5. Investments

A. Fixed maturities and equity securities

The amortized cost and fair value of available-for-sale fixed maturities and the cost and fair value of equity securities were as follows:

March 31, 2013

(in millions)

Amortized
Cost or
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

OTTI
Unrealized
Losses

Fixed maturities:

U.S. Treasury and government agencies

314.0

8.1

0.6

321.5

—

Foreign government

299.7

6.0

0.1

305.6

—

Municipal

988.2

89.3

1.4

1,076.1

—

Corporate

3,443.3

268.8

13.3

3,698.8

9.2

Residential mortgage-backed

720.3

37.3

3.3

754.3

2.0

Commercial mortgage-backed

340.6

18.8

0.6

358.8

—

Asset-backed

204.5

3.9

—

208.4

—

Total fixed maturities

6,310.6

432.2

19.3

6,723.5

11.2

Equity securities

391.2

46.0

2.2

435.0

—


	December 31, 2012
*(in millions)*	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI Unrealized Losses
Fixed maturities:
U.S. Treasury and government agencies	$	317.2	$	8.8	$	0.4	$	325.6	$	—
Foreign government		348.5		4.6		0.2		352.9		—
Municipal		1,010.2		87.2		1.1		1,096.3		—
Corporate		3,512.8		275.4		14.8		3,773.4		9.3
Residential mortgage-backed		769.0		39.4		3.2		805.2		1.7
Commercial mortgage-backed		373.3		23.2		0.3		396.2		—
Asset-backed		198.5		4.1		—		202.6		—

Total fixed maturities	$	6,529.5	$	442.7	$	20.0	$	6,952.2	$	11.0

Equity securities	$	299.0	$	21.6	$	4.8	$	315.8	$	—

Other-than-temporary impairments (“OTTI”) unrealized losses in the tables above represent OTTI recognized in accumulated other comprehensive income. This amount excludes net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date of $20.4 million and $20.5 million as of March 31, 2013 and December 31, 2012, respectively.

The amortized cost and fair value by maturity periods for fixed maturities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, or the Company may have the right to put or sell the obligations back to the issuers.


*(in millions)*	March 31, 2013
	Amortized		Fair
	Cost		Value
Due in one year or less	$	430.2	$	437.4
Due after one year through five years		2,216.7		2,344.4
Due after five years through ten years		1,718.1		1,879.3
Due after ten years		680.2		740.9

		5,045.2		5,402.0
Mortgage-backed and asset-backed securities		1,265.4		1,321.5

Total fixed maturities	$	6,310.6	$	6,723.5

B. Securities in an unrealized loss position

The following tables provide information about the Company’s fixed maturities and equity securities that were in an unrealized loss position at March 31, 2013 and December 31, 2012.

March 31, 2013

12 months or less

Greater than 12 months

Total

(in millions)

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Fixed maturities:

Investment grade:

U.S. Treasury and government agencies

0.5

98.1

0.1

6.5

0.6

104.6

Foreign governments

—

23.9

0.1

0.4

0.1

24.3

Municipal

0.7

65.5

0.6

16.3

1.3

81.8

Corporate

2.1

181.3

6.9

34.4

9.0

215.7

Residential mortgage-backed

0.8

66.7

2.0

9.5

2.8

76.2

Commercial mortgage-backed

0.5

52.4

0.1

4.9

0.6

57.3

Asset-backed

—

24.0

—

0.2

—

24.2

Total investment grade

4.6

511.9

9.8

72.2

14.4

584.1

Below investment grade:

Municipal

—

0.1

3.4

0.1

3.4

Corporate

0.9

30.0

3.4

35.5

4.3

65.5

Residential mortgage-backed

0.1

0.8

0.4

2.2

0.5

3.0

Total below investment grade

1.0

30.8

3.9

41.1

4.9

71.9

Total fixed maturities

5.6

542.7

13.7

113.3

19.3

656.0

Equity securities

1.4

15.4

0.8

7.9

2.2

23.3

Total

7.0

558.1

14.5

121.2

21.5

679.3


	December 31, 2012
	12 months or less				Greater than 12 months				Total
*(in millions)*	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Fixed maturities:
Investment grade:
U.S. Treasury and government agencies	$	0.2	$	89.5	$	0.2	$	8.5	$	0.4	$	98.0
Foreign governments		0.2		81.2		—		0.4		0.2		81.6
Municipal		0.5		61.9		0.6		24.0		1.1		85.9
Corporate		1.8		224.8		6.6		59.0		8.4		283.8
Residential mortgage-backed		0.5		47.3		2.0		9.4		2.5		56.7
Commercial mortgage-backed		0.2		29.9		0.1		4.9		0.3		34.8
Asset-backed		—		11.4		—		0.3		—		11.7

Total investment grade		3.4		546.0		9.5		106.5		12.9		652.5

Below investment grade:
Municipal		—		—		—		2.0		—		2.0
Corporate		1.1		26.6		5.3		50.6		6.4		77.2
Residential mortgage-backed		0.1		1.6		0.6		2.5		0.7		4.1

Total below investment grade		1.2		28.2		5.9		55.1		7.1		83.3

Total fixed maturities		4.6		574.2		15.4		161.6		20.0		735.8

Equity securities		4.8		74.4		—		—		4.8		74.4

Total	$	9.4	$	648.6	$	15.4	$	161.6	$	24.8	$	810.2

The Company views the gross unrealized losses on fixed maturities and equity securities as being temporary since it is its assessment that these securities will recover in the near term, allowing the Company to realize the anticipated long-term economic value. The Company employs a systematic methodology to evaluate declines in fair value below amortized cost for fixed maturity securities or cost for equity securities. In determining OTTI of fixed maturity and equity securities, the Company evaluates several factors and circumstances, including the issuer’s overall financial condition; the issuer’s credit and financial strength ratings; the issuer’s financial performance, including earnings trends, dividend payments and asset quality; any specific events which may influence the operations of the issuer; the general outlook for market conditions in the industry or geographic region in which the issuer operates; and the length of time and the degree to which the fair value of an issuer’s securities remains below the Company’s cost. With respect to fixed maturity investments, the Company considers any factors that might raise doubt about the issuer’s ability to make contractual payments as they come due and whether the Company expects to recover the entire amortized cost basis of the security. With respect to equity securities, the Company considers its ability and intent to hold the investment for a period of time to allow for a recovery in value.

C. Proceeds from sales

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


	Three Months Ended March 31,
	2013						2012
*(in millions)*	Proceeds from Sales		Gross Gains		Gross Losses		Proceeds from Sales		Gross Gains		Gross Losses
Fixed maturities	$	137.2	$	1.6	$	0.6	$	279.2	$	4.7	$	1.1
Equity securities	$	34.5	$	6.6	$	—	$	0.7	$	—	$	0.2

D. Other-than-temporary impairments

For the three months ended March 31, 2013, total OTTI of fixed maturities were $0.7 million. Of this amount, $0.5 million was recognized in earnings and the remaining $0.2 million was recorded as unrealized losses in accumulated other comprehensive income.

For the three months ended March 31, 2012, total OTTI of fixed maturities were $1.6 million. Of this amount, $1.9 million was recognized in earnings, including $0.3 million that was transferred from unrealized losses in accumulated other comprehensive income.

The methodology and significant inputs used to measure the amount of credit losses on fixed maturities in 2013 and 2012 were as follows:

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.


	Three Months Ended March 31,
*(in millions)*	2013			2012
Credit losses at beginning of period	$	8.6		$	14.5
Credit losses for which an OTTI was not previously recognized		0.2			0.1
Additional credit losses on securities for which an OTTI was previously recognized		0.2			0.3
Reductions for securities sold, matured or called		(0.4	)		(1.4	)

Credit losses at end of period	$	8.6		$	13.5

E. Funds at Lloyd’s

In accordance with Lloyd’s operating guidelines, the Company deposits funds at Lloyd’s to support underwriting operations. These funds are available only to fund claim obligations. These assets consisted of approximately $468 million of fixed maturities and $3 million of cash and cash equivalents as of March 31, 2013. The Company also deposits funds with various state and governmental authorities in the U.S. For a discussion of the Company’s deposits with state and governmental authorities, see also Note 3 – “Investments” of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012.