4. 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	2012			2011			2010
(in millions)
Fixed maturities	$	264.2		$	254.3		$	248.6
Equity securities		15.3			6.8			4.5
Other investments		7.0			4.8			1.0
Gross investment income		286.5			265.9			254.1
Less investment expenses		(9.9	)		(7.7	)		(6.9	)
Net investment income	$	276.6		$	258.2		$	247.2

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, 2012 and 2011 were not material. The effects of non-accruals for the years ended December 31, 2012, 2011 and 2010, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, were reductions in net investment income of $2.5 million, $2.3 million and $2.3 million, respectively.

B. NET REALIZED INVESTMENT GAINS AND LOSSES

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


FOR THE YEARS ENDED DECEMBER 31	2012			2011		2010
(in millions)
Fixed maturities	$	9.7		$	20.4	$	17.7
Equity securities		15.5			0.9		13.0
Real estate		3.3			—		—
Derivative instruments		(4.4	)		5.8		3.0
Other investments		(0.5	)		1.0		(4.0	)
Net realized investment gains	$	23.6		$	28.1	$	29.7

Included in the net realized investment gains (losses) were other-than-temporary impairments of investment securities recognized in earnings totaling $7.8 million, $6.9 million and $13.9 million in 2012, 2011 and 2010, respectively.

Other-than-temporary-impairments

For 2012, total OTTI was $7.3 million. Of this amount, $7.8 million was recognized in earnings, including $0.5 million that was transferred from unrealized losses in accumulated other comprehensive income. Of the $7.8 million recorded in earnings, $5.4 million related to fixed maturity securities that the Company intends to sell, $1.2 million was estimated credit losses on fixed maturity securities and $1.2 million related to common stocks.

For 2011, total OTTI was $4.9 million. Of this amount, $6.9 million was recognized in earnings, including $2.0 million that was transferred from unrealized losses in accumulated other comprehensive income. Of the $6.9 million recorded in earnings, $4.6 million related to fixed maturity securities that the Company intends to sell, $1.4 million related to common stocks and $0.9 million was estimated credit losses on fixed maturity securities.

For 2010, total OTTI was $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 intended to sell and $1.9 million related to common stocks.

The methodology and significant inputs used to measure the amount of credit losses on fixed maturities in 2012, 2011 and 2010 were as follows:

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.

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.

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.

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	2012			2011			2010
(in millions)
Credit losses as of the beginning of the year	$	14.5		$	16.7		$	20.0
Credit losses for which an OTTI was not previously recognized		0.6			—			1.2
Additional credit losses on securities for which an OTTI was previously recognized		0.6			0.9			3.1
Reductions for securities sold, matured or called		(6.9	)		(1.8	)		(7.2	)
Reductions for securities reclassified as intend to sell		(0.2	)		(1.3	)		(0.4	)
Credit losses as of the end of the year	$	8.6		$	14.5		$	16.7

The proceeds from sales of available-for-sale securities and the gross realized gains and gross realized losses on those sales, were as follows:


FOR THE YEARS ENDED DECEMBER 31
(in millions)
2012	Proceeds from Sales		Gross Gains		Gross Losses
Fixed maturities	$	616.3	$	12.1	$	2.0
Equity securities	$	141.3	$	17.5	$	0.7

2011
Fixed maturities	$	678.1	$	20.0	$	1.1
Equity securities	$	86.6	$	3.0	$	0.5

2010
Fixed maturities	$	456.2	$	24.1	$	2.2
Equity securities	$	112.1	$	13.5	$	—

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.


FOR THE YEARS ENDED DECEMBER 31	2012							2011								2010
(in millions)	Pre-Tax		Tax Benefit (Expense)			Net of Tax		Pre-Tax			Tax Benefit (Expense)		Net of Tax			Pre-Tax		Tax Benefit (Expense)		Net of Tax
Unrealized gains on available-for-sale securities:
Unrealized gains arising during period	$	186.4	$	(40.2	)	$	146.2	$	97.8		$	23.5	$	121.3		$	130.7	$	9.1	$	139.8
Less: reclassification adjustments for gains realized in net income		23.1		5.9			29.0		20.4			9.3		29.7			26.0		3.2		29.2
Total available-for-sale securities		163.3		(46.1	)		117.2		77.4			14.2		91.6			104.7		5.9		110.6
Unrealized gains (losses) on derivative instruments:
Unrealized gains (losses) arising during period		0.2		(0.1	)		0.1		(1.8	)		0.6		(1.2	)		—		—		—
Other comprehensive income	$	163.5	$	(46.2	)	$	117.3	$	75.6		$	14.8	$	90.4		$	104.7	$	5.9	$	110.6