Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
Commission file number 0-24000
|
| | |
| ERIE INDEMNITY COMPANY | |
| (Exact name of registrant as specified in its charter) | |
|
| | | | |
| PENNSYLVANIA | | 25-0466020 | |
| (State or other jurisdiction of | | (I.R.S. Employer | |
| incorporation or organization) | | Identification No.) | |
|
| | | | |
| 100 Erie Insurance Place, Erie, Pennsylvania | | 16530 | |
| (Address of principal executive offices) | | (Zip Code) | |
| | | | |
|
| | |
| (814) 870-2000 | |
| (Registrant’s telephone number, including area code) | |
|
| | |
| Not applicable | |
| (Former name, former address and former fiscal year, if changed since last report) | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes X No ___
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X No ___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer X Accelerated Filer ___ Non-Accelerated Filer ___ Smaller Reporting Company ___
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
The number of shares outstanding of the registrant’s Class A Common Stock as of the latest practicable date, with no par value and a stated value of $0.0292 per share, was 46,189,068 at July 15, 2016.
The number of shares outstanding of the registrant’s Class B Common Stock as of the latest practicable date, with no par value and a stated value of $70 per share, was 2,542 at July 15, 2016.
PART I. FINANCIAL INFORMATION
| |
ITEM 1. | FINANCIAL STATEMENTS |
ERIE INDEMNITY COMPANY
STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share data)
|
| | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 30, | | June 30, |
| | 2016 | | 2015 | | 2016 | | 2015 |
Operating revenue | | | | | | |
| | |
|
Management fee revenue, net | | $ | 416,665 |
| | $ | 394,224 |
| | $ | 784,123 |
| | $ | 737,458 |
|
Service agreement revenue | | 7,219 |
| | 7,436 |
| | 14,489 |
| | 15,033 |
|
Total operating revenue | | 423,884 |
| | 401,660 |
| | 798,612 |
| | 752,491 |
|
| | | | | | | | |
Operating expenses | | | | | | | | |
Commissions | | 235,794 |
| | 223,731 |
| | 444,508 |
| | 417,448 |
|
Salaries and employee benefits | | 55,025 |
| | 57,354 |
| | 108,314 |
| | 112,373 |
|
All other operating expenses | | 47,306 |
| | 50,592 |
| | 92,366 |
| | 100,257 |
|
Total operating expenses | | 338,125 |
| | 331,677 |
| | 645,188 |
| | 630,078 |
|
Net revenue from operations | | 85,759 |
| | 69,983 |
| | 153,424 |
| | 122,413 |
|
| | | | | | | | |
Investment income | | | | | | | | |
Net investment income | | 4,891 |
| | 4,435 |
| | 9,553 |
| | 8,976 |
|
Net realized investment gains (losses) | | 399 |
| | 598 |
| | (689 | ) | | 358 |
|
Net impairment losses recognized in earnings | | 0 |
| | (35 | ) | | (345 | ) | | (155 | ) |
Equity in earnings of limited partnerships | | 2,114 |
| | 10,707 |
| | 1,444 |
| | 13,065 |
|
Total investment income | | 7,404 |
| | 15,705 |
| | 9,963 |
| | 22,244 |
|
Income before income taxes | | 93,163 |
| | 85,688 |
| | 163,387 |
| | 144,657 |
|
Income tax expense | | 31,854 |
| | 29,538 |
| | 56,183 |
| | 49,674 |
|
Net income | | $ | 61,309 |
| | $ | 56,150 |
| | $ | 107,204 |
| | $ | 94,983 |
|
| | | | | | | | |
| | | | | | | | |
Earnings Per Share | | | | | | |
| | |
|
Net income per share | | | | | | |
| | |
|
Class A common stock – basic | | $ | 1.32 |
| | $ | 1.21 |
| | $ | 2.30 |
| | $ | 2.04 |
|
Class A common stock – diluted | | $ | 1.17 |
| | $ | 1.07 |
| | $ | 2.04 |
| | $ | 1.81 |
|
Class B common stock – basic | | $ | 197 |
| | $ | 181 |
| | $ | 345 |
| | $ | 306 |
|
Class B common stock – diluted | | $ | 197 |
| | $ | 180 |
| | $ | 345 |
| | $ | 305 |
|
| | | | | | | | |
Weighted average shares outstanding – Basic | | | | | | |
| | |
|
Class A common stock | | 46,188,867 |
| | 46,189,068 |
| | 46,188,967 |
| | 46,189,068 |
|
Class B common stock | | 2,542 |
| | 2,542 |
| | 2,542 |
| | 2,542 |
|
| | | | | | | | |
Weighted average shares outstanding – Diluted | | | | | | |
| | |
|
Class A common stock | | 52,392,862 |
| | 52,562,514 |
| | 52,458,394 |
| | 52,598,633 |
|
Class B common stock | | 2,542 |
| | 2,542 |
| | 2,542 |
| | 2,542 |
|
| | | | | | | | |
Dividends declared per share | | | | | | |
| | |
|
Class A common stock | | $ | 0.730 |
| | $ | 0.681 |
| | $ | 1.460 |
| | $ | 1.362 |
|
Class B common stock | | $ | 109.500 |
| | $ | 102.150 |
| | $ | 219.000 |
| | $ | 204.300 |
|
See accompanying notes to Financial Statements. See Note 10, "Accumulated Other Comprehensive Income (Loss)", for amounts reclassified out of accumulated other comprehensive income (loss) into the Statements of Operations.
ERIE INDEMNITY COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
|
| | | | | | | | | | | | | | | |
| | Three months ended | Six months ended |
| | June 30, | June 30, |
| | 2016 | | 2015 | 2016 | | 2015 |
Net income | | $ | 61,309 |
| | $ | 56,150 |
| $ | 107,204 |
| | $ | 94,983 |
|
| | | | | | | |
Other comprehensive income (loss), net of tax | | | | | |
| | |
|
Change in unrealized holding gains (losses) on available-for-sale securities | | 3,026 |
| | (2,583 | ) | 6,491 |
| | (2,483 | ) |
| | | | | | | |
Comprehensive income | | $ | 64,335 |
| | $ | 53,567 |
| $ | 113,695 |
| | $ | 92,500 |
|
See accompanying notes to Financial Statements. See Note 10, "Accumulated Other Comprehensive Income (Loss)", for amounts reclassified out of accumulated other comprehensive income (loss) into the Statements of Operations.
ERIE INDEMNITY COMPANY
STATEMENTS OF FINANCIAL POSITION
(dollars in thousands, except per share data)
|
| | | | | | | | |
| | June 30, | | December 31, |
| | 2016 | | 2015 |
Assets | | (Unaudited) | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 124,111 |
| | $ | 182,889 |
|
Available-for-sale securities | | 46,087 |
| | 62,067 |
|
Trading securities | | 496 |
| | — |
|
Receivables from Erie Insurance Exchange and affiliates | | 387,273 |
| | 348,055 |
|
Prepaid expenses and other current assets | | 33,885 |
| | 24,697 |
|
Federal income taxes recoverable | | 0 |
| | 11,947 |
|
Accrued investment income | | 5,816 |
| | 5,491 |
|
Total current assets | | 597,668 |
| | 635,146 |
|
| | | | |
Available-for-sale securities | | 607,548 |
| | 537,874 |
|
Limited partnership investments | | 70,952 |
| | 88,535 |
|
Fixed assets, net | | 58,986 |
| | 59,087 |
|
Deferred income taxes, net | | 35,780 |
| | 40,686 |
|
Note receivable from Erie Family Life Insurance Company | | 25,000 |
| | 25,000 |
|
Other assets | | 18,892 |
| | 20,968 |
|
Total assets | | $ | 1,414,826 |
| | $ | 1,407,296 |
|
| | | | |
Liabilities and shareholders' equity | | | | |
Current liabilities: | | | | |
Commissions payable | | $ | 217,203 |
| | $ | 195,542 |
|
Agent bonuses | | 58,235 |
| | 106,752 |
|
Accounts payable and accrued liabilities | | 90,856 |
| | 88,532 |
|
Dividends payable | | 33,996 |
| | 33,996 |
|
Deferred executive compensation | | 13,252 |
| | 20,877 |
|
Federal income taxes payable | | 1,960 |
| | 0 |
|
Total current liabilities | | 415,502 |
| | 445,699 |
|
| | | | |
Defined benefit pension plans | | 170,619 |
| | 172,700 |
|
Employee benefit obligations | | 910 |
| | 1,234 |
|
Deferred executive compensation | | 12,461 |
| | 16,580 |
|
Other long-term liabilities | | 140 |
| | 1,580 |
|
Total liabilities | | 599,632 |
| | 637,793 |
|
| | | | |
Shareholders’ equity | | | | |
Class A common stock, stated value $0.0292 per share; 74,996,930 shares authorized; 68,299,200 shares issued; 46,189,068 shares outstanding | | 1,992 |
| | 1,992 |
|
Class B common stock, convertible at a rate of 2,400 Class A shares for one Class B share, stated value $70 per share; 3,070 shares authorized; 2,542 shares issued and outstanding | | 178 |
| | 178 |
|
Additional paid-in-capital | | 16,300 |
| | 16,311 |
|
Accumulated other comprehensive loss | | (90,373 | ) | | (96,864 | ) |
Retained earnings | | 2,033,187 |
| | 1,993,976 |
|
Total contributed capital and retained earnings | | 1,961,284 |
| | 1,915,593 |
|
Treasury stock, at cost; 22,110,132 shares held | | (1,155,301 | ) | | (1,155,108 | ) |
Deferred compensation | | 9,211 |
| | 9,018 |
|
Total shareholders’ equity | | 815,194 |
| | 769,503 |
|
Total liabilities and shareholders’ equity | | $ | 1,414,826 |
| | $ | 1,407,296 |
|
See accompanying notes to Financial Statements.
ERIE INDEMNITY COMPANY
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
| | | | | | | | |
| | Six months ended |
| | June 30, |
| | 2016 | | 2015 |
Cash flows from operating activities | | | | |
Management fee received | | $ | 757,193 |
| | $ | 714,217 |
|
Service agreement fee received | | 14,489 |
| | 15,033 |
|
Net investment income received | | 12,921 |
| | 12,980 |
|
Limited partnership distributions | | 5,418 |
| | 9,360 |
|
Decrease in reimbursements collected from affiliates | | (12,288 | ) | | (10,415 | ) |
Commissions paid to agents | | (363,968 | ) | | (345,986 | ) |
Agents bonuses paid | | (107,170 | ) | | (90,245 | ) |
Salaries and wages paid | | (90,509 | ) | | (78,266 | ) |
Pension contribution and employee benefits paid | | (31,631 | ) | | (28,263 | ) |
General operating expenses paid | | (91,715 | ) | | (110,519 | ) |
Income taxes paid | | (42,258 | ) | | (46,018 | ) |
Net cash provided by operating activities | | 50,482 |
| | 41,878 |
|
| | | | |
Cash flows from investing activities | | | | |
Purchase of investments: | | | | |
Available-for-sale securities | | (161,835 | ) | | (111,216 | ) |
Limited partnerships | | (367 | ) | | (597 | ) |
Proceeds from investments: | | | | |
Available-for-sale securities | | 112,030 |
| | 108,939 |
|
Trading securities | | 3,146 |
| | — |
|
Limited partnerships | | 11,246 |
| | 14,708 |
|
Net purchase of fixed assets | | (7,257 | ) | | (5,266 | ) |
Net collections (distributions) on agent loans | | 1,770 |
| | (184 | ) |
Net cash (used in) provided by investing activities | | (41,267 | ) | | 6,384 |
|
| | | | |
Cash flows from financing activities | | | | |
Dividends paid to shareholders | | (67,993 | ) | | (63,429 | ) |
Net cash used in financing activities | | (67,993 | ) | | (63,429 | ) |
| | | | |
Net decrease in cash and cash equivalents | | (58,778 | ) | | (15,167 | ) |
Cash and cash equivalents, beginning of period | | 182,889 |
| | 91,747 |
|
Cash and cash equivalents, end of period | | $ | 124,111 |
| | $ | 76,580 |
|
See accompanying notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Nature of Operations
Erie Indemnity Company ("Indemnity", "we", "us", "our") is a publicly held Pennsylvania business corporation that has since its incorporation in 1925 served as the attorney-in-fact for the subscribers (policyholders) at the Erie Insurance Exchange ("Exchange"). The Exchange, which also commenced business in 1925, is a Pennsylvania-domiciled reciprocal insurer that writes property and casualty insurance. We function solely as the management company and all insurance operations are performed by the Exchange.
Our primary function, as attorney-in-fact, is to perform certain services for the Exchange relating to the sales, underwriting, and issuance of policies on behalf of the Exchange. This is done in accordance with a subscriber’s agreement (a limited power of attorney) executed individually by each subscriber (policyholder), which appoints us as their common attorney-in-fact to transact certain business on their behalf and to manage the affairs of the Exchange. Pursuant to the subscriber’s agreement and for its services as attorney-in-fact, we earn a management fee calculated as a percentage of the direct and assumed premiums written by the Exchange.
The services we provide to the Exchange are related to the sales, underwriting and issuance of policies. The sales related services we provide include agent compensation and certain sales and advertising support services. Agent compensation includes scheduled commissions to agents based upon premiums written as well as additional commissions and bonuses to agents, which are earned by achieving targeted measures. The underwriting services we provide include underwriting and policy processing. The remaining services we provide include customer service and administrative support. We also provide information technology services that support all the functions listed above.
By virtue of its legal structure as a reciprocal insurer, the Exchange does not have the ability to enter into contractual relationships and therefore Indemnity serves as the attorney-in-fact on behalf of the Exchange for all claims handling services and certain other common overhead and service department functions in accordance with the subscriber’s agreement. The amounts Indemnity incurs on behalf of the Exchange in this capacity are reimbursed to Indemnity from the Exchange at cost. See Note 11, "Related Party" contained within this report.
Our results of operations are tied to the growth and financial condition of the Exchange. If any events occurred that impaired the Exchange’s ability to grow or sustain its financial condition, including but not limited to reduced financial strength ratings, disruption in the independent agency relationships, significant catastrophe losses, or products not meeting customer demands, the Exchange could find it more difficult to retain its existing business and attract new business. A decline in the business of the Exchange almost certainly would have as a consequence a decline in the total premiums paid and a correspondingly adverse effect on the amount of the management fees we receive. We also have an exposure to a concentration of credit risk related to the unsecured receivables due from the Exchange for its management fee. See Note 12, "Concentrations of Credit Risk" contained within this report.
Note 2. Significant Accounting Policies
Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. For further information, refer to the financial statements and footnotes included in our Form 10-K for the year ended December 31, 2015 as filed with the Securities and Exchange Commission on February 25, 2016.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified on the statements of financial position to conform to the current period presentation. These reclassifications had no effect on the previously reported results of operations.
Recently issued accounting standards
In February 2015, the Financial Accounting Standards Board ("FASB") updated Accounting Standards Codification ("ASC") 810 "Consolidation", which amended the existing guidance for determining if a reporting entity has a variable interest in a legal entity. We adopted the new accounting principle on a retrospective basis as of December 31, 2015. In accordance with the new accounting guidance, Indemnity is not deemed to have a variable interest in the Exchange as the fees paid for services provided to the Exchange no longer represent a variable interest. The compensation received from the attorney-in-fact fee arrangement with the subscribers is for services provided by Indemnity acting in its role as attorney-in-fact and is commensurate with the level of effort required to perform those services. Under the previously issued accounting guidance, Indemnity was deemed to be the primary beneficiary of the Exchange and its financial position and operating results were consolidated with Indemnity. Following adoption of the new accounting guidance, the Exchange’s results are no longer required to be consolidated with Indemnity. There was no cumulative effect to Indemnity's shareholders’ equity or net income from no longer consolidating the Exchange's results with ours.
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, "Financial Instruments-Credit Losses", which requires financial assets measured at amortized cost to be presented at the net amount expected to be collected through the use of a new forward-looking expected loss model and credit losses relating to available-for-sale debt securities to be recognized through an allowance for credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption for interim and annual periods beginning after December 15, 2018 is permitted. We are currently evaluating the potential impact of this guidance on our financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases", which requires lessees to recognize assets and liabilities arising from operating leases on the statement of financial position and to disclose key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. We are currently evaluating the potential impact of this guidance on our financial statements.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall". ASU 2016-01 revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. We are currently evaluating the potential impact of this guidance on our financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers". ASU 2014-09 requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for fiscal years beginning after December 15, 2017 including interim periods within that reporting period. We do not expect the adoption of this guidance to have a material impact on our financial statements.
Note 3. Earnings Per Share
Class A and Class B basic earnings per share and Class B diluted earnings per share are calculated under the two-class method. The two-class method allocates earnings to each class of stock based upon its dividend rights. Class B shares are convertible into Class A shares at a conversion ratio of 2,400 to 1. See Note 9, "Capital Stock".
Class A diluted earnings per share are calculated under the if-converted method, which reflects the conversion of Class B shares to Class A shares. Diluted earnings per share calculations include the dilutive effect of assumed issuance of stock-based awards under compensation plans that have the option to be paid in stock using the treasury stock method.
A reconciliation of the numerators and denominators used in the basic and diluted per-share computations is presented as follows for each class of common stock:
|
| | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands, except per share data) | | Three months ended June 30, |
| | 2016 | | 2015 |
| | Allocated net income (numerator) | | Weighted shares (denominator) | | Per-share amount | | Allocated net income (numerator) | | Weighted shares (denominator) | | Per-share amount |
Class A – Basic EPS: | | | | | | | | | | | | |
Income available to Class A stockholders | | $ | 60,807 |
| | 46,188,867 |
| | $ | 1.32 |
| | $ | 55,690 |
| | 46,189,068 |
| | $ | 1.21 |
|
Dilutive effect of stock-based awards | | 0 |
| | 103,195 |
| | — |
| | 0 |
| | 272,646 |
| | — |
|
Assumed conversion of Class B shares | | 502 |
| | 6,100,800 |
| | — |
| | 460 |
| | 6,100,800 |
| | — |
|
Class A – Diluted EPS: | | | | | | | | | | | | |
Income available to Class A stockholders on Class A equivalent shares | | $ | 61,309 |
| | 52,392,862 |
| | $ | 1.17 |
| | $ | 56,150 |
| | 52,562,514 |
| | $ | 1.07 |
|
Class B – Basic EPS: | | | | | | | | | | | | |
Income available to Class B stockholders | | $ | 502 |
| | 2,542 |
| | $ | 197 |
| | $ | 460 |
| | 2,542 |
| | $ | 181 |
|
Class B – Diluted EPS: | | | | | | | | | | | | |
Income available to Class B stockholders | | $ | 502 |
| | 2,542 |
| | $ | 197 |
| | $ | 458 |
| | 2,542 |
| | $ | 180 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands, except per share data) | | Six months ended June 30, |
| | 2016 | | 2015 |
| | Allocated net income (numerator) | | Weighted shares (denominator) | | Per-share amount | | Allocated net income (numerator) | | Weighted shares (denominator) | | Per-share amount |
Class A – Basic EPS: | | |
| | |
| | |
| | |
| | |
| | |
|
Income available to Class A stockholders | | $ | 106,327 |
| | 46,188,967 |
| | $ | 2.30 |
| | $ | 94,205 |
| | 46,189,068 |
| | $ | 2.04 |
|
Dilutive effect of stock-based awards | | 0 |
| | 168,627 |
| | — |
| | 0 |
| | 308,765 |
| | — |
|
Assumed conversion of Class B shares | | 877 |
| | 6,100,800 |
| | — |
| | 778 |
| | 6,100,800 |
| | — |
|
Class A – Diluted EPS: | | |
| | |
| | |
| | |
| | |
| | |
|
Income available to Class A stockholders on Class A equivalent shares | | $ | 107,204 |
| | 52,458,394 |
| | $ | 2.04 |
| | $ | 94,983 |
| | 52,598,633 |
| | $ | 1.81 |
|
Class B – Basic EPS: | | |
| | |
| | |
| | |
| | |
| | |
|
Income available to Class B stockholders | | $ | 877 |
| | 2,542 |
| | $ | 345 |
| | $ | 778 |
| | 2,542 |
| | $ | 306 |
|
Class B – Diluted EPS: | | | | | | | | | | | | |
Income available to Class B stockholders | | $ | 877 |
| | 2,542 |
| | $ | 345 |
| | $ | 776 |
| | 2,542 |
| | $ | 305 |
|
Note 4. Fair Value
Our available-for-sale and trading securities are recorded at fair value, which is the price that would be received to sell the asset in an orderly transaction between willing market participants as of the measurement date.
Valuation techniques used to derive the fair value of our available-for-sale and trading securities are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our own assumptions regarding fair market value for these securities. Although the majority of our prices are obtained from third party sources, we also perform an internal pricing review for securities with low trading volumes under current market conditions. Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:
| |
• | Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. |
| |
• | Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
| |
• | Level 3 – Unobservable inputs for the asset or liability. |
Estimates of fair values for our investment portfolio are obtained primarily from a nationally recognized pricing service. Our Level 1 category includes those securities valued using an exchange traded price provided by the pricing service. The methodologies used by the pricing service that support a Level 2 classification of a financial instrument include multiple verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. Pricing service valuations for Level 3 securities are based upon proprietary models and are used when observable inputs are not available or in illiquid markets.
In limited circumstances we adjust the price received from the pricing service when, in our judgment, a better reflection of fair value is available based upon corroborating information and our knowledge and monitoring of market conditions such as a disparity in price of comparable securities and/or non-binding broker quotes. In other circumstances, certain securities are internally priced because prices are not provided by the pricing service.
We perform continuous reviews of the prices obtained from the pricing service. This includes evaluating the methodology and inputs used by the pricing service to ensure that we determine the proper classification level of the financial instrument. Price variances, including large periodic changes, are investigated and corroborated by market data. We have reviewed the pricing methodologies of our pricing service as well as other observable inputs, such as data, and transaction volumes and believe that their prices adequately consider market activity in determining fair value. Our review process continues to evolve based upon accounting guidance and requirements.
When a price from the pricing service is not available, values are determined by obtaining broker/dealer quotes and/or market comparables. When available, we obtain multiple quotes for the same security. The ultimate value for these securities is determined based upon our best estimate of fair value using corroborating market information. Our evaluation includes the consideration of benchmark yields, reported trades, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data.
For certain securities in an illiquid market, there may be no prices available from a pricing service and no comparable market quotes available. In these situations, we value the security using an internally-developed, risk-adjusted discounted cash flow model.
The following tables present our fair value measurements on a recurring basis by asset class and level of input:
|
| | | | | | | | | | | | | | | | |
| | At June 30, 2016 |
| | Fair value measurements using: |
(in thousands) | | Total | | Quoted prices in active markets for identical assets Level 1 | | Observable inputs Level 2 | | Unobservable inputs Level 3 |
Available-for-sale securities: | | | | | | | | |
States & political subdivisions | | $ | 241,824 |
| | $ | 0 |
| | $ | 241,824 |
| | $ | 0 |
|
Corporate debt securities | | 290,028 |
| | 0 |
| | 281,177 |
| | 8,851 |
|
Residential mortgage-backed securities | | 14,029 |
| | 0 |
| | 14,029 |
| | 0 |
|
Commercial mortgage-backed securities | | 40,023 |
| | 0 |
| | 39,020 |
| | 1,003 |
|
Collateralized debt obligations | | 56,633 |
| | 0 |
| | 55,433 |
| | 1,200 |
|
Other debt securities | | 1,984 |
| | 0 |
| | 1,984 |
| | 0 |
|
Total fixed maturities | | 644,521 |
| | 0 |
| | 633,467 |
| | 11,054 |
|
Common stock | | 9,114 |
| | 9,114 |
| | 0 |
| | 0 |
|
Total available-for-sale securities | | 653,635 |
| | 9,114 |
| | 633,467 |
| | 11,054 |
|
Trading securities: | | | | | | | | |
Common stock | | 496 |
| | 496 |
| | 0 |
| | 0 |
|
Other investments (1) | | 3,908 |
| | — |
| | — |
| | — |
|
Total | | $ | 658,039 |
| | $ | 9,610 |
| | $ | 633,467 |
| | $ | 11,054 |
|
|
| | | | | | | | | | | | | | | | |
| | At December 31, 2015 |
| | Fair value measurements using: |
(in thousands) | | Total | | Quoted prices in active markets for identical assets Level 1 | | Observable inputs Level 2 | | Unobservable inputs Level 3 |
Available-for-sale securities: | | | | | | | | |
States & political subdivisions | | $ | 231,847 |
| | $ | 0 |
| | $ | 231,847 |
| | $ | 0 |
|
Corporate debt securities | | 250,333 |
| | 0 |
| | 250,264 |
| | 69 |
|
Residential mortgage-backed securities | | 13,513 |
| | 0 |
| | 13,513 |
| | 0 |
|
Commercial mortgage-backed securities | | 37,571 |
| | 0 |
| | 37,571 |
| | 0 |
|
Collateralized debt obligations | | 51,745 |
| | 0 |
| | 43,168 |
| | 8,577 |
|
Other debt securities | | 2,200 |
| | 0 |
| | 2,200 |
| | 0 |
|
Total fixed maturities | | 587,209 |
| | 0 |
| | 578,563 |
| | 8,646 |
|
Common stock | | 12,732 |
| | 12,732 |
| | 0 |
| | 0 |
|
Total available-for-sale securities | | 599,941 |
| | 12,732 |
| | 578,563 |
| | 8,646 |
|
Other investments (1) | | 4,526 |
| | — |
| | — |
| | — |
|
Total | | $ | 604,467 |
| | $ | 12,732 |
| | $ | 578,563 |
| | $ | 8,646 |
|
(1) Other investments measured at fair value represent real estate funds included on the balance sheet as limited partnership investments that are reported under the fair value option using the net asset value practical expedient. These amounts are not required to be categorized in the fair value hierarchy. The investments can never be redeemed with the funds. Instead, distributions are received when liquidation of the underlying assets of the funds occur. It is estimated that the underlying assets will generally be liquidated between 5 and 10 years from the inception of the funds. The fair value of these investments is based on the net asset value (NAV) information provided by the general partner. Fair value is based on our proportionate share of the NAV based on the most recent partners' capital statements received from the general partners, which is generally one quarter prior to our balance sheet date. These values are then analyzed to determine if the NAV represents fair value at our balance sheet date, with adjustment being made where appropriate. We consider observable market data and perform a review validating the appropriateness of the NAV at each balance sheet date. It is likely that all of the investments will be redeemed at a future date for an amount different than the NAV of our ownership interest in partners' capital as of June 30, 2016 and December 31, 2015. During the six months ended June 30, 2016, no contributions were made and distributions totaling $0.7 million were received from these investments. During the year ended December 31, 2015, no contributions were made and distributions totaling $3.5 million were received from these investments. The amount of unfunded commitments related to the investments was $0.3 million as of June 30, 2016, and $0.6 million as of December 31, 2015.
Level 3 Assets – Quarterly Change:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | |
(in thousands) | | Beginning balance at March 31, 2016 | | Included in earnings (1) | | Included in other comprehensive income | | Purchases | | Sales | | Transfers in and (out) of Level 3 | | Ending balance at June 30, 2016 |
Available-for-sale securities: | | | | | | | | | | | | | | |
Corporate debt securities | | $ | 4,821 |
| | $ | 30 |
| | $ | 54 |
| | $ | 5,131 |
| | $ | (551 | ) | | $ | (634 | ) | | $ | 8,851 |
|
Commercial mortgage-backed securities | | 0 |
| | 0 |
| | 3 |
| | 1,000 |
| | 0 |
| | 0 |
| | 1,003 |
|
Collateralized debt obligations | | 12,037 |
| | 0 |
| | 0 |
| | 1,200 |
| | 0 |
| | (12,037 | ) | | 1,200 |
|
Total fixed maturities | | 16,858 |
| | 30 |
| | 57 |
| | 7,331 |
| | (551 | ) | | (12,671 | ) | | 11,054 |
|
Total available-for-sale securities | | 16,858 |
| | 30 |
| | 57 |
| | 7,331 |
| | (551 | ) | | (12,671 | ) | | 11,054 |
|
Total Level 3 assets | | $ | 16,858 |
| | $ | 30 |
| | $ | 57 |
| | $ | 7,331 |
| | $ | (551 | ) | | $ | (12,671 | ) | | $ | 11,054 |
|
| |
(1) | These amounts are reported in the Statement of Operations as net investment income and net realized investment gains (losses) for the three months ended June 30, 2016 on Level 3 securities. |
We review the fair value hierarchy classifications each reporting period. Transfers between hierarchy levels may occur due to changes in the available market observable inputs. Transfers in and out of level classifications are reported as having occurred at the beginning of the quarter in which the transfers occurred.
There were no transfers between Level 1 and Level 2 for the three months ended June 30, 2016. Level 2 to Level 3 transfers totaled $1.7 million for seven fixed maturity holdings due to the use of unobservable market data to determine the fair value at June 30, 2016. Level 3 to Level 2 transfers totaled $14.3 million for 21 fixed maturity holdings due to the use of observable market data to determine the fair value at June 30, 2016.
Level 3 Assets – Year-to-Date Change:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
(in thousands) | | Beginning balance at December 31, 2015 | | Included in earnings (1) | | Included in other comprehensive income | | Purchases | | Sales | | Transfers in and (out) of Level 3 | | Ending balance at June 30, 2016 |
Available-for-sale securities: | | | | | | | | | | | | | | |
Corporate debt securities | | $ | 69 |
| | $ | 45 |
| | $ | 81 |
| | $ | 8,670 |
| | $ | (606 | ) | | $ | 592 |
| | $ | 8,851 |
|
Commercial mortgage-backed securities | | 0 |
| | 0 |
| | 3 |
| | 1,000 |
| | 0 |
| | 0 |
| | 1,003 |
|
Collateralized debt obligations | | 8,577 |
| | 4 |
| | (12 | ) | | 4,722 |
| | (54 | ) | | (12,037 | ) | | 1,200 |
|
Total fixed maturities | | 8,646 |
| | 49 |
| | 72 |
| | 14,392 |
| | (660 | ) | | (11,445 | ) | | 11,054 |
|
Total available-for-sale securities | | 8,646 |
| | 49 |
| | 72 |
| | 14,392 |
| | (660 | ) | | (11,445 | ) | | 11,054 |
|
Total Level 3 assets | | $ | 8,646 |
| | $ | 49 |
| | $ | 72 |
| | $ | 14,392 |
| | $ | (660 | ) | | $ | (11,445 | ) | | $ | 11,054 |
|
| |
(1) | These amounts are reported in the Statement of Operations as net investment income and net realized investment gains (losses) for the six months ended June 30, 2016 on Level 3 securities. |
There were no transfers between Level 1 and Level 2 for the six months ended June 30, 2016. Level 2 to Level 3 transfers totaled $3.0 million for 16 fixed maturity holdings due to the use of unobservable market data to determine the fair value at June 30, 2016. Level 3 to Level 2 transfers totaled $14.4 million for 22 fixed maturity holdings due to the use of observable market data to determine the fair value at June 30, 2016.
Level 3 Assets – Quarterly Change: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | |
(in thousands) | | Beginning balance at March 31, 2015 | | Included in earnings | | Included in other comprehensive income | | Purchases | | Sales | | Transfers in and (out) of Level 3 | | Ending balance at June 30, 2015 |
Available-for-sale securities: | | | | | | | | | | | | | | |
Corporate debt securities | | $ | 110 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | (110 | ) | | $ | 0 |
|
Collateralized debt obligations | | 0 |
| | 0 |
| | 0 |
| | 660 |
| | 0 |
| | 0 |
| | 660 |
|
Total fixed maturities | | 110 |
| | 0 |
| | 0 |
| | 660 |
| | 0 |
| | (110 | ) | | 660 |
|
Total available-for-sale securities | | 110 |
| | 0 |
| | 0 |
| | 660 |
| | 0 |
| | (110 | ) | | 660 |
|
Total Level 3 assets | | $ | 110 |
| | $ | 0 |
| | $ | 0 |
| | $ | 660 |
| | $ | 0 |
| | $ | (110 | ) | | $ | 660 |
|
There were no transfers between Level 1 and Level 2 or from Level 2 to Level 3 for the three months ended June 30, 2015. Level 3 to Level 2 transfers totaled $0.1 million for one fixed maturity holding due to the use of observable market data to determine the fair value at June 30, 2015.
Level 3 Assets – Year-to-Date Change: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
(in thousands) | | Beginning balance at December 31, 2014 | | Included in earnings | | Included in other comprehensive income | | Purchases | | Sales | | Transfers in and (out) of Level 3 | | Ending balance at June 30, 2015 |
Available-for-sale securities: | | | | | | | | | | | | | | |
Corporate debt securities | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 110 |
| | $ | 0 |
| | $ | (110 | ) | | $ | 0 |
|
Collateralized debt obligations | | 0 |
| | 0 |
| | 0 |
| | 660 |
| | 0 |
| | 0 |
| | 660 |
|
Total fixed maturities | | 0 |
| | 0 |
| | 0 |
| | 770 |
| | 0 |
| | (110 | ) | | 660 |
|
Total available-for-sale securities | | 0 |
| | 0 |
| | 0 |
| | 770 |
| | 0 |
| | (110 | ) | | 660 |
|
Total Level 3 assets | | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 770 |
| | $ | 0 |
| | $ | (110 | ) | | $ | 660 |
|
There were no transfers between Level 1 and Level 2 or from Level 2 to Level 3 for the six months ended June 30, 2015. Level 3 to Level 2 transfers totaled $0.1 million for one fixed maturity holding due to the use of observable market data to determine the fair value at June 30, 2015.
Quantitative and Qualitative Disclosures about Unobservable Inputs
When a non-binding broker quote was the only input available, the security was classified within Level 3. Use of non-binding brokers quotes totaled $11.1 million at June 30, 2016. The unobservable inputs are not reasonably available to us.
The following table presents our fair value measurements on a recurring basis by pricing source:
|
| | | | | | | | | | | | | | | | |
(in thousands) | | At June 30, 2016 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
Fixed maturities: | | | | | | | | |
Priced via pricing services | | $ | 642,318 |
| | $ | 0 |
| | $ | 633,467 |
| | $ | 8,851 |
|
Priced via market comparables/broker quotes | | 2,203 |
| | 0 |
| | 0 |
| | 2,203 |
|
Total fixed maturities | | 644,521 |
| | 0 |
| | 633,467 |
| | 11,054 |
|
Common stock: | | | | | | | | |
Priced via pricing services | | 9,610 |
| | 9,610 |
| | 0 |
| | 0 |
|
Total common stock | | 9,610 |
| | 9,610 |
| | 0 |
| | 0 |
|
Other investments: | | | | | | | | |
Priced via unobservable inputs (1) | | 3,908 |
| | — |
| | — |
| | — |
|
Total other investments | | 3,908 |
| | — |
| | — |
| | — |
|
Total | | $ | 658,039 |
| | $ | 9,610 |
| | $ | 633,467 |
| | $ | 11,054 |
|
| |
(1) | Other investments measured at fair value represent real estate funds included on the balance sheet as limited partnership investments that are reported under the fair value option using the net asset value practical expedient. These amounts are not required to be categorized in the fair value hierarchy. The fair value of these investments is based on the net asset value (NAV) information provided by the general partner. |
There were no assets measured at fair value on a nonrecurring basis during the six months ended June 30, 2016.
Note 5. Investments
Available-for-sale securities
The following table summarizes the cost and fair value of our available-for-sale securities:
|
| | | | | | | | | | | | | | | | |
| | At June 30, 2016 |
(in thousands) | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value |
Available-for-sale securities: | | | | | | | | |
States & political subdivisions | | $ | 227,669 |
| | $ | 14,155 |
| | $ | 0 |
| | $ | 241,824 |
|
Corporate debt securities | | 288,887 |
| | 2,361 |
| | 1,220 |
| | 290,028 |
|
Residential mortgage-backed securities | | 14,125 |
| | 43 |
| | 139 |
| | 14,029 |
|
Commercial mortgage-backed securities | | 40,503 |
| | 292 |
| | 772 |
| | 40,023 |
|
Collateralized debt obligations | | 56,761 |
| | 104 |
| | 232 |
| | 56,633 |
|
Other debt securities | | 2,000 |
| | 0 |
| | 16 |
| | 1,984 |
|
Total fixed maturities | | 629,945 |
| | 16,955 |
| | 2,379 |
| | 644,521 |
|
Common stock | | 8,949 |
| | 165 |
| | 0 |
| | 9,114 |
|
Total available-for-sale securities | | $ | 638,894 |
| | $ | 17,120 |
| | $ | 2,379 |
| | $ | 653,635 |
|
|
| | | | | | | | | | | | | | | | |
| | At December 31, 2015 |
(in thousands) | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value |
Available-for-sale securities: | | | | | | | | |
States & political subdivisions | | $ | 221,093 |
| | $ | 10,761 |
| | $ | 7 |
| | $ | 231,847 |
|
Corporate debt securities | | 254,464 |
| | 281 |
| | 4,412 |
| | 250,333 |
|
Residential mortgage-backed securities | | 13,639 |
| | 4 |
| | 130 |
| | 13,513 |
|
Commercial mortgage-backed securities | | 38,630 |
| | 30 |
| | 1,089 |
| | 37,571 |
|
Collateralized debt obligations | | 51,905 |
| | 61 |
| | 221 |
| | 51,745 |
|
Other debt securities | | 2,241 |
| | 0 |
| | 41 |
| | 2,200 |
|
Total fixed maturities | | 581,972 |
| | 11,137 |
| | 5,900 |
| | 587,209 |
|
Common stock | | 12,865 |
| | 0 |
| | 133 |
| | 12,732 |
|
Total available-for-sale securities | | $ | 594,837 |
| | $ | 11,137 |
| | $ | 6,033 |
| | $ | 599,941 |
|
The amortized cost and estimated fair value of fixed maturities at June 30, 2016 are shown below by remaining contractual term to maturity. Mortgage-backed securities are allocated based upon their 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 June 30, 2016 |
(in thousands) | | Amortized | | Estimated |
| | cost | | fair value |
Due in one year or less | | $ | 45,685 |
| | $ | 45,799 |
|
Due after one year through five years | | 296,550 |
| | 300,336 |
|
Due after five years through ten years | | 188,270 |
| | 195,896 |
|
Due after ten years | | 99,440 |
| | 102,490 |
|
Total fixed maturities | | $ | 629,945 |
| | $ | 644,521 |
|
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 June 30, 2016 |
(dollars in thousands) | | Less than 12 months | | 12 months or longer | | Total |
| | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | No. of holdings |
Available-for-sale securities: | | | | | | | | | | | | | | |
Corporate debt securities | | 65,341 |
| | 666 |
| | 21,953 |
| | 554 |
| | 87,294 |
| | 1,220 |
| | 260 |
|
Residential mortgage-backed securities | | 5,051 |
| | 18 |
| | 2,599 |
| | 121 |
| | 7,650 |
| | 139 |
| | 7 |
|
Commercial mortgage-backed securities | | 1,283 |
| | 7 |
| | 17,931 |
| | 765 |
| | 19,214 |
| | 772 |
| | 18 |
|
Collateralized debt obligations | | 19,843 |
| | 118 |
| | 13,681 |
| | 114 |
| | 33,524 |
| | 232 |
| | 17 |
|
Other debt securities | | 0 |
| | 0 |
| | 1,984 |
| | 16 |
| | 1,984 |
| | 16 |
| | 1 |
|
Total fixed maturities | | 91,518 |
| | 809 |
| | 58,148 |
| | 1,570 |
| | 149,666 |
| | 2,379 |
| | 303 |
|
Total available-for-sale securities | | $ | 91,518 |
| | $ | 809 |
| | $ | 58,148 |
| | $ | 1,570 |
| | $ | 149,666 |
| | $ | 2,379 |
| | 303 |
|
Quality breakdown of fixed maturities: | | | | | | | | | | | | | | |
Investment grade | | $ | 42,174 |
| | $ | 170 |
| | $ | 47,584 |
| | $ | 1,069 |
| | $ | 89,758 |
| | $ | 1,239 |
| | 56 |
|
Non-investment grade | | 49,344 |
| | 639 |
| | 10,564 |
| | 501 |
| | 59,908 |
| | 1,140 |
| | 247 |
|
Total fixed maturities | | $ | 91,518 |
| | $ | 809 |
| | $ | 58,148 |
| | $ | 1,570 |
| | $ | 149,666 |
| | $ | 2,379 |
| | 303 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2015 |
(dollars in thousands) | | Less than 12 months | | 12 months or longer | | Total |
| | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | No. of holdings |
Available-for-sale securities: | | | | | | | | | | | | | | |
States & political subdivisions | | $ | 5,867 |
| | $ | 7 |
| | $ | 0 |
| | $ | 0 |
| | $ | 5,867 |
| | $ | 7 |
| | 3 |
|
Corporate debt securities | | 172,831 |
| | 2,447 |
| | 19,086 |
| | 1,965 |
| | 191,917 |
| | 4,412 |
| | 349 |
|
Residential mortgage-backed securities | | 9,827 |
| | 84 |
| | 936 |
| | 46 |
| | 10,763 |
| | 130 |
| | 9 |
|
Commercial mortgage-backed securities | | 13,081 |
| | 68 |
| | 19,081 |
| | 1,021 |
| | 32,162 |
| | 1,089 |
| | 24 |
|
Collateralized debt obligations | | 27,981 |
| | 103 |
| | 9,174 |
| | 118 |
| | 37,155 |
| | 221 |
| | 19 |
|
Other debt securities | | 1,960 |
| | 40 |
| | 241 |
| | 1 |
| | 2,201 |
| | 41 |
| | 2 |
|
Total fixed maturities | | 231,547 |
| | 2,749 |
| | 48,518 |
| | 3,151 |
| | 280,065 |
| | 5,900 |
| | 406 |
|
Common stock | | 12,732 |
| | 133 |
| | 0 |
| | 0 |
| | 12,732 |
| | 133 |
| | 1 |
|
Total available-for-sale securities | | $ | 244,279 |
| | $ | 2,882 |
| | $ | 48,518 |
| | $ | 3,151 |
| | $ | 292,797 |
| | $ | 6,033 |
| | 407 |
|
Quality breakdown of fixed maturities: | | | | | | | | | | | | | | |
Investment grade | | $ | 174,723 |
| | $ | 1,296 |
| | $ | 38,369 |
| | $ | 1,256 |
| | $ | 213,092 |
| | $ | 2,552 |
| | 105 |
|
Non-investment grade | | 56,824 |
| | 1,453 |
| | 10,149 |
| | 1,895 |
| | 66,973 |
| | 3,348 |
| | 301 |
|
Total fixed maturities | | $ | 231,547 |
| | $ | 2,749 |
| | $ | 48,518 |
| | $ | 3,151 |
| | $ | 280,065 |
| | $ | 5,900 |
| | 406 |
|
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 with the impairment charges recognized in earnings.
Net investment income
Interest and dividend income are recognized as earned and recorded to net investment income. Investment income, net of expenses, was generated from the following portfolios:
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Three months ended June 30, | | Six months ended June 30, |
| | 2016 | | 2015 | | 2016 | | 2015 |
Fixed maturities | | $ | 4,858 |
| | $ | 4,150 |
| | $ | 9,384 |
| | $ | 8,229 |
|
Equity securities | | 47 |
| | 240 |
| | 82 |
| | 500 |
|
Cash equivalents and other | | 321 |
| | 281 |
| | 645 |
| | 575 |
|
Total investment income | | 5,226 |
| | 4,671 |
| | 10,111 |
| | 9,304 |
|
Less: investment expenses | | 335 |
| | 236 |
| | 558 |
| | 328 |
|
Net investment income | | $ | 4,891 |
| | $ | 4,435 |
| | $ | 9,553 |
| | $ | 8,976 |
|
Realized investment gains (losses)
Realized gains and losses on sales of securities are recognized in income based upon the specific identification method. Realized gains (losses) on investments were as follows:
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Three months ended June 30, | | Six months ended June 30, |
| | 2016 | | 2015 | | 2016 | | 2015 |
Available-for-sale securities: | | |
| | |
| | |
| | |
|
Fixed maturities: | | |
| | |
| | |
| | |
|
Gross realized gains | | $ | 438 |
| | $ | 340 |
| | $ | 572 |
| | $ | 371 |
|
Gross realized losses | | (209 | ) | | (104 | ) | | (1,792 | ) | | (375 | ) |
Net realized gains (losses) | | 229 |
| | 236 |
| | (1,220 | ) | | (4 | ) |
Equity securities: | |
|
| | |
| | |
| | |
|
Gross realized gains | | 0 |
| | 362 |
| | 0 |
| | 362 |
|
Gross realized losses | | 0 |
| | 0 |
| | (34 | ) | | 0 |
|
Net realized gains (losses) | | 0 |
| | 362 |
| | (34 | ) | | 362 |
|
Trading securities: | |
|
| | |
| | |
| | |
|
Common stock: | |
|
| | |
| | |
| | |
|
Gross realized gains | | 586 |
| | 0 |
| | 586 |
| | 0 |
|
Gross realized losses | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Decreases in fair value(1) | | (416 | ) | | 0 |
| | (21 | ) | | 0 |
|
Net realized gains | | 170 |
| | 0 |
| | 565 |
| | 0 |
|
Net realized investment gains (losses) | | $ | 399 |
| | $ | 598 |
| | $ | (689 | ) | | $ | 358 |
|