3. Investments

(a) Available-for-Sale Securities

The amortized cost, estimated fair value and gross unrealized appreciation and depreciation of fixed and equity securities are presented in the tables below:


(Amounts in Thousands) As of December 31, 2011	Original or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Preferred stock	$	5,091	$	—	$	(777	)	$	4,314
Common stock		28,950		5,228		(2,892	)		31,286
U.S. treasury securities		50,474		3,057		(257	)		53,274
U.S. government agencies		6,268		522		—			6,790
Municipal bonds		268,240		7,290		(513	)		275,017
Corporate bonds:
Finance		534,810		13,059		(31,918	)		515,951
Industrial		131,489		4,392		(2,990	)		132,891
Utilities		38,434		1,790		(1,718	)		38,506
Commercial mortgage backed securities		150		—		—			150
Residential mortgage backed securities:
Agency backed		345,112		18,946		(58	)		364,000
Non-agency backed		7,886		—		(222	)		7,664
	$	1,416,904	$	54,284	$	(41,345	)	$	1,429,843


(Amounts in Thousands) As of December 31, 2010	Original or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Preferred stock	$	7,175	$	107	$	(245	)	$	7,037
Common stock		11,402		1,224		(2,251	)		10,375
U.S. treasury securities		82,279		1,634		(1,466	)		82,447
U.S. government agencies		6,483		679		—			7,162
Municipal bonds		67,396		438		(1,158	)		66,676
Corporate bonds:
Finance		411,532		9,756		(15,276	)		406,012
Industrial		47,828		1,970		(45	)		49,753
Utilities		36,375		1,204		(268	)		37,311
Commercial mortgage backed securities		1,970		106		—			2,076
Residential mortgage backed securities:
Agency backed		528,683		18,653		(1,238	)		546,098
Non-agency backed		7,779		817		(5	)		8,591
Asset-backed securities		2,519		168		—			2,687
	$	1,211,421	$	36,756	$	(21,952	)	$	1,226,225

Proceeds from the sale of investments in available-for-sale securities during the years ended December 31, 2011, 2010, and 2009 were approximately $2,140,557, $3,639,191, and $421,355, respectively.

A summary of the Company’s available-for-sale fixed securities as of December 31, 2011 and 2010, by contractual maturity, is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	December 31, 2011
(Amounts in Thousands)	Amortized Cost		Fair Value
Due in one year or less	$	10,044	$	18,661
Due after one through five years		286,007		277,959
Due after five through ten years		501,490		494,290
Due after ten years		228,695		231,519
Mortgage backed securities		356,627		371,814
Total fixed maturities	$	1,382,863	$	1,394,243


	December 31, 2010
(Amounts in Thousands)	Amortized Cost		Fair Value
Due in one year or less	$	5,153	$	5,241
Due after one through five years		102,536		103,222
Due after five through ten years		451,481		450,164
Due after ten years		92,723		90,734
Mortgage backed securities		540,951		559,452
Total fixed maturities	$	1,192,844	$	1,208,813

(b) Investment Income

Net investment income for the years ended December 31, 2011, 2010 and 2009 was derived from the following sources:


(Amounts in Thousands)	2011			2010			2009
Fixed maturity securities	$	53,595		$	43,789		$	47,675
Equity securities		981			702			2,084
Cash and short term investments		1,966			4,042			4,173
Interest on note receivable – related party		—			2,612			2,967
		56,542			51,145			56,899
Less: Investment expenses and interest expense on securities sold under agreement to repurchase		(1,027	)		(628	)		(1,612	)
	$	55,515			50,517		$	55,287

(c) Other Than Temporary Impairment

OTTI charges of our fixed-maturities and equity securities for the years ended December 31, 2011, 2010 and 2009 are presented in the table below:


(Amounts in Thousands)	2011		2010		2009
Equity securities recognized in earnings	$	937	$	10,656	$	20,639
Fixed maturity securities recognized in earnings		3,474		10,540		4,139
	$	4,411	$	21,196	$	24,778

The tables below summarize the gross unrealized losses of our fixed maturity and equity securities by length of time the security has continuously been in an unrealized loss position as of December 31, 2011 and 2010:


	Less Than 12 Months							12 Months or More							Total
(Amounts in Thousands) December 31, 2011	Fair Market Value		Unrealized Losses			No. of Positions Held		Fair Market Value		Unrealized Losses			No. of Positions Held		Fair Market Value		Unrealized Losses
Common and preferred stock	$	4,211	$	(648	)		7	$	4,573	$	(3,021	)		17	$	8,784	$	(3,669	)
U.S. treasury securities		7,523		(257	)		4		773		—			1		8,296		(257	)
Municipal bonds		43,452		(452	)		10		4,098		(61	)		1		47,550		(513	)
Corporate bonds:
Finance		221,950		(13,250	)		81		104,461		(18,668	)		17		326,411		(31,918	)
Industrial		35,105		(2,125	)		11		2,500		(865	)		1		37,605		(2,990	)
Utilities		21,483		(1,261	)		9		5,766		(457	)		1		27,249		(1,718	)
Commercial mortgage backed securities		150		—			2		—		—			—		150		—
Residential mortgage backed securities:
Agency backed		31,986		(58	)		9		—		—			—		31,986		(58	)
Non-agency backed		7,641		(216	)		1		22		(6	)		1		7,663		(222	)
Total temporarily impaired	$	373,501	$	(18,267	)		134	$	122,193	$	(23,078	)		39	$	495,694	$	(41,345	)



	Less Than 12 Months							12 Months or More							Total
(Amounts in Thousands) December 31, 2010	Fair Market Value		Unrealized Losses			No. of Positions Held		Fair Market Value		Unrealized Losses			No. of Positions Held		Fair Market Value		Unrealized Losses
Common and preferred stock	$	1,291	$	(208	)		1	$	7,148	$	(2,288	)		54	$	8,439	$	(2,496	)
U.S. treasury securities		49,390		(1,466	)		6		—		—			—		49,390		(1,466	)
Municipal bonds		50,301		(1,147	)		14		1,204		(11	)		1		51,505		(1,158	)
Corporate bonds:
Finance		79,451		(1,700	)		16		160,126		(13,576	)		31		239,577		(15,276	)
Industrial		6,319		(45	)		1		—		—			—		6,319		(45	)
Utilities		1,981		(106	)		1		11,635		(162	)		2		13,616		(268	)
Residential mortgage backed securities:
Agency backed		150,575		(1,238	)		3		—		—			—		150,575		(1,238	)
Non-agency backed		—		—			—		26		(5	)		1		26		(5	)
Total temporarily impaired	$	339,308	$	(5,910	)		42	$	180,139	$	(16,042	)		89	$	519,447	$	(21,952	)

There are 173 and 131 securities at December 31, 2011 and 2010, respectively that account for the gross unrealized loss, none of which is deemed by the Company to be OTTI. Significant factors influencing the Company’s determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent not to sell these securities and it being not more likely than not that the Company will be required to sell these investments before anticipated recovery of fair value to the Company’s cost basis.

(d) Realized Gains and Losses

The tables below indicate the gross realized gains and losses for the years ended December 31, 2011, 2010 and 2009.


(Amounts in Thousands) Year Ended December 31, 2011	Gross Gains		Gross Losses			Net Gains and Losses
Fixed maturity securities	$	7,631	$	(266	)	$	7,365
Equity securities		569		(755	)		(186	)
Write-down of fixed maturity securities		—		(3,474	)		(3,474	)
Write-down of equity securities		—		(937	)		(937	)
	$	8,200	$	(5,432	)	$	2,768


(Amounts in Thousands) Year Ended December 31, 2010	Gross Gains		Gross Losses			Net Gains and Losses
Fixed maturity securities	$	17,860	$	(4,353	)	$	13,507
Equity securities		19,656		(6,047	)		13,609
Derivatives		33		—			33
Write-down of fixed maturity securities		—		(10,540	)		(10,540	)
Write-down of equity securities		—		(10,656	)		(10,656	)
	$	37,549	$	(31,596	)	$	5,953


(Amounts in Thousands) Year Ended December 31, 2009	Gross Gains		Gross Losses			Net Gains and Losses
Fixed maturity securities	$	6,421	$	(5,536	)	$	885
Equity securities		5,617		(10,734	)		(5,117	)
Derivatives		—		(4,569	)		(4,569	)
Write-down of fixed maturity securities		—		(4,429	)		(4,429	)
Write-down of equity securities		—		(20,349	)		(20,349	)
	$	12,038	$	(45,617	)	$	(33,579	)

(e) Unrealized Gains and Losses

The net unrealized gain (loss) on available-for-sale securities were as follows:


(Amounts in Thousands) Year Ended December 31,	2011			2010			2009
Fixed maturity securities	$	11,380		$	15,969		$	4,444
Equity securities		1,559			(1,165	)		(10,283	)
Total net unrealized gain (loss)		12,939			14,804			(5,839	)
Deferred income tax benefit (expense)		(4,529	)		(5,181	)		2,044
Net unrealized gains (loss), net of deferred income tax		8,410			9,623			(3,795	)
(Decrease) increase in net unrealized gains, net of deferred income tax	$	(1,213	)	$	13,418		$	83,087

(f) Derivatives

The Company from time to time invests in a limited amount of derivatives and other financial instruments as part of its investment portfolio to manage interest rate changes or other exposures to a particular financial market. The Company records changes in valuation on its derivative positions not designated as a hedge as a component of net realized gains and losses.

The Company records changes in valuation on its hedged positions as a component of other comprehensive income. As of December 31, 2011, the Company had two interest rate swap agreements designated as a hedge and were recorded as a liability in the amount of $3,508 and were included as a component of accrued expenses and other liabilities.

The following table presents the notional amounts by remaining maturity of the Company’s Interest Rate Swaps as of December 31, 2011:


	Remaining Life of Notional Amount⁽¹⁾
(Amounts in Thousands)	One Year		Two Through Five Years		Six Through Ten Years		After Ten Years		Total
Interest rate swaps	$	—	$	30,000	$	40,000	$	—	$	70,000

(1)

Notional amount is not representative of either market risk or credit risk and is not recorded in the consolidated balance sheet.

(g) Restricted Cash and Investments

The Company, in order to conduct business in certain states, is required to maintain letters of credit or assets on deposit to support state mandated regulatory requirements and certain third party agreements. The Company also utilizes trust accounts to collateralize business with its reinsurance counterparties. These assets held are primarily in the form of cash or certain high grade securities. The fair values of our restricted assets are as follows:


(Amounts in Thousands) As of December 31,	2011		2010
Restricted cash	$	23,104	$	17,130
Restricted investments		187,227		35,682
Total restricted cash and investments	$	210,331	$	52,812

(h) Other

Securities sold but not yet purchased, represent obligations of the Company to deliver the specified security at the contracted price and, thereby, create a liability to purchase the security in the market at prevailing prices. The Company’s liability for securities to be delivered is measured at their fair value and as of December 31, 2011 and 2010 was $55,830 and $8,483 for corporate bonds, respectively, and $112 and $364 for equity securities, respectively. These transactions result in off-balance sheet risk, as the Company’s ultimate cost to satisfy the delivery of securities sold, not yet purchased, may exceed the amount reflected at December 31, 2011. Substantially all securities owned are pledged to the clearing broker to sell or repledge the securities to others subject to certain limitations.

The Company entered into repurchase agreements, which are accounted for as collateralized borrowing transactions and are recorded at contract amounts. The Company receives cash or securities, that it invests or holds in short term or fixed income securities. As of December 31, 2011 there were $191,718 principal amount outstanding at interest rates between 0.4% and 0.45%. Interest expense associated with these repurchase agreements for the year ended December 31, 2011 was $1,028 of which $0 was accrued as of December 31, 2011. The Company has $210,890 of collateral pledged in support of these agreements. As of December 31, 2010 there were $347,617 principal amount outstanding at interest rates between 0.32% and 0.4%. Interest expense associated with these repurchase agreements for the year ended December 31, 2010 was $610 of which $63 was accrued as of December 31, 2010. The Company had $351,211 of collateral pledged in support of these agreements. Interest expense related to repurchase agreements is recorded as a component of investment income.