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Investments | 9 Months Ended
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Sep. 30, 2013
Investments [Abstract] |
Investments | Investments At September 30, 2013 and December 31, 2012, the amortized cost and fair value of fixed maturity securities and equity securities were as follows:
| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
| (Dollars in thousands)
September 30, 2013 |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |
Available for sale: |  |  |  |  |  |  |
United States Government full faith and credit | $ | 4,608 |  |  | $ | 342 |  |  | $ | (43 | ) |  | $ | 4,907 |
United States Government sponsored agencies | 1,314,449 |  |  | 4,069 |  |  | (78,915 | ) |  | 1,239,603 |
United States municipalities, states and territories | 3,278,749 |  |  | 212,975 |  |  | (30,593 | ) |  | 3,461,131 |
Foreign government obligations | 86,109 |  |  | 9,365 |  |  | (2,792 | ) |  | 92,682 |
Corporate securities | 16,420,869 |  |  | 720,010 |  |  | (399,298 | ) |  | 16,741,581 |
Residential mortgage backed securities | 1,999,201 |  |  | 145,605 |  |  | (25,979 | ) |  | 2,118,827 |
Commercial mortgage backed securities | 1,664,541 |  |  | 5,194 |  |  | (79,425 | ) |  | 1,590,310 |
Other asset backed securities | 1,014,590 |  |  | 23,544 |  |  | (24,297 | ) |  | 1,013,837 |
| $ | 25,783,116 |  |  | $ | 1,121,104 |  |  | $ | (641,342 | ) |  | $ | 26,262,878 |
Held for investment: |  |  |  |  |  |  |
Corporate security | $ | 76,212 |  |  | $ | — |  |  | $ | (15,369 | ) |  | $ | 60,843 |
Equity securities, available for sale: |  |  |  |  |  |  |
Finance, insurance, and real estate | $ | 8,917 |  |  | $ | 791 |  |  | $ | — |  |  | $ | 9,708 |
December 31, 2012 |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |
Available for sale: |  |  |  |  |  |  |
United States Government full faith and credit | $ | 4,590 |  |  | $ | 564 |  |  | $ | — |  |  | $ | 5,154 |
United States Government sponsored agencies | 1,763,789 |  |  | 11,704 |  |  | (3,468 | ) |  | 1,772,025 |
United States municipalities, states and territories | 3,116,678 |  |  | 461,770 |  |  | (125 | ) |  | 3,578,323 |
Foreign government obligations | 86,099 |  |  | 19,160 |  |  | — |  |  | 105,259 |
Corporate securities | 12,930,173 |  |  | 1,568,223 |  |  | (31,624 | ) |  | 14,466,772 |
Residential mortgage backed securities | 2,743,537 |  |  | 172,304 |  |  | (27,728 | ) |  | 2,888,113 |
Commercial mortgage backed securities | 354,870 |  |  | 5,095 |  |  | (1,983 | ) |  | 357,982 |
Other asset backed securities | 957,291 |  |  | 44,190 |  |  | (2,973 | ) |  | 998,508 |
| $ | 21,957,027 |  |  | $ | 2,283,010 |  |  | $ | (67,901 | ) |  | $ | 24,172,136 |
Held for investment: |  |  |  |  |  |  |
Corporate security | $ | 76,088 |  |  | $ | — |  |  | $ | (14,567 | ) |  | $ | 61,521 |
Equity securities, available for sale: |  |  |  |  |  |  |
Finance, insurance, and real estate | $ | 44,598 |  |  | $ | 10,227 |  |  | $ | (1,403 | ) |  | $ | 53,422 |
During the nine months ended September 30, 2013 and 2012, we received $1.1 billion and $3.8 billion, respectively, in redemption proceeds related to calls of our callable United States Government sponsored agency securities and public and private corporate bonds, of which $2.6 billion for the nine months ended September 30, 2012, were c lassified as held for investment. The proceeds from these redemptions have been reinvested primarily in United States government sponsored agencies, corporate securities, residential and commercial mortgage backed securities and other asset backed securities. At September 30, 2013, 31% of our fixed income securities have call features of which 5% ($1.3 billion) will become subject to call redemption during the next twelve months, of which $500.0 million are U.S. Government agency securities maturing in January 2028 with 3.75% coupons. These securities are callable quarterly and a modest decline in interest rates from current levels could result in the calls being exercised on their next call date in January of 2014. The amortized cost and fair value of fixed maturity securities at September 30, 2013, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their lives and are shown below as separate lines.
| Available for sale |  | Held for investment
| Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
| (Dollars in thousands)
Due in one year or less | $ | 123,756 |  |  | $ | 126,880 |  |  | $ | — |  |  | $ | — |
Due after one year through five years | 853,588 |  |  | 958,053 |  |  | — |  |  | — |
Due after five years through ten years | 7,379,238 |  |  | 7,364,750 |  |  | — |  |  | — |
Due after ten years through twenty years | 6,226,753 |  |  | 6,341,286 |  |  | — |  |  | — |
Due after twenty years | 6,521,449 |  |  | 6,748,935 |  |  | 76,212 |  |  | 60,843 |
| 21,104,784 |  |  | 21,539,904 |  |  | 76,212 |  |  | 60,843 |
Residential mortgage backed securities | 1,999,201 |  |  | 2,118,827 |  |  | — |  |  | — |
Commercial mortgage backed securities | 1,664,541 |  |  | 1,590,310 |  |  | — |  |  | — |
Other asset backed securities | 1,014,590 |  |  | 1,013,837 |  |  | — |  |  | — |
| $ | 25,783,116 |  |  | $ | 26,262,878 |  |  | $ | 76,212 |  |  | $ | 60,843 |
Net unrealized gains on available for sale fixed maturity securities and equity securities reported as a separate component of stockholders' equity were comprised of the following:
| September 30, 2013 |  | December 31, 2012
| (Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities and equity securities | $ | 480,553 |  |  | $ | 2,223,933 |
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements | (263,337 | ) |  | (1,201,974 | )
Deferred income tax valuation allowance reversal | 22,534 |  |  | 22,534 |
Deferred income tax benefit | (76,025 | ) |  | (357,686 | )
Net unrealized gains reported as accumulated other comprehensive income | $ | 163,725 |  |  | $ | 686,807 |
The National Association of Insurance Commissioners (“NAIC”) assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given by the Nationally Recognized Statistical Rating Organizations (“NRSRO’s”). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 designations are considered “investment grade” while NAIC Class 3 through 6 designations are considered “non-investment grade.” Based on the NAIC designations, we had 98% of our fixed maturity portfolio rated investment grade at September 30, 2013 and December 31, 2012. The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
|  | September 30, 2013 |  | December 31, 2012
NAIC Designation |  | Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
|  | (Dollars in thousands)
1 |  | $ | 15,945,089 |  |  | $ | 16,367,238 |  |  | $ | 13,737,381 |  |  | $ | 15,250,560 |
2 |  | 9,277,558 |  |  | 9,352,577 |  |  | 7,838,186 |  |  | 8,533,121 |
3 |  | 533,890 |  |  | 509,433 |  |  | 398,294 |  |  | 387,222 |
4 |  | 100,907 |  |  | 93,126 |  |  | 53,879 |  |  | 56,151 |
5 |  | — |  |  | — |  |  | — |  |  | — |
6 |  | 1,884 |  |  | 1,347 |  |  | 5,375 |  |  | 6,603 |
|  | $ | 25,859,328 |  |  | $ | 26,323,721 |  |  | $ | 22,033,115 |  |  | $ | 24,233,657 |
The following tables show our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 885 and 198 securities, respectively) have been in a continuous unrealized loss position, at September 30, 2013 and December 31, 2012:
| Less than 12 months |  | 12 months or more |  | Total
| Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
| (Dollars in thousands)
September 30, 2013 |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |
Available for sale: |  |  |  |  |  |  |  |  |  |  |
United States Government full faith and credit | $ | 977 |  |  | $ | (43 | ) |  | $ | — |  |  | $ | — |  |  | $ | 977 |  |  | $ | (43 | )
United States Government sponsored agencies | 1,130,979 |  |  | (78,915 | ) |  | — |  |  | — |  |  | 1,130,979 |  |  | (78,915 | )
United States municipalities, states and territories | 488,260 |  |  | (30,593 | ) |  | — |  |  | — |  |  | 488,260 |  |  | (30,593 | )
Foreign government obligations | 26,985 |  |  | (2,792 | ) |  | — |  |  | — |  |  | 26,985 |  |  | (2,792 | )
Corporate securities: |  |  |  |  |  |  |  |  |  |  |
Finance, insurance and real estate | 1,291,001 |  |  | (71,692 | ) |  | 119,734 |  |  | (11,273 | ) |  | 1,410,735 |  |  | (82,965 | )
Manufacturing, construction and mining | 2,925,074 |  |  | (161,188 | ) |  | 16,494 |  |  | (2,608 | ) |  | 2,941,568 |  |  | (163,796 | )
Utilities and related sectors | 1,568,088 |  |  | (83,013 | ) |  | 30,766 |  |  | (2,673 | ) |  | 1,598,854 |  |  | (85,686 | )
Wholesale/retail trade | 336,683 |  |  | (20,153 | ) |  | — |  |  | — |  |  | 336,683 |  |  | (20,153 | )
Services, media and other | 843,825 |  |  | (44,173 | ) |  | 30,939 |  |  | (2,525 | ) |  | 874,764 |  |  | (46,698 | )
Residential mortgage backed securities | 296,361 |  |  | (23,605 | ) |  | 34,068 |  |  | (2,374 | ) |  | 330,429 |  |  | (25,979 | )
Commercial mortgage backed securities | 1,268,293 |  |  | (79,425 | ) |  | — |  |  | — |  |  | 1,268,293 |  |  | (79,425 | )
Other asset backed securities | 402,461 |  |  | (17,914 | ) |  | 44,726 |  |  | (6,383 | ) |  | 447,187 |  |  | (24,297 | )
| $ | 10,578,987 |  |  | $ | (613,506 | ) |  | $ | 276,727 |  |  | $ | (27,836 | ) |  | $ | 10,855,714 |  |  | $ | (641,342 | )
Held for investment: |  |  |  |  |  |  |  |  |  |  |
Corporate security: |  |  |  |  |  |  |  |  |  |  |
Insurance | $ | — |  |  | $ | — |  |  | $ | 60,843 |  |  | $ | (15,369 | ) |  | $ | 60,843 |  |  | $ | (15,369 | )
December 31, 2012 |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |
Available for sale: |  |  |  |  |  |  |  |  |  |  |
United States Government sponsored agencies | $ | 973,728 |  |  | $ | (3,468 | ) |  | $ | — |  |  | $ | — |  |  | $ | 973,728 |  |  | $ | (3,468 | )
United States municipalities, states and territories | 24,393 |  |  | (125 | ) |  | — |  |  | — |  |  | 24,393 |  |  | (125 | )
Corporate securities: |  |  |  |  |  |  |  |  |  |  |
Finance, insurance and real estate | 177,962 |  |  | (4,126 | ) |  | 85,709 |  |  | (8,438 | ) |  | 263,671 |  |  | (12,564 | )
Manufacturing, construction and mining | 426,120 |  |  | (4,303 | ) |  | 21,975 |  |  | (1,281 | ) |  | 448,095 |  |  | (5,584 | )
Utilities and related sectors | 221,044 |  |  | (5,187 | ) |  | 39,224 |  |  | (4,212 | ) |  | 260,268 |  |  | (9,399 | )
Wholesale/retail trade | 101,790 |  |  | (784 | ) |  | 10,250 |  |  | (208 | ) |  | 112,040 |  |  | (992 | )
Services, media and other | 264,421 |  |  | (3,085 | ) |  | — |  |  | — |  |  | 264,421 |  |  | (3,085 | )
Residential mortgage backed securities | 220,622 |  |  | (8,679 | ) |  | 260,226 |  |  | (19,049 | ) |  | 480,848 |  |  | (27,728 | )
Commercial mortgage backed securities | 161,582 |  |  | (1,983 | ) |  | — |  |  | — |  |  | 161,582 |  |  | (1,983 | )
Other asset backed securities | 145,238 |  |  | (2,242 | ) |  | 26,131 |  |  | (731 | ) |  | 171,369 |  |  | (2,973 | )
| $ | 2,716,900 |  |  | $ | (33,982 | ) |  | $ | 443,515 |  |  | $ | (33,919 | ) |  | $ | 3,160,415 |  |  | $ | (67,901 | )
Held for investment: |  |  |  |  |  |  |  |  |  |  |
Corporate security: |  |  |  |  |  |  |  |  |  |  |
Insurance | $ | — |  |  | $ | — |  |  | $ | 61,521 |  |  | $ | (14,567 | ) |  | $ | 61,521 |  |  | $ | (14,567 | )
Equity security, available for sale: |  |  |  |  |  |  |  |  |  |  |
Services | $ | — |  |  | $ | — |  |  | $ | 8,722 |  |  | $ | (1,403 | ) |  | $ | 8,722 |  |  | $ | (1,403 | )
The following is a description of the factors causing the temporary unrealized losses by investment category as of September 30, 2013: United States Government sponsored agencies: These securities are relatively long in duration; however, they are callable in less than 12 months making the value of such securities sensitive to changes in market interest rates. The timing of when some of these securities were purchased gave rise to unrealized losses at September 30, 2013. United States municipalities, states and territories: These securities are relatively long in duration and their fair values are sensitive to changes in market interest rates. The timing of the purchase of these securities have resulted in unrealized losses at this point in time. Foreign government obligations: The unrealized losses on these securities are due to wider spreads on the announcement of increased capital expenditures with resulting higher leverage and greater supply. Corporate securities: The unrealized losses in these securities are due partially to the timing of purchases in 2012 and 2013. These securities carry yields less than those available at September 30, 2013 as the result of rising interest rates in the first nine months of 2013. In addition, a small number of securities have seen their credit spreads remain wide due to issuer or industry specific news while some financial and industrial sector credit spreads remain wide due to continued economic uncertainty and concerns of economic instability. Residential mortgage backed securities: At September 30, 2013, we had no exposure to sub-prime residential mortgage backed securities. All of our residential mortgage backed securities are pools of first-lien residential mortgage loans. Substantially all of the securities that we own are in the most senior tranche of the securitization in which they are structured and are not subordinated to any other tranche. Our "Alt-A" residential mortgage backed securities are comprised of 36 securities with a total amortized cost basis of $323.4 million and a fair value of $340.7 million. Despite recent improvements in the capital markets, the fair values of RMBS with weaker borrower characteristics continue at prices below amortized cost. These RMBS prices will likely remain below our cost basis until the housing market is able to absorb current and future foreclosures. Commercial mortgage backed securities: The unrealized losses in these securities are due partially to the timing of purchases in 2012 and 2013. A number of purchases made in the middle of the fourth quarter 2012 were at yields lower than what could be executed at the end of this quarter due to the increase in the treasury yield since the time of purchase. Yield spreads for commercial mortgage backed securities have narrowed but remain attractive. Other asset backed securities: The unrealized losses in these securities are predominantly assigned to financial sector capital trust securities which have longer maturity dates and have declined in price due to prolonged stress in the financial sector. No securities in an unrealized loss position are rated below investment grade. Approximately 94% and 75% of the unrealized losses on fixed maturity securities shown in the above table for September 30, 2013 and December 31, 2012, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations. All of the securities with unrealized losses are current with respect to the payment of principal and interest. Changes in net unrealized gains on investments for the three and nine months ended September 30, 2013 and 2012 are as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2013 |  | 2012 |  | 2013 |  | 2012
| (Dollars in thousands)
Fixed maturity securities held for investment carried at amortized cost | $ | (449 | ) |  | $ | (626 | ) |  | $ | (802 | ) |  | $ | (12,505 | )
Investments carried at fair value: |  |  |  |  |  |  |
Fixed maturity securities, available for sale | $ | (276,793 | ) |  | $ | 402,274 |  |  | $ | (1,735,347 | ) |  | $ | 790,648 |
Equity securities, available for sale | (84 | ) |  | 2,963 |  |  | (8,033 | ) |  | 6,600 |
| (276,877 | ) |  | 405,237 |  |  | (1,743,380 | ) |  | 797,248 |
Adjustment for effect on other balance sheet accounts: |  |  |  |  |  |  |
Deferred policy acquisition costs and deferred sales inducements | 152,944 |  |  | (201,676 | ) |  | 938,637 |  |  | (405,006 | )
Deferred income tax asset/liability | 43,378 |  |  | (71,247 | ) |  | 281,661 |  |  | (137,285 | )
| 196,322 |  |  | (272,923 | ) |  | 1,220,298 |  |  | (542,291 | )
Change in net unrealized gains on investments carried at fair value | $ | (80,555 | ) |  | $ | 132,314 |  |  | $ | (523,082 | ) |  | $ | 254,957 |
Proceeds from sales of available for sale securities for the nine months ended September 30, 2013 and 2012 were $1.2 billion and $276.1 million, respectively. Scheduled principal repayments, calls and tenders for available for sale securities for the nine months ended September 30, 2013 and 2012 were $1.9 billion and $1.6 billion, respectively. Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Net realized gains (losses) on investments, excluding net OTTI losses for the three and nine months ended September 30, 2013 and 2012 are as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2013 |  | 2012 |  | 2013 |  | 2012
| (Dollars in thousands)
Available for sale fixed maturity securities: |  |  |  |  |  |  |
Gross realized gains | $ | 3,965 |  |  | $ | 3,028 |  |  | $ | 24,608 |  |  | $ | 8,076 |
Gross realized losses | (2,096 | ) |  | (180 | ) |  | (5,106 | ) |  | (535 | )
| 1,869 |  |  | 2,848 |  |  | 19,502 |  |  | 7,541 |
Equity securities: |  |  |  |  |  |  |
Gross realized gains | — |  |  | — |  |  | 9,571 |  |  | 562 |
Other investments: |  |  |  |  |  |  |
Gain on sale of real estate | 201 |  |  | 53 |  |  | 1,505 |  |  | 2,948 |
Loss on sale of real estate | (278 | ) |  | — |  |  | (744 | ) |  | — |
Impairment losses on real estate | (678 | ) |  | (830 | ) |  | (823 | ) |  | (3,473 | )
| (755 | ) |  | (777 | ) |  | (62 | ) |  | (525 | )
Mortgage loans on real estate: |  |  |  |  |  |  |
Increase in allowance for credit losses | (3,191 | ) |  | (3,309 | ) |  | (4,814 | ) |  | (15,503 | )
| $ | (2,077 | ) |  | $ | (1,238 | ) |  | $ | 24,197 |  |  | $ | (7,925 | )
Losses in 2013 were realized primarily due to strategies in place to reposition the fixed maturity security portfolio that result in improved net investment income, risk or duration profiles as they pertain to our asset liability management. One corporate issue was sold at a loss in 2013 due to the our fundamental, long-term concern with the issuer's ability to meet its future financial obligations. We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes analyzing our ability to recover the amortized cost basis of each investment that has a fair value that is materially lower than its amortized cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties. We have a policy and process in place to identify securities that could potentially have impairments that are other than temporary. This process involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
• | the length of time and the extent to which the fair value has been less than amortized cost or cost;
• | whether the issuer is current on all payments and all contractual payments have been made as agreed;
• | the remaining payment terms and the financial condition and near-term prospects of the issuer;
• | the lack of ability to refinance due to liquidity problems in the credit market;
• | the fair value of any underlying collateral;
• | the existence of any credit protection available;
• | our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;
• | our assessment in the case of equity securities including perpetual preferred stocks with credit deterioration that the security cannot recover to cost in a reasonable period of time;
• | our intent and ability to retain equity securities for a period of time sufficient to allow for recovery;
• | consideration of rating agency actions; and
• | changes in estimated cash flows of mortgage and asset backed securities.
We determine whether other than temporary impairment losses should be recognized for debt and equity securities by assessing all facts and circumstances surrounding each security. Where the decline in market value of debt securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more likely than not we will be required to sell these investments before a recovery of amortized cost, which may be maturity. For equity securities, we recognize an impairment charge in the period in which we do not have the intent and ability to hold the securities until recovery of cost or we determine that the security will not recover to book value within a reasonable period of time. We determine what constitutes a reasonable period of time on a security-by-security basis by considering all the evidence available to us, including the magnitude of any unrealized loss and its duration. In any event, this period does not exceed 18 months from the date of impairment for perpetual preferred securities for which there is evidence of deterioration in credit of the issuer and common equity securities. For perpetual preferred securities absent evidence of a deterioration in credit of the issuer we apply an impairment model, including an anticipated recovery period, similar to a debt security. Other than temporary impairment losses on equity securities are recognized in operations. If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized cost basis, other than temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss in operations. If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the entire amortized cost basis of the security, an impairment loss would be recognized in operations in the amount of the expected credit loss. We determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in operations. The remaining amount of the other than temporary impairment is recognized in other comprehensive income. The determination of the credit loss component of a mortgage backed security is based on a number of factors. The primary consideration in this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase. Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default, loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation. We utilize the models from a leading structured product software specialist serving institutional investors. These models incorporate each security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future, we use the "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of the expected recovery when compared to the amortized cost of the security will be recorded as the credit loss component of other than temporary impairment. The cash flow modeling is performed on a security-by-security basis and incorporates actual cash flows on the residential mortgage backed securities through the current period, as well as the projection of remaining cash flows using a number of assumptions including default rates, prepayment rates and loss severity rates. The default curves we use are tailored to the Prime or Alt-A residential mortgage backed securities that we own, which assume lower default rates and loss severity for Prime securities versus Alt-A securities. These default curves are scaled higher or lower depending on factors such as current underlying mortgage loan performance, rating agency loss projections, loan to value ratios, geographic diversity, as well as other appropriate considerations. The following table presents the range of significant assumptions used to determine the credit loss component of other than temporary impairments we have recognized on residential mortgage backed securities for the nine months ended September 30, 2013 and 2012, which are all senior level tranches within the structure of the securities:
|  |  |  | Discount Rate |  | Default Rate |  | Loss Severity
Sector |  | Vintage |  | Min |  | Max |  | Min |  | Max |  | Min |  | Max
Nine months ended September 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Prime |  | 2003 |  | 5.1 | % |  | 5.1 | % |  | 2 | % |  | 2 | % |  | 30 | % |  | 30 | %
|  | 2005 |  | 6.5 | % |  | 7.7 | % |  | 8 | % |  | 18 | % |  | 50 | % |  | 65 | %
|  | 2006 |  | 6.0 | % |  | 6.9 | % |  | 9 | % |  | 16 | % |  | 50 | % |  | 50 | %
|  | 2007 |  | 6.2 | % |  | 6.7 | % |  | 11 | % |  | 25 | % |  | 40 | % |  | 60 | %
|  | 2008 |  | 6.6 | % |  | 6.6 | % |  | 16 | % |  | 16 | % |  | 45 | % |  | 45 | %
|  | 2009 |  | 6.8 | % |  | 6.8 | % |  | 17 | % |  | 17 | % |  | 60 | % |  | 60 | %
Alt-A |  | 2005 |  | 5.6 | % |  | 8.7 | % |  | 15 | % |  | 81 | % |  | 2 | % |  | 65 | %
|  | 2007 |  | 6.2 | % |  | 6.9 | % |  | 38 | % |  | 52 | % |  | 60 | % |  | 65 | %
Nine months ended September 30, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Prime |  | 2005 |  | 6.5 | % |  | 7.7 | % |  | 9 | % |  | 18 | % |  | 50 | % |  | 50 | %
|  | 2006 |  | 5.8 | % |  | 7.4 | % |  | 9 | % |  | 19 | % |  | 40 | % |  | 55 | %
|  | 2007 |  | 6.2 | % |  | 7.3 | % |  | 11 | % |  | 38 | % |  | 40 | % |  | 60 | %
Alt-A |  | 2005 |  | 5.6 | % |  | 8.7 | % |  | 12 | % |  | 27 | % |  | 5 | % |  | 55 | %
|  | 2006 |  | 6.0 | % |  | 6.0 | % |  | 32 | % |  | 46 | % |  | 55 | % |  | 60 | %
|  | 2007 |  | 6.2 | % |  | 7.0 | % |  | 31 | % |  | 55 | % |  | 55 | % |  | 60 | %
The determination of the credit loss component of a corporate bond (including redeemable preferred stocks) is based on the underlying financial performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited to, credit rating changes, financial statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of financial covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer appears unlikely to meet its future obligation, or the security's price decline is deemed other than temporary, an estimate of credit loss is determined. Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the amount of credit loss associated with the security. In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized. Once an impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an ongoing basis. Unrealized losses may be recognized in future periods through a charge to earnings, should we later conclude that the decline in fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts presented in our consolidated financial statements. The following table summarizes other than temporary impairments for the three and nine months ended September 30, 2013 and 2012, by asset type:
| Number of Securities |  | Total OTTI Losses |  | Portion of OTTI Losses Recognized from Other Comprehensive Income |  | Net OTTI Losses Recognized in Operations
|  |  | (Dollars in thousands)
Three months ended September 30, 2013 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
Residential mortgage backed securities | 2 |  |  | $ | — |  |  | $ | (222 | ) |  | $ | (222 | )
Three months ended September 30, 2012 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
Residential mortgage backed securities | 4 |  |  | $ | — |  |  | $ | (1,686 | ) |  | $ | (1,686 | )
Nine months ended September 30, 2013 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
United States Government sponsored agencies | 2 |  |  | $ | (2,775 | ) |  | $ | — |  |  | $ | (2,775 | )
Corporate securities: |  |  |  |  |  |  |
Industrial | 1 |  |  | (1,761 | ) |  | — |  |  | (1,761 | )
Residential mortgage backed securities | 6 |  |  | — |  |  | (1,270 | ) |  | (1,270 | )
Equity security, available for sale: |  |  |  |  |  |  |
Industrial | 1 |  |  | (428 | ) |  | — |  |  | (428 | )
| 10 |  |  | $ | (4,964 | ) |  | $ | (1,270 | ) |  | $ | (6,234 | )
Nine months ended September 30, 2012 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
Residential mortgage backed securities | 24 |  |  | $ | (2,156 | ) |  | $ | (3,389 | ) |  | $ | (5,545 | )
Other than temporary impairments during the nine months ended September 30, 2013 on United States Government sponsored agencies were recognized as we had the intent to sell these securities as of June 30, 2013. These securities were sold during the quarter ended September 30, 2013. The other than temporary impairments were determined based on the market values of the underlying securities at June 30, 2013. The cumulative portion of other than temporary impairments determined to be credit losses which have been recognized in operations for debt securities are summarized as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2013 |  | 2012 |  | 2013 |  | 2012
| (Dollars in thousands)
Cumulative credit loss at beginning of period | $ | (128,513 | ) |  | $ | (122,954 | ) |  | $ | (134,027 | ) |  | $ | (119,095 | )
Credit losses on securities for which OTTI has not previously been recognized | — |  |  | — |  |  | (4,536 | ) |  | (47 | )
Additional credit losses on securities for which OTTI has previously been recognized | (222 | ) |  | (1,686 | ) |  | (1,270 | ) |  | (5,498 | )
Accumulated losses on securities that were disposed of during the period | 2,775 |  |  | — |  |  | 13,873 |  |  | — |
Cumulative credit loss at end of period | $ | (125,960 | ) |  | $ | (124,640 | ) |  | $ | (125,960 | ) |  | $ | (124,640 | )
The following table summarizes the cumulative noncredit portion of OTTI and the change in fair value since recognition of OTTI, both of which were recognized in other comprehensive income, by major type of security, for securities that are part of our investment portfolio at September 30, 2013 and December 31, 2012:
| Amortized Cost |  | OTTI Recognized in Other Comprehensive Income |  | Change in Fair Value Since OTTI was Recognized |  | Fair Value
| (Dollars in thousands)
September 30, 2013 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
Corporate securities | $ | — |  |  | $ | — |  |  | $ | 32 |  |  | $ | 32 |
Residential mortgage backed securities | 715,871 |  |  | (176,334 | ) |  | 222,943 |  |  | 762,480 |
Equity securities, available for sale: |  |  |  |  |  |  |
Finance, insurance and real estate and services | 1,416 |  |  | — |  |  | 493 |  |  | 1,909 |
| $ | 717,287 |  |  | $ | (176,334 | ) |  | $ | 223,468 |  |  | $ | 764,421 |
December 31, 2012 |  |  |  |  |  |  |
Fixed maturity securities, available for sale: |  |  |  |  |  |  |
Corporate securities | $ | 10,599 |  |  | $ | (2,151 | ) |  | $ | 5,676 |  |  | $ | 14,124 |
Residential mortgage backed securities | 855,915 |  |  | (177,604 | ) |  | 171,514 |  |  | 849,825 |
Equity securities, available for sale: |  |  |  |  |  |  |
Finance, insurance and real estate | 9,976 |  |  | — |  |  | 9,668 |  |  | 19,644 |
| $ | 876,490 |  |  | $ | (179,755 | ) |  | $ | 186,858 |  |  | $ | 883,593 |

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- Definition The entire disclosure for investments in certain debt and equity securities. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 115 -Paragraph 3, 19, 20, 21, 22, 137 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -Glossary Debt Security -URI http://asc.fasb.org/extlink&oid=6509901 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6379141&loc=d3e15032-111544 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 320 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6957658&loc=d3e62557-112803 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27161-111563 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27357-111563 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27290-111563 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27405-111563 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27232-111563 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -Glossary Equity Security -URI http://asc.fasb.org/extlink&oid=6511694 + Details
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