5. INVESTMENT INCOME AND GAINS AND LOSSES

A. NET INVESTMENT INCOME

The components of net investment income were as follows:


FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
*(In millions)*
Fixed maturities	$	248.6		$	249.3		$	251.3
Equity securities		4.5			5.2			4.7
Mortgage loans		0.7			2.3			0.9
Other long-term investments		0.1			(0.1	)		2.2
Short-term investments		0.2			2.0			4.5

Gross investment income		254.1			258.7			263.6
Less investment expenses		(6.9	)		(6.6	)		(4.9	)

Net investment income	$	247.2		$	252.1		$	258.7

The carrying value of non-income producing fixed maturities, as well as the carrying value of fixed maturity securities on non-accrual status, at December 31, 2010 and 2009 was not material. The effect of non-accruals for the years ended December 31, 2010, 2009 and 2008, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, was a reduction in net investment income of $2.3 million, $3.1 million and $2.1 million, respectively.

B. NET REALIZED INVESTMENT GAINS AND LOSSES

Net realized gains (losses) on investments were as follows:


FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
*(In millions)*
Fixed maturities	$	17.7		$	5.3		$	(90.8	)
Equity securities		13.0			(4.3	)		(7.6	)
Other investments		(1.0	)		0.4			0.6

Net realized investment gains (losses)	$	29.7		$	1.4		$	(97.8	)

Included in the net realized investment gains (losses) were other-than-temporary impairments of investment securities recognized in earnings totaling $13.9 million, $32.9 million and $113.1 million in 2010, 2009 and 2008, respectively.

Other-than-temporary-impairments

As of April 1, 2009, the Company adopted the guidance included in ASC 320, which modified the assessment of OTTI on fixed maturity securities, as well as the method of recording and reporting OTTI. Under the new guidance, if a company intends to sell or more likely than not will be required to sell a fixed maturity security before recovery of its amortized cost basis, the amortized cost of the security is reduced to its fair value, with a corresponding charge to earnings. If a company does not intend to sell the debt security, or more likely than not will not be required to sell it, the company is required to separate the other-than-temporary impairment into the portion which represents the credit loss and the amount related to all other factors. The amount of the estimated loss attributable to credit is recognized in earnings and the amount related to non-credit factors is recognized in other comprehensive income, net of applicable taxes.

ASC 320 requires a cumulative effect adjustment upon adoption to reclassify the non-credit component of previously recognized impairments from retained earnings to other comprehensive income. The Company reviewed previously recognized OTTI recorded through realized losses on securities held at April 1, 2009, which was approximately $121 million, and determined that $33.3 million of these OTTI were related to non-credit factors, such as interest rates and market conditions. Accordingly, the Company increased the amortized cost basis of these debt securities and recorded a cumulative effect adjustment of $33.3 million within shareholders' equity. The cumulative effect adjustment had no effect on total shareholders' equity as it increased retained earnings and reduced accumulated other comprehensive income.

For 2010, total OTTI were $9.4 million. Of this amount, $13.9 million was recognized in earnings, including $4.5 million that was transferred from unrealized losses in accumulated other comprehensive income. Of the $13.9 million recorded in earnings, $4.4 million related to certain low-income housing tax credit limited partnerships, $4.3 million was estimated credit losses on fixed maturity securities, $3.3 million related to fixed maturity securities that the Company intends to sell and $1.9 million related to common stocks. Other-than-temporary impairments recognized on fixed maturity securities during 2010 primarily included $2.9 million on below investment grade corporate bonds principally in the industrial and utilities sectors, $2.7 million on investment grade residential mortgage-backed securities and $1.2 million on investment grade corporate bonds in the industrial sector.

For 2009, total OTTI were $42.2 million. Of this amount, $32.9 million was recognized in earnings and the remaining $9.3 million was recorded as unrealized losses in accumulated other comprehensive income. Of the OTTI recognized in earnings, $15.7 million related primarily to below investment grade corporate bonds in the industrial sector that the Company intended to sell and $9.6 million were from equities, including perpetual preferred securities primarily in the financial sector. In addition, the Company recorded OTTI of $7.6 million that was estimated credit losses, primarily on below investment grade fixed maturity securities, including $4.1 million on corporate bonds, $2.1 million on residential mortgage-backed securities and $1.4 million on a municipal bond.

The methodology and significant inputs used to measure the amount of credit losses on fixed maturities in 2010 and 2009 are as follows:

Corporate bonds - the Company utilized a financial model that derives expected cash flows based on probability-of-default factors by credit rating and asset duration and loss-given-default factors based on security type. These factors are based on historical data provided by an independent third-party rating agency.

Asset-backed securities, including commercial and residential mortgage backed securities - the Company utilized cash flow estimates based on bond specific facts and circumstances that include collateral characteristics, expectations of delinquency and default rates, loss severity, prepayment speeds and structural support, including subordination and guarantees.

Municipals - the Company utilized cash flow estimates based on bond specific facts and circumstances that may include the political subdivision's taxing authority, the issuer's ability to adjust user fees or other sources of revenue to satisfy its debt obligations and the ability to access insurance or guarantees.

The following table provides rollforwards of the cumulative amounts related to the Company's credit loss portion of the OTTI losses on fixed maturity securities for which the non-credit portion of the loss is included in other comprehensive income.


FOR THE YEARS ENDED DECEMBER 31	2010			2009 (1)
(In millions)
Credit losses as of the beginning of the period	$	22.1		$	17.3
Credit losses for which an OTTI was not previously recognized		1.2			4.0
Additional credit losses on securities for which an OTTI was previously recognized		3.1			3.6
Reductions for securities sold, matured or called during the period		(8.3	)		(1.4	)
Reductions for securities reclassified as intend to sell		(0.4	)		(1.4	)

Credit losses as of the end of the year	$	17.7		$	22.1

(1)	The effective date of the section of ASC 320 requiring this disclosure was April 1, 2009, therefore the period represented is April 1, 2009 through December 31, 2009.

The proceeds from voluntary sales of available-for-sale securities and the gross realized gains and gross realized losses on those sales, excluding discontinued operations, are provided in the following table for the periods indicated:


FOR THE YEARS ENDED DECEMBER 31
*(In millions)*
2010	Proceeds from Voluntary Sales		Gross Gains		Gross Losses
Fixed maturities	$	456.2	$	24.1	$	2.2
Equity securities	$	112.1	$	13.5	$	—

2009
Fixed maturities	$	1,522.4	$	40.4	$	14.2
Equity securities	$	44.6	$	7.6	$	2.6

2008
Fixed maturities	$	498.1	$	16.4	$	7.8
Equity securities	$	1.1	$	0.2	$	—

C. OTHER COMPREHENSIVE INCOME (LOSS) RECONCILIATION

The following table provides a reconciliation of gross unrealized investment gains (losses) to the net balance shown in the Consolidated Statements of Comprehensive Income (Loss).


FOR THE YEARS ENDED DECEMBER 31	2010		2009			2008
*(In millions)*
Unrealized appreciation (depreciation) on available-for-sale securities:
Unrealized holding gains (losses) arising during period, net of income tax benefit of $9.1, $1.3 and $2.9 in 2010, 2009 and 2008.	$	139.8	$	414.9		$	(397.0	)
Less: reclassification adjustment for gains (losses) included in net income		29.2		(2.2	)		(115.0	)

Total available-for-sale securities		110.6		417.1			(282.0	)

Unrealized depreciation on derivative instruments:
Unrealized holding losses arising during period, net of income tax benefit of $1.7 in 2008.		—		—			(3.2	)
Less: reclassification adjustment for losses included in net income, net of income tax benefit of $1.9 in 2008.		—		—			(3.6	)

Total derivative instruments		—		—			0.4

Other comprehensive income (loss)	$	110.6	$	417.1		$	(281.6	)