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13. Fair Value of Financial Instruments (Tables)
 9 Months Ended
Sep. 30, 2012
Notes to Financial Statements  
Financial instruments carried at fair value by ASC 820-10 valuation hierarchy
Fair Values of Financial Instruments by Level:   As of September 30, 2012  
($ in millions)   Level 1     Level 2     Level 3     Total  
                         
Assets                        
Available-for-sale debt securities                        
  U.S. government and agency   $ 499.7     $ 112.4     $ 320.6 (1)   $ 932.7  
  State and political subdivision     —       151.6       192.9       344.5  
  Foreign government     —       159.6       55.0       214.6  
  Corporate     —       3,673.2       3,733.2       7,406.4  
  CMBS     —       899.6       73.7       973.3  
  RMBS     —       1,048.8       832.8       1,881.6  
  CDO/CLO     —       —       216.5       216.5  
  Other asset-backed     —       146.1       321.0       467.1  
Available-for-sale equity securities     1.6       —       29.3       30.9  
Derivative assets     19.8       175.3       —       195.1  
Fair value investments(2)     31.8       17.9       164.1       213.8  
Separate account assets     3,395.4       —       —       3,395.4  
Total assets   $ 3,948.3     $ 6,384.5     $ 5,939.1     $ 16,271.9  
Liabilities                                
Derivative liabilities   $ —     $ 60.0     $ —     $ 60.0  
Embedded derivatives     —       —       84.4       84.4  
Total liabilities   $ —     $ 60.0     $ 84.4     $ 144.4  

 

Fair Values of Financial Instruments by Level:

   As of December 31, 2011  
($ in millions)   As restated and amended  
    Level 1     Level 2     Level 3     Total  
                         
Assets                        
Available-for-sale debt securities                        
  U.S. government and agency   $ 268.2     $ 137.4     $ 336.2 (1)   $ 741.8  
  State and political subdivision     —       165.2       116.6       281.8  
  Foreign government     —       153.4       51.8       205.2  
  Corporate     —       3,056.7       3,501.5       6,558.2  
  CMBS     —       1,028.7       100.6       1,129.3  
  RMBS     —       1,162.8       944.2       2,107.0  
  CDO/CLO     —       –       232.4       232.4  
  Other asset-backed     —       205.8       335.5       541.3  
Available-for-sale equity securities     1.5       4.8       29.4       35.7  
Derivative assets     18.9       143.3       —       162.2  
Fair value investments(2)     23.7       15.5       144.8       184.0  
Separate account assets     3,738.6       78.3       —       3,816.9  
Total assets   $ 4,050.9     $ 6,151.9     $ 5,793.0     $ 15,995.8  
Liabilities                                
Derivative liabilities   $ —     $ 24.2     $ —     $ 24.2  
Embedded derivatives     —       —       84.5       84.5  
Total liabilities   $ —     $ 24.2     $ 84.5     $ 108.7  
Corporates fair value on a recurring basis

The following tables present corporates carried at fair value and on a recurring basis by sector.

 

Fair Values of Corporates by Level and Sector:   As of September 30, 2012  
($ in millions)   Level 1     Level 2     Level 3     Total  
                         
Corporates                        
Consumer   $ —     $ 1,056.5     $ 1,837.2     $ 2,893.7  
Energy     —       245.8       144.3       390.1  
Financial services     —       1,421.9       760.9       2,182.8  
Technical/communications     —       149.9       35.8       185.7  
Transportation     —       72.8       149.2       222.0  
Utilities     —       519.5       623.9       1,143.4  
Other     —       206.8       181.9       388.7  
Total corporates   $ —     $ 3,673.2     $ 3,733.2     $ 7,406.4  

 

Fair Values of Corporates by Level and Sector:   As of December 31, 2011  
($ in millions)   As restated and amended  
    Level 1     Level 2     Level 3     Total  
                         
Corporates                        
Consumer   $ —     $ 898.4     $ 1,662.4     $ 2,560.8  
Energy     —       171.7       131.4       303.1  
Financial services     —       1,221.3       721.9       1,943.2  
Technical/communications     —       130.9       23.8       154.7  
Transportation     —       60.2       187.4       247.6  
Utilities     —       467.4       619.2       1,086.6  
Other     —       106.8       155.4       262.2  
Total corporates   $ —     $ 3,056.7     $ 3,501.5     $ 6,558.2  
Fair value hierarchy

 

 

Level 3 Financial Assets:   Three months ended September 30, 2012  
($ in millions)                                 Realized &              
                                  unrealized     Unrealized        
                                  gains     gains        
    Balance,                 Transfers     Transfers     (losses)     (losses)        
    beginning                 into     out of     included     included        
    of period     Purchases     Sales     Level 3     Level 3     in income(1)     in OCI     Total  
Assets                                                
Available-for-sale debt securities                                                
  U.S. government and agency(2)   $ 322.9     $ 0.6     $ (2.3 )   $ —     $ —     $ 0.2     $ (0.8 )   $ 320.6  
  State and political subdivision     181.7       10.2       (0.4 )      —       —       —       1.4       192.9  
  Foreign government     52.9       —       —       —       —       —       2.1       55.0  
  Corporate     3,702.2       88.4       (10.2 )      —       (18.8 )      —       (28.4 )     3,733.2  
  CMBS     99.2       —       —       —       —       —       (25.5 )     73.7  
  RMBS     857.5       3.8       (9.1 )      —       —       (0.4 )     (19.0 )     832.8  
  CDO/CLO     207.6       —       (5.5 )      —       —       0.5       13.9       216.5  
  Other asset-backed     297.5       3.5       (5.9 )      32.5       —       (0.5 )     (6.1 )      321.0  
Available-for-sale equity securities     36.0       —       —       —       —       (1.5 )     (5.2 )     29.3  
Fair value investments     159.3       1.8       (10.2 )      —       (1.4 )      14.6       —       164.1  
Total assets   $ 5,916.8     $ 108.3     $ (43.6 )   $ 32.5     $ (20.2 )   $ 12.9     $ (67.6 )   $ 5,939.1  

———————

(1) Reflected in realized investment gains and losses for all assets except limited partnerships and other investments and fair value investments.
(2) Includes securities whose underlying collateral is an obligation of a U.S. government entity.

 

Level 3 Financial Assets:   Three months ended September 30, 2011  
($ in millions)   As restated and amended  
                                  Realized &              
                                  unrealized     Unrealized        
                                  gains     gains        
    Balance,                 Transfers     Transfers     (losses)     (losses)        
    beginning                 into     out of     included     included        
    of period     Purchases     Sales     Level 3     Level 3     in income(1)     in OCI     Total  
Assets                                                
Available-for-sale debt securities                                                
  U.S. government and agency(2)   $ 331.7     $ —     $ (2.1 )   $ —     $ —     $ —     $ 22.5     $ 352.1  
  State and political subdivision     74.1       —       (0.7 )     2.5       —       —       16.9       92.8  
  Foreign government     46.0       —       —       —       —       —       (7.1 )     38.9  
  Corporate     3,276.7       26.9       (16.4 )     175.0       (7.2 )     (2.6 )     (1.6 )      3,450.8  
  CMBS     89.2       8.9       (2.0 )     —       —       (2.5 )     (9.8 )     83.8  
  RMBS     1,022.9       44.0       (38.9 )     —       —       (1.7 )     (46.4 )     979.9  
  CDO/CLO     230.5       10.1       (3.7 )     —       —       (1.2 )     (20.3 )     215.4  
  Other asset-backed     357.1       7.8       (10.0 )     —       —       (0.3 )     (10.4 )     344.2  
Available-for-sale equity securities     39.9       —       —       1.1       —       —       (3.4 )     37.6  
Fair value investments     143.4       —       (1.0 )      —       —       (5.6 )     —       136.8  
Total assets   $ 5,611.5     $ 97.7     $ (74.8 )   $ 178.6     $ (7.2 )   $ (13.9 )   $ (59.6 )    $ 5,732.3  

———————

(1) Reflected in realized investment gains and losses for all assets except limited partnerships and other investments and fair value investments.
(2) Includes securities whose underlying collateral is an obligation of a U.S. government entity.

 

Level 3 Financial Assets:   Nine months ended September 30, 2012  
($ in millions)                                 Realized &              
                                  unrealized     Unrealized        
                                  gains     gains        
    Balance,                 Transfers     Transfers     (losses)     (losses)        
    beginning                 into     out of     included     included        
    of period     Purchases     Sales     Level 3     Level 3     in income(1)     in OCI     Total  
Assets                                                
Available-for-sale debt securities                                                
  U.S. government and agency(2)   $ 336.2     $ 2.6     $ (13.9 )   $ —     $ —     $ 0.2     $ (4.5 )   $ 320.6  
  State and political subdivision     116.6       40.5       (2.5 )     22.2       (8.3 )     —       24.4       192.9  
  Foreign government     51.8       5.0       (0.1 )     —       —       —       (1.7 )     55.0  
  Corporate     3,501.5       457.6       (65.8 )     56.3       (122.4 )     (0.5 )     (93.5 )     3,733.2  
  CMBS     100.6       —       (8.2 )     12.1       (37.1 )     (4.2 )     10.5       73.7  
  RMBS     944.2       2.9       (94.6 )     —       —       (6.7 )     (13.0 )     832.8  
  CDO/CLO     232.4       9.9       (18.6 )     —       —       1.3       (8.5 )     216.5  
  Other asset-backed     335.5       17.2       (26.4 )     0.1       (11.4 )     (1.5 )     7.5       321.0  
Available-for-sale equity securities     29.4       5.6       —       4.8       —       (1.5 )     (9.0 )     29.3  
Fair value investments     144.8       26.3       (9.0 )     —       —       2.0       —       164.1  
Total assets   $ 5,793.0     $ 567.6     $ (239.1 )   $ 95.5     $ (179.2 )   $ (10.9 )   $ (87.8 )   $ 5,939.1  

———————

(1) Reflected in realized investment gains and losses for all assets except limited partnerships and other investments and fair value investments.
(2) Includes securities whose underlying collateral is an obligation of a U.S. government entity.

 

 

Level 3 Financial Assets:   Nine months ended September 30, 2011  
($ in millions)   As restated and amended  
                                  Realized &              
                                  unrealized     Unrealized        
                                  gains     gains        
    Balance,                 Transfers     Transfers     (losses)     (losses)        
    beginning                 into     out of     included     included        
    of period     Purchases     Sales     Level 3     Level 3     in income(1)     in OCI     Total  
Assets                                                
Available-for-sale debt securities                                                
  U.S. government and agency(2)   $ 341.4     $ 5.2     $ (7.9 )   $ 6.9     $ —     $ —     $ 6.5     $ 352.1  
  State and political subdivision     67.1       10.0       (1.4 )     —       —       —       17.1       92.8  
  Foreign government     47.1       —       —       —       (7.0 )     —       (1.2 )     38.9  
  Corporate     3,278.3       308.1       (51.7 )     149.0       (95.9 )     (7.0 )     (130.0 )     3,450.8  
  CMBS     91.7       5.0       (5.0 )     8.4       (17.8 )     (1.9 )     3.4       83.8  
  RMBS     919.1       184.4       (77.2 )     —       —       (3.1 )     (43.3 )     979.9  
  CDO/CLO     238.0       0.3       (6.2 )     —       —       (0.8 )     (15.9 )     215.4  
  Other asset-backed     252.8       102.9       (30.9 )     3.2       (6.0 )     0.5       21.7       344.2  
Available-for-sale equity securities     36.2       4.0       —       0.6       —       —       (3.2 )     37.6  
Fair value investments     126.0       13.6       (10.5 )     —       —       7.7       —       136.8  
Total assets   $ 5,397.7     $ 633.5     $ (190.8 )   $ 168.1     $ (126.7 )   $ (4.6 )   $ (144.9 )   $ 5,732.3  

———————

(1) Reflected in realized investment gains and losses for all assets except limited partnerships and other investments and fair value investments.
(2) Includes securities whose underlying collateral is an obligation of a U.S. government entity.
Embedded Derivative Liabilities

 

Level 3 Financial Liabilities:   Embedded Derivative Liabilities  
($ in millions)   Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2012   2011     2012   2011  
       

As restated

and amended

        

As restated

and amended

  
                         
Balance, beginning of period   $ 89.3     $ 46.2     $ 84.5     $ 30.4  
Net purchases/(sales)     2.2       (9.0 )     6.8       14.5  
Transfers into Level 3     —       —       —       —  
Transfers out of Level 3     —       —       —       —  
Realized (gains) losses(1)     (7.1 )     50.5       (6.9 )     42.9  
Balance, end of period   $ 84.4     $ 87.8     $ 84.4     $ 87.8  
Quantitative information about unobservable inputs

The following table presents quantitative estimates about unobservable inputs used in the fair value measurement of significant categories of internally priced assets.

 

Level 3 Assets: (1)   As of September 30, 2012
($ in millions)                  
    Fair   Valuation   Unobservable      
    Value   Technique(s)   Input   Range (Weighted Average)  
                     
U.S. government and agency   $ 282.8   Spread matrix   Yield   1.54% - 5.21% (2.98%)  
                     
                     
State and political subdivision   $ 85.7   Discounted cash flow   Yield   1.80% - 3.41% (2.71%)  
                     
                     
Foreign Government   $ 10.1   Spread matrix   Yield   2.11%  
                     
                     
Corporate   $ 2,825.9   Spread matrix   Yield   1.53% - 6.86% (2.78%)  
                     
          Discounted cash flow   Yield   1.51% - 8.24% (3.16%)  
                     
                     
CDO/CLO   $ 18.0   Discounted cash flow   Prepayment rate   20% (CLOs)  
              Default rate   2.5% (CLOs)  
              Recovery rate   65% (Loans), 35% (High yield bonds), 45% (Investment grade bonds)  
              Reinvestment spread   3 mo LIBOR + 400bps (CLOs)  
                     
                     
Other asset-backed   $ 41.9   Discounted cash flow   Yield   2.41% - 5.38% (2.66%)  
                     
          Discounted cash flow   Prepayment rate   5%  
              Default rate   2.53% for 48 mos then .33% thereafter  
              Recovery rate   10% (TRUPS)  
                     
                     
                     
Fair value option investments   $ 4.8    Discounted cash flow   Default rate   0.24%  
              Recovery rate   45%  
                     

 

Level 3 Liabilities:   As of September 30, 2012  
($ in millions)   Fair Value   Valuation Technique(s)   Unobservable Input   Range  
                     
Embedded derivatives   $ 48.7    Budget method   Swap curve   0.24% - 2.32%  
(EIA VED)             Mortality rate   75% of A2000 basic table  
              Lapse rate   1.00% - 35.00%  
              CSA   4.75%  
                     
                     

Embedded derivatives

(GMAB / GMWB)

   $ 35.7   

Risk neutral stochastic

  valuation methodology

   Volatility surface   11.75% - 48.97%  
              Swap curve   0.24% - 2.98%  
              Mortality rate   75% of A2000 basic table  
              Lapse rate   0.00% - 60.00%  
              CSA   4.75%  
                     
                     
Total Level 3 liabilities   $ 84.4               
Level 3 Assets and Liabilities by Pricing Source
Level 3 Assets and Liabilities by Pricing Source:   As of September 30, 2012  
($ in millions)   Internal(1)     External(2)     Total  
                   
Assets                  
Available-for-sale debt securities                  
  U.S. government and agency(3)   $ 282.8     $ 37.8     $ 320.6  
  State and political subdivision     85.7       107.2       192.9  
  Foreign government     10.1       44.9       55.0  
  Corporate     2,825.9       907.3       3,733.2  
  CMBS     —       73.7       73.7  
  RMBS     —       832.8       832.8  
  CDO/CLO     18.0       198.5       216.5  
  Other asset-backed     41.9       279.1       321.0  
Available-for-sale equity securities     —       29.3       29.3  
Fair value investments     4.8       159.3       164.1  
Total assets   $ 3,269.2     $ 2,669.9     $ 5,939.1  
Liabilities                        
Embedded derivatives   $ 84.4     $ —     $ 84.4  
Total liabilities   $ 84.4     $ —     $ 84.4  
Level 3 Assets and Liabilities by Pricing Source:   As of December 31, 2011  
    As restated and amended  
($ in millions)   Internal(1)     External(2)     Total  
                   
Assets                  
Available-for-sale debt securities                  
  U.S. government and agency(3)   $ 315.4     $ 20.8     $ 336.2  
  State and political subdivision     30.9       85.7       116.6  
  Foreign government     10.4       41.4       51.8  
  Corporate     2,662.8       838.7       3,501.5  
  CMBS     —       100.6       100.6  
  RMBS     —       944.2       944.2  
  CDO/CLO     199.3       33.1       232.4  
  Other asset-backed     59.1       276.4       335.5  
Available-for-sale equity securities     —       29.4       29.4  
Fair value investments     37.9       106.9       144.8  
Total assets   $ 3,315.8     $ 2,477.2     $ 5,793.0  
Liabilities                        
Embedded derivatives   $ 84.5     $ —     $ 84.5  
Total liabilities   $ 84.5     $ —     $ 84.5  
Company's financial instruments where the carrying amounts and fair values differ:
Carrying Amounts and Fair Values       As of September 30, 2012     As of December 31, 2011  
of Financial Instruments:   Fair Value               As restated and amended  
($ in millions)   Hierarchy   Carrying     Fair     Carrying     Fair  
    Level   Value     Value     Value     Value  
                             
Financial assets:                            
Policy loans   Level 3   $ 2,338.4     $ 2,326.8     $ 2,379.3     $ 2,367.7  
Cash and cash equivalents   Level 1     283.8       283.8       168.2       168.2  
                                     
Financial liabilities:                                    
Investment contracts   Level 3   $ 2,914.6     $ 2,920.2     $ 2,432.3     $ 2,443.5  
Surplus notes   Level 3     126.1       95.0       174.2       126.9  
Senior unsecured bonds   Level 2     252.7       245.1       252.7       195.1