Investments

3 Months Ended

Mar. 31, 2011

Investments

Investments

9. Investments

Fixed Maturity Securities and Short Term Investments

Net Investment Income

	First Quarter
	2011			2010
	(in millions)
	(restated)
Income from fixed maturity securities	$	98.5		$	87.2
Income from short-term investments	0.3			(0.4		)
Gross investment income	98.8			86.8
Investment expenses	(2.7		)	(2.5		)
Net investment income	$	96.1		$	84.3

The increase in net investment income in First Quarter 2011 was due primarily to the deployment of cash during 2010. In addition income increased due to an increase in accretion related to improved cash flow expectations in securities purchased for loss mitigation purposes. Accrued investment income was $98.1 million and $97.9 million as of March 31, 2011 and December 31, 2010, respectively.

Net Realized Investment Gains (Losses)

	First Quarter
	2011			2010
	(in millions)
Realized gains on investment portfolio	$	9.9		$	13.2
Realized losses on investment portfolio	(2.5		)	(3.3		)
Other-than-temporary impairment (“OTTI”):
Intent to sell	(2.7		)	(0.4		)
Credit component of OTTI securities	(1.9		)	(0.1		)
OTTI(1)	(4.6		)	(0.5		)
Net realized investment gains (losses)	$	2.8		$	9.4

(1)OTTI recorded in the consolidated statement of operations for First Quarter 2011 and 2010 includes only the credit component of unrealized fair value adjustments of impaired securities. The full unrealized loss was $6.9 million in 2011 and $1.1 million in 2010, prior to impairment, as shown on the consolidated statement of operations.

The following table presents the roll-forward of the credit losses of fixed maturity securities for which the Company has recognized OTTI and where the portion of the fair value adjustment related to other factors was recognized in other comprehensive income (“OCI”).

Roll Forward of Credit Losses in the Investment Portfolio

	First Quarter
	2011		2010
	(in millions)
Balance, beginning of period	$	27.3	$	19.9
Additions for credit losses on securities for which an OTTI was not previously recognized	1.4		—
Additions for credit losses on securities for which an OTTI was previously recognized	0.5		0.1
Balance, end of period	$	29.2	$	20.0

Fixed Maturity Securities and Short Term Investments

by Security Type

	As of March 31, 2011
Investments Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain (Loss) on Securities with OTTI(2)			Weighted Average Credit Quality(3)
	(dollars in millions)
Fixed maturity securities:
U.S. government and agencies	10	%	$	967.3	$	41.2	$	(0.7	)	$	1,007.8	$	—		AAA
Obligations of state and political subdivisions	48		4,905.5		88.5		(62.4		)	4,931.6		(0.7		)	AA
Corporate securities	9		946.9		21.9		(15.7		)	953.1		(0.5		)	AA–
Mortgage-backed securities(4):
RMBS	13		1,315.4		62.2		(84.1		)	1,293.5		(1.7		)	AA–
CMBS	4		395.6		14.5		(1.1		)	409.0		2.7			AAA
Asset-backed securities	5		491.7		26.2		(1.9		)	516.0		18.9			BBB
Foreign government securities	3		346.3		4.4		(1.9		)	348.8		—			AAA
Total fixed maturity securities	92		9,368.7		258.9		(167.8		)	9,459.8		18.7			AA
Short-term investments	8		813.4		—		—			813.4		—			AAA
Total investment portfolio	100	%	$	10,182.1	$	258.9	$	(167.8	)	$	10,273.2	$	18.7		AA

	As of December 31, 2010
Investments Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain (Loss) on Securities with OTTI			Weighted Average Credit Quality(3)
	(dollars in millions)
Fixed maturity securities:
U.S. government and agencies	10	%	$	1,000.3	$	48.3	$	(0.4	)	$	1,048.2	$	—		AAA
Obligations of state and political subdivisions	48		4,922.0		99.9		(62.0		)	4,959.9		(1.4		)	AA
Corporate securities	9		980.1		25.2		(12.8		)	992.5		0.2			AA–
Mortgage-backed securities(4):
RMBS	11		1,158.9		56.5		(44.3		)	1,171.1		(8.6		)	AA
CMBS	4		365.7		14.8		(1.4		)	379.1		2.5			AAA
Asset-backed securities	5		498.2		9.9		(5.2		)	502.9		(4.1		)	BBB+
Foreign government securities	3		349.5		5.3		(6.2		)	348.6		—			AA+
Total fixed maturity securities	90		9,274.7		259.9		(132.3		)	9,402.3		(11.4		)	AA
Short-term investments	10		1,055.3		0.3		—			1,055.6		—			AAA
Total investment portfolio	100	%	$	10,330.0	$	260.2	$	(132.3	)	$	10,457.9	$	(11.4	)	AA

(1)Based on amortized cost.

(2)Accumulated OCI (“AOCI”).

(3)Ratings in the table above represent the lower of the Moody’s and S&P classifications except for bonds purchased for loss mitigation or risk management strategies which use internal ratings classifications. The Company’s portfolio is comprised primarily of high-quality, liquid instruments.

(4)As of March 31, 2011 and December 31, 2010, respectively, approximately 60% and 64% of the Company’s total mortgage backed securities were government agency obligations.

The Company continues to receive sufficient information to value its investments and has not had to modify its valuation approach due to the current market conditions. As of March 31, 2011, amounts, net of tax, in AOCI included a net unrealized gain of $15.2 million for securities for which the Company had recognized OTTI and a net unrealized gain of $67.9 million for securities for which the Company had not recognized OTTI. As of December 31, 2010, amounts, net of tax, in AOCI included a net unrealized loss of $5.6 million for securities for which the Company had recognized OTTI and a net unrealized gain of $115.3 million for securities for which the Company had not recognized OTTI.

The following tables summarize, for all securities in an unrealized loss position as of March 31, 2011 and December 31, 2010, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.

Fixed Maturity Securities

Gross Unrealized Loss by Length of Time

	As of March 31, 2011
	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(dollars in millions)
U.S. government and agencies	$	53.5	$	(0.7	)	$	—	$	—		$	53.5	$	(0.7	)
Obligations of) state and political subdivisions	1,790.6		(59.9		)	17.9		(2.5		)	1,808.5		(62.4		)
Corporate securities	437.5		(15.7		)	—		—			437.5		(15.7		)
Mortgage-backed securities:
RMBS	239.9		(63.5		)	26.6		(20.6		)	266.5		(84.1		)
CMBS	115.4		(1.1		)	—		—			115.4		(1.1		)
Asset-backed securities	98.8		(1.8		)	2.3		(0.1		)	101.1		(1.9		)
Foreign government securities	232.8		(1.9		)	—		—			232.8		(1.9		)
Total	$	2,968.5	$	(144.6	)	$	46.8	$	(23.2	)	$	3,015.3	$	(167.8	)
Number of securities			434					14					448
Number of securities with OTTI			10					2					12

	As of December 31, 2010
	Less than 12 months					12 months or more					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(dollars in millions)
U.S. government and agencies	$	20.5	$	(0.4	)	$	—	$	—		$	20.5	$	(0.4	)
Obligations of) state and political subdivisions	1,694.5		(58.9		)	23.5		(3.1		)	1,718.0		(62.0		)
Corporate securities	403.6		(12.8		)	—		—			403.6		(12.8		)
Mortgage-backed securities:
RMBS	143.4		(32.1		)	37.3		(12.2		)	180.7		(44.3		)
CMBS	92.6		(1.4		)	—		—			92.6		(1.4		)
Asset-backed securities	228.3		(5.1		)	2.3		(0.1		)	230.6		(5.2		)
Foreign government securities	245.3		(6.2		)	—		—			245.3		(6.2		)
Total	$	2,828.2	$	(116.9	)	$	63.1	$	(15.4	)	$	2,891.3	$	(132.3	)
Number of securities			405					18					423
Number of securities with OTTI			10					3					13

The increase in gross unrealized losses in First Quarter 2011 was primarily due to the increase of unrealized losses attributable to RMBS securities of $39.8 million. Of the securities in an unrealized loss position for 12 months or more as of March 31, 2011, seven securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of March 31, 2011 was $22.9 million. The unrealized loss is yield related and not specific to individual issuer credit. The Company has determined that these securities were not other-than-temporarily-impaired as of March 31, 2011.

The amortized cost and estimated fair value of available-for-sale fixed maturity securities by contractual maturity as of March 31, 2011 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Distribution of Fixed-Maturity Securities

by Contractual Maturity

	As of March 31, 2011
	Amortized Cost		Estimated Fair Value
	(in millions)
	(restated)		(restated)
Due within one year	$	164.2	$	165.6
Due after one year through five years	1,716.4		1,752.0
Due after five years through ten years	2,268.5		2,331.6
Due after ten years	3,508.6		3,508.1
Mortgage-backed securities:
RMBS	1,315.4		1,293.5
CMBS	395.6		409.0
Total	$	9,368.7	$	9,459.8

Under agreements with its cedants and in accordance with statutory requirements, the Company maintains fixed maturity securities in trust accounts for the benefit of reinsured companies, which amounted to $371.5 million and $365.3 million as of March 31, 2011 and December 31, 2010, respectively. In addition, to fulfill state licensing requirements the Company has placed on deposit eligible securities of $19.0 million and $19.2 million as of March 31, 2011 and December 31, 2010, respectively, for the protection of the policyholders.

Under certain derivative contracts, the Company is required to post eligible securities as collateral. The need to post collateral under these transactions is generally based on mark-to-market valuations in excess of contractual thresholds. The fair market value of the Company’s pledged securities totaled $765.6 million and $765.9 million as of March 31, 2011 and December 31, 2010, respectively.

No material investments of the Company were non-income producing for First Quarter 2011 and 2010, respectively.

The Company purchased securities that it has insured, and for which it has expected losses, in order to economically mitigate insured losses. These securities were purchased at a discount and are accounted for excluding the effects of the Company’s insurance on the securities. As of March 31, 2011, securities purchased for loss mitigation purposes had a fair value of $250.6 million representing $925.9 million of par. Under the terms of certain credit derivative contracts, the Company has obtained the obligations referenced in the transactions and recorded such assets in fixed maturity securities in the consolidated balance sheets. Such amounts totaled $191.0 million, representing $248.7 million of par.