Investments

(a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended December 31, 2012, 2011 and 2010:



($ in thousands)	2012			2011		2010
AFS securities:
Fixed maturity securities	$	165,330		130,517		56,754
Equity securities	18,941			13,529		11,597
Total AFS securities	184,271			144,046		68,351

HTM securities:
Fixed maturity securities	3,926			5,566		14,523
Total HTM securities	3,926			5,566		14,523

Total net unrealized gains	188,197			149,612		82,874
Deferred income tax expense	(65,869		)	(52,364	)	(29,006	)
Net unrealized gains, net of deferred income tax	122,328			97,248		53,868

Increase in net unrealized gains in OCI, net of deferred income tax	$	25,080		43,380		24,529

(b) The carrying value, unrecognized holding gains and losses, and fair values of HTM fixed maturity securities were as follows:



December 31, 2012			Net
			Unrealized			Unrecognized	Unrecognized
	Amortized		Gains		Carrying	Holding	Holding		Fair
($ in thousands)	Cost		(Losses)		Value	Gains	Losses		Value
Foreign government	$	5,292	212		5,504	367	—		5,871
Obligations of state and political subdivisions	491,180		6,769		497,949	28,996	(23	)	526,922
Corporate securities	38,285		(812	)	37,473	4,648	—		42,121
ABS	6,980		(1,052	)	5,928	1,170	—		7,098
CMBS	8,406		(1,191	)	7,215	5,434	—		12,649
Total HTM fixed maturity securities	$	550,143	3,926		554,069	40,615	(23	)	594,661



December 31, 2011			Net
			Unrealized			Unrecognized	Unrecognized
	Amortized		Gains		Carrying	Holding	Holding		Fair
($ in thousands)	Cost		(Losses)		Value	Gains	Losses		Value
Foreign government	$	5,292	292		5,584	—	(88	)	5,496
Obligations of state and political subdivisions	614,118		11,894		626,012	31,529	(156	)	657,385
Corporate securities	64,840		(2,189	)	62,651	6,887	—		69,538
ABS	8,077		(1,469	)	6,608	1,353	(7	)	7,954
CMBS	14,455		(2,962	)	11,493	6,177	—		17,670
Total HTM fixed maturity securities	$	706,782	5,566		712,348	45,946	(251	)	758,043

Unrecognized holding gains/losses of HTM securities are not reflected in the Financial Statements, as they represent fair value fluctuations from the later of: (i) the date a security is designated as HTM; or (ii) the date that an OTTI charge is recognized on an HTM security, through the date of the balance sheet. Our HTM securities had an average duration of 2.5 years as of December 31, 2012.

During 2012, 10 securities with a carrying value of $32.7 million in a net unrecognized gain position of $2.4 million were reclassified from the HTM category to AFS due to credit rating downgrades that occurred by either Moody’s Investors Service (“Moody’s”), Standard and Poor’s Financial Services (“S&P”), or Fitch Ratings (“Fitch”). These unexpected rating downgrades raised significant concerns about the issuers’ credit worthiness, which changed our intention to hold these securities to maturity. In addition to the transfer activity, redemptions and maturities of HTM securities in 2012 amounted to $118.3 million.



December 31, 2012
	Cost/
	Amortized		Unrealized	Unrealized		Fair
($ in thousands)	Cost		Gains	Losses		Value
U.S. government and government agencies	$	241,874	17,219	(1	)	259,092
Foreign government	28,813		1,540	(124	)	30,229
Obligations of states and political subdivisions	773,953		44,398	(327	)	818,024
Corporate securities	1,368,954		81,696	(402	)	1,450,248
ABS	126,330		2,319	(9	)	128,640
CMBS¹	133,763		4,572	(1,216	)	137,119
RMBS²	456,996		15,961	(296	)	472,661
AFS fixed maturity securities	3,130,683		167,705	(2,375	)	3,296,013
AFS equity securities	132,441		19,400	(459	)	151,382
Total AFS securities	$	3,263,124	187,105	(2,834	)	3,447,395



December 31, 2011
	Cost/
	Amortized		Unrealized	Unrealized		Fair
($ in thousands)	Cost		Gains	Losses		Value
U.S. government and government agencies³	$	333,504	20,292	—		353,796
Foreign government	33,687		1,042	(556	)	34,173
Obligations of states and political subdivisions	578,214		44,491	(46	)	622,659
Corporate securities	1,168,439		50,167	(5,296	)	1,213,310
ABS	77,706		1,289	(46	)	78,949
CMBS¹	107,838		6,427	(1,667	)	112,598
RMBS²	467,468		16,187	(1,767	)	481,888
AFS fixed maturity securities	2,766,856		139,895	(9,378	)	2,897,373
AFS equity securities	143,826		13,617	(88	)	157,355
Total AFS securities	$	2,910,682	153,512	(9,466	)	3,054,728

¹CMBS includes government guaranteed agency securities with a fair value of $48.9 million at December 31, 2012 and $72.9 million at December 31, 2011.

² RMBS includes government guaranteed agency securities with a fair value of $91.0 million at December 31, 2012 and $98.2 million at December 31, 2011.

³ U.S. government includes corporate securities fully guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) with a fair value of $76.5 million at December 31, 2011.

Unrealized gains/losses of AFS securities represent fair value fluctuations from the later of: (i) the date a security is designated as AFS; or (ii) the date that an OTTI charge is recognized on an AFS security, through the date of the balance sheet. These unrealized gains and losses are recorded in AOCI on the Consolidated Balance Sheets.

(d) The following tables summarize, for all securities in a net unrealized/unrecognized loss position at December 31, 2012 and December 31, 2011, the fair value and gross pre-tax net unrealized/unrecognized loss by asset class and by length of time those securities have been in a net loss position:



December 31, 2012	Less than 12 months				12 months or longer
($ in thousands)	Fair Value		Unrealized Losses¹		Fair Value	Unrealized Losses¹
AFS securities:
U.S. government and government agencies	$	518	(1	)	—	—
Foreign government	—		—		2,871	(124	)
Obligations of states and political subdivisions	32,383		(327	)	—	—
Corporate securities	50,880		(402	)	—	—
ABS	9,137		(9	)	—	—
CMBS	7,637		(19	)	11,830	(1,197	)
RMBS	8,710		(59	)	5,035	(237	)
Total fixed maturity securities	109,265		(817	)	19,736	(1,558	)
Equity securities	15,901		(459	)	—	—
Subtotal	$	125,166	(1,276	)	19,736	(1,558	)



	Less than 12 months					12 months or longer
($ in thousands)	Fair Value		Unrealized Losses¹		Unrecognized Gains²	Fair Value	Unrealized Losses¹		Unrecognized Gains²
HTM securities:
Obligations of states and political subdivisions	$	1,218	(33	)	29	1,108	(47	)	38
ABS	—		—		—	2,860	(840	)	753
Subtotal	$	1,218	(33	)	29	3,968	(887	)	791
Total AFS and HTM	$	126,384	(1,309	)	29	23,704	(2,445	)	791



December 31, 2011	Less than 12 months				12 months or longer
($ in thousands)	Fair Value		Unrealized Losses¹		Fair Value	Unrealized Losses¹
AFS securities:
Foreign government	$	8,299	(556	)	—	—
Obligations of states and political subdivisions	517		(1	)	1,740	(45	)
Corporate securities	157,510		(4,415	)	14,084	(881	)
ABS	15,808		(14	)	702	(32	)
CMBS	4,822		(48	)	14,564	(1,619	)
RMBS	29,803		(625	)	15,007	(1,142	)
Total fixed maturity securities	216,759		(5,659	)	46,097	(3,719	)
Equity securities	743		(88	)	—	—
Subtotal	$	217,502	(5,747	)	46,097	(3,719	)



	Less than 12 months					12 months or longer
($ in thousands)	Fair Value		Unrealized Losses¹		Unrecognized Gains²	Fair Value	Unrealized Losses¹		Unrecognized Gains²
HTM securities:
Obligations of states and political subdivisions	$	7,244	(94	)	78	9,419	(519	)	324
ABS	—		—		—	2,816	(1,009	)	737
CMBS	—		—		—	2,794	(1,447	)	761
Subtotal	$	7,244	(94	)	78	15,029	(2,975	)	1,822
Total AFS and HTM	$	224,746	(5,841	)	78	61,126	(6,694	)	1,822

¹Gross unrealized losses include non-OTTI unrealized amounts and OTTI losses recognized in AOCI. In addition, this column includes remaining unrealized gain or loss amounts on securities that were transferred to an HTM designation in the first quarter of 2009 for those securities that are in a net unrealized/unrecognized loss position.

² Unrecognized holding gains/(losses) represent fair value fluctuations from the later of: (i) the date a security is designated as HTM; or (ii) the date that an OTTI charge is recognized on an HTM security.

As evidenced by the table below, our unrealized/unrecognized loss positions improved by $7.7 million as of December 31, 2012 compared to last year as follows:



($ in thousands)
December 31, 2012				December 31, 2011
Number of Issues	% of Market/Book	Unrealized Unrecognized Loss		Number of Issues	% of Market/Book	Unrealized Unrecognized Loss
100	80% - 99%	$	2,701	140	80% - 99%	$	10,166
1	60% - 79%	233		—	60% - 79%	—
—	40% - 59%	—		1	40% - 59%	469
—	20% - 39%	—		—	20% - 39%	—
—	0% - 19%	—		—	0% - 19%	—
		$	2,934			$	10,635

We have reviewed the securities in the tables above in accordance with our OTTI policy, as described in Note 2. “Summary of Significant Accounting Policies” of this Form 10-K.

At December 31, 2012, we had 101 securities in an aggregate unrealized/unrecognized loss position of $2.9 million, $1.7 million of which have been in a loss position for more than 12 months. Securities that have had non-credit OTTI impairments comprised $0.9 million of the $1.7 million balance. The remainder of the $1.7 million balance is related to securities that were on average 5% impaired compared to their amortized cost.

At December 31, 2011, we had 141 securities in an aggregate unrealized/unrecognized loss position of $10.6 million, $4.9 million of which have been in a loss position for more than 12 months. Non-credit OTTI impairments comprised $2.1 million of the $4.9 million, with the remainder related to securities that were on average 6% impaired compared to their amortized cost.

We do not have the intent to sell any securities in an unrealized/unrecognized loss position nor do we believe we will be required to sell these securities, and therefore we have concluded that they are temporarily impaired as of December 31, 2012. This conclusion reflects our current judgment as to the financial position and future prospects of the entity that issued the investment security and underlying collateral. If our judgment about an individual security changes in the future, we may ultimately record a credit loss after having originally concluded that one did not exist, which could have a material impact on our net income and financial position in future period.

(e) Fixed-maturity securities at December 31, 2012, by contractual maturity are shown below. MBS are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Listed below is a summary of HTM fixed maturity securities at December 31, 2012:



($ in thousands)	Carrying Value		Fair Value
Due in one year or less	$	103,671	108,524
Due after one year through five years	399,560		428,480
Due after five years through 10 years	44,255		49,635
Due after 10 years	6,583		8,022
Total HTM fixed maturity securities	$	554,069	594,661

Listed below is a summary of AFS fixed maturity securities at December 31, 2012:



($ in thousands)	Fair Value
Due in one year or less	$	359,291
Due after one year through five years	1,875,834
Due after five years through 10 years	1,026,073
Due after 10 years	34,815
Total AFS fixed maturity securities	$	3,296,013

(f) The following table outlines a summary of our other investment portfolio by strategy and the remaining commitment amount associated with each strategy:



Other Investments	Carrying Value			2012
	December 31,		December 31,	Remaining
($ in thousands)	2012		2011	Commitment
Alternative Investments
Secondary private equity	$	28,032	30,114	7,592
Energy/power generation	18,640		25,913	8,692
Private equity	18,344		21,736	4,594
Distressed debt	12,728		16,953	2,916
Mezzanine financing	12,692		8,817	21,333
Real estate	11,751		13,767	10,381
Venture capital	7,477		7,248	400
Total alternative investments	109,664		124,548	55,908
Other securities	4,412		3,753	982
Total other investments	$	114,076	128,301	56,890

The following is a description of our alternative investment strategies:

Secondary Private Equity

This strategy purchases seasoned private equity funds from investors desiring liquidity prior to normal fund termination. Investments are made across all sectors of the private equity market, including leveraged buyouts, venture capital, distressed securities, mezzanine financing, real estate, and infrastructure.

Energy/Power Generation

This strategy invests primarily in cash flow generating assets in the coal, natural gas, power generation, and electric and gas transmission and distribution industries.

Private Equity

This strategy makes private equity investments, primarily in established large and middle market companies across diverse industries in North America, Europe, and Asia.

Distressed Debt

This strategy makes direct and indirect investments in debt and equity securities of companies that are experiencing financial and/or operational distress. Investments include buying indebtedness of bankrupt or financially troubled companies, small balance loan portfolios, special situations and capital structure arbitrage trades, commercial real estate mortgages and similar non-U.S. securities and debt obligations. This strategy also includes a fund of funds component.

The fund of funds component of our distressed debt strategy, which makes up approximately $7.8 million of our distressed debt strategy, encompasses a number of strategies that generally fall into one of the following broad categories:

Distressed Debt Funds – Trading-Focused

These funds focus on buying and selling debt of distressed companies (“Distressed Debt”).

Distressed Debt Funds – Restructuring-Focused

These funds focus on acquiring Distressed Debt with the intent of converting it into equity in a restructuring and taking control of the company.

Special Situations Funds

These funds pursue strategies that seek to take advantage of dislocations or opportunities in the market that are often related to, or are derivatives of, distressed investing. Special situations are often event-driven and characterized by complexity, market inefficiency, and excess risk premiums.

Private Equity Funds – Turnaround-Focused

These funds are a subset of private equity funds focused on investing in under-performing or distressed companies. These funds generally create value by acquiring the equity of these companies, in certain cases out of bankruptcy, and effecting operational turnarounds or financial restructuring.

Mezzanine Financing

This strategy provides privately negotiated fixed income securities, generally with an equity component, to leveraged buyout (“LBO”) firms and private and publicly traded large, mid and small-cap companies to finance LBOs, recapitalizations, and acquisitions.

Real Estate

This strategy invests opportunistically in real estate in North America, Europe, and Asia via direct property ownership, joint ventures, mortgages, and investments in equity and debt instruments.

Venture Capital

In general, these investments are venture capital investments made principally by investing in equity securities of privately held corporations, for long-term capital appreciation. This strategy also makes private equity investments in growth equity and buyout partnerships.

Our seven alternative investment strategies employ low or moderate levels of leverage and generally use hedging only to reduce foreign exchange or interest rate volatility. At this time, our alternative investment strategies do not include hedge funds. We cannot redeem our investments with the general partners of these investments; however, occasionally these partnerships can be traded on the secondary market. Once liquidation is triggered by clauses within the limited partnership agreements or at the funds’ stated end date, we will receive our final allocation of capital and any earned appreciation of the underlying investments, assuming we have not divested ourselves of our partnership interests prior to that time. We currently receive distributions from these alternative investments through the realization of the underlying investments in the limited partnerships. We anticipate that the general partners of these alternative investments will liquidate their underlying investment portfolios through 2022.

The following tables set forth summarized financial information for our investments that are accounted for under the equity method, which are primarily alternative investments. This information is presented in the aggregate for our other investment portfolio. Since the majority of these investments report results to us on a quarter lag, the summarized financial statement information is as of, and for the 12-month period ended, September 30:



Balance Sheet Information
September 30,
($ in millions)	2012		2011
Investments	$	12,214	13,553
Total assets	12,912		14,253
Total liabilities	657		1,105
Partners’ capital	12,255		13,148



Income Statement Information
12 months ended September 30,
($ in millions)	2012			2011	2010
Net investment income	$	226		564	563
Realized gains (losses)	1,015			893	(358	)
Net change in unrealized (depreciation) appreciation	(100		)	1,485	2,250
Net income	$	1,141		2,942	2,455

Insurance Subsidiaries' other investments income	9			21	20

(g) At December 31, 2012, we had 32 fixed maturity securities, with a carrying value of $59.3 million, that were pledged as collateral for our outstanding borrowing of $58 million with the FHLBI. This outstanding borrowing is included in “Notes payable” on our Consolidated Balance Sheets. In accordance with the terms of our agreement with the FHLBI, we retain all rights regarding these securities, which are included in the “U.S. government and government agencies,” “RMBS,” and “CMBS” classifications of our AFS fixed maturity securities portfolio.

In addition, certain bonds with a carrying value of $23.3 million were on deposit with various state and regulatory agencies to comply with insurance laws. We retain all rights regarding these securities, which are primarily included in the "U.S. government and government agencies" classification of our HTM fixed maturity securities portfolio.

(h) The components of net investment income earned were as follows:



($ in thousands)	2012			2011		2010
Fixed maturity securities	$	124,687		129,710		130,990
Equity securities, dividend income	6,215			4,535		2,238
Short-term investments	151			160		437
Other investments	8,996			20,539		20,313
Miscellaneous income	—			133		139
Investment expenses	(8,172		)	(7,634	)	(8,409	)
Net investment income earned	$	131,877		147,443		145,708

The $15.6 million decrease in investment income before tax when compared to the prior year was primarily attributable to a decrease in income of $10.3 million from alternative investments within our other investments portfolio. This decrease in alternative investment income was primarily in the energy and private equity sectors, including the secondary markets. Fixed maturity securities income also decreased by $5.0 million, mainly due to lower reinvestment yields in 2012 when compared to 2011. In 2012, bonds that matured or were sold, valued at $658.3 million, had yields that averaged 3.7%, pre-tax, while new purchases of $892.6 million had an average yield of 2.2%.

While net investment income remained relatively flat in 2011 compared to 2010, its components reflect increased dividend income from the high dividend yield equities strategy that we implemented during 2011 partially offset by lower yields on our fixed maturity securities. In 2011, bonds that matured or were sold, valued at $481.9 million, had yields that averaged 3.8%, pre-tax, while new purchases of $490.8 million had an average yield of 2.7%.

(i) The following tables summarize OTTI by asset type for the periods indicated:



2012						Recognized in
($ in thousands)	Gross			Included in OCI		Earnings
Fixed maturity securities
ABS	$	98		—		98
CMBS	(1,525		)	(2,335	)	810
RMBS	(35		)	(218	)	183
Total fixed maturity securities	(1,462		)	(2,553	)	1,091
Equity securities	3,173			—		3,173
OTTI losses	$	1,711		(2,553	)	4,264



2011						Recognized in
($ in thousands)	Gross			Included in OCI		Earnings
Fixed maturity securities
Obligations of state and political subdivisions	$	17		—		17
Corporate securities	244			—		244
ABS	175			(546	)	721
CMBS	(149		)	(843	)	694
RMBS	346			201		145
Total fixed maturity securities	633			(1,188	)	1,821
Equity securities	11,365			—		11,365
OTTI losses	$	11,998		(1,188	)	13,186



2010						Recognized in
($ in thousands)	Gross			Included in OCI		Earnings
Fixed maturity securities
Obligations of state and political subdivisions	$	197		—		197
ABS	(20		)	(179	)	159
CMBS	5,552			(863	)	6,415
RMBS	7,953			(391	)	8,344
Total fixed maturity securities	13,682			(1,433	)	15,115
Equity securities	2,543			—		2,543
OTTI losses	$	16,225		(1,433	)	17,658

OTTI losses in 2012 and 2011 were primarily comprised of charges on our equity portfolio. In 2012, $1.0 million related to securities that we do not believe will recover in the near term and $2.2 million related to securities for which we had the intent to sell. In 2011, $8.5 million related to securities that we do not believe will recover in the near term and $2.9 million related to securities for which we had the intent to sell.

OTTI charges in 2010 were compromised of the following:

•

$8.3 million of RMBS credit OTTI charges were largely driven by impairments on two securities in the first quarter of 2010 that we intended to sell. We sold these securities in the second quarter of 2010. The remaining charges related to securities that experienced declines in the related cash flows of their underlying collateral. Based on our analysis, we did not believe it was probable that we would receive all contractual cash flows for these securities.

•

$6.4 million of CMBS credit OTTI charges. These charges were due to reductions in the related cash flows of the underlying collateral of these securities. These charges were primarily associated with securities that had been previously impaired but, over time, had shown little, if any, improvement in valuations, poor net operating income performance of the underlying properties, and, in some cases, an increase in over 60-day delinquency rates. These securities had, on average, unrealized/unrecognized loss positions of more than 60% of their amortized cost. Based on our DCF analysis, we did not believe it was probable that we would receive all contractual cash flows for these securities.

The following table sets forth, for the periods indicated, credit loss impairments on fixed maturity securities for which a portion of the OTTI charge was recognized in OCI, and the corresponding changes in such amounts:



($ in thousands)	2012		2011		2010
Balance, beginning of year	$	6,602	17,723		22,189
Credit losses remaining in retained earnings after adoption of OTTI accounting guidance	—		—		—
Addition for the amount related to credit loss for which an OTTI was not previously recognized	—		—		2,326
Reductions for securities sold during the period	—		—		(2,990	)
Reductions for securities for which the amount previously recognized in OCI was recognized in earnings because of intention or potential requirement to sell before recovery of amortized cost	—		—		—
Reductions for securities for which the entire amount previously recognized in OCI was recognized in earnings due to a decrease in cash flows expected	—		(11,672	)	(8,143	)
Additional increases to the amount related to credit loss for which an OTTI was previously recognized	875		551		4,341
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	—		—		—
Balance, end of year	$	7,477	6,602		17,723

(j) The components of net realized gains (losses), excluding OTTI charges, were as follows:



($ in thousands)	2012			2011		2010
HTM fixed maturity securities
Gains	$	194		4		569
Losses	(217		)	(564	)	(894	)
AFS fixed maturity securities
Gains	4,452			9,385		8,161
Losses	(472		)	(70	)	(7,619	)
AFS equity securities
Gains	10,901			6,671		16,698
Losses	(1,205		)	—		(1,156	)
Short-term investments
Losses	(2		)	—		—
Other investments
Gains	1			—		—
Losses	(400		)	—		(5,184	)
Total other net realized investment gains	13,252			15,426		10,575
Total OTTI charges recognized in earnings	(4,264		)	(13,186	)	(17,658	)
Total net realized gains (losses)	$	8,988		2,240		(7,083	)

Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. Proceeds from the sale of AFS securities were $205.3 million in 2012, $206.5 million during 2011, and $288.5 million during 2010. Net realized gains in 2012, excluding OTTI charges, were driven by: (i) calls and maturities; and (ii) the sale of AFS equity securities related to reallocations within the high-dividend yield portfolio.

Net realized gains in 2011, excluding OTTI charges, were driven by: (i) calls and maturities; (ii) the sale of AFS fixed maturity securities, primarily corporate, municipal, and government holdings; and (iii) the sale of AFS equity securities to facilitate the reallocation of the equity portfolio to a high-dividend yield strategy.

Realized gains in 2010 were driven by: (i) the sale of energy-focused AFS equity securities to mitigate portfolio risk and sector exposure; and (ii) the sale of AFS fixed maturity and equity securities associated with tax planning strategies. These gains were largely offset by realized losses on certain AFS fixed maturity securities that we sold in the second quarter of 2010 following an initial review of the portfolio by our investment managers who were put in place in 2010. The managers’ sale recommendations were due to ongoing credit concerns of the underlying investments coupled with strategically positioning the portfolio to generate maximum yield while balancing risk objectives. Realized losses in our other investment portfolio was due to the fourth quarter 2010 sale of certain limited partnerships in the secondary market, which reduced our exposure in the mezzanine financing, private equity, secondary private equity, and real estate sectors of our alternative investment portfolio.