5 -

Investments

The amortized cost and estimated fair values of our fixed maturities and equity securities at September 30, 2013 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
Held to Maturity
Obligations of states and political subdivisions	$	30,102	$	670	$	—	$	30,772
Residential mortgage-backed securities		106		6		—		112

Totals	$	30,208	$	676	$	—	$	30,884


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	74,697	$	207	$	3,247	$	71,657
Obligations of states and political subdivisions		398,591		14,872		10,509		402,954
Corporate securities		56,173		1,121		1,177		56,117
Residential mortgage-backed securities		140,039		1,630		2,588		139,081

Fixed maturities		669,500		17,830		17,521		669,809
Equity securities		13,520		165		285		13,400

Totals	$	683,020	$	17,995	$	17,806	$	683,209

At September 30, 2013, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $329.9 million and an amortized cost of $323.7 million. Our holdings at September 30, 2013 also included special revenue bonds with an aggregate fair value of $103.8 million and an amortized cost of $105.0 million. With respect to both categories of these bonds, we held no securities of any issuer that comprised more than 10% of the category at September 30, 2013. Education bonds and water and sewer utility bonds represented 55% and 22%, respectively, of our total investments in special revenue bonds based on their carrying values at September 30, 2013. Many of the issuers of the special revenue bonds we held at September 30, 2013 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we held are similar to general obligation bonds.

The amortized cost and estimated fair values of our fixed maturities and equity securities at December 31, 2012 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
Held to Maturity
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	1,000	$	12	$	—	$	1,012
Obligations of states and political subdivisions		40,909		1,609		—		42,518
Residential mortgage-backed securities		191		15		—		206

Totals	$	42,100	$	1,636	$	—	$	43,736


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	70,254	$	1,101	$	44	$	71,311
Obligations of states and political subdivisions		385,372		32,221		606		416,987
Corporate securities		73,942		3,523		109		77,356
Residential mortgage-backed securities		125,606		3,316		66		128,856

Fixed maturities		655,174		40,161		825		694,510
Equity securities		8,663		201		107		8,757

Totals	$	663,837	$	40,362	$	932	$	703,267

At December 31, 2012, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $358.5 million and an amortized cost of $332.4 million. Our holdings at December 31, 2012 also included special revenue bonds with an aggregate fair value of $101.0 million and an amortized cost of $93.9 million. With respect to both categories, we held no securities of any issuer that comprised more than 10% of the category at December 31, 2012. Education bonds and water and sewer utility bonds represented 54% and 19%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2012. Many of the issuers of the special revenue bonds we held at December 31, 2012 have the authority to impose ad valorem taxes. In that respect, many of the special revenue bonds we held are similar to general obligation bonds.

We show below the amortized cost and estimated fair value of our fixed maturities at September 30, 2013 by contractual maturity. 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.


	Amortized Cost		Estimated Fair Value
	(in thousands)
Held to maturity
Due in one year or less	$	—	$	—
Due after one year through five years		25,158		25,709
Due after five years through ten years		4,944		5,063
Due after ten years		—		—
Residential mortgage-backed securities		106		112

Total held to maturity	$	30,208	$	30,884

Available for sale
Due in one year or less	$	9,006	$	9,124
Due after one year through five years		38,779		39,835
Due after five years through ten years		210,203		212,654
Due after ten years		271,473		269,115
Residential mortgage-backed securities		140,039		139,081

Total available for sale	$	669,500	$	669,809

Gross realized gains and losses from investments before applicable income taxes were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)
Gross realized gains:
Fixed maturities	$	390	$	1,249	$	2,730	$	4,944
Equity securities		352		215		1,093		1,003

		742		1,464		3,823		5,947

Gross realized losses:
Fixed maturities		304		36		328		42
Equity securities		89		116		551		755

		393		152		879		797

Net realized gains	$	349	$	1,312	$	2,944	$	5,150

We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at September 30, 2013 as follows:


	Less Than 12 Months				More Than 12 Months
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	55,647	$	3,139	$	1,421	$	108
Obligations of states and political subdivisions		102,382		10,199		2,176		310
Corporate securities		20,611		1,059		1,995		118
Residential mortgage-backed securities		63,787		2,301		5,296		287
Equity securities		4,232		261		328		24

Totals	$	246,659	$	16,959	$	11,216	$	847

We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at December 31, 2012 as follows:


	Less Than 12 Months				More Than 12 Months
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	12,308	$	44	$	—	$	—
Obligations of states and political subdivisions		22,134		606		—		—
Corporate securities		12,272		79		2,959		30
Residential mortgage-backed securities		22,492		66		—		—
Equity securities		2,226		107		—		—

Totals	$	71,432	$	902	$	2,959	$	30

Of our total fixed maturity securities with an unrealized loss at September 30, 2013, we classified 183 securities with a fair value of $253.3 million and an unrealized loss of $17.5 million as available-for-sale and carried them at fair value on our balance sheet.

Of our total fixed maturity securities with an unrealized loss at December 31, 2012, we classified 46 securities with a fair value of $72.2 million and an unrealized loss of $825,168 as available-for-sale and carried them at fair value on our balance sheet.

We have no direct exposure to sub-prime residential mortgage-backed securities and hold no collateralized debt obligations. Substantially all of the unrealized losses in our fixed maturity investment portfolio have resulted from increased market interest rates and the related impact on our fixed maturity investment valuations. We make estimates concerning the valuation of our investments and the recognition of other-than-temporary declines in the value of our investments. For equity securities, when we consider the decline in value of an individual investment to be other than temporary, we write the investment down to its fair value, and we reflect the amount of the write-down as a realized loss in our results of operations. We individually monitor all investments for other-than-temporary declines in value. Generally, if an individual equity security has depreciated in value by more than 20% of its original cost, and has been in an unrealized loss position for more than six months, we assume the decline in value is other than temporary. We held nine equity securities that were in an unrealized loss position at September 30, 2013. Based upon our analysis of general market conditions and underlying factors impacting these equity securities, we consider these declines in value to be temporary. With respect to a debt security that is in an unrealized loss position, we first assess if we intend to sell the debt security. If we intend to sell the debt security, we recognize the impairment loss in our results of operations. If we do not intend to sell the debt security, we determine whether it is more likely than not that we will be required to sell the debt security prior to recovery. If it is more likely than not that we will be required to sell the debt security prior to recovery, we recognize an impairment loss in our results of operations. If it is more likely than not that we will not be required to sell the debt security prior to recovery, we then evaluate whether a credit loss has occurred. To determine whether a credit loss has occurred, we compare the amortized cost of the debt security to the present value of the cash flows we expect to receive. If we expect a cash flow shortfall, we consider a credit loss to have occurred. If we consider a credit loss to have occurred, we consider the impairment to be other than temporary. We then recognize the amount of the impairment loss related to the credit loss in our results of operations, and we recognize the remaining portion of the impairment loss in our other comprehensive income, net of applicable taxes. In addition, we may write down securities in an unrealized loss position based on a number of other factors, including whether the fair value of the investment is significantly below its cost, whether the financial condition of the issuer of the security has deteriorated, the occurrence of industry, company and geographic events that have negatively impacted the value of the security and rating agency downgrades. We determined that no investments with fair values below cost had declined on an other-than-temporary basis during the first nine months of 2013 and 2012, respectively.

We amortize premiums and discounts on debt securities over the life of the security as an adjustment to yield using the effective interest method. We compute realized investment gains and losses using the specific identification method.

We amortize premiums and discounts on mortgage-backed debt securities using anticipated prepayments.

We account for investments in our affiliates using the equity method of accounting. Under this method, we record our investment at cost, with adjustments for our share of our affiliates’ earnings and losses as well as changes in the equity of our affiliates due to unrealized gains and losses. Our investments in affiliates include our 48.2% ownership interest in DFSC. We include our share of DFSC’s net income in our results of operations. We have compiled the following summary financial information for DFSC at September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and 2012, respectively, from the financial statements of DFSC. The financial information of DFSC at September 30, 2013 and for the three and nine months then ended is unaudited.


	September 30, 2013		December 31, 2012
	(in thousands)
Balance sheets:
Total assets	$	514,409	$	509,670

Total liabilities	$	439,107	$	433,490
Stockholders’ equity		75,302		76,180

Total liabilities and stockholders’ equity	$	514,409	$	509,670


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)
Income statements:
Net income	$	1,525	$	2,771	$	5,184	$	7,510