Fair Values of Financial Instruments

Presented as follows are the carrying amounts and fair values of financial instruments. The carrying values of financial instruments such as short-term investments, cash and bank deposits, accounts and premiums receivable, and accrued investment income approximate fair value due to the short-term nature of the instruments. As such, these financial instruments are not included in the following chart.



	December 31
	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in millions of dollars)
Assets
Fixed Maturity Securities	$	42,486.7	$	42,486.7	$	40,035.6	$	40,035.6
Mortgage Loans	1,612.3		1,789.8		1,516.8		1,685.4
Policy Loans	3,051.4		3,124.4		2,996.1		3,044.4
Other Long-term Investments
Derivatives	137.7		137.7		99.1		99.1
Equity Securities	11.2		11.2		10.4		10.4
Miscellaneous Long-term Investments	490.3		490.3		419.8		419.8

Liabilities
Policyholders' Funds
Deferred Annuity Products	$	641.1	$	641.1	$	656.3	$	656.3
Supplementary Contracts without Life Contingencies	502.6		502.6		508.5		508.5
Short-term Debt	312.3		312.3		225.1		226.8
Long-term Debt	2,570.2		2,540.2		2,631.3		2,483.8
Other Liabilities
Derivatives	173.7		173.7		199.6		199.6
Embedded Derivative in Modified Coinsurance Arrangement	135.7		135.7		96.3		96.3
Unfunded Commitments to Investment Partnerships	160.6		160.6		169.9		169.9

Note 2 - Fair Values of Financial Instruments - Continued

The methods and assumptions used to estimate fair values of financial instruments are discussed as follows.

Fair Value Measurements for Financial Instruments Not Carried at Fair Value

Mortgage Loans: Fair values are estimated using discounted cash flow analyses and interest rates currently being offered for similar loans to borrowers with similar credit ratings and maturities. Loans with similar characteristics are aggregated for purposes of the calculations.

Policy Loans: Fair values for policy loans, net of reinsurance ceded, are estimated using discounted cash flow analyses and interest rates currently being offered to policyholders with similar policies. The carrying amounts of ceded policy loans of $2,838.3 million and $2,790.5 million as of December 31, 2011 and 2010, respectively, are reported on a gross basis in our consolidated balance sheets and approximate fair value.

Miscellaneous Long-term Investments: Carrying amounts approximate fair value.

Policyholders' Funds: Policyholders' funds are comprised primarily of deferred annuity products and supplementary contracts without life contingencies. The carrying amounts approximate fair value.

Fair values for insurance contracts other than investment contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in our overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.

Short-term and Long-term Debt: Fair values for short-term and long-term debt other than securities lending agreements are obtained from independent pricing services or discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements. Carrying amounts for securities lending agreements approximate fair value.

Unfunded Commitments to Investment Partnerships: Unfunded equity commitments represent legally binding amounts that we have committed to certain investment partnerships subject to the partnerships meeting specified conditions. When these conditions are met, we are obligated to invest these amounts in the partnerships. Carrying amounts approximate fair value.

Fair Value Measurements for Financial Instruments Carried at Fair Value

We report fixed maturity securities, derivative financial instruments, and equity securities at fair value in our consolidated balance sheets. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and less judgment utilized in measuring fair value. An active market for a financial instrument is a market in which transactions for an asset or a similar asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and should be used to measure fair value whenever available. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation techniques that require more judgment. Pricing observability is generally impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, and overall market conditions.

Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types. The market approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities. The income approach converts future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. The cost approach is based upon the amount that currently would be required to replace the service capacity of an asset, or the current replacement cost.

Note 2 - Fair Values of Financial Instruments - Continued

We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available that can be obtained without undue cost and effort. In some cases, a single valuation technique will be appropriate (for example, when valuing an asset or liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques will be appropriate. If we use multiple valuation techniques to measure fair value, we evaluate and weigh the results, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.

The selection of the valuation method(s) to apply considers the definition of an exit price and depends on the nature of the asset or liability being valued. For assets and liabilities accounted for at fair value, we generally use valuation techniques consistent with the market approach, and to a lesser extent, the income approach. We believe the market approach valuation technique provides more observable data than the income approach, considering the type of investments we hold. Our fair value measurements could differ significantly based on the valuation technique and available inputs. When markets are less active, brokers may rely more on models with inputs based on the information available only to the broker. In weighing a broker quote as an input to fair value, we place less reliance on quotes that do not reflect the result of market transactions. We also consider the nature of the quote, particularly whether the quote is a binding offer. If prices in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value. When relevant market data is unavailable, which may be the case during periods of market uncertainty, the income approach can, in suitable circumstances, provide a more appropriate fair value. During 2011, we have applied valuation techniques on a consistent basis to similar assets and liabilities and consistent with those techniques used at year end 2010.

We use observable and unobservable inputs in measuring the fair value of our financial instruments. Inputs that may be used include the following:


•	Broker market maker prices and price levels


•	Trade Reporting and Compliance Engine (TRACE) pricing


•	Prices obtained from external pricing services


•	Benchmark yields (Treasury and interest rate swap curves)


•	Transactional data for new issuance and secondary trades


•	Security cash flows and structures


•	Recent issuance/supply


•	Sector and issuer level spreads


•	Security credit ratings/maturity/capital structure/optionality


•	Corporate actions


•	Underlying collateral


•	Prepayment speeds/loan performance/delinquencies/weighted average life/seasoning


•	Public covenants


•	Comparative bond analysis


•	Derivative spreads


•	Relevant reports issued by analysts and rating agencies


•	Audited financial statements

We review all prices obtained to ensure they are consistent with a variety of observable market inputs and to verify the validity of a security’s price. The overall valuation process for determining fair values may include adjustments to valuations obtained from our pricing sources when they do not represent a valid exit price. These adjustments may be made when, in our judgment and considering our knowledge of the financial conditions and industry in which the issuer operates, certain features of the financial instrument require that an adjustment be made to the value originally obtained from our pricing sources. These features may include the complexity of the financial instrument, the market in which the financial instrument is traded, counterparty credit risk, credit structure, concentration, or liquidity. Additionally, an adjustment to the price derived from a model typically reflects our judgment of the inputs that other participants in the market for the financial instrument being measured at fair value would consider in pricing that same financial instrument.

Note 2 - Fair Values of Financial Instruments - Continued

The parameters and inputs used to validate a price on a security may be adjusted for assumptions about risk and current market conditions on a quarter to quarter basis, as certain features may be more significant drivers of valuation at the time of pricing. Changes to inputs in valuations are not changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset classes from changes in market conditions.

Fair values for derivatives other than embedded derivatives in modified coinsurance arrangements are based on market quotes or pricing models and represent the net amount of cash we would have paid or received if the contracts had been settled or closed as of the last day of the period. We analyze credit default swap spreads relative to the average credit spread embedded within the London Interbank Offered Rate (LIBOR) setting syndicate in determining the effect of credit risk on our derivatives' fair values. If counterparty credit risk for a derivative asset is determined to be material and is not adequately reflected in the LIBOR-based fair value obtained from our pricing sources, we adjust the valuations obtained from our pricing sources. In regard to our own credit risk component, we adjust the valuation of derivative liabilities wherein the counterparty is exposed to our credit risk when the LIBOR-based valuation of our derivatives obtained from pricing sources does not effectively include an adequate credit component for our own credit risk.

Fair values for our embedded derivative in a modified coinsurance arrangement are estimated using internal pricing models and represent the hypothetical value of the duration mismatch of assets and liabilities, interest rate risk, and third party credit risk embedded in the modified coinsurance arrangement.

Certain of our investments do not have readily determinable market prices and/or observable inputs or may at times be affected by the lack of market liquidity. For these securities, we use internally prepared valuations combining matrix pricing with vendor purchased software programs, including valuations based on estimates of future profitability, to estimate the fair value. Additionally, we may obtain prices from independent third-party brokers to aid in establishing valuations for certain of these securities. Key assumptions used by us to determine fair value for these securities include risk free interest rates, risk premiums, performance of underlying collateral (if any), and other factors involving significant assumptions which may or may not reflect those of an active market.

At December 31, 2011, approximately 10.9 percent of our fixed maturity securities were valued using active trades from TRACE pricing or broker market maker prices for which there was current market activity in that specific security (comparable to receiving one binding quote). The prices obtained were not adjusted, and the assets were classified as Level 1, the highest category of the three-level fair value hierarchy classification wherein inputs are unadjusted and represent quoted prices in active markets for identical assets or liabilities.

The remaining 89.1 percent of our fixed maturity securities were valued based on non-binding quotes or other observable and unobservable inputs, as discussed below.

•

Approximately 71.1 percent of our fixed maturity securities were valued based on prices from pricing services that generally use observable inputs such as prices for securities or comparable securities in active markets in their valuation techniques. These assets were classified as Level 2. Level 2 assets or liabilities are those valued using inputs (other than prices included in Level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

•

Approximately 4.1 percent of our fixed maturity securities were valued based on one or more non-binding broker price levels, if validated by observable market data, or on TRACE prices for identical or similar assets absent current market activity. When only one price is available, it is used if observable inputs and analysis confirms that it is appropriate. These assets, for which we were able to validate the price using other observable market data, were classified as Level 2.

Note 2 - Fair Values of Financial Instruments - Continued

•

Approximately 13.9 percent of our fixed maturity securities were valued based on prices of comparable securities, matrix pricing, market models, and/or internal models or were valued based on non-binding quotes with no other observable market data. These assets were classified as either Level 2 or Level 3, with the categorization dependent on whether there was other observable market data. Level 3 is the lowest category of the fair value hierarchy and reflects the judgment of management regarding what market participants would use in pricing assets or liabilities at the measurement date. Financial assets and liabilities categorized as Level 3 are generally those that are valued using unobservable inputs to extrapolate an estimated fair value.

We consider transactions in inactive or disorderly markets to be less representative of fair value. We use all available observable inputs when measuring fair value, but when significant other unobservable inputs and adjustments are necessary, we classify these assets or liabilities as Level 3.

The categorization of fair value measurements by input level is as follows:



	December 31, 2011
	(in millions of dollars)
	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Fixed Maturity Securities
United States Government and Government Agencies and Authorities	$	326.6	$	977.8	$	—	$	1,304.4
States, Municipalities, and Political Subdivisions	107.3		1,416.2		68.1		1,591.6
Foreign Governments	—		1,376.7		—		1,376.7
Public Utilities	718.0		9,576.4		338.9		10,633.3
Mortgage/Asset-Backed Securities	—		2,941.5		31.7		2,973.2
All Other Corporate Bonds	3,469.5		20,415.1		665.5		24,550.1
Redeemable Preferred Stocks	—		20.2		37.2		57.4
Total Fixed Maturity Securities	4,621.4		36,723.9		1,141.4		42,486.7

Other Long-term Investments
Derivatives
Interest Rate Swaps	—		134.2		—		134.2
Foreign Exchange Contracts	—		3.5		—		3.5
Total Derivatives	—		137.7		—		137.7
Equity Securities	—		—		11.2		11.2

Liabilities
Other Liabilities
Derivatives
Interest Rate Swaps	$	—	$	32.9	$	—	$	32.9
Foreign Exchange Contracts	—		140.8		—		140.8
Embedded Derivative in Modified Coinsurance Arrangement	—		—		135.7		135.7
Total Derivatives	—		173.7		135.7		309.4

Note 2 - Fair Values of Financial Instruments - Continued



	December 31, 2010
	(in millions of dollars)
	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Fixed Maturity Securities
United States Government and Government Agencies and Authorities	$	102.8	$	998.9	$	—	$	1,101.7
States, Municipalities, and Political Subdivisions	301.9		943.3		—		1,245.2
Foreign Governments	0.7		1,408.6		—		1,409.3
Public Utilities	840.1		8,670.5		173.6		9,684.2
Mortgage/Asset-Backed Securities	—		3,384.8		0.7		3,385.5
All Other Corporate Bonds	4,170.7		18,154.3		829.7		23,154.7
Redeemable Preferred Stocks	—		33.3		21.7		55.0
Total Fixed Maturity Securities	5,416.2		33,593.7		1,025.7		40,035.6

Other Long-term Investments
Derivatives
Interest Rate Swaps	—		98.4		—		98.4
Foreign Exchange Contracts	—		0.7		—		0.7
Total Derivatives	—		99.1		—		99.1
Equity Securities	—		8.9		1.5		10.4

Liabilities
Other Liabilities
Derivatives
Interest Rate Swaps	$	—	$	39.1	$	—	$	39.1
Foreign Exchange Contracts	—		160.5		—		160.5
Embedded Derivative in Modified Coinsurance Arrangement	—		—		96.3		96.3
Total Derivatives	—		199.6		96.3		295.9

Note 2 - Fair Values of Financial Instruments - Continued

Transfers of assets between Level 1 and Level 2 are as follows:



	Year Ended December 31
	2011				2010
	(in millions of dollars) Transfers into
	Level 1 from Level 2		Level 2 from Level 1		Level 1 from Level 2		Level 2 from Level 1
Fixed Maturity Securities
United States Government and Government Agencies and Authorities	$	169.8	$	—	$	95.9	$	—
States, Municipalities, and Political Subdivisions	47.7		274.9		36.2		33.7
Foreign Governments	—		0.7		0.7		—
Public Utilities	362.1		534.2		483.2		673.6
All Other Corporate Bonds	1,426.5		2,452.7		1,940.1		1,676.6
Redeemable Preferred Stocks	—		—		—		5.5
Total Fixed Maturity Securities	$	2,006.1	$	3,262.5	$	2,556.1	$	2,389.4

Transfers between Level 1 and Level 2 occurred due to the change in availability of either a TRACE or broker market maker price. Depending on current market conditions, the availability of these Level 1 prices can vary from period to period. For fair value measurements of financial instruments that were transferred either into or out of Level 1 or 2, we reflect the transfers using the fair value at the beginning of the period.

Note 2 - Fair Values of Financial Instruments - Continued

Changes in assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows:



	Year Ended December 31, 2011
	(in millions of dollars)
				Total Realized and Unrealized Investment Gains (Losses) Included in
	Beginning of Year			Earnings			Other Comprehensive Income or Loss			Purchases		Sales			Level 3 Transfers					End of Year
															Into		Out of
Fixed Maturity Securities
States, Municipalities, and Political Subdivisions	$	—		$	—		$	2.5		$	28.0	$	—		$	37.6	$	—		$	68.1
Public Utilities	173.6			0.2			26.9			34.8		(3.2		)	259.9		(153.3		)	338.9
Mortgage/Asset-Backed Securities	0.7			—			(0.8		)	31.9		(0.1		)	—		—			31.7
All Other Corporate Bonds	829.7			(2.4		)	8.9			133.6		(81.4		)	250.1		(473.0		)	665.5
Redeemable Preferred Stocks	21.7			—			1.2			—		—			14.3		—			37.2
Total Fixed Maturity Securities	1,025.7			(2.2		)	38.7			228.3		(84.7		)	561.9		(626.3		)	1,141.4

Equity Securities	1.5			(0.6		)	(1.7		)	3.0		—			9.0		—			11.2
Embedded Derivative in Modified Coinsurance Arrangement	(96.3		)	(39.4		)	—			—		—			—		—			(135.7		)

	Year Ended December 31, 2010
	(in millions of dollars)
				Total Realized and Unrealized Investment Gains (Losses) Included in
	Beginning of Year			Earnings			Other Comprehensive Income or Loss			Purchases		Sales			Level 3 Transfers					End of Year
															Into		Out of
Fixed Maturity Securities
Public Utilities	$	264.3		$	(1.0	)	$	11.0		$	—	$	(7.5	)	$	120.5	$	(213.7	)	$	173.6
Mortgage/Asset-Backed Securities	4.7			—			0.3			—		(4.3		)	—		—			0.7
All Other Corporate Bonds	580.0			(5.5		)	53.7			105.3		(58.3		)	444.6		(290.1		)	829.7
Redeemable Preferred Stocks	20.4			—			1.3			—		—			—		—			21.7
Total Fixed Maturity Securities	869.4			(6.5		)	66.3			105.3		(70.1		)	565.1		(503.8		)	1,025.7

Equity Securities	1.5			—			0.1			—		(0.1		)	—		—			1.5
Embedded Derivative in Modified Coinsurance Arrangement	(117.4		)	21.1			—			—		—			—		—			(96.3		)

Note 2 - Fair Values of Financial Instruments - Continued

Realized and unrealized investment gains and losses presented in the preceding tables represent gains and losses only for the time during which the applicable financial instruments were classified as Level 3. The transfers between levels resulted primarily from a change in observability of three inputs used to determine fair values of the securities transferred: (1) transactional data for new issuance and secondary trades, (2) broker/dealer quotes and pricing, primarily related to changes in the level of activity in the market and whether the market was considered orderly, and (3) comparable bond metrics from which to perform an analysis. For fair value measurements of financial instruments that were transferred either into or out of Level 3, we reflect the transfers using the fair value at the beginning of the period. Gains (losses) for the years ended December 31, 2011 and 2010 which are included in earnings and are attributable to the change in unrealized gains or losses relating to assets or liabilities valued using significant unobservable inputs and still held at each year end were $(39.4) million and $21.1 million, respectively. These amounts relate entirely to the changes in fair value of an embedded derivative in a modified coinsurance arrangement which are reported as realized investment gains and losses.