Note 9. Investments

The following tables set forth the Company’s cash and investments as of March 31, 2014 and December 31, 2013. The table below includes other-than-temporarily impaired (“OTTI”) securities recognized within accumulated other comprehensive income (“AOCI”).


	March 31, 2014
			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
In thousands	Value		Gains		(Losses)			Cost
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	417,942	$	3,066	$	(4,956	)	$	419,832
States, municipalities and political subdivisions		491,598		12,216		(6,948	)		486,330
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		265,818		7,182		(3,525	)		262,161
Residential mortgage obligations		57,852		1,573		(136	)		56,415
Asset-backed securities		162,226		639		(563	)		162,150
Commercial mortgage-backed securities		173,333		7,792		(272	)		165,813

Subtotal	$	659,229	$	17,186	$	(4,496	)	$	646,539
Corporate bonds		593,944		15,472		(2,319	)		580,791

Total fixed maturities	$	2,162,713	$	47,940	$	(18,719	)	$	2,133,492
Equity securities - common stocks		141,476		26,589		(1,271	)		116,158
Equity securities - Preferred stocks		22,051		852		(1	)		21,200
Short-term investments		207,843		—		—			207,843
Cash		55,041		—		—			55,041

Total	$	2,589,124	$	75,381	$	(19,991	)	$	2,533,734


	December 31, 2013
			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
In thousands	Value		Gains		(Losses)			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 March 31, 2014 and December 31, 2013, fixed maturities for which non-credit OTTI was previously recognized and included in other accumulated comprehensive income are now in an unrealized gains position of $0.6 million and $0.5 million, respectively.

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 fix 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. We do not intend to sell any of these securities and it is more likely than not that we will not be required to sell these securities before the recovery of the amortized cost basis. For equity securities, the 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. 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 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 March 31, 2014 are shown in the following table:


	March 31, 2014
	Fair		Amortized
In thousands	Value		Cost
Due in one year or less	$	78,570	$	77,743
Due after one year through five years		739,594		725,355
Due after five years through ten years		407,558		406,355
Due after ten years		277,762		277,500
Mortgage- and asset-backed securities		659,229		646,539

Total	$	2,162,713	$	2,133,492

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 4.1 years.

The following table shows the amount and percentage of the Company’s fixed maturities as of March 31, 2014 by 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.


	March 31, 2014
		Fair		Percent
In thousands	Rating	Value		of Total
Rating description:
Extremely strong	AAA	$	389,209		18	%
Very strong	AA		1,014,656		47	%
Strong	A		561,731		26	%
Adequate	BBB		175,311		8	%
Speculative	BB & Below		18,287		1	%
Not rated	NR		3,519		0	%

Total	AA	$	2,162,713		100	%

The following table summarizes all securities in a gross unrealized loss position as of March 31, 2014 and December 31, 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.


	March 31, 2014						December 31, 2013
					Gross						Gross
	Number of				Unrealized		Number of				Unrealized
In thousands, except # of securities	Securities		Fair Value		Loss		Securities		Fair Value		Loss
Fixed maturities:
U.S. Treasury bonds, agency bonds, and foreign government bonds
0-6 months		20	$	120,036	$	518		27	$	136,360	$	1,096
7-12 months		21		128,509		4,426		26		149,370		7,759
> 12 months		1		897		12		—		—		—

Subtotal		42	$	249,442	$	4,956		53	$	285,730	$	8,855
States, municipalities and political subdivisions
0-6 months		14	$	24,744	$	163		28	$	40,132	$	297
7-12 months		77		160,382		5,050		104		205,152		12,100
> 12 months		16		36,052		1,735		6		12,357		1,254

Subtotal		107	$	221,178	$	6,948		138	$	257,641	$	13,651
Agency mortgage-backed securities
0-6 months		6	$	22,200	$	65		39	$	39,458	$	434
7-12 months		53		61,847		2,060		64		77,860		3,768
> 12 months		11		22,492		1,400		9		22,784		1,814

Subtotal		70	$	106,539	$	3,525		112	$	140,102	$	6,016
Residential mortgage obligations
0-6 months		2	$	897	$	3		3	$	431	$	2
7-12 months		4		536		18		7		950		29
> 12 months		13		2,222		115		15		2,467		130

Subtotal		19	$	3,655	$	136		25	$	3,848	$	161
Asset-backed securities
0-6 months		7	$	42,213	$	67		14	$	75,887	$	479
7-12 months		3		31,495		496		1		203		1
> 12 months		—		—		—		—		—		—

Subtotal		10	$	73,708	$	563		15	$	76,090	$	480
Commercial mortgage-backed securities
0-6 months		3	$	6,103	$	13		4	$	6,712	$	31
7-12 months		2		15,004		250		2		15,098		322
> 12 months		2		519		9		4		774		21

Subtotal		7	$	21,626	$	272		10	$	22,584	$	374
Corporate bonds
0-6 months		45	$	176,120	$	744		34	$	93,591	$	717
7-12 months		12		45,043		1,575		18		55,021		2,726
> 12 months		1		1,701		—		—		—		—

Subtotal		58	$	222,864	$	2,319		52	$	148,612	$	3,443

Total fixed maturities		313	$	899,012	$	18,719		405	$	934,607	$	32,980

Equity securities - common stocks
0-6 months		10	$	21,578	$	1,120		5	$	7,387	$	422
7-12 months		3		3,794		151		2		3,538		128
> 12 months		—		—		—		—		—		—

Total common Stocks		13	$	25,372	$	1,271		7	$	10,925	$	550

Equity securities - preferred stocks
0-6 months		1	$	553	$	1		—	$	—	$	—
7-12 months		—		—		—		—		—		—
> 12 months		—		—		—		—		—		—

Total Preferred Stocks		1	$	553	$	1		—	$	—	$	—

As of March 31, 2014 and December 31, 2013, the largest unrealized loss by a non-government backed issuer in the investment portfolio was $0.6 million and $1.1 million, respectively.

The 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, 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 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, 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 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. 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.

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 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.

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

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


	Three Months Ended March 31,
	2014				2013
	Number of				Number of
In thousands, except # of securities	Securities		Amount		Securities		Amount
Total OTTI losses:
Corporate and other bonds		—	$	—		—	$	—
Commercial mortgage-backed securities		—		—		—		—
Residential mortgage-backed securities		—		—		—		—
Asset-backed securities		—		—		—		—
Equities		—		—		2		42

Total		—	$	—		2	$	42

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

Total			$	—			$	—

Impairment losses recognized in earnings:
Corporate and other bonds			$	—			$	—
Commercial mortgage-backed securities				—				—
Residential mortgage-backed securities				—				—
Asset-backed securities				—				—
Equities				—				42

Total			$	—			$	42

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 months ended March 31, 2014 and 2013. The 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.


	Three Months Ended March 31,
In thousands	2014		2013
Beginning balance	$	4,183	$	2,362
Additions for credit loss impairments recognized in the current period on securities not previously impaired		—		—
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		—		—

Ending balance	$	4,183	$	2,362

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


	March 31, 2014
	Gross Unrealized Losses					Fair Value
In thousands	Amount		Percent of Total			Amount		Percent of Total
Due in one year or less	$	—		0	%	$	1,701		0	%
Due after one year through five years		1,697		9	%		316,024		35	%
Due after five years through ten years		7,773		41	%		235,549		26	%
Due after ten years		4,753		26	%		140,210		16	%
Mortgage- and asset-backed securities		4,496		24	%		205,528		23	%

Total	$	18,719		100	%	$	899,012		100	%

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


	Three Months Ended March 31,
In thousands	2014			2013
Fixed maturities	$	13,953		$	13,167
Equity securities		3,233			1,030
Short-term investments		218			189

Total investment income	$	17,404		$	14,386
Investment expenses		(794	)		(729	)

Net investment income	$	16,610		$	13,657

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


	Three Months Ended March 31,
In thousands	2014		2013
Fixed maturities	$	18,347	$	(10,930	)
Equity securities		1,019		8,172

Gross unrealized gains (losses)	$	19,366	$	(2,758	)
Deferred income tax		6,675		(1,003	)

Change in net unrealized gains (losses), net	$	12,691	$	(1,755	)

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


	Three Months Ended March 31,
In thousands	2014			2013
Fixed maturities:
Gains	$	1,867		$	3,206
Losses		(2,051	)		(310	)

Fixed maturities, net	$	(184	)	$	2,896
Equity securities:
Gains	$	1,920		$	1,918
Losses		(903	)		—

Equity securities, net	$	1,017		$	1,918

Net realized gains (losses)	$	833		$	4,814

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, the Company’s fixed maturities and equity securities by asset class that are measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013


	March 31, 2014
In thousands	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	217,631	$	200,311	$	—	$	417,942
States, municipalities and political subdivisions		—		491,598		—		491,598
Mortgage-backed and asset-backed securities:								—
Agency mortgage-backed securities		—		265,818		—		265,818
Residential mortgage obligations		—		57,852		—		57,852
Asset-backed securities		—		162,226		—		162,226
Commercial mortgage-backed securities		—		173,333		—		173,333

Subtotal	$	—	$	659,229	$	—	$	659,229
Corporate bonds		—		593,944		—		593,944

Total fixed maturities	$	217,631	$	1,945,082	$	—	$	2,162,713
Equity securities - common stocks		141,476		—		—		141,476
Equity securities - preferred stocks				22,051				22,051

Total	$	359,107	$	1,967,133	$	—	$	2,326,240


	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 the 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.

The Company did not have any significant transfers between Level 1 and 2 as of March 31, 2014 and March 31, 2013.

The following tables present a reconciliation of the beginning and ending balances of all investments measured at fair value using Level 3 inputs during the three months ended March 31, 2014.


	Three Months Ended March 31, 2014
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:
Corporate Bonds	$	4,407	$	—	$	—	$	—	$	—	$	—	$	—	$	(4,407	)	$	—

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

As of March 31, 2013, the Company did not have any Level 3 assets

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