Investments

(a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended December 31, 2013, 2012, and 2011:



($ in thousands)	2013			2012		2011
AFS securities:
Fixed maturity securities	$	39,559		165,330		130,517
Equity securities	37,421			18,941		13,529
Total AFS securities	76,980			184,271		144,046

HTM securities:
Fixed maturity securities	2,257			3,926		5,566
Total HTM securities	2,257			3,926		5,566

Total net unrealized gains	79,237			188,197		149,612
Deferred income tax expense	(27,733		)	(65,869	)	(52,364	)
Net unrealized gains, net of deferred income tax	51,504			122,328		97,248

(Decrease) increase in net unrealized gains in OCI, net of deferred income tax	$	(70,824	)	25,080		43,380

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



December 31, 2013			Net
			Unrealized			Unrecognized	Unrecognized
	Amortized		Gains		Carrying	Holding	Holding	Fair
($ in thousands)	Cost		(Losses)		Value	Gains	Losses	Value
Foreign government	$	5,292	131		5,423	168	—	5,591
Obligations of state and political subdivisions	348,109		4,013		352,122	17,634	—	369,756
Corporate securities	28,174		(346	)	27,828	2,446	—	30,274
ABS	3,413		(655	)	2,758	657	—	3,415
CMBS	5,634		(886	)	4,748	3,197	—	7,945
Total HTM fixed maturity securities	$	390,622	2,257		392,879	24,102	—	416,981



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

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 2.2 years as of December 31, 2013.

During 2013, 16 securities with a carrying value of $39.6 million and a net unrecognized gain position of $1.4 million, were reclassified from an HTM designation to an AFS designation due to credit rating downgrades by Moody’s Investors Service (“Moody’s”) and/or Standard and Poor’s ("S&P") Financial Services. These unexpected rating downgrades indicated significant deterioration of credit worthiness, which changed our intention to hold these securities to maturity.



December 31, 2013
	Cost/
	Amortized		Unrealized	Unrealized		Fair
($ in thousands)	Cost		Gains	Losses		Value
U.S. government and government agencies	$	163,218	10,661	(504	)	173,375
Foreign government	29,781		906	(72	)	30,615
Obligations of states and political subdivisions	946,455		25,194	(20,025	)	951,624
Corporate securities	1,707,928		44,004	(17,049	)	1,734,883
ABS	140,430		934	(468	)	140,896
CMBS¹	172,288		2,462	(3,466	)	171,284
RMBS²	515,877		7,273	(10,291	)	512,859
AFS fixed maturity securities	3,675,977		91,434	(51,875	)	3,715,536
AFS equity securities	155,350		37,517	(96	)	192,771
Total AFS securities	$	3,831,327	128,951	(51,971	)	3,908,307



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

¹CMBS includes government guaranteed agency securities with a fair value of $30.0 million at December 31, 2013 and $48.9 million at December 31, 2012.

² RMBS includes government guaranteed agency securities with a fair value of $55.2 million at December 31, 2013 and $91.0 million at December 31, 2012.

Unrealized gains and 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, 2013 and December 31, 2012, 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, 2013	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	$	16,955	(500	)	507	(4	)
Foreign government	2,029		(30	)	2,955	(42	)
Obligations of states and political subdivisions	442,531		(19,120	)	13,530	(905	)
Corporate securities	511,100		(15,911	)	14,771	(1,138	)
ABS	68,725		(468	)	—	—
CMBS	100,396		(2,950	)	6,298	(516	)
RMBS	268,943		(10,031	)	2,670	(260	)
Total fixed maturity securities	1,410,679		(49,010	)	40,731	(2,865	)
Equity securities	1,124		(96	)	—	—
Subtotal	$	1,411,803	(49,106	)	40,731	(2,865	)



	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	$	65	(5	)	5	441	(20	)	14
ABS	—		—		—	2,490	(655	)	621
Subtotal	$	65	(5	)	5	2,931	(675	)	635
Total AFS and HTM	$	1,411,868	(49,111	)	5	43,662	(3,540	)	635



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

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 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 net unrealized/unrecognized loss positions increased by $49.1 million as of December 31, 2013 compared to the prior year as follows:



($ in thousands)
December 31, 2013				December 31, 2012
Number of Issues	% of Market/Book	Unrealized/Unrecognized Loss		Number of Issues	% of Market/Book	Unrealized/ Unrecognized Loss
556	80% - 99%	$	51,835	100	80% - 99%	$	2,701
1	60% - 79%	176		1	60% - 79%	233
—	40% - 59%	—		—	40% - 59%	—
—	20% - 39%	—		—	20% - 39%	—
—	0% - 19%	—		—	0% - 19%	—
		$	52,011			$	2,934

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, 2013, we had 557 securities in an aggregate unrealized/unrecognized loss position of $52.0 million, $2.9 million of which have been in a loss position for more than 12 months. 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. During 2013, interest rates, other than short-term, generally rose. For example, the yield on the 10-year U.S. Treasury Note rose by 127 basis points. This interest rate movement has negatively impacted our fixed maturity securities portfolio's valuation, thus increasing the number of securities in a loss position and the corresponding dollar amount of unrealized losses. The increase in the unrealized losses does not correspond to any issuer specific credit concerns; however, it does reflect an expected reduction in market value due to higher market interest rates. If interest rates rise further, it is reasonable to expect downward pressure on the fair market values within our fixed maturity securities portfolio, potentially resulting in an increased number of securities in a loss position for an extended period of time, and a corresponding increase in the dollar amount of unrealized losses. For a discussion regarding the sensitivity of interest rate movements and the related impacts on the fixed maturity securities portfolio, refer to Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" of this Form 10-K.

We do not intend 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, 2013. 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 periods.

(e) Fixed-maturity securities at December 31, 2013, by contractual maturity are shown below. Mortgage-backed securities ("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, 2013:



($ in thousands)	Carrying Value		Fair Value
Due in one year or less	$	67,784	70,422
Due after one year through five years	293,947		312,109
Due after five years through 10 years	31,148		34,450
Total HTM fixed maturity securities	$	392,879	$	416,981

Listed below is a summary of AFS fixed maturity securities at December 31, 2013:



($ in thousands)	Fair Value
Due in one year or less	$	375,313
Due after one year through five years	1,947,709
Due after five years through 10 years	1,363,912
Due after 10 years	28,602
Total AFS fixed maturity securities	$	3,715,536

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



Other Investments	Carrying Value			2013
	December 31,		December 31,	Remaining
($ in thousands)	2013		2012	Commitment
Alternative Investments
Secondary private equity	$	25,618	28,032	7,739
Private equity	20,192		18,344	9,998
Energy/power generation	17,361		18,640	6,984
Mezzanine financing	12,738		12,692	18,249
Real estate	11,698		11,751	10,203
Distressed debt	11,579		12,728	2,965
Venture capital	7,025		7,477	400
Total alternative investments	106,211		109,664	56,538
Other securities	1,664		4,412	—
Total other investments	$	107,875	114,076	56,538

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.

Private Equity

This strategy makes private equity investments, primarily in established large and middle market companies across diverse industries globally.

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.

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.

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 $7.9 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.

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 2026.

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)	2013		2012
Investments	$	11,020	12,214
Total assets	11,727		12,912
Total liabilities	573		657
Partners’ capital	11,154		12,255



Income Statement Information
12 months ended September 30,
($ in millions)	2013		2012		2011
Net investment income	$	406	226		564
Realized gains	913		1,015		893
Net change in unrealized appreciation (depreciation)	382		(100	)	1,485
Net income	$	1,701	1,141		2,942

Insurance Subsidiaries' other investments income	15		9		21

(g) At December 31, 2013, we had fixed maturity securities, with a carrying value of $62.3 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.

Also at December 31, 2013, we had fixed maturity securities, with a carrying value of $22.1 million, and short-term investments with a carrying value of $0.7 million, that collateralize reinsurance obligations related to our 2011 acquisition of our E&S book of business. Similar to the FHLBI collateral discussion above, we retain all rights regarding these investments. The fixed maturity securities are included in the "Municipal," "Corporate," "U.S. government and government agencies," "RMBS," and "ABS" classifications of our AFS fixed maturity securities portfolio.

In addition, certain bonds with a carrying value of $26.5 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 AFS fixed maturity securities portfolio.

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



($ in thousands)	2013			2012		2011
Fixed maturity securities	$	121,582		124,687		129,710
Equity securities, dividend income	6,140			6,215		4,535
Short-term investments	117			151		160
Other investments	15,208			8,996		20,539
Miscellaneous income	—			—		133
Investment expenses	(8,404		)	(8,172	)	(7,634	)
Net investment income earned	$	134,643		131,877		147,443

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



2013							Recognized in
($ in thousands)	Gross			Included in OCI			Earnings
HTM fixed maturity securities:
ABS	$	(44	)	(47		)	3
Total HTM fixed maturity securities	(44		)	(47		)	3
AFS fixed maturity securities:
RMBS	16			(30		)	46
Total AFS fixed maturity securities	16			(30		)	46
Equity securities	3,747			—			3,747
Total AFS securities	3,763			(30		)	3,793
Other investments	1,847			—			1,847
OTTI losses	$	5,566		$	(77	)	$	5,643



2012						Recognized in
($ in thousands)	Gross			Included in OCI		Earnings
AFS fixed maturity securities:
ABS	98			—		98
CMBS	(1,525		)	(2,335	)	810
RMBS	(35		)	(218	)	183
Total AFS 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
AFS 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 AFS fixed maturity securities	633			(1,188	)	1,821
Equity securities	11,365			—		11,365
OTTI losses	$	11,998		(1,188	)	13,186

The majority of the OTTI charges in 2013, 2012, and 2011 were primarily comprised of charges on our equity portfolio. In 2013, $2.0 million related to securities that we did not believe would recover in the near term and $1.7 million related to securities for which we had the intent to sell. In 2012, $1.0 million related to securities that we did not believe would 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 did not believe would recover in the near term and $2.9 million related to securities for which we had the intent to sell. Also contributing to the OTTI charges in 2013 were $1.8 million of charges that relate to an investment in a limited liability company within our other investments portfolio that has sustained significant losses for which we do not anticipate recovery.

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)	2013		2012	2011
Balance, beginning of year	$	7,477	6,602	17,723
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	—		—	—
Reductions for securities sold during the period	—		—	—
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	)
Additional increases to the amount related to credit loss for which an OTTI was previously recognized	11		875	551
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	—		—	—
Balance, end of year	$	7,488	7,477	6,602

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



($ in thousands)	2013			2012		2011
HTM fixed maturity securities
Gains	$	195		194		4
Losses	(95		)	(217	)	(564	)
AFS fixed maturity securities
Gains	3,340			4,452		9,385
Losses	(373		)	(472	)	(70	)
AFS equity securities
Gains	24,776			10,901		6,671
Losses	(408		)	(1,205	)	—
Short-term investments
Losses	—			(2	)	—
Other investments
Gains	—			1		—
Losses	(1,060		)	(400	)	—
Total other net realized investment gains	26,375			13,252		15,426
Total OTTI charges recognized in earnings	(5,643		)	(4,264	)	(13,186	)
Total net realized gains	$	20,732		8,988		2,240

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 $135.9 million in 2013, $205.3 million in 2012, and $206.5 million in 2011. Net realized gains in 2013, excluding OTTI charges, were driven by the sale of AFS equity securities due to the rebalancing of our high-dividend yield strategy holdings within our equity portfolio.

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 rebalancing of our high-dividend yield strategy holdings within our equity 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.