3. INVESTMENTS

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity and equity security investments, carried at market value, are as follows for the periods indicated:


	At September 30, 2012
	Amortized		Unrealized		Unrealized			Market
(Dollars in thousands)	Cost		Appreciation		Depreciation			Value
Fixed maturity securities
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	77,754	$	1,658	$	(817	)	$	78,595
Obligations of U.S. states and political subdivisions		1,275,967		90,415		(53	)		1,366,329
Corporate securities		1,342,335		65,091		(6,198	)		1,401,228
Asset-backed securities		48,695		2,228		-			50,923
Mortgage-backed securities
Commercial		45,345		8,066		(404	)		53,007
Agency residential		559,808		15,901		(541	)		575,168
Non-agency residential		2,148		357		(25	)		2,480
Foreign government securities		759,964		56,900		(4,176	)		812,688
Foreign corporate securities		948,952		46,681		(9,933	)		985,700
Total fixed maturity securities	$	5,060,968	$	287,297	$	(22,147	)	$	5,326,118
Equity securities	$	15	$	-	$	(2	)	$	13


	At December 31, 2011
	Amortized		Unrealized		Unrealized			Market
(Dollars in thousands)	Cost		Appreciation		Depreciation			Value
Fixed maturity securities
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	77,351	$	2,475	$	(287	)	$	79,539
Obligations of U.S. states and political subdivisions		1,558,615		102,815		(525	)		1,660,905
Corporate securities		1,200,941		45,070		(17,776	)		1,228,235
Asset-backed securities		44,351		758		(6	)		45,103
Mortgage-backed securities
Commercial		41,953		7,187		(1,266	)		47,874
Agency residential		528,946		16,209		(1,762	)		543,393
Non-agency residential		24,139		470		(320	)		24,289
Foreign government securities		733,814		57,437		(2,602	)		788,649
Foreign corporate securities		670,544		29,421		(10,924	)		689,041
Total fixed maturity securities	$	4,880,654	$	261,842	$	(35,468	)	$	5,107,028
Equity securities	$	15	$	-	$	(5	)	$	10

The $812,688 thousand of foreign government securities at September 30, 2012 included $89,412 thousand of European sovereign securities. Approximately 48.6%, 15.1%, 11.8%, 7.3% and 5.4% of European Sovereign Securities represented securities held in the governments of France, the United Kingdom, Sweden, the Netherlands and Austria, respectively. No other countries represented more than 5% of the European sovereign securities. The Company held no sovereign securities of Portugal, Italy, Ireland, Greece or Spain at September 30, 2012.

In accordance with FASB guidance, the Company reclassified the non-credit portion of other-than-temporary impairments from retained earnings into accumulated other comprehensive income (loss), on April 1, 2009. The table below presents the pre-tax cumulative unrealized appreciation (depreciation) on those corporate securities, for the periods indicated:


(Dollars in thousands)	At September 30, 2012		At December 31, 2011
Pre-tax cumulative unrealized appreciation (depreciation)	$	490	$	635

The amortized cost and market value of fixed maturity securities are shown in the following table by contractual maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately.


	At September 30, 2012				At December 31, 2011
	Amortized		Market		Amortized		Market
(Dollars in thousands)	Cost		Value		Cost		Value
Fixed maturity securities – available for sale
Due in one year or less	$	351,241	$	349,065	$	224,406	$	223,507
Due after one year through five years		2,272,775		2,360,911		2,055,299		2,129,437
Due after five years through ten years		977,030		1,040,976		955,253		1,009,893
Due after ten years		803,926		893,588		1,006,307		1,083,532
Asset-backed securities		48,695		50,923		44,351		45,103
Mortgage-backed securities
Commercial		45,345		53,007		41,953		47,874
Agency residential		559,808		575,168		528,946		543,393
Non-agency residential		2,148		2,480		24,139		24,289
Total fixed maturity securities	$	5,060,968	$	5,326,118	$	4,880,654	$	5,107,028

The changes in net unrealized appreciation (depreciation) for the Company's investments are derived from the following sources for the periods as indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2012			2011			2012			2011
Increase (decrease) during the period between the market value and cost
of investments carried at market value, and deferred taxes thereon:
Fixed maturity securities	$	28,226		$	11,911		$	38,923		$	51,341
Fixed maturity securities, other-than-temporary impairment		(77	)		(137	)		(146	)		(132	)
Equity securities		-			(1	)		3			(1	)
Other invested assets		-			215			-			(1,515	)
Change in unrealized appreciation (depreciation), pre-tax		28,149			11,988			38,780			49,693
Deferred tax benefit (expense)		(9,879	)		(4,243	)		(13,624	)		(17,438	)
Deferred tax benefit (expense), other-than-temporary impairment		27			48			51			46
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in stockholder's equity	$	18,297		$	7,793		$	25,207		$	32,301

The Company frequently reviews all of its fixed maturity, available for sale securities for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized cost at the time of review. The Company then assesses whether the decline in value is temporary or other-than-temporary. In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information. Generally, a change in a security's value caused by a change in the market, interest rate or foreign exchange environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value. Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income (loss). If the Company determines that the decline is other-than-temporary and the Company does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, the carrying value of the investment is written down to fair value. The fair value adjustment that is credit or foreign exchange related is recorded in net realized capital gains (losses) in the Company's consolidated statements of operations and comprehensive income (loss). The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company's consolidated balance sheets. The Company's assessments are based on the issuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company's asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected prepayments for pass-through security types.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:


	Duration of Unrealized Loss at September 30, 2012 By Security Type
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Market Value		Depreciation			Market Value		Depreciation			Market Value		Depreciation
Fixed maturity securities - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	-	$	-		$	11,543	$	(817	)	$	11,543	$	(817	)
Obligations of U.S. states and political subdivisions		-		-			5,779		(53	)		5,779		(53	)
Corporate securities		56,805		(411	)		108,100		(5,787	)		164,905		(6,198	)
Asset-backed securities		-		-			-		-			-		-
Mortgage-backed securities
Commercial		-		-			10,332		(404	)		10,332		(404	)
Agency residential		74,338		(354	)		12,983		(187	)		87,321		(541	)
Non-agency residential		-		-			496		(25	)		496		(25	)
Foreign government securities		37,667		(592	)		38,281		(3,584	)		75,948		(4,176	)
Foreign corporate securities		66,424		(1,290	)		80,924		(8,643	)		147,348		(9,933	)
Total fixed maturity securities	$	235,234	$	(2,647	)	$	268,438	$	(19,500	)	$	503,672	$	(22,147	)
Equity securities		-		-			13		(2	)		13		(2	)
Total	$	235,234	$	(2,647	)	$	268,451	$	(19,502	)	$	503,685	$	(22,149	)


	Duration of Unrealized Loss at September 30, 2012 By Maturity
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Market Value		Depreciation			Market Value		Depreciation			Market Value		Depreciation
Fixed maturity securities
Due in one year or less	$	12,962	$	(287	)	$	35,341	$	(5,663	)	$	48,303	$	(5,950	)
Due in one year through five years		116,020		(1,805	)		149,214		(11,175	)		265,234		(12,980	)
Due in five years through ten years		29,938		(175	)		45,936		(1,587	)		75,874		(1,762	)
Due after ten years		1,976		(26	)		14,136		(459	)		16,112		(485	)
Asset-backed securities		-		-			-		-			-		-
Mortgage-backed securities		74,338		(354	)		23,811		(616	)		98,149		(970	)
Total fixed maturity securities	$	235,234	$	(2,647	)	$	268,438	$	(19,500	)	$	503,672	$	(22,147	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at September 30, 2012 were $503,685 thousand and $22,149 thousand, respectively. There were no unrealized losses on a single issuer that exceeded 0.03% of the market value of the fixed maturity securities at September 30, 2012. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $2,647 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were comprised of domestic and foreign corporate securities, foreign government securities as well as agency residential mortgage-backed securities. Of these unrealized losses, $2,039 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $19,500 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities and foreign government securities. Of these unrealized losses, $17,181 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The non-investment grade securities with unrealized losses were mainly comprised of corporate securities, with the majority representing a large number of short duration, floating interest rate bank loan securities. The gross unrealized depreciation for mortgage-backed securities included $25 thousand related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis. In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.


	Duration of Unrealized Loss at December 31, 2011 By Security Type
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Market Value		Depreciation			Market Value		Depreciation			Market Value		Depreciation
Fixed maturity securities - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	-	$	-		$	3,452	$	(287	)	$	3,452	$	(287	)
Obligations of U.S. states and political subdivisions		-		-			7,518		(525	)		7,518		(525	)
Corporate securities		342,959		(8,449	)		75,998		(9,327	)		418,957		(17,776	)
Asset-backed securities		819		(6	)		-		-			819		(6	)
Mortgage-backed securities
Commercial		9,292		(1,266	)		-		-			9,292		(1,266	)
Agency residential		151,951		(1,695	)		7,199		(67	)		159,150		(1,762	)
Non-agency residential		41		-			20,693		(320	)		20,734		(320	)
Foreign government securities		12,777		(269	)		40,743		(2,333	)		53,520		(2,602	)
Foreign corporate securities		77,458		(2,025	)		94,182		(8,899	)		171,640		(10,924	)
Total fixed maturity securities	$	595,297	$	(13,710	)	$	249,785	$	(21,758	)	$	845,082	$	(35,468	)
Equity securities		-		-			10		(5	)		10		(5	)
Total	$	595,297	$	(13,710	)	$	249,795	$	(21,763	)	$	845,092	$	(35,473	)


	Duration of Unrealized Loss at December 31, 2011 By Maturity
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Market Value		Depreciation			Market Value		Depreciation			Market Value		Depreciation
Fixed maturity securities
Due in one year or less	$	9,583	$	(59	)	$	26,204	$	(4,486	)	$	35,787	$	(4,545	)
Due in one year through five years		213,809		(4,754	)		137,972		(9,576	)		351,781		(14,330	)
Due in five years through ten years		186,061		(5,484	)		37,964		(2,391	)		224,025		(7,875	)
Due after ten years		23,741		(446	)		19,753		(4,918	)		43,494		(5,364	)
Asset-backed securities		819		(6	)		-		-			819		(6	)
Mortgage-backed securities		161,284		(2,961	)		27,892		(387	)		189,176		(3,348	)
Total fixed maturity securities	$	595,297	$	(13,710	)	$	249,785	$	(21,758	)	$	845,082	$	(35,468	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2011 were $845,092 thousand and $35,473 thousand, respectively. There were no unrealized losses on a single issuer that exceeded 0.09% of the market value of the fixed maturity securities at December 31, 2011. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $13,710 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities as well as commercial and agency residential mortgage-backed securities. Of these unrealized losses, $5,635 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $21,758 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate and foreign government securities. Of these unrealized losses, $15,880 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The non-investment grade securities with unrealized losses were mainly comprised of corporate securities, with the majority representing a large number of short duration, floating interest rate bank loan securities. The gross unrealized depreciation for mortgage-backed securities included $56 thousand related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

Other invested assets, at fair value, is comprised of common shares of the Company's ultimate parent, Group. At September 30, 2012, the Company held 9,719,971 shares of Group representing 15.8% of the total outstanding shares.

The components of net investment income are presented in the table below for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2012			2011			2012			2011
Fixed maturity securities	$	55,495		$	58,248		$	164,248		$	178,006
Equity securities		8,849			8,726			29,281			20,366
Short-term investments and cash		330			296			758			890
Other invested assets
Limited partnerships		9,096			12,399			29,940			44,753
Dividends from Parent's shares		4,666			4,665			13,997			13,979
Other		1,427			(1,520	)		2,453			3,203
Total gross investment income		79,863			82,814			240,677			261,197
Interest debited (credited) and other investment expense		(3,521	)		(4,489	)		(8,887	)		(11,281	)
Total net investment income	$	76,342		$	78,325		$	231,790		$	249,916

The Company records results from limited partnership investments on the equity method of accounting with changes in value reported through net investment income. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag. If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company identifies the decline.

The Company had contractual commitments to invest up to an additional $71,741 thousand in limited partnerships at September 30, 2012. These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2016.

The components of net realized capital gains (losses) are presented in the table below for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2012			2011			2012			2011
Fixed maturity securities, market value:
Other-than-temporary impairments	$	(486	)	$	(911	)	$	(6,627	)	$	(14,522	)
Gains (losses) from sales		85			2,699			4,018			(15,589	)
Fixed maturity securities, fair value:
Gains (losses) from sales		512			(16	)		5,539			(966	)
Gains (losses) from fair value adjustments		298			(5,014	)		1,623			(8,537	)
Equity securities, market value:
Gains (losses) from sales		-			-			-			37
Equity securities, fair value:
Gains (losses) from sales		3,154			637			23,101			2,303
Gains (losses) from fair value adjustments		58,667			(153,395	)		104,739			(115,288	)
Other invested assets, fair value:
Gains (losses) from fair value adjustments		33,729			(23,036	)		222,296			(54,181	)
Short-term investment gains (losses)		(16	)		-			(16	)		(1	)
Total net realized capital gains (losses)	$	95,943		$	(179,036	)	$	354,673		$	(206,744	)

The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above. The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2012			2011			2012			2011
Proceeds from sales of fixed maturity securities	$	126,393		$	268,425		$	363,837		$	1,105,435
Gross gains from sales		2,704			11,572			15,371			29,154
Gross losses from sales		(2,107	)		(8,889	)		(5,814	)		(45,709	)

Proceeds from sales of equity secuities	$	85,277		$	61,080		$	377,157		$	177,872
Gross gains from sales		5,204			6,022			33,005			9,124
Gross losses from sales		(2,050	)		(5,385	)		(9,904	)		(6,784	)