NOTE 4. INVESTMENTS

The following tables set forth our Company’s Available-For-Sale Investments as of June 30, 2018 and December 31, 2017 and include Other-Than-Temporary-Impairment (“OTTI”) securities recognized within Accumulated Other Comprehensive Income (“AOCI”):

	June 30, 2018
			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
amounts in thousands	Value		Gains		(Losses)			Cost
Fixed Maturities:
U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds	$	289,612	$	955	$	(4,189	)	$	292,846
States, Municipalities and Political Subdivisions		658,129		10,410		(4,870	)		652,589
Mortgage-Backed and Asset-Backed Securities:
Agency Residential Mortgage-Backed Securities		362,870		1,091		(14,497	)		376,276
Residential Mortgage Obligations		96,134		464		(431	)		96,101
Asset-Backed Securities		476,838		737		(2,749	)		478,850
Commercial Mortgage-Backed Securities		168,609		807		(2,817	)		170,619
Subtotal	$	1,104,451	$	3,099	$	(20,494	)	$	1,121,846
Corporate Exposures⁽¹⁾		909,349		4,303		(19,302	)		924,348
Total Fixed Maturities	$	2,961,541	$	18,767	$	(48,855	)	$	2,991,629
Short-Term Investments		6,368		—		—			6,368
Total Available-For-Sale Investments	$	2,967,909	$	18,767	$	(48,855	)	$	2,997,997

(1) -

Corporate Exposures consist of investments in corporate bonds, hybrid bonds and redeemable preferred stocks.

	December 31, 2017
			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
amounts in thousands	Value		Gains		(Losses)			Cost
Fixed Maturities:
U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds	$	393,563	$	2,081	$	(2,014	)	$	393,496
States, Municipalities and Political Subdivisions		814,632		20,136		(1,423	)		795,919
Mortgage-Backed and Asset-Backed Securities:
Agency Residential Mortgage-Backed Securities		407,619		2,352		(5,414	)		410,681
Residential Mortgage Obligations		54,104		606		(79	)		53,577
Asset-Backed Securities		328,753		2,138		(663	)		327,278
Commercial Mortgage-Backed Securities		160,904		2,354		(1,182	)		159,732
Subtotal	$	951,380	$	7,450	$	(7,338	)	$	951,268
Corporate Exposures⁽¹⁾		897,479		14,491		(3,737	)		886,725
Total Fixed Maturities	$	3,057,054	$	44,158	$	(14,512	)	$	3,027,408
Equity Securities:
Common Stocks	$	52,439	$	7,423	$	(112	)	$	45,128
Preferred Stocks		183,542		6,071		(1,560	)		179,031
Total Equity Securities	$	235,981	$	13,494	$	(1,672	)	$	224,159
Short-Term Investments		6,480		3		—			6,477
Total Available-For-Sale Investments	$	3,299,515	$	57,655	$	(16,184	)	$	3,258,044

(1) -

Corporate Exposures consist of investments in corporate bonds, hybrid bonds and redeemable preferred stocks.

The following table sets forth our Company’s Equity Securities at fair value as of June 30, 2018:

	As of June 30, 2018
			Gross		Gross
	Fair		Unrealized		Unrealized			Cost
amounts in thousands	Value		Gains		(Losses)
Equity Securities:
Common Stocks	$	145,077	$	9,749	$	(499	)	$	135,827
Preferred Stocks		182,389		3,854		(3,135	)		181,670
Total Equity Securities	$	327,466	$	13,603	$	(3,634	)	$	317,497

Our Company made investments in certain companies, which are reported as Other Invested Assets on the Consolidated Balance Sheet and accounted for using the equity method. In applying the equity method, these investments were initially recorded at cost and subsequently adjusted based on our Company’s proportionate share of the net income or loss of the investments. Our initial purchase price for these investments was $2.0 million with a current carrying value of $1.7 million at June 30, 2018 and December 31, 2017, as reflected on our Consolidated Balance Sheet.

Other Invested Assets also includes overseas deposits with a fair value of $36.6 million at June 30, 2018 and $28.8 million at December 31, 2017. The overseas deposits consist of investments in private funds which are managed centrally by The Corporation of Lloyds in support of all Lloyd’s market participants. The funds consist of fixed income securities, bank deposits, and cash invested in local markets which are intended to fulfill regulatory deposit requirements in worldwide jurisdictions. Our Company’s ability to withdraw from the funds is restricted by an annual and quarterly funding and release process managed by Lloyd’s in conjunction with Syndicate 1221’s capital requirements in various jurisdictions.

As of June 30, 2018 and December 31, 2017, our Company did not have a concentration of greater than 5% of invested assets in a single non-government backed issuer.

As of June 30, 2018 and December 31, 2017, Fixed Maturities for which Non-Credit OTTI was previously recognized and included in AOCI were in a Net Unrealized Gain position of $0.4 million and $0.5 million, respectively.

The fair value of our Company’s Fixed Maturities investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, foreign exchange rates and credit spreads. Our Company does not have the intent to sell nor is it more likely than not that it will have to sell Fixed Maturities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. Our Company does not intend to sell, and it is more likely than not that our Company will not be required to sell, these securities before the recovery of the amortized cost basis. Our Company may realize investment losses to the extent our liquidity needs require the disposition of Fixed Maturity securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors our Company considers when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the Consolidated Financial Statements.

The contractual maturity dates for Fixed Maturities categorized by the number of years until maturity as of June 30, 2018 are shown in the following table:

	June 30, 2018
	Fair		Amortized
amounts in thousands	Value		Cost
Due in one year or less	$	219,948	$	221,066
Due after one year through five years		722,278		732,073
Due after five years through ten years		336,352		338,140
Due after ten years		578,512		578,504
Mortgage-Backed and Asset-Backed Securities		1,104,451		1,121,846
Total	$	2,961,541	$	2,991,629

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Prepayment assumptions associated with the Mortgage-Backed and Asset-Backed Securities are reviewed on a periodic basis. When changes in prepayment assumptions are deemed necessary as the result of actual prepayments differing from anticipated prepayments, securities are revalued based upon the new prepayment assumptions utilizing the retrospective accounting method. Due to the periodic repayment of principal, our Mortgage-Backed and Asset-Backed Securities are estimated to have an effective maturity of approximately 5.3 years.

The following tables summarize all Available-For-Sale securities in a gross unrealized loss position as of June 30, 2018 and December 31, 2017, showing the aggregate fair value and gross unrealized loss by the length of time those securities have continuously been in a gross unrealized loss position:

	June 30, 2018
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
amounts in thousands	Value		(Losses)			Value		(Losses)			Value		(Losses)
Fixed Maturities:
U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds	$	220,029	$	(3,420	)	$	39,864	$	(769	)	$	259,893	$	(4,189	)
States, Municipalities and Political Subdivisions		213,600		(3,184	)		42,654		(1,686	)		256,254		(4,870	)
Mortgage-Backed and Asset-Backed Securities:
Agency Residential Mortgage-Backed Securities		115,138		(3,504	)		214,279		(10,993	)		329,417		(14,497	)
Residential Mortgage Obligations		78,032		(421	)		387		(10	)		78,419		(431	)
Asset-Backed Securities		273,120		(2,413	)		23,583		(336	)		296,703		(2,749	)
Commercial Mortgage-Backed Securities		59,304		(954	)		22,124		(1,863	)		81,428		(2,817	)
Subtotal	$	525,594	$	(7,292	)	$	260,373	$	(13,202	)	$	785,967	$	(20,494	)
Corporate Exposures ⁽¹⁾		643,226		(15,432	)		101,454		(3,870	)		744,680		(19,302	)
Total Fixed Maturities	$	1,602,449	$	(29,328	)	$	444,345	$	(19,527	)	$	2,046,794	$	(48,855	)

(1) -

Corporate Exposures consist of investments in corporate bonds, hybrid bonds and redeemable preferred stocks.

	December 31, 2017
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
amounts in thousands	Value		(Losses)			Value		(Losses)			Value		(Losses)
Fixed Maturities:
U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds	$	273,672	$	(1,502	)	$	54,484	$	(512	)	$	328,156	$	(2,014	)
States, Municipalities and Political Subdivisions		74,097		(503	)		45,085		(920	)		119,182		(1,423	)
Mortgage-Backed and Asset-Backed Securities:
Agency Residential Mortgage-Backed Securities		87,496		(346	)		236,745		(5,068	)		324,241		(5,414	)
Residential Mortgage Obligations		12,418		(62	)		546		(17	)		12,964		(79	)
Asset-Backed Securities		85,877		(468	)		24,733		(195	)		110,610		(663	)
Commercial Mortgage-Backed Securities		20,482		(95	)		22,903		(1,087	)		43,385		(1,182	)
Subtotal	$	206,273	$	(971	)	$	284,927	$	(6,367	)	$	491,200	$	(7,338	)
Corporate Exposures ⁽¹⁾		295,433		(1,690	)		121,410		(2,047	)		416,843		(3,737	)
Total Fixed Maturities	$	849,475	$	(4,666	)	$	505,906	$	(9,846	)	$	1,355,381	$	(14,512	)
Equity Securities:
Common Stocks	$	11,245	$	(81	)	$	1,770	$	(31	)	$	13,015	$	(112	)
Preferred Stocks		50,861		(1,524	)		662		(36	)		51,523		(1,560	)
Total Equity Securities	$	62,106	$	(1,605	)	$	2,432	$	(67	)	$	64,538	$	(1,672	)
Total Fixed Maturities and Equity Securities	$	911,581	$	(6,271	)	$	508,338	$	(9,913	)	$	1,419,919	$	(16,184	)

(1) -

Corporate Exposures consist of investments in corporate bonds, hybrid bonds and redeemable preferred stocks.

Our Company analyzes impaired securities quarterly to determine if any impairments are other-than-temporary. The above securities with unrealized losses are deemed to be temporarily impaired based on our evaluation.

As of June 30, 2018, there were 753 Fixed Maturities in an unrealized loss position. As of December 31, 2017, there were 454 Fixed Maturities and 22 Equity Securities in an unrealized loss position. As of June 30, 2018, the gross unrealized loss for the greater than 12 months category consists primarily of Agency Residential Mortgage-Backed Securities and Corporate Exposures principally due to an increase in interest rates and spread widening. The gross unrealized loss for the less than 12 months category for the period ended June 30, 2018 consists primarily of Corporate Exposures due to spread widening. As of December 31, 2017, the gross unrealized loss for the greater than 12 month category consists primarily of Agency Residential Mortgage-Backed Securities and Corporate Exposures and is mostly due to an increase in interest rates since the time of purchase. The gross unrealized loss for the less than 12 months category for the period ended December 31, 2017 consists primarily of Corporate Bonds and Preferred Stocks, which are reported in Equity Securities, due to an increase in interest rates since time of purchase, as well as Foreign Government Bonds due to an unfavorable exchange rate movement in our Canadian portfolio.

As of June 30, 2018 and December 31, 2017, the largest unrealized loss by a non-government backed issuer in the investment portfolio was $1.7 million and $0.7 million, respectively.

Our Company’s ability to hold securities is supported by sufficient cash flow from our operations and from maturities within our investment portfolio in order to meet our claims payments and other disbursement obligations arising from our underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information and market conditions.

Upon adoption of ASU 2016-01 as of January 1, 2018, changes in the fair value of Equity Securities are recognized through Net Income. Our Company did not have any credit related OTTI losses during the three months ended June 30, 2018 or 2017. Our Company did not have any credit related OTTI losses during the six months ended June 30, 2018. Our Company had two credit related OTTI losses of $1.1 million in the equity portfolio during the six months ended June 30, 2017.

As of June 30, 2018 and 2017, the cumulative amounts related to our Company’s credit loss portion of the OTTI losses on Fixed Maturities was $2.4 million. There were no changes to the cumulative amounts of our Company’s credit loss portion of OTTI for the three and six months ended June 30, 2018 and 2017.

Our Company’s Net Investment Income was derived from the following sources:

	Three Months Ended June 30,						Six Months Ended June 30,
amounts in thousands	2018			2017			2018			2017
Fixed Maturities	$	21,719		$	19,186		$	42,771		$	37,527
Equity Securities		3,161			3,780			6,086			7,564
Short-Term Investments, Cash & Cash Equivalents		415			87			642			170
Other Invested Assets		141			113			327			242
Total Investment Income	$	25,436		$	23,166		$	49,826		$	45,503
Investment Expenses		(835	)		(901	)		(1,523	)		(1,790	)
Net Investment Income	$	24,601		$	22,265		$	48,303		$	43,713

Realized Gains and Losses on Investments Sold, excluding net OTTI losses recognized in earnings, for the periods indicated, were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
amounts in thousands	2018			2017			2018			2017
Fixed Maturities:
Gains	$	1,541		$	344		$	3,347		$	812
Losses		(481	)		(958	)		(756	)		(2,214	)
Fixed Maturities, Net	$	1,060		$	(614	)	$	2,591		$	(1,402	)

Short-Term Investments, Cash & Cash Equivalents:
Gains	$	63		$	119		$	81		$	226
Losses		(21	)		(45	)		(195	)		(125	)
Short-Term, Net	$	42		$	74		$	(114	)	$	101

Other Invested Assets:
Gains	$	20		$	16		$	70		$	21
Losses		(45	)		(24	)		(86	)		(135	)
Other Invested Assets, Net	$	(25	)	$	(8	)	$	(16	)	$	(114	)

Equity Securities:
Gains	$	754		$	2,470		$	754		$	4,386
Losses		(44	)		(228	)		(259	)		(228	)
Equity Securities, Net	$	710		$	2,242		$	495		$	4,158
Net Realized Gains on Investments Sold	$	1,787		$	1,694		$	2,956		$	2,743

The following table presents the portion of Net Unrealized Gains (Losses) recognized during the three and six months ended June 30, 2018, that relates to Equity Securities held as of June 30, 2018:

	Three Months Ended June 30,		Six Months Ended June 30,
amounts in thousands	2018		2018
Equity Securities:
Total Net Realized and Unrealized Gains (Losses) recognized during the period	$	2,039	$	(1,357	)
Less: Net Realized Gains on Investments Sold recognized during the period		710		495
Net Unrealized Gains (Losses) recognized during the period	$	1,329	$	(1,852	)