Note 4.

Investments

The following tables set forth our Company’s cash and investments as of December 31, 2014 and 2013. The tables below include OTTI securities recognized within AOCI.


	December 31, 2014
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	397,923	$	3,431	$	(5,965	)	$	400,457
States, municipalities and political subdivisions		541,007		19,204		(558	)		522,361
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		364,622		8,476		(998	)		357,144
Residential mortgage obligations		34,087		1,153		(138	)		33,072
Asset-backed securities		206,413		380		(964	)		206,997
Commercial mortgage-backed securities		206,318		6,630		(98	)		199,786

Subtotal	$	811,440	$	16,639	$	(2,198	)	$	796,999
Corporate bonds		615,564		13,048		(1,626	)		604,142

Total fixed maturities	$	2,365,934	$	52,322	$	(10,347	)	$	2,323,959
Equity securities - common stocks		127,183		28,520		(1,254	)		99,917
Equity securities - preferred stocks		57,112		2,236		(50	)		54,926
Short-term investments		179,506		—		(21	)		179,527
Cash		90,751		—		—			90,751

Total	$	2,820,486	$	83,078	$	(11,672	)	$	2,749,080


	December 31, 2013
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	441,685	$	2,854	$	(8,855	)	$	447,686
States, municipalities and political subdivisions		460,422		9,298		(13,651	)		464,775
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		301,274		6,779		(6,016	)		300,511
Residential mortgage obligations		41,755		1,212		(161	)		40,704
Asset-backed securities		125,133		653		(480	)		124,960
Commercial mortgage-backed securities		172,750		7,656		(374	)		165,468

Subtotal	$	640,912	$	16,300	$	(7,031	)	$	631,643
Corporate bonds		504,854		15,402		(3,443	)		492,895

Total fixed maturities	$	2,047,873	$	43,854	$	(32,980	)	$	2,036,999
Equity securities - common stocks		143,954		25,700		(550	)		118,804
Short-term investments		296,250		—		—			296,250
Cash		86,509		—		—			86,509

Total	$	2,574,586	$	69,554	$	(33,530	)	$	2,538,562

As of December 31, 2014 and 2013, fixed maturities for which non-credit OTTI was previously recognized and included in accumulated other comprehensive income are now in an unrealized gains position of $0.7 million and $0.5 million, respectively.

The fair value of our Company’s investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, 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 any of these securities 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. For equity securities, our Company also considers its intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. Our Company may realize investment losses to the extent its 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 December 31, 2014 are shown in the following table:


	December 31, 2014
In thousands	Fair Value		Amortized Cost
Due in one year or less	$	63,670	$	65,643
Due after one year through five years		765,084		758,064
Due after five years through ten years		356,929		348,195
Due after ten years		368,811		355,058
Mortgage- and asset-backed securities		811,440		796,999

Total	$	2,365,934	$	2,323,959

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. Due to the periodic repayment of principal, the mortgage-backed and asset-backed securities are estimated to have an effective maturity of approximately 4.4 years.

The following table shows the amount and percentage of our Company’s fixed maturities as of December 31, 2014 by Standard & Poor’s (“S&P”) credit rating or, if an S&P rating is not available, the equivalent Moody’s Investor Services (“Moody’s”) rating. The table includes fixed maturities at fair value, and the total rating is the weighted average quality rating.


	December 31, 2014
In thousands	Rating	Fair Value		Percent of Total
Rating description:
Extremely strong	AAA	$	462,603		20	%
Very strong	AA		1,090,505		45	%
Strong	A		612,131		26	%
Adequate	BBB		185,372		8	%
Speculative	BB & Below		14,852		1	%
Not rated	NR		471		0	%

Total	AA	$	2,365,934		100	%

The following table summarizes all securities in a gross unrealized loss position as of December 31, 2014 and 2013, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the relevant number of securities.


	December 31, 2014						December 31, 2013
In thousands, except # of securities	Number of Securities		Fair Value		Gross Unrealized Loss		Number of Securities		Fair Value		Gross Unrealized Loss
Fixed maturities:
U.S. Treasury bonds, agency bonds, and foreign government bonds
0-6 months		19	$	87,915	$	1,061		27	$	136,360	$	1,096
7-12 months		—		—		—		26		149,370		7,759
> 12 months		31		117,683		4,904		—		—		—

Subtotal		50	$	205,598	$	5,965		53	$	285,730	$	8,855
States, municipalities and political subdivisions
0-6 months		13	$	14,242	$	41		28	$	40,132	$	297
7-12 months		2		2,107		19		104		205,152		12,100
> 12 months		17		37,340		498		6		12,357		1,254

Subtotal		32	$	53,689	$	558		138	$	257,641	$	13,651
Agency mortgage-backed securities
0-6 months		4	$	14,743	$	52		39	$	39,458	$	434
7-12 months		2		4,138		28		64		77,860		3,768
> 12 months		46		58,301		918		9		22,784		1,814

Subtotal		52	$	77,182	$	998		112	$	140,102	$	6,016
Residential mortgage obligations
0-6 months		6	$	4,966	$	43		3	$	431	$	2
7-12 months		2		659		7		7		950		29
> 12 months		14		1,728		88		15		2,467		130

Subtotal		22	$	7,353	$	138		25	$	3,848	$	161
Asset-backed securities
0-6 months		19	$	96,123	$	354		14	$	75,887	$	479
7-12 months		3		14,152		185		1		203		1
> 12 months		3		34,530		425		—		—		—

Subtotal		25	$	144,805	$	964		15	$	76,090	$	480
Commercial mortgage-backed securities
0-6 months		4	$	18,665	$	65		4	$	6,712	$	31
7-12 months		1		1,076		6		2		15,098		322
> 12 months		3		1,391		27		4		774		21

Subtotal		8	$	21,132	$	98		10	$	22,584	$	374
Corporate bonds
0-6 months		52	$	179,390	$	797		34	$	93,591	$	717
7-12 months		4		11,071		74		18		55,021		2,726
> 12 months		14		31,126		755		—		—		—

Subtotal		70	$	221,587	$	1,626		52	$	148,612	$	3,443

Total fixed maturities		259	$	731,346	$	10,347		405	$	934,607	$	32,980

Equity securities - common stocks
0-6 months		6	$	9,152	$	761		5	$	7,387	$	422
7-12 months		1		3,887		486		2		3,538		128
> 12 months		1		238		7		—		—		—

		8	$	13,277	$	1,254		7	$	10,925	$	550
Equity securities - preferred stocks
0-6 months		7	$	6,651	$	50		—	$	—	$	—
7-12 months		—		—		—		—		—		—
> 12 months		—		—		—		—		—		—

		7	$	6,651	$	50		—	$	—	$	—

Total equity securities		15	$	19,928	$	1,304		7	$	10,925	$	550

As of December 31, 2014 and 2013, the largest unrealized loss by a non-government backed issuer in the investment portfolio was $0.5 million and $1.1 million, respectively.

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

For fixed maturities, when assessing whether the amortized cost basis of the security will be recovered, our Company compares the present value of cash flows expected to be collected in relation to the current book value. Any shortfalls of the present value of the cash flows expected to be collected to the amortized cost basis is considered the credit loss portion of OTTI losses and is recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within AOCI.

To determine whether the unrealized loss on structured securities is other-than-temporary, our Company analyzes the projections provided by its investment managers with respect to an expected principal loss under a range of scenarios and utilizes the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. These assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security is expected ultimately to incur a loss or whether there is a material impact on yield due to either a projected loss or a change in cash flow timing. A break even default rate is also calculated. A comparison of the break even default rate to the actual default rate provides an indication of the level of cushion or coverage to the first dollar principal loss. The analysis applies the stated assumptions throughout the remaining term of the transaction to forecast cash flows, which are then applied through the transaction structure to determine whether there is a loss to the security. For securities in which a tranche loss is present, and the net present value of loss adjusted cash flows is less than book value, impairment is recognized. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating.

The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. Our Company does not intend to sell any of these securities and it is more likely than not that, it will not be required to sell these securities before the recovery of the amortized cost basis.

For equity securities, in general, our Company focuses its attention on those securities with a fair value less than 80% of their cost for six or more consecutive months. If warranted as the result of conditions relating to a particular security, our Company will focus on a significant decline in fair value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost of the security, the length of time the investment has been below cost and by how much the investment is below cost. If an equity security is deemed to be other-than-temporarily impaired, the cost is written down to fair value with the loss recognized in earnings.

Our Company’s ability to hold securities is supported by sufficient cash flow from its operations and from maturities within its investment portfolio in order to meet its claims payment and other disbursement obligations arising from its 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.

As of December 31, 2014, there were no securities with a fair value that was less than 80% of amortized cost.

The table below summarizes our Company’s activity related to OTTI losses for the periods indicated:


	Year Ended December 31,
	2014					2013				2012
In thousands, except # of securities	Number of Securities		Amount			Number of Securities		Amount		Number of Securities		Amount
Total OTTI losses:
Corporate and other bonds		—	$	—			1	$	1,822		—	$	—
Commercial mortgage-backed securities		—		—			—		—		—		—
Residential mortgage-backed securities		31		(137	)		—		—		1		55
Asset-backed securities		—		—			—		—		—		—
Equities		—		—			3		571		3		847

Total		31	$	(137	)		4	$	2,393		4	$	902

Less: Portion of loss in accumulated other comprehensive income (loss):
Corporate and other bonds			$	—				$	—			$	—
Commercial mortgage-backed securities				—					—				—
Residential mortgage-backed securities				(137	)				—				44
Asset-backed securities				—					—				—
Equities				—					—				—

Total			$	(137	)			$	—			$	44

Impairment losses recognized in earnings:
Corporate and other bonds			$	—				$	1,822			$	—
Commercial mortgage-backed securities				—					—				—
Residential mortgage-backed securities				—					—				11
Asset-backed securities				—					—				—
Equities				—					571				847

Total			$	—				$	2,393			$	858

The following table summarizes the cumulative amounts related to our Company’s credit loss portion of the OTTI losses on fixed maturities for the years ended December 31, 2014, 2013 and 2012. Our Company does not intend to sell and it is more likely than not that it will not be required to sell, the securities prior to recovery of the amortized cost basis and for which the non-credit loss portion is included in AOCI.


	Year Ended December 31,
In thousands	2014			2013		2012
Beginning balance	$	5,154		$	3,332	$	3,321
Additions for credit loss impairments recognized in the current period on securities not previously impaired		—			1,822		—
Additions for credit loss impairments recognized in the current period on securities previously impaired		—			—		11
Reductions for credit loss impairments previously recognized on securities sold during the period		(2,793	)		—		—

Ending balance	$	2,361		$	5,154	$	3,332

The contractual maturity dates for fixed maturities categorized by the number of years until maturity, with a gross unrealized loss as of December 31, 2014 is presented in the following table:


	December 31, 2014
	Gross Unrealized Losses					Fair Value
In thousands	Amount		Percent of Total			Amount		Percent of Total
Due in one year or less	$	2,638		25	%	$	21,919		3	%
Due after one year through five years		3,791		37	%		334,046		46	%
Due after five years through ten years		1,562		15	%		103,376		14	%
Due after ten years		158		2	%		21,533		3	%
Mortgage- and asset-backed securities		2,198		21	%		250,472		34	%

Total	$	10,347		100	%	$	731,346		100	%

Our Company’s net investment income was derived from the following sources:


	Year Ended December 31,
In thousands	2014			2013			2012
Fixed maturities	$	57,219		$	53,898		$	58,995
Equity securities		9,036			4,835			3,945
Short-term investments		911			774			1,694

Total investment income		67,166			59,507			64,634
Investment expenses		(2,998	)		(3,256	)		(10,386	)

Net investment income	$	64,168		$	56,251		$	54,248

Investment expenses for the year ended December 31, 2012 include $4.5 million of interest expense related to the settlement of a dispute with Equitas over foregone interest on amounts that were due on certain reinsurance contracts. In the dispute Equitas alleged that we failed to make timely payments to them under certain reinsurance agreements in connection with subrogation recoveries received by our Company with respect to several catastrophe losses that occurred in the late 1980’s and early 1990’s. In addition, investment expenses for the year ended December 31, 2012 includes a $2.8 million investment performance fee.

The change in net unrealized gains and losses, inclusive of the change in the non-credit portion of OTTI losses, consisted of:


	Year Ended December 31,
In thousands	2014		2013			2012
Fixed maturities	$	31,080	$	(76,194	)	$	15,709
Equity securities		4,302		8,857			(5,989	)

Gross unrealized gains (losses)		35,382		(67,337	)		9,720
Deferred income tax		12,197		(23,565	)		3,418

Change in net unrealized gains (losses), net	$	23,185	$	(43,772	)	$	6,302

Realized gains and losses, excluding net OTTI losses recognized in earnings, for the periods indicated, were as follows:


	Year Ended December 31,
In thousands	2014			2013			2012
Fixed maturities:
Gains	$	8,326		$	8,539		$	28,789
Losses		(2,610	)		(2,797	)		(1,915	)

Fixed maturities, net	$	5,716		$	5,742		$	26,874
Equity securities:
Gains	$	9,447		$	17,955		$	14,673
Losses		(2,351	)		(758	)		(473	)

Equity securities, net	$	7,096		$	17,197		$	14,200

Net realized gains (losses)	$	12,812		$	22,939		$	41,074

The following tables present, for each of the fair value hierarchy levels as defined by the accounting guidance for fair value measurements and described below, our Company’s fixed maturities and equity securities by asset class that are measured at fair value on a recurring basis as of December 31, 2014 and 2013:


	December 31, 2014
In thousands	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	146,904	$	251,019	$	—	$	397,923
States, municipalities and political subdivisions		—		541,007		—		541,007
Mortgage-backed and asset-backed securities:								—
Agency mortgage-backed securities		—		364,622		—		364,622
Residential mortgage obligations		—		34,087		—		34,087
Asset-backed securities		—		206,413		—		206,413
Commercial mortgage-backed securities		—		206,318		—		206,318

Subtotal	$	—	$	811,440	$	—	$	811,440
Corporate bonds		—		615,564		—		615,564

Total fixed maturities	$	146,904	$	2,219,030	$	—	$	2,365,934
Equity securities - common stocks		127,183				—		127,183
Equity securities - preferred stocks		—		57,112		—		57,112

Total	$	274,087	$	2,276,142	$	—	$	2,550,229


	December 31, 2013
In thousands	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	242,379	$	199,306	$	—	$	441,685
States, municipalities and political subdivisions		—		460,422		—		460,422
Mortgage-backed and asset-backed securities:								—
Agency mortgage-backed securities		—		301,274		—		301,274
Residential mortgage obligations		—		41,755		—		41,755
Asset-backed securities		—		125,133		—		125,133
Commercial mortgage-backed securities		—		172,750		—		172,750

Subtotal	$	—	$	640,912	$	—	$	640,912
Corporate bonds		—		500,447		4,407		504,854

Total fixed maturities	$	242,379	$	1,801,087	$	4,407	$	2,047,873
Equity securities - common stocks		143,954		—		—		143,954

Total	$	386,333	$	1,801,087	$	4,407	$	2,191,827

The fair value of financial instruments is determined based on the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets. Examples are listed equity and fixed income securities traded on an exchange. U.S. Treasury securities are reported as level 1 and are valued based on unadjusted quoted prices for identical assets in active markets that our Company can access.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Examples are asset-backed and mortgage-backed securities that are similar to other asset-backed or mortgage-backed securities observed in the market. U.S. government agency securities are reported as level 2 and are valued using yields and spreads that are observable in active markets.

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. An example would be a private placement with minimal liquidity.

Our Company did not have any significant transfers between Level 1 and 2 for the years ended December 31, 2014 and 2013.

Our Company did not have any Level 3 assets for the year ended December 31, 2014.

During 2014, one security was transferred from Level 3 to Level 2 as our Company was able to obtain a price from a vendor, in which all significant inputs to the model are observable in active markets.

The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value using Level 3 inputs for the years ended December 31, 2014 and 2013. For the year ended December 31, 2012, our Company did not have any Level 3 assets.


	Year Ended December 31, 2014
In thousands	Beginning Balance		Realized Gains (Losses)		Unrealized Gains (Losses)		Purchase		Sales		Settlements		Transfers into Level 3		Transfers out of Level 3			Ending
Assets:
Corporate Bond	$	4,407	$	—	$	—	$	—	$	—	$	—	$	—	$	(4,407	)	$	—

Total assets	$	4,407	$	—	$	—	$	—	$	—	$	—	$	—	$	(4,407	)	$	—


	Year Ended December 31, 2013
In thousands	Beginning Balance		Realized Gains (Losses)		Unrealized Gains (Losses)			Purchase		Sales			Settlements		Transfers into Level 3		Transfers out of Level 3		Ending
Assets:
Commercial
Mortgage	$	—	$	—	$	(42	)	$	4,660	$	(211	)	$	—	$	—	$	—	$	4,407

Total assets	$	—	$	—	$	(42	)	$	4,660	$	(211	)	$	—	$	—	$	—	$	4,407

In 2013 the Level 3 security was valued using unobservable inputs based on a proxy of a security of similar duration in which market quotations are available.

As of December 31, 2014 and 2013, our Company’s restricted net assets in support of the underwriting activities of the Insurance Companies and Lloyd’s Operations were $523.4 million and $520.9 million, respectively, consisting of fixed maturities, short term investments and cash. Refer to Note 13, Dividends and Statutory Financial Information, for additional information on the nature and type of restricted net assets.

As of December 31, 2014 and 2013, our Company did not have a concentration of greater than 5% of invested assets in a single non-U.S. government-backed issuer.