4—Investments

The amortized cost and estimated fair values of our fixed maturities at December 31, 2018 and 2017 are as follows:


	2018
Held to Maturity	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	76,222,306	$	174,904	$	1,086,613	$	75,310,597
Obligations of states and political subdivisions		159,292,158		8,236,804		704,104		166,824,858
Corporate securities		127,010,071		396,197		4,391,451		123,014,817
Mortgage-backed securities		40,273,983		64,318		450,277		39,888,024

Totals	$	402,798,518	$	8,872,223	$	6,632,445	$	405,038,296


	2018
Available for Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	45,188,053	$	25,241	$	1,003,365	$	44,209,929
Obligations of states and political subdivisions		73,760,836		1,762,127		306,994		75,215,969
Corporate securities		140,688,937		203,393		3,059,185		137,833,145
Mortgage-backed securities		275,474,625		148,967		6,324,331		269,299,261

Totals	$	535,112,451	$	2,139,728	$	10,693,875	$	526,558,304


	2017
Held to Maturity	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	71,736,445	$	804,012	$	546,868	$	71,993,589
Obligations of states and political subdivisions		137,581,155		11,161,650		112,193		148,630,612
Corporate securities		108,024,776		2,860,255		730,843		110,154,188
Mortgage-backed securities		49,312,701		515,976		156,638		49,672,039

Totals	$	366,655,077	$	15,341,893	$	1,546,542	$	380,450,428


	2017
Available for Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	44,759,456	$	20,377	$	730,409	$	44,049,424
Obligations of states and political subdivisions		128,478,000		3,941,610		302,440		132,117,170
Corporate securities		105,254,120		1,010,744		525,445		105,739,419
Mortgage-backed securities		259,922,761		444,603		3,327,327		257,040,037

Totals	$	538,414,337	$	5,417,334	$	4,885,621	$	538,946,050

At December 31, 2018, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $157.7 million and an amortized cost of $152.2 million. Our holdings also included special revenue bonds with an aggregate fair value of $84.3 million and an amortized cost of $80.9 million. With respect to both categories of bonds, we held no securities of any issuer that comprised more than 10% of that category at December 31, 2018. Education bonds and water and sewer utility bonds represented 49% and 29%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2018. Many of the issuers of the special revenue bonds we held at December 31, 2018 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.

At December 31, 2017, our holdings of obligations of states and political subdivisions included general obligation bonds with an aggregate fair value of $190.7 million and an amortized cost of $181.4 million. Our holdings also included special revenue bonds with an aggregate fair value of $90.0 million and an amortized cost of $84.7 million. With respect to both categories of bonds, we held no securities of any issuer that comprised more than 10% of that category at December 31, 2017. Education bonds and water and sewer utility bonds represented 53% and 26%, respectively, of our total investments in special revenue bonds based on their carrying values at December 31, 2017. Many of the issuers of the special revenue bonds we held at December 31, 2017 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 have segregated within accumulated other comprehensive loss the net unrealized losses of $15.1 million arising prior to the November 30, 2013 reclassification date for fixed maturities reclassified from available for sale to held to maturity. We will amortize this balance over the remaining life of the related securities as an adjustment of yield in a manner consistent with the accretion of discount on the same fixed maturities. During 2018, we recorded amortization of $1.2 million in other comprehensive loss. At December 31, 2018 and 2017, net unrealized losses of $8.6 million and $9.8 million, respectively, remained within accumulated other comprehensive loss.

We set forth below the amortized cost and estimated fair value of fixed maturities at December 31, 2018 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
Held to maturity
Due in one year or less	$	7,058,908	$	7,050,979
Due after one year through five years		71,760,946		72,293,032
Due after five years through ten years		138,736,485		137,974,815
Due after ten years		144,968,196		147,831,446
Mortgage-backed securities		40,273,983		39,888,024

Total held to maturity	$	402,798,518	$	405,038,296

Available for sale
Due in one year or less	$	32,119,775	$	32,223,407
Due after one year through five years		88,814,531		87,999,196
Due after five years through ten years		119,447,672		117,530,095
Due after ten years		19,255,848		19,506,345
Mortgage-backed securities		275,474,625		269,299,261

Total available for sale	$	535,112,451	$	526,558,304

The cost and estimated fair values of our equity securities at December 31, 2018 were as follows:


	Cost		Gross Gains		Gross Losses		Estimated Fair Value
	(in thousands)
Equity securities	$	40,942,716	$	4,817,917	$	2,093,624	$	43,667,009

The cost and estimated fair values of our equity securities at December 31, 2017 were as follows:


	Cost		Gross Gains		Gross Losses		Estimated Fair Value
	(in thousands)
Equity securities	$	44,219,097	$	6,505,287	$	279,141	$	50,445,243

The amortized cost of fixed maturities on deposit with various regulatory authorities at December 31, 2018 and 2017 amounted to $8,795,334 and $9,646,390, respectively.

Our investment in DFSC represented our 48.2% investment in the amount of $41,025,975 and $38,773,420 at December 31, 2018 and 2017, respectively. We accounted for our investment in DFSC using the equity method of accounting. Under this method, we recorded our investment at cost, with adjustments for our share of DFSC’s earnings and losses as well as changes in DFSC’s equity due to its unrealized gains and losses. We and Donegal Mutual sold DFSC in March 2019. We refer you to Note 22—Subsequent Event for information regarding the sale of 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 December 31, 2018 and 2017 from the financial statements of DFSC.


	December 31,
Balance sheets:	2018		2017
Total assets	$	553,190,379	$	567,935,408

Total liabilities	$	468,187,592	$	487,603,999
Stockholders’ equity		85,002,787		80,331,409

Total liabilities and stockholders’ equity	$	553,190,379	$	567,935,408


	Year Ended December 31,
Income statements:	2018		2017		2016
Net income	$	5,457,636	$	3,362,861	$	2,252,456

Other comprehensive (loss) income in our statements of comprehensive (loss) income includes net unrealized (losses) gains of ($387,037), $112,053 and ($103,331) for 2018, 2017 and 2016, respectively, representing our share of DFSC’s unrealized investment gains or losses.

We received a distribution from DFSC of $1.0 million during 2017. Based on the nature of the activities that generated the distribution, we made an accounting policy election to classify the distribution as a return on our investment in DFSC.

We derive net investment income, consisting primarily of interest and dividends, from the following sources:


	2018			2017			2016
Fixed maturities	$	27,733,555		$	26,143,924		$	25,066,582
Equity securities		1,264,120			999,335			1,187,814
Short-term investments		795,522			407,580			115,763
Other		29,450			33,316			108,003

Investment income		29,822,647			27,584,155			26,478,162
Investment expenses		(2,914,991	)		(4,056,851	)		(3,845,432	)

Net investment income	$	26,907,656		$	23,527,304		$	22,632,730

We present below gross gains and losses from investments, including those we classified as held to maturity, and the change in the difference between fair value and cost of investments:


	2018			2017		2016
Gross gains:
Fixed maturities	$	131,660		$	168,855	$	2,161,108
Equity securities		1,890,762			6,197,253		1,378,548

		2,022,422			6,366,108		3,539,656

Gross losses:
Fixed maturities		630,904			98,723		281,131
Equity securities		6,193,027			562,130		732,950

		6,823,931			660,853		1,014,081

Net (losses) gains	$	(4,801,509	)	$	5,705,255	$	2,525,575

Change in difference between fair value and cost of investments:
Fixed maturities	$	(20,641,433	)	$	2,335,578	$	(12,932,470	)
Equity securities		(3,501,853	)		1,569,999		3,160,356

Totals	$	(24,143,286	)	$	3,905,577	$	(9,772,114	)

We recognized $1.2 million of gains and $4.4 million of losses on equity securities held at December 31, 2018 in net investment losses for 2018.

We held fixed maturities with unrealized losses representing declines that we considered temporary at December 31, 2018 as follows:


	Less than 12 months				12 months or longer
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	26,342,398	$	165,774	$	54,900,027	$	1,924,204
Obligations of states and political subdivisions		28,321,962		477,357		21,559,520		533,741
Corporate securities		149,269,854		4,482,870		59,396,885		2,967,766
Mortgage-backed securities		82,593,454		912,616		181,379,875		5,861,992

Totals	$	286,527,668	$	6,038,617	$	317,236,307	$	11,287,703

We held fixed maturities and equity securities with unrealized losses representing declines that we considered temporary at December 31, 2017 as follows:


	Less than 12 months				12 months or longer
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	24,024,445	$	286,518	$	33,987,229	$	990,759
Obligations of states and political subdivisions		10,223,383		120,076		14,127,415		294,557
Corporate securities		35,203,959		253,241		31,560,591		1,003,047
Mortgage-backed securities		100,533,516		817,315		124,061,502		2,666,650
Equity securities		4,291,875		279,141		—		—

Totals	$	174,277,178	$	1,756,291	$	203,736,737	$	4,955,013

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, we measure investments at fair value and, beginning January 1, 2018, we recognize changes in fair value in our results of operations. 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 determine 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 we determine 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 we determine 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. We determine whether a credit loss has occurred by comparing the amortized cost of the debt security to the present value of the cash flows we expect to collect. If we expect a cash flow shortfall, we consider that a credit loss has occurred. If we determine that a credit loss has 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 when the fair value of an investment is significantly below its cost, when the financial condition of the issuer of a security has deteriorated, the occurrence of industry, company or geographic events that have negatively impacted the value of a security and rating agency downgrades. We held 509 debt securities that were in an unrealized loss position at December 31, 2018. Based upon our analysis of general market conditions and underlying factors impacting these debt securities, we considered these declines in value to be temporary.

We did not recognize any impairment losses in 2018, 2017 or 2016. We had no sales or transfers from our held to maturity portfolio in 2018, 2017 or 2016. We had no derivative instruments or hedging activities during 2018, 2017 or 2016.