Note 10. Investments

The following tables set forth the Company’s cash and investments as of September 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,
	As of September 30, 2011
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost		OTTI Recognized in OCI
Fixed-maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds	$	301,757	$	8,656	$	(487	)	$	293,588	$	—
States, municipalities and political subdivisions		386,167		23,394		(195	)		362,968		—
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		377,465		16,932		(20	)		360,553		—
Residential mortgage obligations		24,525		30		(2,232	)		26,727		(1,260	)
Asset-backed securities		49,915		779		(86	)		49,222		—
Commerical mortgage-backed securities		215,033		6,673		(909	)		209,269		—

Subtotal	$	666,938	$	24,414	$	(3,247	)	$	645,771	$	(1,260	)
Corporate bonds		473,111		15,008		(7,998	)		466,101		—

Total fixed-maturities	$	1,827,973	$	71,472	$	(11,927	)	$	1,768,428	$	(1,260	)
Equity securities - common stocks		147,794		18,597		(4,419	)		133,616		—
Cash		58,935		—		—			58,935		—
Short-term investments		159,549		—		—			159,549		—

Total	$	2,194,251	$	90,069	$	(16,346	)	$	2,120,528	$	(1,260	)


	As of December 31, 2010
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost		OTTI Recognized in OCI
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-backed 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		—
Commerical 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 contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of September 30, 2011 are shown in the following table:

		September 30,		September 30,
	As of September 30, 2011
In thousands	Fair Value		Amortized Cost
Due in one year or less	$	86,286	$	85,378
Due after one year through five years		516,118		506,889
Due after five years through ten years		353,019		335,229
Due after ten years		205,612		195,161
Mortgage- and asset-backed securities		666,938		645,771

Total	$	1,827,973	$	1,768,428

The following table summarizes all securities in a gross unrealized loss position as of September 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,
	As of September 30, 2011						As of December 31, 2010
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. Government Treasury bonds, agency bonds, and foreign government bonds
0-6 months		8	$	80,840	$	230		36	$	163,253	$	4,499
7-12 months		2		6,916		257		—		—		—
> 12 months		—		—		—		—		—		—

Subtotal		10	$	87,756	$	487		36	$	163,253	$	4,499
States, municipalities and political subdivisions
0-6 months		7	$	6,133	$	26		57	$	112,291	$	3,749
7-12 months		4		8,809		131		1		1,004		20
> 12 months		5		3,196		38		4		1,317		36

Subtotal		16	$	18,138	$	195		62	$	114,612	$	3,805
Agency mortgage-backed securities
0-6 months		4	$	8,049	$	20		36	$	139,226	$	2,434
7-12 months		—		—		—		—		—		—
> 12 months		—		—		—		—		—		—

Subtotal		4	$	8,049	$	20		36	$	139,226	$	2,434
Residential mortgage obligations
0-6 months		7	$	9,407	$	124		3	$	3,215	$	20
7-12 months		3		1,520		111		—		—		—
> 12 months		47		11,716		1,997		52		15,939		2,373

Subtotal		57	$	22,643	$	2,232		55	$	19,154	$	2,393
Asset-backed securities
0-6 months		7	$	14,216	$	86		7	$	28,175	$	292
7-12 months		—		—		—		—		—		—
> 12 months		1		2		—		1		2		—

Subtotal		8	$	14,218	$	86		8	$	28,177	$	292
Commercial mortgage-backed securities
0-6 months		23	$	53,115	$	772		16	$	78,212	$	1,755
7-12 months		6		7,078		120		—		—		—
> 12 months		1		220		17		2		491		39

Subtotal		30	$	60,413	$	909		18	$	78,703	$	1,794
Corporate bonds
0-6 months		81	$	168,290	$	6,819		98	$	214,180	$	5,545
7-12 months		15		22,737		1,179		—		—		—
> 12 months		—		—		—		—		—		—

Subtotal		96	$	191,027	$	7,998		98	$	214,180	$	5,545

Total fixed maturities		221	$	402,244	$	11,927		313	$	757,305	$	20,762

Equity securities - common stocks
0-6 months		25	$	59,039	$	4,419		1	$	322	$	10
7-12 months		—		—		—		—		—		—
> 12 months		—		—		—		—		—		—

Total equity securities		25	$	59,039	$	4,419		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.

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.

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 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 September 30,								Nine Months Ended September 30,
	2011				2010				2011				2010
In thousands except # of securities	Number of Securities		Amount		Number of Securities		Amount		Number of Securities		Amount		Number of Securities		Amount
Total other than temporary impairment losses:
Corporate and other bonds		—	$	—		—	$	—		—	$	—		—	$	—
Commercial mortgage-backed securities		—		—		—		—		—		—		—		—
Residential mortgage-backed securities		10		1,241		10		674		15		1,791		12		1,387
Asset-backed securities		—		—		—		—		—		—		—		—
Equities		—		—		1		360		1		547		2		387

Total		10	$	1,241		11	$	1,034		16	$	2,338		14	$	1,774
Portion of loss in accumulated other comprehensive income (loss):
Corporate and other bonds			$	—			$	—			$	—			$	—
Commercial mortgage-backed securities				—				—				—				—
Residential mortgage-backed securities				618				365				941				870
Asset-backed securities				—				—				—				—
Equities				—				—				—				—

Total			$	618			$	365			$	941			$	870
Impairment losses recognized in earnings
Corporate and other bonds			$	—			$	—			$	—			$	—
Commercial mortgage-backed securities				—				—				—				—
Residential mortgage-backed securities				623				309				850				517
Asset-backed securities				—				—				—				—
Equities				—				360				547				387

Total			$	623			$	669			$	1,397			$	904

The following table summarizes the cumulative amounts related to the Company’s credit loss portion of the OTTI losses on debt securities for the three and nine months ended September 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 securities 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,			September 30,		September 30,
	Three Months Ended September 30,					Nine Months Ended September 30,
In thousands	2011		2010			2011		2010
Beginning balance	$	1,885	$	2,731		$	1,658	$	2,523
Additions for credit loss impairments recognized in the current period on securities not previously impaired		623		309			850		517
Additions for credit loss impairments recognized in the current period on securities previously impaired		—		—			—		—
Reductions for credit loss impairments previously recognized on securities sold during the period		—		(935	)		—		(935	)

Ending balance	$	2,508	$	2,105		$	2,508	$	2,105

The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity, with a gross unrealized loss as of September 30, 2011 is presented in the following table:

		September 30,		September 30,			September 30,		September 30,
	As of September 30, 2011
	Gross Unrealized Losses					Fair Value
In thousands	Amount		Percent of Total			Amount		Percent of Total
Due in one year or less	$	3		0	%	$	4,509		1	%
Due after one year through five years		5,229		44	%		204,736		51	%
Due after five years through ten years		2,592		22	%		57,144		14	%
Due after ten years		856		7	%		30,532		8	%
Mortgage- and asset-backed securities		3,247		27	%		105,323		26	%

Total	$	11,927		100	%	$	402,244		100	%

The change in net unrealized gains/(losses), inclusive of the change in the non credit portion of other-than-temporary impairment losses, consisted of:

		September 30,			September 30,
	Nine Months Ended September 30,
In thousands	2011			2010
Fixed maturities	$	32,898		$	54,257
Equity securities		(8,287	)		4,227

Gross unrealized gains (losses)		24,611			58,484
Deferred income tax charge (credit)		8,251			20,160

Change in net unrealized gains (losses), net	$	16,360		$	38,324

Realized gains/(losses), excluding net other-than-temporary impairment losses recognized in earnings, for the periods indicated were as follows:

		September 30,			September 30,			September 30,			September 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
In thousands	2011			2010			2011			2010
Fixed maturities:
Gains	$	3,315		$	4,790		$	10,625		$	22,440
Losses		(77	)		(1,036	)		(6,610	)		(1,319	)

Fixed maturities, net	$	3,238		$	3,754		$	4,015		$	21,121
Equity securities:
Gains	$	—		$	773		$	841		$	773
Losses		—			(6	)					(241	)

Equity securities, net	$	—		$	767		$	841		$	532

Net realized gains (losses)	$	3,238		$	4,521		$	4,856		$	21,653

The following tables present, 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 as of September 30, 2011 and December 31, 2010:

		September 30,		September 30,		September 30,		September 30,
	As of September 30, 2011
In thousands	Level 1		Level 2		Level 3		Total
Fixed-maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds	$	100,325	$	201,432	$	—	$	301,757
States, municipalities and political subdivisions		—		386,167		—		386,167
Mortgage-backed and asset-backed securities:								—
Agency mortgage-backed securities		—		377,465		—		377,465
Residential mortgage obligations		—		24,525		—		24,525
Asset-backed securities		—		49,915		—		49,915
Commercial mortgage-backed securities		—		215,033		—		215,033

Subtotal	$	—	$	666,938	$	—	$	666,938
Corporate bonds		—		473,111		—		473,111

Total fixed-maturities	$	100,325	$	1,727,648	$	—	$	1,827,973
Equity securities - common stocks		147,794		—		—		147,794

Total	$	248,119	$	1,727,648	$	—	$	1,975,767

		September 30,		September 30,		September 30,		September 30,
	As of December 31, 2010
In thousands	Level 1		Level 2		Level 3		Total
Fixed-maturities:
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-backed 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 nine months ended September 30, 2011.

The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value using Level 3 inputs during the three and nine months ended September 30, 2011.

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,			September 30,
	For The Three Months Ended September 30, 2011
In thousands	Beginning Balance		Realized Gains (Losses)		Unrealized Gains (Losses)		Purchases		Sales		Settlements		Transfers into Level 3		Transfers out of Level 3			Ending Balance
Assets:
Commercial Mortgage
Obligations	$	4,821	$	—	$	—	$	—	$	—	$	—	$	—	$	(4,821	)	$	—

Total assets	$	4,821	$	—	$	—	$	—	$	—	$	—	$	—	$	(4,821	)	$	—

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,			September 30,
	For The Nine Months Ended September 30, 2011
In thousands	Beginning Balance		Realized Gains (Losses)		Unrealized Gains (Losses)		Purchases		Sales		Settlements		Transfers into Level 3		Transfers out of Level 3			Ending Balance
Assets:
Commercial Mortgage
Obligations	$	1,837	$	—	$	—	$	4,821	$	—	$	—	$	—	$	(6,658	)	$	—

Total assets	$	1,837	$	—	$	—	$	4,821	$	—	$	—	$	—	$	(6,658	)	$	—

As of September 30, 2010, the Company did not have any securities classified as Level 3 and there were no changes in Level 3 assets for the three and nine months ended September 30, 2010.