Note 2 - Investments

The Company's investment portfolio includes no free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics), and there are no embedded derivative features related to the Company’s insurance products.

Fixed Maturities and Equity Securities

The Company’s investment portfolio is comprised primarily of fixed maturity securities (“fixed maturities”) and equity securities. The amortized cost or cost, unrealized investment gains and losses, fair values and other-than-temporary impairment (“OTTI”) included in accumulated other comprehensive income (loss) (“AOCI”) of all fixed maturities and equity securities in the portfolio as of June 30, 2013 and December 31, 2012 were as follows:

	Amortized		Unrealized		Unrealized		Fair		OTTI in
	Cost/Cost		Gains		Losses		Value		AOCI (2)
June 30, 2013
Fixed maturity securities
U.S. government and federally sponsored agency obligations (1):
Mortgage-backed securities	$	573,425	$	46,609	$	6,165	$	613,869	$	-
Other, including
U.S. Treasury securities		431,906		17,819		11,420		438,305		-
Municipal bonds		1,413,405		115,166		20,322		1,508,249		-
Foreign government bonds		49,517		5,913		216		55,214		-
Corporate bonds		2,344,406		197,675		28,376		2,513,705		-
Other mortgage-backed securities		778,466		30,938		8,132		801,272		2,653
Totals	$	5,591,125	$	414,120	$	74,631	$	5,930,614	$	2,653
Equity securities	$	78,016	$	6,373	$	1,349	$	83,040	$	-

December 31, 2012
Fixed maturity securities
U.S. government and federally sponsored agency obligations (1):
Mortgage-backed securities	$	547,040	$	72,644	$	125	$	619,559	$	-
Other, including
U.S. Treasury securities		371,706		37,857		135		409,428		-
Municipal bonds		1,402,424		186,261		2,648		1,586,037		-
Foreign government bonds		48,476		9,393		-		57,869		-
Corporate bonds		2,258,554		313,430		4,950		2,567,034		-
Other mortgage-backed securities		683,257		41,080		2,032		722,305		3,214
Totals	$	5,311,457	$	660,665	$	9,890	$	5,962,232	$	3,214
Equity securities	$	52,396	$	2,397	$	1,290	$	53,503	$	-

(1)

Fair value includes securities issued by Federal National Mortgage Association (“FNMA”) of $383,040 and $375,111; Federal Home Loan Mortgage Corporation (“FHLMC”) of $431,649 and $418,174; and Government National Mortgage Association (“GNMA”) of $130,780 and $136,998 as of June 30, 2013 and December 31, 2012, respectively.

(2)

Represents the amount of other-than-temporary impairment losses in AOCI which, beginning April 1, 2009, was not included in earnings under current accounting guidance. Amounts also include unrealized gains/losses on impaired securities relating to changes in the fair value of such securities subsequent to the impairment measurement date.

Compared to December 31, 2012, the reduction in net unrealized gains at June 30, 2013 was due to higher yields on U.S. Treasury securities and slightly wider credit spreads across most asset classes in 2013, the combination of which resulted in a decrease in net unrealized gains for the Company’s holdings of corporate, municipal, government and mortgage-backed securities.

The following table presents the fair value and gross unrealized losses of fixed maturities and equity securities in an unrealized loss position at June 30, 2013 and December 31, 2012, respectively. The Company views the decrease in value of all of the securities with unrealized losses at June 30, 2013 — which was driven largely by changes in interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition — as temporary. For fixed maturity securities, management does not have the intent to sell the securities and it is not more likely than not the Company will be required to sell the securities before the anticipated recovery of the amortized cost bases, and the present value of future cash flows exceeds the amortized cost bases. In addition, management expects to recover the entire cost bases of the fixed maturity securities. For equity securities, the Company has the ability and intent to hold the securities for the recovery of cost and recovery of cost is expected within a reasonable period of time. Therefore, no impairment of these securities was recorded at June 30, 2013.

	12 Months or Less					More than 12 Months					Total
				Gross					Gross					Gross
	Fair Value			Unrealized Losses		Fair Value			Unrealized Losses		Fair Value			Unrealized Losses
June 30, 2013
Fixed maturity securities
U.S. government and federally sponsored agency obligations:
Mortgage-backed securities	$	103,346		$	6,165	$	44		$	-	$	103,390		$	6,165
Other		167,405			11,420		-			-		167,405			11,420
Municipal bonds		302,729			19,486		9,551			837		312,280			20,323
Foreign government bonds		5,762			216		-			-		5,762			216
Corporate bonds		541,977			24,891		13,749			3,484		555,726			28,375
Other mortgage-backed securities		189,646			6,986		35,632			1,146		225,278			8,132
Total fixed maturity securities		1,310,865			69,164		58,976			5,467		1,369,841			74,631
Equity securities (1)		29,394			926		1,033			423		30,427			1,349
Combined totals	$	1,340,259		$	70,090	$	60,009		$	5,890	$	1,400,268		$	75,980

Number of positions with a gross unrealized loss		435					33					468
Fair value as a percentage of total fixed maturities and equity securities fair value		22.3	%				1.0	%				23.3	%

December 31, 2012
Fixed maturity securities
U.S. government and federally sponsored agency obligations:
Mortgage-backed securities	$	11,006		$	124	$	50		$	1	$	11,056		$	125
Other		9,944			135		-			-		9,944			135
Municipal bonds		108,578			2,605		3,990			43		112,568			2,648
Foreign government bonds		-			-		-			-		-			-
Corporate bonds		56,481			875		26,725			4,075		83,206			4,950
Other mortgage-backed securities		58,218			621		25,014			1,411		83,232			2,032
Total fixed maturity securities		244,227			4,360		55,779			5,530		300,006			9,890
Equity securities (1)		19,344			1,288		9			2		19,353			1,290
Combined totals	$	263,571		$	5,648	$	55,788		$	5,532	$	319,359		$	11,180

Number of positions with a gross unrealized loss		156					43					199
Fair value as a percentage of total fixed maturities and equity securities fair value		4.4	%				0.9	%				5.3	%

(1)	Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.

Credit Losses

The following table summarizes the cumulative amounts related to the Company’s credit loss component of the other-than-temporary impairment losses on fixed maturity securities held as of June 30, 2013 and 2012 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized cost bases, for which the non-credit portions of the other-than-temporary impairment losses were recognized in other comprehensive income:

	Six Months Ended
	June 30,
	2013		2012
Cumulative credit loss (1)
Beginning of period	$	2,877	$	3,957
New credit losses (2)		860		-
Losses related to securities sold or paid down during the period		-		-
End of period	$	3,737	$	3,957

(1)	The cumulative credit loss amounts exclude other-than-temporary impairment losses on securities held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required to sell the security before the recovery of the amortized cost basis.
(2)	Other than temporary impairment loss recorded on a Detroit general obligation bond.

Maturities/Sales of Fixed Maturities and Equity Securities

The following table presents the distribution of the Company's fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities differ from contractual maturities, reflecting assumptions regarding borrowers’ utilization of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other asset-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified for consistency with the interest rate and economic environments.

	Percent of Total Fair Value						June 30, 2013
	June 30,			December 31,			Fair		Amortized
	2013			2012			Value		Cost
Estimated expected maturity:
Due in 1 year or less		4.7	%		4.3	%	$	279,815	$	263,813
Due after 1 year through 5 years		20.7			20.8			1,226,101		1,155,912
Due after 5 years through 10 years		38.2			38.4			2,266,237		2,136,503
Due after 10 years through 20 years		19.3			18.7			1,145,965		1,080,363
Due after 20 years		17.1			17.8			1,012,496		954,534
Total		100.0	%		100.0	%	$	5,930,614	$	5,591,125

Average option-adjusted duration, in years		6.3			6.3

Proceeds received from sales of fixed maturities and equity securities, each determined using the specific identification method, and gross gains and gross losses realized as a result of those sales for each period were:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Fixed maturity securities
Proceeds received	$	114,804	$	121,228	$	213,986	$	279,529
Gross gains realized		9,878		8,471		14,390		17,362
Gross losses realized		(471)		(2,684)		(481)		(11,829)

Equity securities
Proceeds received	$	6,299	$	915	$	11,133	$	924
Gross gains realized		2,776		8		3,344		17
Gross losses realized		(172)		(76)		(387)		(76)

Unrealized Gains and Losses on Fixed Maturities and Equity Securities

Net unrealized gains and losses are computed as the difference between fair value and amortized cost for fixed maturities or cost for equity securities. The following table reconciles the net unrealized investment gains and losses, net of tax, included in accumulated other comprehensive income (loss), before the impact on deferred policy acquisition costs:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Net unrealized investment gains (losses) on fixed maturity securities, net of tax
Beginning of period	$	411,979	$	298,096	$	423,004	$	284,338
Change in unrealized investment gains and losses		(182,919)		61,869		(189,828)		75,867
Reclassification of net realized investment (gains) losses to net income		(8,392)		(3,861)		(12,508)		(4,101)
End of period	$	220,668	$	356,104	$	220,668	$	356,104

Net unrealized investment gains (losses) on equity securities, net of tax
Beginning of period	$	3,604	$	2,238	$	720	$	2,408
Change in unrealized investment gains and losses		1,291		882		4,519		727
Reclassification of net realized investment (gains) losses to net income		(1,629)		(2,577)		(1,973)		(2,592)
End of period	$	3,266	$	543	$	3,266	$	543

Repurchase Agreements

Beginning in 2013, the Company enters into repurchase agreements to earn incremental spread income. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. These transactions are generally short-term in nature, and therefore, the carrying amounts of these instruments approximate fair value.

As part of repurchase agreements, the Company transfers U.S. government and government agency securities and receives cash. For the repurchase agreements, the Company receives cash in an amount equal to at least 95% of the fair value of the securities transferred, and the agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received from the repurchase program is typically invested in high quality floating rate fixed maturity securities. The Company accounts for the repurchase agreements as collateralized borrowings. The securities transferred under repurchase agreements are included in fixed maturity, available-for-sale securities with the obligation to repurchase those securities recorded in Other Liabilities on the Company's Consolidated Balance Sheets. The fair value of the securities transferred was $129,767 as of June 30, 2013. The obligation for securities sold under agreement to repurchase was $134,000, including accrued interest, as of June 30, 2013.