Investments

6 Months Ended

Jun. 30, 2012

Investments [Abstract]

Investments

3. Investments

Fixed Maturity and Equity Securities Available for Sale

Securities by Asset Class

The following table provides amortized cost and fair value of securities by asset class at June 30, 2012.

	Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses
U.S. Treasury securities and obligations of U.S. Government	$	121,606	$	14,308	$	22	$	135,892
Federal agencies 1		22,063		4,061		1		26,123
Federal agency issued residential mortgage-backed securities 1		97,158		9,281		-		106,439
Subtotal		240,827		27,650		23		268,454
Corporate obligations:
Industrial		498,231		48,437		1,727		544,941
Energy		173,030		20,692		46		193,676
Communications and technology		199,416		20,097		28		219,485
Financial		298,693		20,753		2,624		316,822
Consumer		488,138		47,467		53		535,552
Public utilities		253,931		39,068		485		292,514
Subtotal		1,911,439		196,514		4,963		2,102,990
Corporate private-labeled residential mortgage-backed securities		157,621		2,711		8,694		151,638
Municipal securities		148,664		25,510		26		174,148
Other		106,488		4,771		8,081		103,178
Redeemable preferred stocks		15,736		328		222		15,842
Fixed maturity securities		2,580,775		257,484		22,009		2,816,250
Equity securities		35,499		1,815		130		37,184
Total	$	2,616,274	$	259,299	$	22,139	$	2,853,434

¹ Federal agency securities are not backed by the full faith and credit of the U.S. Government.

The following table provides amortized cost and fair value of securities by asset class at December 31, 2011.

	Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses
U.S. Treasury securities and obligations of U.S. Government	$	120,593	$	13,856	$	12	$	134,437
Federal agencies 1		22,401		3,480		-		25,881
Federal agency issued residential mortgage-backed securities 1		109,738		9,901		2		119,637
Subtotal		252,732		27,237		14		279,955
Corporate obligations:
Industrial		444,030		43,710		860		486,880
Energy		152,580		19,131		-		171,711
Communications and technology		184,983		16,566		156		201,393
Financial		308,813		15,155		5,890		318,078
Consumer		452,962		43,788		263		496,487
Public utilities		259,609		38,094		1,366		296,337
Subtotal		1,802,977		176,444		8,535		1,970,886
Corporate private-labeled residential mortgage-backed securities		167,666		1,856		12,620		156,902
Municipal securities		150,267		18,316		61		168,522
Other		100,315		3,576		9,235		94,656
Redeemable preferred stocks		11,735		226		740		11,221
Fixed maturity securities		2,485,692		227,655		31,205		2,682,142
Equity securities		34,951		1,873		135		36,689
Total	$	2,520,643	$	229,528	$	31,340	$	2,718,831

¹ Federal agency securities are not backed by the full faith and credit of the U.S. Government.

Contractual Maturities

The following table provides the distribution of maturities for fixed maturity securities available for sale at June 30, 2012. Expected maturities may differ from these contractual maturities since borrowers may have the right to call or prepay obligations.

	June 30, 2012
	Amortized Cost		Fair Value
Due in one year or less	$	99,536	$	101,304
Due after one year through five years		619,948		665,859
Due after five years through ten years		1,035,701		1,151,964
Due after ten years		474,696		532,021
Securities with variable principal payments		335,158		349,260
Redeemable preferred stocks		15,736		15,842
	$	2,580,775	$	2,816,250

Unrealized Losses on Investments

The Company reviews all security investments, with particular attention given to those having unrealized losses. Further, the Company specifically assesses all investments with greater than 10% declines in fair value below amortized cost and, in general, monitors all security investments as to ongoing risk. These risks are fundamentally evaluated through both a qualitative and quantitative analysis of the issuer. The Company also prepares a formal review document no less often than quarterly of all investments where fair value is less than 80% of amortized cost for six months or more and selected investments that have changed significantly from a previous period and that have a decline in fair value greater than 10% of amortized cost.

The Company has a policy and process in place to identify securities that could potentially have an impairment that is other-than-temporary (OTTI). This process involves monitoring market events and other items that could impact issuers. The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary. Relevant facts and circumstances considered are described in the Valuation of Investments section of Note 1 – Nature of Operations and Significant Accounting Policies of the Company’s 2011 Form 10-K.

To the extent the Company determines that a fixed maturity security is deemed to be other-than-temporarily impaired, the portion of the impairment that is deemed to be due to credit is charged to the Consolidated Statements of Comprehensive Income and the cost basis of the underlying investment is reduced. The portion of such impairment that is determined to be non-credit-related is deducted from net realized loss in the Consolidated Statements of Comprehensive Income and is reflected in other comprehensive income and accumulated other comprehensive income.

There are a number of significant risks and uncertainties inherent in the process of monitoring impairments, determining if an impairment is other-than-temporary and determining the portion of an other-than-temporary impairment that is due to credit. These risks and uncertainties are described in the Valuation of Investments section of Note 1 of the Company’s 2011 Form 10-K.

Once a security is determined to have met certain of the criteria for consideration as being other-than-temporarily impaired, further information is gathered and evaluated pertaining to the particular security. If the security is an unsecured obligation, the additional research is a top-down approach with particular emphasis on the likelihood of the issuer to meet the contractual terms of the obligation. If the security is secured by an asset or guaranteed by another party, the value of the underlying secured asset or the financial ability of the third-party guarantor is evaluated as a secondary source of repayment. Such research is based upon a top-down approach, narrowing to the specific estimates of value and cash flow of the underlying secured asset or guarantor. If the security is a collateralized obligation, such as a mortgage-backed or other asset-backed instrument, research is also conducted to obtain and analyze the performance of the collateral relative to expectations at the time of acquisition and with regard to projections for the future. Such analyses are based upon historical results, trends, comparisons to collateral performance of similar securities, and analyses performed by third parties. This information is used to develop projected cash flows that are compared to the amortized cost of the security.

If a determination is made that an unsecured security, secured security, or security with a guaranty of payment by a third-party is other-than-temporarily impaired, an estimate is developed of the portion of such impairment that is due to credit. The estimate of the portion of impairment due to credit is based upon a comparison of ratings and maturity horizon for the security and relative historical default probabilities from one or more nationally recognized rating organizations. When appropriate for any given security, sector or period in the business cycle, the historical default probability is adjusted to reflect periods or situations of distress by adding to the default probability increments of standard deviations from mean historical results. The credit impairment analysis is supplemented by estimates of potential recovery values for the specific security, including the potential impact of the value of any secured assets, in the event of default. This information is used to determine the Company’s best estimate, derived from probability-weighted cash flows.

The evaluation of loan-backed and similar asset-backed securities, particularly including residential mortgage-backed securities, with significant indications of potential other-than-temporary impairment requires considerable use of estimates and judgment. Specifically, the Company performs discounted cash flow projections on these securities to evaluate whether the value of the investment is expected to be fully realized. Projections of expected future cash flows are based upon considerations of the performance of the actual underlying assets, including historical delinquencies, defaults, severity of losses incurred, and prepayments, along with the Company’s estimates of future results for these factors. The Company’s estimates of future results are based upon actual historical performance of the underlying assets relative to historical, current and expected general economic conditions, specific conditions related to the underlying assets, industry data, and other factors that are believed to be relevant. If the present value of the projected expected future cash flows is determined to be below the Company’s carrying value, the Company recognizes an other-than-temporary impairment on the portion of the carrying value that exceeds the projected expected future cash flows. To the extent that the loan-backed or other asset-backed securities were high quality investments at the time of acquisition, and they remain high quality investments and do not otherwise demonstrate characteristics of impairment, the Company performs other initial evaluations to determine whether other-than-temporary cash flow evaluations need to be performed.

The discounted future cash flow calculation typically becomes the primary determinant of whether any portion and to what extent an unrealized loss is due to credit on loan-backed and similar asset-backed securities with significant indications of potential other-than-temporary impairment. Such indications typically include below investment grade ratings and significant unrealized losses for an extended period of time, among other factors. The Company identified 17 non-U.S. Agency mortgage-backed securities that had such indications at both June 30, 2012 and December 31, 2011. The discount rate used in calculating the present value of future cash flows was the investment yield at the time of purchase for each security. The initial default rates were assumed to remain constant over a 24-month time frame and grade down thereafter, reflecting the general perspective of a more stabilized residential housing environment in the future.

For loan-backed and similar asset-backed securities, the determination of any amount of impairment that is due to credit is based upon the present value of projected future cash flows being less than the amortized cost of the security. This amount is recognized as a realized loss in the Company’s Consolidated Statements of Comprehensive Income and the carrying value of the security is written down by the same amount. The portion of an impairment that is determined not to be due to credit is recorded as a component of accumulated other comprehensive income in the Consolidated Balance Sheets.

As part of the required accounting for unrealized gains and losses, the Company also adjusts the deferred acquisition costs (DAC) and value of business acquired (VOBA) assets to recognize the adjustment to those assets as if the unrealized gains and losses from securities classified as available for sale actually had been realized.

The following table provides information regarding fixed maturity and equity security investments available for sale with unrealized losses by length of time at June 30, 2012.

	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government	$	900	$	8	$	779	$	14	$	1,679	$	22
Federal agency issued residential mortgage-backed securities  1		333		-		293		1		626		1
Subtotal		1,233		8		1,072		15		2,305		23
Corporate obligations:
Industrial		24,733		1,727		-		-		24,733		1,727
Energy		9,580		46		-		-		9,580		46
Communications and technology		4,053		28		-		-		4,053		28
Financial		17,959		258		15,610		2,366		33,569		2,624
Consumer		14,480		46		587		7		15,067		53
Public utilities		9,236		74		6,740		411		15,976		485
Subtotal		80,041		2,179		22,937		2,784		102,978		4,963
Corporate private-labeled residential mortgage-backed securities		-		-		70,210		8,694		70,210		8,694
Municipal securities		3,078		18		893		8		3,971		26
Other		-		-		45,185		8,081		45,185		8,081
Redeemable preferred stocks		-		-		3,460		222		3,460		222
Fixed maturity securities		84,352		2,205		143,757		19,804		228,109		22,009
Equity securities		-		-		1,127		130		1,127		130
Total	$	84,352	$	2,205	$	144,884	$	19,934	$	229,236	$	22,139

¹ Federal agency securities are not backed by the full faith and credit of the U.S. Government.

The following table provides information regarding fixed maturity and equity security investments available for sale with unrealized losses by length of time at December 31, 2011.

	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government	$	-	$	-	$	959	$	12	$	959	$	12
Federal agency issued residential mortgage-backed securities 1		649		-		294		2		943		2
Subtotal		649		-		1,253		14		1,902		14
Corporate obligations:
Industrial		25,455		860		-		-		25,455		860
Communications and technology		7,239		156		-		-		7,239		156
Financial		51,273		2,107		16,402		3,783		67,675		5,890
Consumer		11,765		119		3,689		144		15,454		263
Public utilities		4,710		344		11,152		1,022		15,862		1,366
Subtotal		100,442		3,586		31,243		4,949		131,685		8,535
Corporate private-labeled residential mortgage-backed securities		41,734		2,668		61,864		9,952		103,598		12,620
Municipal securities		-		-		3,909		61		3,909		61
Other		9,257		921		47,146		8,314		56,403		9,235
Redeemable preferred stocks		2,939		115		3,056		625		5,995		740
Fixed maturity securities		155,021		7,290		148,471		23,915		303,492		31,205
Equity securities		69		104		1,054		31		1,123		135
Total	$	155,090	$	7,394	$	149,525	$	23,946	$	304,615	$	31,340

¹ Federal agency securities are not backed by the full faith and credit of the U.S. Government.

In addition, the Company also considers as part of its monitoring and evaluation process the length of time the fair value of a security is below amortized cost. At June 30, 2012, the Company had 65 issues in its investment portfolio of fixed maturity and equity securities with unrealized losses. Included in this total, 30 security issues were below cost for less than one year; six security issues were below cost for one year or more and less than three years; and 29 security issues were below cost for three years or more. At December 31, 2011, the Company had 85 issues in its investment portfolio of fixed maturity and equity securities with unrealized losses. Included in this total, 46 security issues were below cost for less than one year; 10 security issues were below cost for one year or more and less than three years; and 29 security issues were below cost for three years or more.

The following table provides the distribution of maturities for fixed maturity securities available for sale with unrealized losses at June 30, 2012 and December 31, 2011. Expected maturities may differ from these contractual maturities since borrowers may have the right to call or prepay obligations.

	June 30, 2012				December 31, 2011
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Fixed maturity security securities available for sale:
Due in one year or less	$	919	$	8	$	2,953	$	48
Due after one year through five years		32,871		491		42,416		2,120
Due after five years through ten years		60,008		2,636		64,772		2,616
Due after ten years		60,015		9,958		82,816		13,061
Total		153,813		13,093		192,957		17,845
Securities with variable principal payments		70,836		8,694		104,540		12,620
Redeemable preferred stocks		3,460		222		5,995		740
Total	$	228,109	$	22,009	$	303,492	$	31,205

The following table provides a reconciliation of credit losses recognized in earnings on fixed maturity securities held by the Company for which a portion of the other-than-temporary loss was recognized in other comprehensive income.

	Quarter Ended June 30			Six Months Ended June 30
	2012			2012
Credit losses on securities held at beginning of the period in accumulated other comprehensive income	$	13,715		$	13,559
Additions for credit losses not previously recognized in other-than-temporary impairment		1			29
Additions for increases in the credit loss for which an other-than-temporary impairment was previously recognized when there was no intent to sell the security before recovery of its amortized cost basis		145			277
Reductions for securities sold during the period (realized)		-			-
Reductions for securities previously recognized in other comprehensive income because of intent to sell the security before recovery of its amortized cost basis		-			-
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security		(4	)		(8	)
Credit losses on securities held at the end of the period in accumulated other comprehensive income	$	13,857		$	13,857

Realized Gains (Losses)

The following table provides detail concerning realized investment gains and losses for the second quarters and six months ended June 30, 2012 and 2011.

	Quarter Ended June 30						Six Months Ended June 30
	2012			2011			2012			2011
Gross gains resulting from:
Sales of investment securities	$	-		$	3,341		$	313		$	3,652
Investment securities called and other		595			387			803			1,250
Sales of real estate		1,010			-			16,180			-
Total gross gains		1,605			3,728			17,296			4,902
Gross losses resulting from:
Sales of investment securities		(32	)		(1,590	)		(32	)		(1,590	)
Investment securities called and other		(151	)		(125	)		(204	)		(179	)
Mortgage loans		(13	)		-			(178	)		(3	)
Total gross losses		(196	)		(1,715	)		(414	)		(1,772	)
Change in allowance for potential future losses on mortgage loans		(32	)		-			332			-
Amortization of DAC and VOBA		(16	)		(120	)		(16	)		(225	)
Net realized investment gains, excluding impairment losses		1,361			1,893			17,198			2,905
Net impairment losses recognized in earnings:
Total other-than-temporary impairment losses		(188	)		(238	)		(456	)		(507	)
Portion of loss recognized in other comprehensive income		42			56			150			114
Net impairment losses recognized in earnings		(146	)		(182	)		(306	)		(393	)
Net realized investment gains	$	1,215		$	1,711		$	16,892		$	2,512

Proceeds From Sales of Investment Securities

The table below provides information regarding sales of fixed maturity and equity securities, excluding maturities and calls, for the second quarters and six months ended June 30, 2012 and 2011.

	Quarter Ended June 30						Six Months Ended June 30
	2012			2011			2012			2011
Proceeds	$	2,216		$	41,398		$	8,616		$	51,541
Gross realized gains		-			3,341			313			3,652
Gross realized losses		(32	)		(1,590	)		(32	)		(1,590	)

Mortgage Loans

The Company invests on an ongoing basis in commercial mortgage loans that are secured by commercial real estate and are stated at cost, adjusted for amortization of premium and accrual of discount, less an allowance for potential future losses. This allowance is maintained at a level believed by management to be adequate to absorb estimated credit losses and was $2.5 million at June 30, 2012 and $2.8 million at December 31, 2011. The Company had 16% of its invested assets in commercial mortgage loans at June 30, 2012, compared to 17% at December 31, 2011. In addition to the subject collateral underlying the mortgage, the Company typically requires some amount of recourse from borrowers as another potential source of repayment. The recourse requirement is determined as part of the underwriting requirements of each loan. The average loan to value ratio for the overall portfolio was 45% and 46% at June 30, 2012 and December 31, 2011, respectively, and is based upon the appraisal of value at the time the loan was originated or acquired.

The following table identifies the gross mortgage loan principal outstanding and the allowance for potential future losses at June 30, 2012 and December 31, 2011.

	June 30 2012			December 31 2011
Principal outstanding	$	582,017		$	604,772
Allowance for potential future losses		(2,517	)		(2,849	)
Carrying value	$	579,500		$	601,923

The following table summarizes the amount of mortgage loans held by the Company at June 30, 2012 and December 31, 2011, segregated by year of origination. Purchased loans are shown in the year acquired by the Company, although the individual loans may have been initially originated in prior years.

	June 30 2012		% of Total		December 31 2011		% of Total
Prior to 2002	$	22,216		4%	$	28,437		5%
2003		35,236		6%		42,112		7%
2004		28,473		5%		29,966		5%
2005		52,462		9%		54,802		9%
2006		40,594		7%		42,676		7%
2007		34,600		6%		35,323		6%
2008		38,504		7%		44,285		7%
2009		48,268		8%		50,574		8%
2010		106,816		18%		133,684		22%
2011		136,784		23%		142,913		24%
2012		38,064		7%		-		-
	$	582,017		100%	$	604,772		100%

The following table identifies mortgage loans by geographic location at June 30, 2012 and December 31, 2011.

	June 30 2012		% of Total		December 31 2011		% of Total
Pacific	$	133,619		23%	$	138,529		23%
West north central		106,095		18%		130,481		22%
West south central		106,996		18%		98,036		16%
Mountain		85,285		15%		82,029		14%
South atlantic		59,980		10%		63,125		10%
Middle atlantic		41,016		7%		42,112		7%
East north central		30,462		5%		30,482		5%
East south central		18,564		4%		19,978		3%
	$	582,017		100%	$	604,772		100%

The following table identifies mortgage loans by property type at June 30, 2012 and December 31, 2011. The Other category consists of apartments and retail properties.

	June 30 2012		% Total		December 31 2011		% Total
Industrial	$	248,332		43%	$	251,839		42%
Office		231,643		40%		243,885		40%
Medical		42,066		7%		43,089		7%
Other		59,976		10%		65,959		11%
	$	582,017		100%	$	604,772		100%

The following table identifies the concentration of mortgage loans by state greater than 5% at June 30, 2012 and December 31, 2011.

	June 30 2012		% of Total		December 31 2011		% of Total
California	$	113,231		19%	$	117,261		19%
Texas		94,021		16%		84,724		14%
Minnesota		63,962		11%		64,952		11%
Florida		33,292		6%		31,310		5%
All others		277,511		48%		306,525		51%
	$	582,017		100%	$	604,772		100%

The table below identifies the carrying amount of mortgage loans by maturity at June 30, 2012 and December 31, 2011.

	June 30 2012		% of Total		December 31 2011		% of Total
Due in one year or less	$	5,572		1%	$	2,356		-
Due after one year through five years		181,974		32%		153,822		25%
Due after five years through ten years		235,378		40%		255,615		42%
Due after ten years		159,093		27%		192,979		33%
	$	582,017		100%	$	604,772		100%

The Company may refinance commercial mortgage loans prior to contractual maturity as a means of originating new loans that meet the Company’s underwriting and pricing parameters. The Company refinanced loans with outstanding balances of $4.0 million and $1.9 million during the second quarters of 2012 and 2011, respectively, and $8.6 million and $9.7 million during the first six months of 2012 and 2011, respectively.

In the normal course of business, the Company commits to fund commercial mortgage loans generally up to 120 days in advance. These commitments generally have fixed expiration dates. A small percentage of commitments expire due to the borrower’s failure to deliver the requirements of the commitment by the expiration date. In these cases, the Company retains the commitment fee. For additional information, please see Note 16 – Commitments.

At June 30, 2012, the Company had a construction-to-permanent loan commitment in the amount of $2.8 million, and $2.5 million had been disbursed on this loan. At completion and fulfillment of occupancy requirements, the construction loan will convert to a long-term, fixed-rate permanent loan.