Accumulated Other Comprehensive Income Years Ended December 31,
Dollars in thousands) Details about Accumulated Other Comprehensive Income Components	Affected Line Item in the Consolidated Statements of Operations	2015			2014
Unrealized gains and losses on available for sale securities	Other net realized investment (gains)	$	(11,559	)	$	(57,114	)
	Other than temporary impairment losses on investments		7,335			501
	Total before tax		(4,224	)		(56,613	)
	Income tax expense		1,842			19,490
	Unrealized gains and losses on available for sale securities, net of tax	$	(2,382	)	$	(37,123	)
Foreign currency items	Other net realized investment (gains) losses	$	610		$	(83	)
	Income tax expense (benefit)		(213	)		29
	Foreign currency items, net of tax	$	397		$	(54	)
Total reclassifications	Total reclassifications, net of tax	$	(1,985	)	$	(37,177	)

Net Realized Investment Gains (Losses)

The components of net realized investment gains (losses) for the years ended December 31, 2015, 2014, and 2013 were as follows:

	Years Ended December 31,
(Dollars in thousands)	2015			2014			2013
Fixed maturities:
Gross realized gains	$	3,565		$	2,843		$	1,857
Gross realized losses		(2,180	)		(703	)		(691	)
Net realized gains		1,385			2,140			1,166
Common stock:
Gross realized gains		10,379			55,907			27,302
Gross realized losses		(8,246	)		(1,351	)		(2,483	)
Net realized gains		2,133			54,556			24,819
Preferred stock:
Gross realized gains		96			0			0
Gross realized losses		—			0			0
Net realized gains		96			0			0
Derivatives:
Gross realized gains		—			—			1,668
Gross realized losses		(6,988	)		(20,836	)		(241	)
Net realized gains (losses)		(6,988	)		(20,836	)		1,427
Total net realized investment gains (losses)	$	(3,374	)	$	35,860		$	27,412

The proceeds from sales of available for sale securities resulting in net realized investment gains (losses) for the years ended December 31, 2015, 2014, and 2013 were as follows:

	Years Ended December 31,
(Dollars in thousands)	2015		2014		2013
Fixed maturities	$	647,404	$	415,739	$	292,200
Equity securities		39,723		191,765		101,379
Preferred stock		1,540		—		—

Net Investment Income

The sources of net investment income for the years ended December 31, 2015, 2014, and 2013 were as follows:

	Years Ended December 31,
(Dollars in thousands)	2015			2014			2013
Fixed maturities	$	32,091		$	26,788		$	35,669
Equity securities		3,125			5,484			5,452
Cash and cash equivalents		82			61			126
Other invested assets		2,620			87			141
Total investment income		37,918			32,420			41,388
Investment expense		(3,309	)		(3,599	)		(4,179	)
Net investment income	$	34,609		$	28,821		$	37,209

The Company’s total investment return on a pre-tax basis for the years ended December 31, 2015, 2014, and 2013 were as follows:

	Years Ended December 31,
(Dollars in thousands)	2015			2014			2013
Net investment income	$	34,609		$	28,821		$	37,209
Net realized investment gains(losses)		(3,374	)		35,860			27,412
Change in unrealized holding gains and losses		(25,673	)		(45,861	)		7,301
Net realized and unrealized investment returns		(29,047	)		(10,001	)		34,713
Total investment return	$	5,562		$	18,820		$	71,922
Total investment return %		0.3	%		1.2	%		4.6	%
Average investment portfolio	$	1,752,785		$	1,533,104		$	1,549,747

Insurance Enhanced Asset-Backed and Credit Securities

As of December 31, 2015, the Company held insurance enhanced asset-backed and credit securities with a market value of approximately $39.3 million. Approximately $18.6 million of these securities were tax-free municipal bonds, which represented approximately 1.2% of the Company’s total cash and invested assets, net of payable/ receivable for securities purchased and sold. These securities had an average rating of “A+.” Approximately $8.5 million of these bonds are pre-refunded with U.S. treasury securities, of which $0.5 million are backed by financial guarantors, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the bond. Of the remaining $10.1 million of insurance enhanced municipal bonds, $0.5 million would have carried a lower credit rating had they not been insured. The following table provides a breakdown of the ratings for these municipal bonds with and without insurance.

(Dollars in thousands) Rating	Ratings with Insurance		Ratings without Insurance
AA	$	507	$	—
BB		—		507
Total	$	507	$	507

A summary of the Company’s insurance enhanced municipal bonds that are backed by financial guarantors, including the pre-refunded bonds that are escrowed in U.S. government obligations, as of December 31, 2015, is as follows:

(Dollars in thousands) Financial Guarantor	Total		Pre-refunded Securities		Government Guaranteed Securities		Exposure Net of Pre-refunded & Government Guaranteed Securities
Ambac Financial Group	$	1,541	$	469	$	—	$	1,072
Assured Guaranty Corporation		3,616		—		—		3,616
Municipal Bond Insurance Association		4,865		—		—		4,865
Gov’t National Housing Association		551		—		551		—
Total backed by financial guarantors		10,573		469		551		9,553
Other credit enhanced municipal bonds		7,982		7,982		—		—
Total	$	18,555	$	8,451	$	551	$	9,553

In addition to the tax-free municipal bonds, the Company held $20.7 million of insurance enhanced asset-backed and taxable municipal bonds, which represented approximately 1.4% of the Company’s total invested assets, net of receivable/payable for securities purchased and sold. The financial guarantors of the Company’s $20.7 million of insurance enhanced asset-backed and taxable municipal securities include Municipal Bond Insurance Association ($5.0 million), Ambac Financial Group ($1.3 million), Assured Guaranty Corporation ($14.2 million), and Financial Guaranty Insurance Group ($0.2 million).

The Company had no direct investments in the entities that have provided financial guarantees or other credit support to any security held by the Company at December 31, 2015.

Bonds Held on Deposit

Certain cash balances, cash equivalents, equity securities, and bonds available for sale were deposited with various governmental authorities in accordance with statutory requirements, were held as collateral pursuant to borrowing arrangements, or were held in trust pursuant to intercompany reinsurance agreements. The fair values were as follows as of December 31, 2015 and 2014:

	Estimated Fair Value
(Dollars in thousands)	December 31, 2015		December 31, 2014
On deposit with governmental authorities	$	38,815	$	32,790
Intercompany trusts held for the benefit of U.S. policyholders		643,216		495,301
Held in trust pursuant to third party requirements		66,544		95,828
Letter of credit held for third party requirements		5,598		9,340
Securities held as collateral for borrowing arrangements (1)		95,647		222,809
Total	$	849,820	$	856,068

(1) Amount required to collateralize margin borrowing facilities.