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Investments
6 Months Ended
Jun. 30, 2011
Investments

Note 10. Investments

The following tables set forth the Company’s cash and investments as of June 30, 2011 and December 31, 2010. The table below includes other-than-temporarily impaired (“OTTI”) securities recognized within other comprehensive income (“OCI”).

 

September 30, September 30, September 30, September 30, September 30,

June 30, 2011

     Fair Value        Gross
Unrealized
Gains
       Gross
Unrealized
(Losses)
     Cost or
Amortized
Cost
       OTTI
Recognized
in OCI
 
       ($ in thousands)  

Fixed Maturities:

                      

U.S. Government Treasury bonds, agency bonds and foreign government bonds

     $ 291,492         $ 5,492         $ (610    $ 286,610         $ —     

States, municipalities and political subdivisions

       374,873           15,910           (962      359,925           —     

Mortgage- and asset-backed securities:

                      

Agency mortgage-backed securities

       365,497           12,752           (864      353,609           —     

Residential mortgage obligations

       25,948           40           (2,266      28,174           (1,384

Asset-backed securities

       52,559           539           (77      52,097           —     

Commercial mortgage-backed securities

       218,429           6,480           (800      212,749           —     
    

 

 

      

 

 

      

 

 

    

 

 

      

 

 

 

Subtotal

       662,433           19,811           (4,007      646,629           (1,384

Corporate bonds

       518,423           14,927           (2,709      506,205           —     
    

 

 

      

 

 

      

 

 

    

 

 

      

 

 

 

Total fixed maturities

       1,847,221           56,140           (8,288      1,799,369           (1,384
    

 

 

      

 

 

      

 

 

    

 

 

      

 

 

 

Equity securities - common stocks

       94,737           26,959           (257      68,035           —     

Cash

       40,340           —             —           40,340           —     

Short-term investments

       185,032           —             —           185,032           —     
    

 

 

      

 

 

      

 

 

    

 

 

      

 

 

 

Total

     $ 2,167,330         $ 83,099         $ (8,545    $ 2,092,776         $ (1,384
    

 

 

      

 

 

      

 

 

    

 

 

      

 

 

 

 

September 30, September 30, September 30, September 30, September 30,

December 31, 2010

     Fair Value        Gross
Unrealized
Gains
       Gross
Unrealized
(Losses)
     Cost or
Amortized
Cost
       OTTI
Recognized
in OCI
 
       ($ in thousands)  

Fixed Maturities:

                      

U.S. Government Treasury bonds, agency bonds and foreign government bonds

     $ 324,145         $ 5,229         $ (4,499    $ 323,415         $ —     

States, municipalities and political subdivisions

       392,250           11,903           (3,805      384,152           —     

Mortgage- and asset-backed securities:

                      

Agency mortgage-backed securities

       382,628           10,127           (2,434      374,935           —     

Residential mortgage obligations

       20,463           24           (2,393      22,832           (1,646

Asset-backed securities

       46,093           247           (292      46,138           —     

Commercial mortgage-backed securities

       190,015           4,804           (1,794      187,005           —     
    

 

 

      

 

 

      

 

 

    

 

 

      

 

 

 

Subtotal

       639,199           15,202           (6,913      630,910           (1,646

Corporate bonds

       526,651           15,075           (5,545      517,121           —     
    

 

 

      

 

 

      

 

 

    

 

 

      

 

 

 

Total fixed maturities

       1,882,245           47,409           (20,762      1,855,598           (1,646
    

 

 

      

 

 

      

 

 

    

 

 

      

 

 

 

Equity securities - common stocks

       87,258           22,475           (10      64,793           —     

Cash

       31,768           —             —           31,768           —     

Short-term investments

       153,057           —             —           153,057           —     
    

 

 

      

 

 

      

 

 

    

 

 

      

 

 

 

Total

     $ 2,154,328         $ 69,884         $ (20,772    $ 2,105,216         $ (1,646
    

 

 

      

 

 

      

 

 

    

 

 

      

 

 

 

The fair value of the 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. The Company does not have the intent to sell nor is it more likely than not that it will have to sell debt securities in unrealized loss positions that are not other-than-temporarily impaired before recovery. The 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 the Company considers when evaluating investment for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.

 

The scheduled maturity dates for fixed maturity securities categorized by the number of years until maturity at June 30, 2011 are shown in the following table:

 

September 30, September 30,

Period from

June 30, 2011

to Maturity

     Fair
Value
       Amortized
Cost
 
       ($ in thousands)  

Due in one year or less

     $ 101,673         $ 100,292   

Due after one year through five years

       544,156           528,318   

Due after five years through ten years

       342,481           331,505   

Due after ten years

       196,478           192,625   

Mortgage- and asset-backed (including GNMAs)

       662,433           646,629   
    

 

 

      

 

 

 

Total

     $ 1,847,221         $ 1,799,369   
    

 

 

      

 

 

 

 

The following table summarizes all securities in a gross unrealized loss position at June 30, 2011 and December 31, 2010, 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.

 

September 30, September 30, September 30, September 30, September 30, September 30,
       June 30, 2011        December 31, 2010  
       Number of
Securities
       Fair
Value
       Gross
Unrealized  Loss
       Number of
Securities
       Fair
Value
       Gross
Unrealized Loss
 
       ($ in thousands except # of securities)  

Fixed Maturities:

                             

U.S. Government Treasury bonds, agency bonds and foreign government bonds

                             

0-6 Months

       4         $ 7,714         $ 16           36         $ 163,253         $ 4,499   

7-12 Months

       16           42,623           594           —             —             —     

> 12 Months

       —             —             —             —             —             —     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Subtotal

       20           50,337           610           36           163,253           4,499   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

States, municipalities and political subdivisions

                             

0-6 Months

       4           11,970           42           57           112,291           3,749   

7-12 Months

       15           19,445           870           1           1,004           20   

> 12 Months

       8           2,239           50           4           1,317           36   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Subtotal

       27           33,654           962           62           114,612           3,805   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Agency mortgage-backed securities

                             

0-6 Months

       5           31,727           89           36           139,226           2,434   

7-12 Months

       16           41,952           775           —             —             —     

> 12 Months

       —             —             —             —             —             —     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Subtotal

       21           73,679           864           36           139,226           2,434   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Residential mortgage obligations

                             

0-6 Months

       9           10,986           119           3           3,215           20   

7-12 Months

       1           183           15           —             —             —     

> 12 Months

       47           12,779           2,132           52           15,939           2,373   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Subtotal

       57           23,948           2,266           55           19,154           2,393   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Asset-backed securities

                             

0-6 Months

       8           18,225           77           7           28,175           292   

7-12 Months

       —             —             —             —             —             —     

> 12 Months

       1           2           —             1           2           —     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Subtotal

       9           18,227           77           8           28,177           292   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Commercial mortgage-backed securities

                             

0-6 Months

       14           50,628           541           16           78,212           1,755   

7-12 Months

       5           11,832           240           —             —             —     

> 12 Months

       1           222           19           2           491           39   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Subtotal

       20           62,682           800           18           78,703           1,794   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Corporate bonds

                             

0-6 Months

       36           60,661           667           98           214,180           5,545   

7-12 Months

       49           101,100           2,042           —             —             —     

> 12 Months

       —             —             —             —             —             —     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Subtotal

       85           161,761           2,709           98           214,180           5,545   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total fixed maturities

       239         $ 424,288         $ 8,288           313         $ 757,305         $ 20,762   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Equity securities - common stocks

                             

0-6 Months

       7         $ 4,743         $ 257           1         $ 322         $ 10   

7-12 Months

       —             —             —             —             —             —     

> 12 Months

       —             —             —             —             —             —     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total equity securities

       7         $ 4,743         $ 257           1         $ 322         $ 10   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary based on our policies.

 

In the above table the residential mortgage obligations gross unrealized loss for the greater than 12 months category consists primarily of residential mortgage-backed securities. Residential mortgage-backed securities are a type of fixed income security in which residential mortgage loans are sold into a trust or special purpose vehicle, thereby securitizing the cash flows of the mortgage loans.

To determine whether the unrealized loss on structured securities is other-than-temporary, the 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 ultimately incurs 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.

For debt securities, when assessing whether the amortized cost basis of the security will be recovered, the 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 in relation 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 OCI.

For equity securities, in general, the 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, the 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. 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.

For equity securities, the Company 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. For fixed maturity securities, the Company considers its’ intent to sell a security and whether it is more likely than not that the Company will be required to sell a security before the anticipated recovery as part of the process of evaluating whether a security’s unrealized loss represents an other-than-temporary decline. The Company’s ability to hold such 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.

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. The 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.

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

 

September 30, September 30, September 30, September 30, September 30, September 30, September 30, September 30,
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
    Number of           Number of           Number of           Number of        
    Securities     Amount     Securities     Amount     Securities     Amount     Securities     Amount  
($ in thousands, except # of securities)                                                

Total other-than-temporary impairment losses

               

Corporate and other bonds

    —        $ —          —        $ —          —        $ —          —        $ —     

Commercial mortgage-backed securities

    —          —          —          —          —          —          —          —     

Residential mortgage-backed securities

    6        516        4        489        7        549        6        713   

Asset-backed securities

    —          —          —          —          —          —          —          —     

Equities

    1        317        —          —          1        547        1        27   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    7      $ 833        4      $ 489        8      $ 1,096        7      $ 740   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Portion of loss in accumulated other comprehensive income (loss)

               

Corporate and other bonds

    $ —          $ —          $ —          $ —     

Commercial mortgage-backed securities

      —            —            —            —     

Residential mortgage-backed securities

      301          334          322          504   

Asset-backed securities

      —            —            —            —     

Equities

      —            —            —            —     
   

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $ 301        $ 334        $ 322        $ 504   
   

 

 

     

 

 

     

 

 

     

 

 

 

Impairment losses recognized in earnings

               

Corporate and other bonds

    $ —          $ —          $ —          $ —     

Commercial mortgage-backed securities

      —            —            —            —     

Residential mortgage-backed securities

      215          155          227          209   

Asset-backed securities

      —            —            —            —     

Equities

      317          —            547          27   
   

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $ 532        $ 155        $ 774        $ 236   
   

 

 

     

 

 

     

 

 

     

 

 

 

The following tables summarize the cumulative amounts related to the Company’s credit loss portion of the OTTI losses on debt securities for the three and six months ended June 30, 2011 and 2010 that it does not intend to sell and it is more likely than not that it will not be required to sell the security prior to recovery of the amortized cost basis and for which the non-credit loss portion is included in other comprehensive income:

 

September 30, September 30,
       Three months ended June 30,  
($ in thousands)      2011        2010  

Beginning balance at April 1

     $ 1,669         $ 2,577   

Credit losses on securities not previously impaired as of April 1

       —             182   

Additional credit losses on securities previously impaired as of April 1

       215           —     

Reductions for securities sold during the period

       —             —     
    

 

 

      

 

 

 

Ending balance at June 30

     $ 1,884         $ 2,759   
    

 

 

      

 

 

 

 

September 30, September 30,
       Six months ended June 30,  
($ in thousands)      2011        2010  

Beginning balance at January 1

     $ 1,658         $ 2,523   

Credit losses on securities not previously impaired as of January 1

       —             236   

Additional credit losses on securities previously impaired as of January 1

       226           —     

Reductions for securities sold during the period

       —             —     
    

 

 

      

 

 

 

Ending balance at June 30

     $ 1,884         $ 2,759   
    

 

 

      

 

 

 

For the three months ended June 30, 2011, OTTI losses within other comprehensive income (“OCI”) increased $0.1 million. For the six months ended June 30, 2011, OTTI losses within other comprehensive income (“OCI”) decreased $0.3 million, primarily as a result of increases in the fair value of securities previously impaired. For the comparable period in 2010, OTTI losses within OCI decreased $0.9 million and $1.9 million, respectively.

The contractual maturity categorized by the number of years until maturity for fixed maturity securities with a gross unrealized loss at June 30, 2011 are shown in the following table:

 

September 30, September 30, September 30, September 30,
       Gross
Unrealized Loss
    Fair Value  
                Percent              Percent  
       Amount        of Total     Amount        of Total  
       ($ in thousands)  

Due in one year or less

     $ —                 $ 7            

Due after one year through five years

       730           9     93,496           22

Due after five years through ten years

       2,258           27     109,933           26

Due after ten years

       1,293           16     42,316           10

Mortgage- and asset-backed securities

       4,007           48     178,536           42
    

 

 

      

 

 

   

 

 

      

 

 

 

Total fixed maturity securities

     $ 8,288           100   $ 424,288           100
    

 

 

      

 

 

   

 

 

      

 

 

 

The change in net unrealized gains/(losses) consisted of:

 

September 30, September 30,
       Six months ended June 30,  
       2011      2010  
       ($ in thousands)  

Fixed maturities

     $ 21,206      $ 26,921   

Equity securities

       4,238         (5,347
    

 

 

    

 

 

 
       25,444         21,574   

Deferred income tax (charged) credited

       (8,573      (7,354
    

 

 

    

 

 

 

Change in unrealized gains (losses), net

     $ 16,871       $ 14,220   
    

 

 

    

 

 

 

 

Realized gains/(losses) for the periods indicated were as follows:

 

September 30, September 30, September 30, September 30,
       Three Months Ended June 30,      Six Months Ended June 30,  
       2011      2010      2011      2010  
       ($ in thousands)  

Fixed maturities:

             

Gains

     $ 4,443       $ 11,281       $ 7,312       $ 17,651   

(Losses)

       (2,277      (26      (6,534      (283
    

 

 

    

 

 

    

 

 

    

 

 

 
       2,166         11,255         778         17,368   
    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities:

             

Gains

       840         —           840         —     

(Losses)

       —           (235      —           (235
    

 

 

    

 

 

    

 

 

    

 

 

 
       840         (235      840         (235
    

 

 

    

 

 

    

 

 

    

 

 

 

Net realized gains (losses)

     $ 3,006       $ 11,020       $ 1,618       $ 17,133   
    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents, for each of the fair value hierarchy levels as defined in ASC 820, Fair Value Measurements, the Company’s fixed maturities and equity securities by asset class that are measured at fair value at June 30, 2011 and December 31, 2010:

 

September 30, September 30, September 30, September 30,

June 30, 2011

     Level 1        Level 2        Level 3        Total  
       ($ in thousands)  

U.S. Government Treasury bonds, agency bonds and foreign government bonds

     $ 108,291         $ 183,201         $ —           $ 291,492   

States, municipalities and political subdivisions

       —             374,873           —             374,873   

Mortgage- and asset-backed securities:

                   

Agency mortgage-backed securities

       —             365,497           —             365,497   

Residential mortgage obligations

       —             25,948           —             25,948   

Asset-backed securities

       —             52,559           —             52,559   

Commercial mortgage-backed securities

       —             218,429           —             218,429   
    

 

 

      

 

 

      

 

 

      

 

 

 

Subtotal

       —             662,433           —             662,433   

Corporate bonds

       —             518,423           —             518,423   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total fixed maturities

       108,291           1,738,930           —             1,847,221   
    

 

 

      

 

 

      

 

 

      

 

 

 

Equity securities - common stocks

       94,737           —             —             94,737   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $ 203,028         $ 1,738,930         $ —           $ 1,941,958   
    

 

 

      

 

 

      

 

 

      

 

 

 

 

September 30, September 30, September 30, September 30,

December 31, 2010

     Level 1        Level 2        Level 3        Total  
       ($ in thousands)  

U.S. Government Treasury bonds, agency bonds and foreign government bonds

     $ 212,933         $ 111,212         $ —           $ 324,145   

States, municipalities and political subdivisions

       —             392,250           —             392,250   

Mortgage- and asset-backed securities:

                   

Agency mortgage-backed securities

       —             382,628           —             382,628   

Residential mortgage obligations

       —             20,463           —             20,463   

Asset-backed securities

       —             46,093           —             46,093   

Commercial mortgage-backed securities

       —             188,178           1,837           190,015   
    

 

 

      

 

 

      

 

 

      

 

 

 

Subtotal

       —             637,362           1,837           639,199   

Corporate bonds

       —             526,651           —             526,651   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total fixed maturities

       212,933           1,667,475           1,837           1,882,245   
    

 

 

      

 

 

      

 

 

      

 

 

 

Equity securities - common stocks

       87,258           —             —             87,258   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $ 300,191         $ 1,667,475         $ 1,837         $ 1,969,503   
    

 

 

      

 

 

      

 

 

      

 

 

 

The fair value of financial instruments is determined based on the following fair value hierarchy. The fair value measurement inputs and valuation techniques are similar across all asset classes within the levels outlined below.

 

 

Level 1 – Quoted prices for identical instruments in active markets. Examples are listed equity and fixed income securities traded on an exchange. Treasury securities would generally be considered Level 1.

 

 

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 which are similar to other asset-backed or mortgage-backed securities observed in the market.

 

 

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.

 

The Company did not have any significant transfers between Level 1 and 2 for the three and six months ended June 30, 2011. The Company did not have any securities classified as Level 3 at June 30, 2011 and 2010.

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value using Level 3 inputs during the six months ended June 30, 2011 and 2010.

 

September 30, September 30,
       2011      2010  
       ($ in thousands)  

Level 3 investments as of December 31

     $ 1,837       $ —     

Unrealized net gains included in other comprehensive income (loss)

       (26      —     

Purchases, sales, paydowns and amortization

       (4      —     

Transfer from Level 3

       (1,807      —     

Transfer to Level 3

       —           —     
    

 

 

    

 

 

 

Level 3 investments as of June 30

     $ —         $ —