2. INVESTMENTS

A summary of net investment income is as follows:


NET INVESTMENT INCOME
(in thousands)	2014		2013		2012
Interest on fixed income securities	$	48,757	$	45,870	$	50,646
Dividends on equity securities		11,962		11,865		12,848
Interest on cash and short-term investments		7		23		15
Gross investment income		60,726		57,758		63,509
Less investment expenses		(5,118)		(4,995)		(4,678)
Net investment income	$	55,608	$	52,763	$	58,831

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)	2014		2013		2012
Net realized investment gains (losses):
Fixed income:
Available-for-sale	$	3,955	$	1,338	$	12,965
Available-for-sale OTTI		—		—		—
Held-to-maturity		4		9		247
Trading		—		—		—
Equity securities		29,468		21,533		16,245
Equity securities OTTI		—		—		(1,156)
Other		(1,245)		(844)		(2,929)
Total	$	32,182	$	22,036	$	25,372

Net changes in unrealized gains(losses) on investments:
Fixed income:
Available-for-sale	$	37,880	$	(75,228)	$	23,643
Equity securities		17,300		64,305		16,212
Total	$	55,180	$	(10,923)	$	39,855
Net realized investment gains (losses) and changes in unrealized gains (losses) on investments	$	87,362	$	11,113	$	65,227

During 2014, we recorded $32.2 million in net realized gains along with a change in unrealized gains of $55.2 million. The majority of our net realized gains were due to sales of equity securities while the change in unrealized gains was due to increases in the fixed income and equity portfolios. For 2014, the net realized investment gains and changes in unrealized gains (losses) on investments totaled $87.4 million.

The following is a summary of the disposition of fixed income securities 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)
2014
Available-for-sale	$	342,308	$	7,208	$	(3,664)	$	3,544
Held-to-maturity		654		4		—		4
Trading		—		—		—		—
Equities		72,869		29,794		(326)		29,468
2013
Available-for-sale	$	173,694	$	3,561	$	(2,597)	$	964
Held-to-maturity		—		—		—		—
Trading		—		—		—		—
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


							Net
CALLS/MATURITIES			Gross Realized				Realized
(in thousands)	Proceeds		Gains		Losses		Gain (Loss)
2014
Available-for-sale	$	101,517	$	414	$	(3)	$	411
Held-to-maturity		—		—		—		—
Trading		—		—		—		—
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		—		—		—		—

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of December 31, 2014, 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
Available-for-sale securities:
U.S. agency	$	—	$	6,747	$	—	$	6,747
Corporate		—		562,690		—		562,690
Agency MBS		—		264,468		—		264,468
ABS/CMBS*		—		135,304		—		135,304
Non-U.S. govt. & agency		—		10,665		—		10,665
U.S. government		—		33,788		—		33,788
Municipal		—		481,425		—		481,425
Equity		410,642		—		—		410,642
Total available-for-sale securities	$	410,642	$	1,495,087	$	—	$	1,905,729

*Non-agency asset-backed & commercial mortgage-backed

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
Available-for-sale securities:
U.S. agency	$	—	$	10,298	$	—	$	10,298
Corporate		—		526,038		—		526,038
Agency MBS		—		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

*Non-agency 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, 2014 and 2013. Additionally, there were no securities transferred in or out of levels 1 or 2 during 2014 or 2013.

The amortized cost and estimated fair value of fixed income securities at December 31, 2014, by contractual maturity, are shown as follows:


(in thousands)	Amortized Cost		Fair Value
Available-for-sale
Due in one year or less	$	19,147	$	19,368
Due after one year through five years		219,567		229,146
Due after five years through 10 years		570,196		587,807
Due after 10 years		248,956		258,994
Mtge/ABS/CMBS*		390,338		399,772
Total available-for-sale	$	1,448,204	$	1,495,087

*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, 2014, the net unrealized appreciation of available-for-sale fixed income and equity securities totaled $264.0 million pretax. At December 31, 2013, the net unrealized appreciation of available-for-sale fixed maturities and equity securities totaled $208.8 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, 2014 and 2013:


2014	Amortized				Gross Unrealized
(in thousands)	Cost		Fair Value		Gains		Losses
Available-for-sale:
U.S. government	$	33,668	$	33,788	$	131	$	(11)
U.S. agency		6,385		6,747		362		—
Non-U.S. govt. & agency		9,862		10,665		803		—
Mtge/ABS/CMBS*		390,337		399,772		11,222		(1,787)
Corporate		543,183		562,690		23,697		(4,190)
Municipal		464,769		481,425		16,789		(133)
Total fixed income	$	1,448,204	$	1,495,087	$	53,004	$	(6,121)
Equity securities		193,535		410,642		218,105		(998)
Total available-for-sale	$	1,641,739	$	1,905,729	$	271,109	$	(7,119)

Held-to-maturity:
Municipal	$	—	$	—	$	—	$	—
Total held-to-maturity	$	—	$	—	$	—	$	—

Trading**	$	—	$	—	$	—	$	—
Total	$	1,641,739	$	1,905,729	$	271,109	$	(7,119)

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

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


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:
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

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

Unrealized losses in the collateralized securities bond portfolio decreased to $1.8 million in 2014 due to the decrease in interest rates during the year. All 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, 2014, 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, 2014.

Corporate Bonds

Unrealized losses in the corporate bond portfolio decreased to $4.2 million in 2014 from $8.0 million at the end of 2013 as interest rates decreased during the year. While these unrealized losses are not due to credit-specific issues, the energy sector experienced a shift in risk premiums higher near year-end; wider credit spreads in energy were largely due to a rapid decline in oil and a repricing of risk for related companies. The corporate bond portfolio has an overall rating of BBB.

Municipal Bonds

As of December 31, 2014, municipal bonds totaled $481.4 million with gross unrealized losses of $0.1 million, down from $12.7 of unrealized losses at the end of 2013. The decline was due to lower interest rates in conjunction with narrower risk premiums or tighter spreads when compared to last year. As of December 31, 2014, approximately 49 percent of the municipal fixed income securities in the investment portfolio were general obligations of state and local governments and the remaining 51 percent were revenue based. Ninety percent of our municipal fixed income securities were rated AA or better while 99 percent were rated A or better.

Equity Securities

Our equity portfolio consists of common stocks and exchange traded funds (ETF). Unrealized losses in the equity portfolio increased $0.7 million to $1.0 million in 2014. 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, 2014, and December 31, 2013. 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, 2014						December 31, 2013
			12 Mos.						12 Mos. &
(in thousands)	< 12 Mos.		& Greater		Total		< 12 Mos.		Greater		Total
U.S. Government
Fair value	$	4,416	$	—	$	4,416	$	—	$	—	$	—
Cost or amortized cost		4,427		—		4,427		—		—		—
Unrealized Loss	$	(11)	$	—	$	(11)	$	—	$	—	$	—

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)

Agency MBS
Fair value	$	12,840	$	61,534	$	74,374	$	118,283	$	—	$	118,283
Cost or amortized cost		12,947		62,803		75,750		124,034		—		124,034
Unrealized Loss	$	(107)	$	(1,269)	$	(1,376)	$	(5,751)	$	—	$	(5,751)

ABS/CMBS*
Fair value	$	63,782	$	11,616	$	75,398	$	54,115	$	—	$	54,115
Cost or amortized cost		64,084		11,725		75,809		56,014		—		56,014
Unrealized Loss	$	(302)	$	(109)	$	(411)	$	(1,899)	$	—	$	(1,899)

Corporate
Fair value	$	123,617	$	14,488	$	138,105	$	190,470	$	2,245	$	192,715
Cost or amortized cost		127,634		14,661		142,295		198,250		2,477		200,727
Unrealized Loss	$	(4,017)	$	(173)	$	(4,190)	$	(7,780)	$	(232)	$	(8,012)

Municipal
Fair value	$	12,382	$	19,019	$	31,401	$	309,407	$	943	$	310,350
Cost or amortized cost		12,411		19,123		31,534		322,095		949		323,044
Unrealized Loss	$	(29)	$	(104)	$	(133)	$	(12,688)	$	(6)	$	(12,694)

Subtotal, fixed income
Fair value	$	217,037	$	106,657	$	323,694	$	679,860	$	3,188	$	683,048
Cost or amortized cost		221,503		108,312		329,815		708,280		3,426		711,706
Unrealized Loss	$	(4,466)	$	(1,655)	$	(6,121)	$	(28,420)	$	(238)	$	(28,658)

Equity securities
Fair value	$	10,837	$	—	$	10,837	$	2,394	$	—	$	2,394
Cost or amortized cost		11,835		—		11,835		2,669		—		2,669
Unrealized Loss	$	(998)	$	—	$	(998)	$	(275)	$	—	$	(275)

Total
Fair value	$	227,874	$	106,657	$	334,531	$	682,254	$	3,188	$	685,442
Cost or amortized cost		233,338		108,312		341,650		710,949		3,426		714,375
Unrealized Loss	$	(5,464)	$	(1,655)	$	(7,119)	$	(28,695)	$	(238)	$	(28,933)

*Non-agency asset-backed & commercial mortgage-backed

As of December 31, 2014, we held four equity securities that were in unrealized loss positions. The total unrealized loss on these securities was $1.0 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 258 securities in an unrealized loss position as of December 31, 2014. Of these 258 securities, 49 have been in an unrealized loss position for 12 consecutive months or longer and represent $1.7 million in unrealized losses. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Credit-related impairments on fixed income securities that we do not plan to sell, and for which we are not more likely than not to be required to sell, are recognized in net earnings. Any non-credit related impairment is 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, 2014, and 2013.

During 2014 and 2013, we did not recognize any impairment losses. There were $1.2 million in losses associated with OTTI of securities in 2012.

As required by law, certain fixed maturity investments amounting to $28.1 million at December 31, 2014, were on deposit with either regulatory authorities or banks.

Other Invested Assets

Other invested assets shown on the balance sheet as of December 31, 2014 include an investment in a low income housing tax credit partnership as well as membership stock in the Federal Home Loan Bank of Chicago (FHLBC). During 2014, we recorded an interest in a low income housing tax credit partnership totaling $10.0 million. The interest had a balance of $9.8 million at December 31, 2014 and recognized a total tax benefit of $0.2 million during the year. Our investment in FHLBC stock totaled $1.8 million at the end of the year.