4. Investments

Fair values

The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:


	Amortized cost		Gross unrealized					Fair value
($ in thousands)	Amortized cost		Gains		Losses			Fair value
December 31, 2012
U.S. government and agencies	$	86,428	$	5,659	$	—		$	92,087
Municipal		2,499		401		—			2,900
Corporate		178,824		13,173		(29	)		191,968
Foreign government		4,999		265		—			5,264
RMBS		28,239		1,498		—			29,737
CMBS		8,335		268		—			8,603

Total fixed income securities	$	309,324	$	21,264	$	(29	)	$	330,559

December 31, 2011
U.S. government and agencies	$	84,059	$	5,943	$	—		$	90,002
Municipal		2,499		399		—			2,898
Corporate		169,820		12,105		(99	)		181,826
Foreign government		4,998		239		—			5,237
RMBS		40,089		2,427		(9	)		42,507
CMBS		8,514		360		(518	)		8,356
ABS		2,806		8		—			2,814

Total fixed income securities	$	312,785	$	21,481	$	(626	)	$	333,640

Scheduled maturities

The scheduled maturities for fixed income securities are as follows as of December 31, 2012:


($ in thousands)	Amortized cost		Fair value
Due in one year or less	$	33,429	$	34,027
Due after one year through five years		132,690		141,438
Due after five years through ten years		93,657		103,296
Due after ten years		12,974		13,458

		272,750		292,219
RMBS and CMBS		36,574		38,340

Total	$	309,324	$	330,559

Actual maturities may differ from those scheduled as a result of prepayments by the issuers. RMBS and CMBS are shown separately because of the potential for prepayment of principal prior to contractual maturity dates.

Net investment income

Net investment income for the years ended December 31 is as follows:


($ in thousands)	2012			2011			2010
Fixed income securities	$	12,138		$	12,133		$	12,480
Short-term and other investments		20			11			21

Investment income, before expense		12,158			12,144			12,501
Investment expense		(568	)		(308	)		(434	)

Net investment income	$	11,590		$	11,836		$	12,067

Realized capital gains and losses

The Company recognized net realized capital gains of $626 thousand, $2.1 million and $694 thousand in 2012, 2011 and 2010, respectively. Realized capital gains and losses in 2012 and 2011 included $19 thousand and $12 thousand, respectively, of other-than-temporary impairment losses related to RMBS, none of which were included in other comprehensive income. Realized capital gains and losses in 2010 did not include any other-than-temporary impairment losses and therefore, none were included in other comprehensive income. No other-than-temporary impairment losses were included in accumulated other comprehensive income as of December 31, 2012 or 2011.

Gross gains of $645 thousand, $1.9 million and $652 thousand and gross losses of zero, $3 thousand and zero were realized on sales of fixed income securities during 2012, 2011 and 2010, respectively.

Unrealized net capital gains and losses

Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:


($ in thousands)	Fair value		Gross unrealized					Unrealized net gains (losses)
($ in thousands)	Fair value		Gains		Losses			Unrealized net gains (losses)
December 31, 2012
Fixed income securities	$	330,559	$	21,264	$	(29	)	$	21,235
Short-term investments		24,203		1		—			1

Unrealized net capital gains and losses, pre-tax									21,236
Deferred income taxes									(7,433	)

Unrealized net capital gains and losses, after-tax								$	13,803


	Fair value		Gross unrealized					Unrealized net gains (losses)
	Fair value		Gains		Losses			Unrealized net gains (losses)
December 31, 2011
Fixed income securities	$	333,640	$	21,481	$	(626	)	$	20,855
Short-term investments		12,974		—		—			—

Unrealized net capital gains and losses, pre-tax									20,855
Deferred income taxes									(7,299	)

Unrealized net capital gains and losses, after-tax								$	13,556

Change in unrealized net capital gains and losses

The change in unrealized net capital gains and losses for the years ended December 31 is as follows:


($ in thousands)	2012			2011			2010
Fixed income securities	$	380		$	5,247		$	7,052
Short-term investments		1			—			—

Total		381			5,247			7,052
Deferred income taxes		(134	)		(1,836	)		(2,468	)

Increase in unrealized net capital gains and losses	$	247		$	3,411		$	4,584

Portfolio monitoring

The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be other-than-temporarily impaired.

For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security’s decline in fair value is considered other than temporary and is recorded in earnings.

If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compares this to the amortized cost of the security. If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.

The Company’s portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of other-than-temporary impairment for these fixed income securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other than temporary are: 1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost.

The following table summarizes the gross unrealized losses and fair value of fixed income securities that have been in a continuous unrealized loss position for less than twelve months. No securities have been in a continuous unrealized loss position for more than twelve months as of December 31, 2012 or 2011.


($ in thousands)	Number of issues		Fair value		Unrealized losses
December 31, 2012
Corporate		1	$	1,936	$	(29	)

Total		1	$	1,936	$	(29	)

December 31, 2011
Corporate		1	$	5,161	$	(99	)
RMBS		1		1,075		(9	)
CMBS		1		1,484		(518	)

Total		3	$	7,720	$	(626	)

As of December 31, 2012, $29 thousand of unrealized losses are related to a fixed income security with an unrealized loss position less than 20% of amortized cost, the degree of which suggests that this security does not pose a high risk of being other-than-temporarily impaired. This unrealized loss is related to an investment grade fixed income security. Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P, Fitch, Dominion, Kroll or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available. Unrealized losses on the investment grade security are related to widening credit spreads or rising interest rates since the time of initial purchase.

As of December 31, 2012, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis.

Municipal bonds

All of the municipal bond issuers represented in the Company’s municipal bond portfolio were in Washington as of both December 31, 2012 and 2011.

Concentration of credit risk

As of December 31, 2012, the Company is not exposed to any credit concentration risk of a single issuer and its affiliates greater than 10% of the Company’s shareholder’s equity.

Other investment information

As of December 31, 2012, fixed income securities and short-term investments with a carrying value of $9.9 million were on deposit with regulatory authorities as required by law.