2. INVESTMENTS

A summary of net investment income is as follows:

NET INVESTMENT INCOME

(in thousands)	2013			2012			2011
Interest on fixed income securities	$	45,870		$	50,646		$	58,294
Dividends on equity securities	11,865			12,848			9,957
Interest on cash and short-term investments	23			15			47
Gross investment income	57,758			63,509			68,298
Less investment expenses	(4,995		)	(4,678		)	(4,617		)
Net investment income	$	52,763		$	58,831		$	63,681

Pretax net realized investment gains (losses) and net changes in unrealized gains (losses) on investments for the years ended December 31 are summarized as follows:

REALIZED/UNREALIZED GAINS

(in thousands)	2013			2012			2011
Net realized investment gains (losses)
Fixed income
Available-for-sale	$	1,338		$	12,965		$	10,892
Available-for-sale OTTI	—			—			—
Held-to-maturity	9			247			201
Trading	—			—			—
Equity securities	21,533			16,245			6,129
Equity securities OTTI	—			(1,156		)	(257		)
Other	(844		)	(2,929		)	71
Total	$	22,036		$	25,372		$	17,036
Net changes in unrealized gains
(losses) on investments
Fixed income
Available-for-sale	$	(75,228	)	$	23,643		$	22,393
Equity securities	64,305			16,212			10,462
Total	$	(10,923	)	$	39,855		$	32,855
Net realized investment gains (losses) and changes in unrealized gains (losses) on investments	$	11,113		$	65,227		$	49,891

During 2013, we recorded $22.0 million in net realized gains along with a change in unrealized losses of $10.9 million. The majority of our net realized gains were due to sales of equity securities while the change in unrealized losses was due to decreases in the fixed income portfolio. For 2013, the net realized investment gains and changes in unrealized gains (losses) on investments totaled $11.1 million.

The following is a summary of the disposition of fixed maturities and equities for the years ended December 31, with separate presentations for sales and calls/maturities.

								Net
SALES	Proceeds		Gross Realized					Realized
(in thousands)	From Sales		Gains		Losses			Gain (Loss)
2013
Available-for-sale	$	173,694	$	3,561	$	(2,597	)	$	964
Held-to-maturity	—		—		—			—
Trading	5		—		—			—
Equities	73,982		21,542		(9		)	21,533
2012
Available-for-sale	$	181,338	$	11,208	$	(43	)	$	11,165
Held-to-maturity	—		—		—			—
Trading	—		—		—			—
Equities	78,315		19,755		(3,510		)	16,245
2011
Available-for-sale	$	383,664	$	11,333	$	(487	)	$	10,846
Held-to-maturity	—		—		—			—
Trading	—		—		—			—
Equities	40,092		8,483		(2,354		)	6,129

								Net
CALLS/MATURITIES			Gross Realized					Realized
(in thousands)	Proceeds		Gains		Losses			Gain (Loss)
2013
Available-for-sale	$	224,620	$	379	$	(5	)	$	374
Held-to-maturity	11,090		9		—			9
Trading	1		—		—			—
2012
Available-for-sale	$	248,134	$	1,806	$	(6	)	$	1,800
Held-to-maturity	273,816		247		—			247
Trading	—		—		—			—
2011
Available-for-sale	$	261,654	$	63	$	(17	)	$	46
Held-to-maturity	258,493		201		—			201
Trading	6		—		—			—

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of December 31, 2013, are summarized below:

			Significant
	Quoted in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Trading securities	$	—	$	—	$	—	$	—
Available-for-sale securities:
U.S. agency	$	—	$	10,298	$	—	$	10,298
Corporate	—		526,038		—		526,038
Mortgage-backed	—		244,416		—		244,416
ABS/CMBS*	—		106,309		—		106,309
Non-U.S. govt. & agency	—		13,678		—		13,678
U.S. government	—		17,303		—		17,303
Municipal	—		522,010		—		522,010
Equity	418,654		—		—		418,654
Total available-for-sale securities	$	418,654	$	1,440,052	$	—	$	1,858,706
Total	$	418,654	$	1,440,052	$	—	$	1,858,706

*Asset-backed & commercial mortgage-backed

Assets measured at fair value on a recurring basis as of December 31, 2012, are summarized below:

			Significant
	Quoted in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Trading securities	$	—	$	7	$	—	$	7
Available-for-sale securities:
U.S. agency	$	—	$	11,759	$	—	$	11,759
Corporate	—		580,708		—		580,708
Mortgage-backed	—		250,387		—		250,387
ABS/CMBS*	—		77,329		—		77,329
Non-U.S. govt. & agency	—		9,367		—		9,367
U.S. government	—		16,713		—		16,713
Municipal	—		432,319		—		432,319
Equity	375,788		—		—		375,788
Total available-for-sale securities	$	375,788	$	1,378,582	$	—	$	1,754,370
Total	$	375,788	$	1,378,589	$	—	$	1,754,377

*Asset-backed & commercial mortgage-backed

As noted in the previous tables, we did not have any assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2013 and 2012. Additionally, there were no securities transferred in or out of levels 1 or 2 during 2013 or 2012.

The amortized cost and estimated fair value of fixed income securities at December 31, 2013, by contractual maturity, are shown as follows:

(in thousands)	Amortized Cost		Fair Value

Available-for-sale
Due in one year or less	$	12,048	$	12,102
Due after one year through five years	150,049		158,587
Due after five years through 10 years	668,637		675,290
Due after 10 years	250,127		243,348
Mtge/ABS/CMBS*	350,188		350,725
Total available-for-sale	$	1,431,049	$	1,440,052

Held-to-maturity:
Due in one year or less	$	—	$	—
Due after one year through five years	651		687
Due after five years through 10 years	—		—
Due after 10 years	—		—
Total held-to-maturity	$	651	$	687

Trading	$	—	$	—

Total fixed income
Due in one year or less	$	12,048	$	12,102
Due after one year through five years	150,700		159,274
Due after five years through 10 years	668,637		675,290
Due after 10 years	250,127		243,348
Mtge/ABS/CMBS*	350,188		350,725
Total fixed income	$	1,431,700	$	1,440,739

*Mortgage-backed, asset-backed & commercial mortgage-backed

Expected maturities may differ from contractual maturities due to call provisions on some existing securities. At December 31, 2013, the net unrealized appreciation of available-for-sale fixed maturities and equity securities totaled $208.8 million pretax. At December 31, 2012, the net unrealized appreciation of available-for-sale fixed maturities and equity securities totaled $219.7 million pretax.

In addition, the following table is a schedule of amortized costs and estimated fair values of investments in fixed income and equity securities as of December 31, 2013 and 2012:

2013	Amortized				Gross Unrealized
(in thousands)	Cost		Fair Value		Gains		Losses
Available-for-sale:
U.S. government	$	17,086	$	17,303	$	217	$	—
U.S. agency	10,513		10,298		22		(237		)
Non-U.S. govt. & agency	13,306		13,678		437		(65		)
Mtge/ABS/CMBS*	350,187		350,725		8,188		(7,650		)
Corporate	511,748		526,038		22,302		(8,012		)
Municipal	528,209		522,010		6,495		(12,694		)
Total fixed income	$	1,431,049	$	1,440,052	$	37,661	$	(28,658	)
Equity securities	218,848		418,654		200,081		(275		)
Total available-for-sale	$	1,649,897	$	1,858,706	$	237,742	$	(28,933	)

Held-to-maturity:
U.S. agency	$	—	$	—	$	—	$	—
Corporate	—		—		—		—
Municipal	651		687		36		—
Total held-to-maturity	$	651	$	687	$	36	$	—

Trading**	$	—	$	—	$	—	$	—
Total	$	1,650,548	$	1,859,393	$	237,778	$	(28,933	)

*Mortgage-backed, asset-backed & commercial mortgage-backed

**Trading securities are carried at fair value with unrealized gains (losses) included in earnings

2012	Amortized				Gross Unrealized
(in thousands)	Cost		Fair Value		Gains		Losses
Available-for-sale:
U.S. government	$	16,358	$	16,713	$	355	$	—
U.S. agency	11,609		11,759		150		—
Non-U.S. govt. & agency	8,410		9,367		957		—
Mtge/ABS/CMBS*	307,310		327,716		20,406		—
Corporate	535,437		580,708		45,497		(226		)
Municipal	415,226		432,319		17,250		(157		)
Total fixed income	$	1,294,350	$	1,378,582	$	84,615	$	(383	)
Equity securities	240,287		375,788		136,376		(875		)
Total available-for-sale	$	1,534,637	$	1,754,370	$	220,991	$	(1,258	)

Held-to-maturity:
U.S. agency	$	10,076	$	10,150	$	74	$	—
Corporate	—		—		—		—
Municipal	1,652		1,718		66		—
Total held-to-maturity	$	11,728	$	11,868	$	140	$	—

Trading**	$	6	$	7	$	—	$	—
Total	$	1,546,371	$	1,766,245	$	221,131	$	(1,258	)

*Mortgage-backed, asset-backed & commercial mortgage-backed

**Trading securities are carried at fair value with unrealized gains (losses) included in earnings

Corporate Bonds

Unrealized losses in the corporate bond portfolio increased to $8.0 million in 2013 from $0.2 million at the end of 2012 as interest rates increased during the year. These unrealized losses are not due to credit-specific issues. The corporate bond portfolio has an overall rating of A.

Municipal Bonds

Unrealized losses in the municipal bond portfolio increased $12.5 million to $12.7 million in 2013 as interest rates increased during the year. Municipals continue to be a focus area of portfolio strategy and were a large component of net purchases during the year. Ninety-one percent of our municipal securities are rated AA or better while 99 percent are rated A or better.

Mortgage-Backed, Commercial Mortgage-Backed and Asset-Backed Securities

Unrealized losses in the collateralized securities bond portfolio increased to $7.7 million in 2013 due to the increase in interest rates during the year. Ninety-nine percent of our collateralized securities carry the highest credit rating by one or more major rating agency and continue to pay according to contractual terms.

For all fixed income securities at a loss at December 31, 2013, we believe it is probable that we will receive all contractual payments in the form of principal and interest. In addition, we are not required to, nor do we intend to sell these investments prior to recovering the entire amortized cost basis of each security, which may be maturity. We do not consider these investments to be other-than-temporarily impaired at December 31, 2013.

Equity Securities

Our equity portfolio consists of common stocks and exchange traded funds (ETF). Unrealized losses in the equity portfolio decreased $0.6 million in 2013. Given our intent to hold and expectation of recovery to cost within a reasonable period of time, we do not consider any of our equities to be other-than-temporarily impaired.

Under current accounting standards, an OTTI write-down of debt securities, where fair value is below amortized cost, is triggered by circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income.

Part of our evaluation of whether particular securities are other-than-temporarily impaired involves assessing whether we have both the intent and ability to continue to hold equity securities in an unrealized loss position. For fixed income securities, we consider our intent to sell a security (which is determined on a security-by-security basis) and whether it is more likely than not we will be required to sell the security before the recovery of our amortized cost basis. Significant changes in these factors could result in a charge to net earnings for impairment losses. Impairment losses result in a reduction of the underlying investment’s cost basis.

The following table is also used as part of our impairment analysis and displays the total value of securities that were in an unrealized loss position as of December 31, 2013, and December 31, 2012. The table segregates the securities based on type, noting the fair value, cost (or amortized cost) and unrealized loss on each category of investment as well as in total. The table further classifies the securities based on the length of time they have been in an unrealized loss position.

	December 31, 2013									December 31, 2012
(in thousands)	< 12 Mos.			12 Mos. & Greater			Total			< 12 Mos.			12 Mos. & Greater			Total

U.S. Government
Fair value	$	—		$	—		$	—		$	749		$	—		$	749
Cost or amortized cost	—			—			—			749			—			749
Unrealized Loss	$	—		$	—		$	—		$	—		$	—		$	—

U.S. Agency
Fair value	$	5,760		$	—		$	5,760		$	—		$	—		$	—
Cost or amortized cost	5,997			—			5,997			—			—			—
Unrealized Loss	$	(237	)	$	—		$	(237	)	$	—		$	—		$	—

Non-U.S. Government
Fair value	$	1,825		$	—		$	1,825		$	—		$	—		$	—
Cost or amortized cost	1,890			—			1,890			—			—			—
Unrealized Loss	$	(65	)	$	—		$	(65	)	$	—		$	—		$	—

Mortgage-backed
Fair value	$	118,283		$	—		$	118,283		$	—		$	—		$	—
Cost or amortized cost	124,034			—			124,034			—			—			—
Unrealized Loss	$	(5,751	)	$	—		$	(5,751	)	$	—		$	—		$	—

ABS/CMBS*
Fair value	$	54,115		$	—		$	54,115		$	18		$	—		$	18
Cost or amortized cost	56,014			—			56,014			18			—			18
Unrealized Loss	$	(1,899	)	$	—		$	(1,899	)	$	—		$	—		$	—

Corporate
Fair value	$	190,470		$	2,245		$	192,715		$	35,969		$	960		$	36,929
Cost or amortized cost	198,250			2,477			200,727			36,162			993			37,155
Unrealized Loss	$	(7,780	)	$	(232	)	$	(8,012	)	$	(193	)	$	(33	)	$	(226	)

Municipal
Fair value	$	309,407		$	943		$	310,350		$	35,064		$	—		$	35,064
Cost or amortized cost	322,095			949			323,044			35,221			—			35,221
Unrealized Loss	$	(12,688	)	$	(6	)	$	(12,694	)	$	(157	)	$	—		$	(157	)

Subtotal, fixed income
Fair value	$	679,860		$	3,188		$	683,048		$	71,800		$	960		$	72,760
Cost or amortized cost	708,280			3,426			711,706			72,150			993			73,143
Unrealized Loss	$	(28,420	)	$	(238	)	$	(28,658	)	$	(350	)	$	(33	)	$	(383	)

Equity securities
Fair value	$	2,394		$	—		$	2,394		$	16,207		$	—		$	16,207
Cost or amortized cost	2,669			—			2,669			17,082			—			17,082
Unrealized Loss	$	(275	)	$	—		$	(275	)	$	(875	)	$	—		$	(875	)

Total
Fair value	$	682,254		$	3,188		$	685,442		$	88,007		$	960		$	88,967
Cost or amortized cost	710,949			3,426			714,375			89,232			993			90,225
Unrealized Loss	$	(28,695	)	$	(238	)	$	(28,933	)	$	(1,225	)	$	(33	)	$	(1,258	)

*Asset-backed & commercial mortgage-backed

As of December 31, 2013, we held one equity security that was in an unrealized loss position. The total unrealized loss on this security was $0.3 million. In considering both the significance and duration of the unrealized loss position, we have no equity securities in an unrealized loss position of greater than 20 percent for more than six consecutive months.

The fixed income portfolio contained 337 securities at an unrealized loss as of December 31, 2013. Of these 337 securities, two have been in an unrealized loss position for 12 consecutive months or longer and represent $0.2 million in unrealized losses. The majority of fixed income unrealized losses can be attributed to the increases in interest rates during the final three quarters of the year and are not credit related. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Any credit-related impairment related to fixed income securities we do not plan to sell and for which we are not more likely than not to be required to sell is recognized in net earnings, with the non-credit related impairment recognized in comprehensive earnings. Based on our analysis, our fixed income portfolio is of a high credit quality and we believe we will recover the amortized cost basis of our fixed income securities. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. There were no OTTI losses recognized in other comprehensive earnings in the periods presented. Key factors that we consider in the evaluation of credit quality include:

· Changes in technology that may impair the earnings potential of the investment,

· The discontinuance of a segment of business that may affect future earnings potential,

· Reduction or elimination of dividends,

· Specific concerns related to the issuer’s industry or geographic area of operation,

· Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and

· Downgrades in credit quality by a major rating agency.

Based on our analysis, we concluded that the securities in an unrealized loss position were not other-than-temporarily impaired at December 31, 2013, and 2012.

During 2013, we did not recognize any impairment losses. There were $1.2 million in losses associated with OTTI of securities in 2012 and $0.3 million in losses associated with OTTI of securities in 2011.

As required by law, certain fixed maturity investments amounting to $23.7 million at December 31, 2013, were on deposit with either regulatory authorities or banks.