Fixed Maturity Securities

At September 30, 2014 and December 31, 2013, all fixed maturity securities were classified as available-for-sale. In the following charts, prior year amounts have been reclassified, where applicable, between public utilities and all other corporate bonds to conform to the current year categorization of certain securities.

The amortized cost and fair values of securities by security type are shown as follows.



	September 30, 2014
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
	(in millions of dollars)
United States Government and Government Agencies and Authorities	$	975.3	$	222.5	$	1.4	$	1,196.4
States, Municipalities, and Political Subdivisions	1,744.0		302.4		3.8		2,042.6
Foreign Governments	1,166.9		179.8		—		1,346.7
Public Utilities	7,121.4		1,317.8		4.6		8,434.6
Mortgage/Asset-Backed Securities	2,309.8		192.5		0.6		2,501.7
All Other Corporate Bonds	25,559.0		3,658.3		74.2		29,143.1
Redeemable Preferred Stocks	44.0		6.1		—		50.1
Total Fixed Maturity Securities	$	38,920.4	$	5,879.4	$	84.6	$	44,715.2



	December 31, 2013
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
	(in millions of dollars)
United States Government and Government Agencies and Authorities	$	1,028.6	$	173.1	$	5.6	$	1,196.1
States, Municipalities, and Political Subdivisions	1,706.0		117.2		40.0		1,783.2
Foreign Governments	1,226.4		149.6		2.8		1,373.2
Public Utilities	7,121.7		901.2		25.7		7,997.2
Mortgage/Asset-Backed Securities	1,858.7		184.6		4.0		2,039.3
All Other Corporate Bonds	25,315.2		2,828.3		225.8		27,917.7
Redeemable Preferred Stocks	33.0		4.7		—		37.7
Total Fixed Maturity Securities	$	38,289.6	$	4,358.7	$	303.9	$	42,344.4

The following charts indicate the length of time our fixed maturity securities have been in a gross unrealized loss position.



	September 30, 2014
	Less Than 12 Months				12 Months or Greater
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
	(in millions of dollars)
United States Government and Government Agencies and Authorities	$	—	$	—	$	6.5	$	1.4
States, Municipalities, and Political Subdivisions	58.5		0.7		70.8		3.1
Public Utilities	28.6		0.4		114.7		4.2
Mortgage/Asset-Backed Securities	8.0		—		17.4		0.6
All Other Corporate Bonds	1,473.4		30.9		907.6		43.3
Total Fixed Maturity Securities	$	1,568.5	$	32.0	$	1,117.0	$	52.6



	December 31, 2013
	Less Than 12 Months				12 Months or Greater
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
	(in millions of dollars)
United States Government and Government Agencies and Authorities	$	41.1	$	3.1	$	5.2	$	2.5
States, Municipalities, and Political Subdivisions	412.5		33.5		37.2		6.5
Foreign Governments	87.2		2.8		—		—
Public Utilities	506.0		23.7		27.5		2.0
Mortgage/Asset-Backed Securities	341.0		3.6		2.5		0.4
All Other Corporate Bonds	3,776.9		197.4		238.6		28.4
Total Fixed Maturity Securities	$	5,164.7	$	264.1	$	311.0	$	39.8

The following is a distribution of the maturity dates for fixed maturity securities. The maturity dates have not been adjusted for possible calls or prepayments.



	September 30, 2014
	Total Amortized Cost		Unrealized Gain Position				Unrealized Loss Position
	Total Amortized Cost		Gross Gain		Fair Value		Gross Loss		Fair Value
	(in millions of dollars)
1 year or less	$	1,165.8	$	29.5	$	1,195.3	$	—	$	—
Over 1 year through 5 years	6,938.3		749.6		7,642.5		0.3		45.1
Over 5 years through 10 years	9,566.8		996.7		9,052.8		43.5		1,467.2
Over 10 years	18,939.7		3,911.1		21,662.8		40.2		1,147.8
	36,610.6		5,686.9		39,553.4		84.0		2,660.1
Mortgage/Asset-Backed Securities	2,309.8		192.5		2,476.3		0.6		25.4
Total Fixed Maturity Securities	$	38,920.4	$	5,879.4	$	42,029.7	$	84.6	$	2,685.5



	December 31, 2013
	Total Amortized Cost		Unrealized Gain Position				Unrealized Loss Position
	Total Amortized Cost		Gross Gain		Fair Value		Gross Loss		Fair Value
	(in millions of dollars)
1 year or less	$	903.9	$	20.6	$	915.5	$	—	$	9.0
Over 1 year through 5 years	7,098.2		727.1		7,678.5		0.6		146.2
Over 5 years through 10 years	9,492.6		940.2		8,137.4		95.8		2,199.6
Over 10 years	18,936.2		2,486.2		18,441.5		203.5		2,777.4
	36,430.9		4,174.1		35,172.9		299.9		5,132.2
Mortgage/Asset-Backed Securities	1,858.7		184.6		1,695.8		4.0		343.5
Total Fixed Maturity Securities	$	38,289.6	$	4,358.7	$	36,868.7	$	303.9	$	5,475.7

At September 30, 2014, the fair value of investment-grade fixed maturity securities was $41,198.3 million, with a gross unrealized gain of $5,719.9 million and a gross unrealized loss of $47.6 million. The gross unrealized loss on investment-grade fixed maturity securities was 56.3 percent of the total gross unrealized loss on fixed maturity securities. Unrealized losses on investment-grade fixed maturity securities principally relate to changes in interest rates or changes in market or sector credit spreads which occurred subsequent to the acquisition of the securities.

At September 30, 2014, the fair value of below-investment-grade fixed maturity securities was $3,516.9 million, with a gross unrealized gain of $159.5 million and a gross unrealized loss of $37.0 million. The gross unrealized loss on below-investment-grade fixed maturity securities was 43.7 percent of the total gross unrealized loss on fixed maturity securities. Generally, below-investment-grade fixed maturity securities are more likely to develop credit concerns than investment-grade securities. At September 30, 2014, the unrealized losses in our below-investment-grade fixed maturity securities were generally due to credit spreads in certain industries or sectors and, to a lesser extent, credit concerns related to specific securities. For each specific security in an unrealized loss position, we believe there are positive factors which mitigate credit concerns and the securities for which we have not recorded an other-than-temporary impairment will recover in value.

As of September 30, 2014, we held 94 individual investment-grade fixed maturity securities and 68 individual below-investment-grade fixed maturity securities that were in an unrealized loss position, of which 48 investment-grade fixed maturity securities and 14 below-investment-grade fixed maturity securities had been in an unrealized loss position continuously for over one year.

In determining when a decline in fair value below amortized cost of a fixed maturity security is other than temporary, we evaluate the following factors:


•	Whether we expect to recover the entire amortized cost basis of the security


•	Whether we intend to sell the security or will be required to sell the security before the recovery of its amortized cost basis


•	Whether the security is current as to principal and interest payments


•	The significance of the decline in value


•	The time period during which there has been a significant decline in value


•	Current and future business prospects and trends of earnings


•	The valuation of the security's underlying collateral


•	Relevant industry conditions and trends relative to their historical cycles


•	Market conditions


•	Rating agency and governmental actions


•	Bid and offering prices and the level of trading activity


•	Adverse changes in estimated cash flows for securitized investments


•	Changes in fair value subsequent to the balance sheet date


•	Any other key measures for the related security

We evaluate available information, including the factors noted above, both positive and negative, in reaching our conclusions. In particular, we also consider the strength of the issuer's balance sheet, its debt obligations and near term funding requirements, cash flow and liquidity, the profitability of its core businesses, the availability of marketable assets which could be sold to increase liquidity, its industry fundamentals and regulatory environment, and its access to capital markets. Although available and applicable factors are considered in our analysis, our expectation of recovering the entire amortized cost basis of the security, whether we intend to sell the security, whether it is more likely than not we will be required to sell the security before recovery of its amortized cost, and whether the security is current on principal and interest payments are the most critical factors in determining whether impairments are other than temporary. The significance of the decline in value and the length of time during which there has been a significant decline are also important factors, but we generally do not record an impairment loss based solely on these two factors, since often other more relevant factors will impact our evaluation of a security.

While determining other-than-temporary impairments is a judgmental area, we utilize a formal, well-defined, and disciplined process to monitor and evaluate our fixed income investment portfolio, supported by issuer specific research and documentation as of the end of each period. The process results in a thorough evaluation of problem investments and the recording of losses on a timely basis for investments determined to have an other-than-temporary impairment.

If we determine that the decline in value of an investment is other than temporary, the investment is written down to fair value, and an impairment loss is recognized in the current period, either in earnings or in both earnings and other comprehensive income, as applicable. For those fixed maturity securities with an unrealized loss for which we have not recognized an other-than-temporary impairment, we believe we will recover the entire amortized cost, we do not intend to sell the security, and we do not believe it is more likely than not we will be required to sell the security before recovery of its amortized cost. There have been no defaults in the repayment obligations of any securities for which we have not recorded an other-than-temporary impairment.

We held no fixed maturity securities as of September 30, 2014 or December 31, 2013 for which a portion of an other-than-temporary impairment was recognized in accumulated other comprehensive income.

At September 30, 2014, we had non-binding commitments of $117.0 million to fund private placement fixed maturity securities.

Variable Interest Entities

We invest in variable interests issued by variable interest entities. These investments include tax credit partnerships, private equity partnerships, and special purpose entities. For those variable interests that are not consolidated in our financial statements, we are not the primary beneficiary because we have neither the power to direct the activities that are most significant to economic performance nor the responsibility to absorb a majority of the expected losses. The determination of whether we are the primary beneficiary is performed at the time of our initial investment and at the date of each subsequent reporting period.

As of September 30, 2014, the carrying amount of our variable interest entity investments that are not consolidated in our financial statements was $469.8 million, comprised of $293.8 million of tax credit partnerships and $176.0 million of private equity partnerships. These variable interest entity investments are reported as other long-term investments in our consolidated balance sheets.

Additionally, we recognize a liability for all legally binding unfunded commitments to these partnerships, with a corresponding recognition of an invested asset. Our liability for legally binding unfunded commitments to the tax credit partnerships was $13.7 million at September 30, 2014. Contractually, we are a limited partner in these investments, and our maximum exposure to loss is limited to the carrying value of our investment. We also had non-binding commitments of $128.4 million to fund certain private equity partnerships at September 30, 2014, the amount of which may or may not be funded.

We are the sole beneficiary of a special purpose entity which is consolidated in our financial statements. This entity is a securitized asset trust containing a highly rated bond for principal protection and a private equity partnership investment which we contributed into the trust at the time it was established. There are no restrictions on the assets held in this trust, and the trust is free to dispose of the assets at any time. The fair values of the bond and partnership were $142.2 million and $1.6 million, respectively, as of September 30, 2014. The bond is reported as a component of fixed maturity securities, and the partnership is reported as a component of other long-term investments in our consolidated balance sheets. At September 30, 2014, we had no commitments to fund the underlying partnership, nor did we fund any amounts to the partnership during the three and nine months ended September 30, 2014 and 2013.

Mortgage Loans

Our mortgage loan portfolio is well diversified by both geographic region and property type to reduce risk of concentration. All of our mortgage loans are collateralized by commercial real estate. When issuing a new loan, our general policy is not to exceed a loan-to-value ratio, or the ratio of the loan balance to the estimated fair value of the underlying collateral, of 75 percent. We update the loan-to-value ratios at least every three years for each loan, and properties undergo a general inspection at least every two years. Our general policy for newly issued loans is to have a debt service coverage ratio greater than 1.25 times on a normalized 25 year amortization period. We update our debt service coverage ratios annually.

Mortgage loans by property type and geographic region are presented below.



	September 30, 2014				December 31, 2013
	(in millions of dollars)
	Carrying		Percent of		Carrying		Percent of
	Amount		Total		Amount		Total
Property Type
Apartment	$	85.6	4.7	%	$	61.1	3.3	%
Industrial	522.1		28.9		567.8		31.3
Office	792.1		43.8		776.5		42.8
Retail	407.7		22.6		409.7		22.6
Total	$	1,807.5	100.0	%	$	1,815.1	100.0	%



Region
New England	$	111.9	6.2	%	$	100.9	5.6	%
Mid-Atlantic	180.9		10.0		191.5		10.5
East North Central	230.4		12.7		244.3		13.5
West North Central	168.0		9.3		162.3		8.9
South Atlantic	445.1		24.6		447.7		24.7
East South Central	65.7		3.6		67.7		3.7
West South Central	200.4		11.1		190.9		10.5
Mountain	107.5		6.0		101.9		5.6
Pacific	297.6		16.5		307.9		17.0
Total	$	1,807.5	100.0	%	$	1,815.1	100.0	%

We evaluate each of our mortgage loans individually for impairment and assign an internal credit quality rating based on a comprehensive rating system used to evaluate the credit risk of the loan. The factors we use to derive our internal credit ratings may include the following:


•	Loan-to-value ratio


•	Debt service coverage ratio based on current operating income


•	Property location, including regional economics, trends and demographics


•	Age, condition, and construction quality of property


•	Current and historical occupancy of property


•	Lease terms relative to market


•	Tenant size and financial strength


•	Borrower's financial strength


•	Borrower's equity in transaction


•	Additional collateral, if any

Although all available and applicable factors are considered in our analysis, loan-to-value and debt service coverage ratios are the most critical factors in determining whether we will initially issue the loan and also in assigning values and determining impairment. If we determine that it is probable we will be unable to collect all amounts due under the contractual terms of a

mortgage loan, we establish an allowance for credit loss. If we expect to foreclose on the property, the amount of the allowance typically equals the excess carrying value of the mortgage loan over the fair value of the underlying collateral. If we expect to retain the mortgage loan until payoff, the allowance equals the excess carrying value of the mortgage loan over the expected future cash flows of the loan. We assign an overall rating to each loan using an internal rating scale of Aa (highest quality) to B (lowest quality). We review and adjust, as needed, our internal credit quality ratings on an annual basis. This review process is performed more frequently for mortgage loans deemed to have a higher risk of delinquency.

Mortgage loans, sorted by the applicable credit quality indicators, are as follows:



	September 30 2014		December 31 2013
	(in millions of dollars)
Internal Rating
Aa	$	7.8	$	10.8
A	693.1		683.1
Baa	1,062.2		1,094.6
Ba	13.2		13.5
B	31.2		13.1
Total	$	1,807.5	$	1,815.1



Loan-to-Value Ratio
<= 65%	$	871.0	$	777.4
> 65% <= 75%	806.1		867.5
> 75% <= 85%	76.7		107.6
> 85%	53.7		62.6
Total	$	1,807.5	$	1,815.1

There were no troubled debt restructurings during the three months ended September 30, 2014 and 2013. A summary of our troubled debt restructurings for the nine months ended September 30, 2014 and 2013 is as follows:



	Nine Months Ended September 30
	2014		2013
	(in millions of dollars)
Foreclosure
Carrying Amount	$	—	$	4.3
Number of Loans	—		1

Modification of Loan Terms
Carrying Amount	$	18.1	$	—
Realized Loss	$	3.0	$	—
Number of Loans	1		—

We had no realized losses on loan foreclosures for the three and nine months ended September 30, 2014 and 2013.

There have been no changes to our accounting policies or methodology from the prior period regarding estimating the allowance for credit losses on our mortgage loans. For mortgage loans on which collection of interest income is uncertain, we discontinue the accrual of interest and recognize it in the period when an interest payment is received. We typically do not resume the accrual of interest on mortgage loans on nonaccrual status until there are significant improvements in the underlying financial condition of the borrower. We consider a loan to be delinquent if full payment is not received in accordance with the contractual terms of the loan. At September 30, 2014, we held one mortgage loan with a carrying value of $18.1 million that was greater than 90 days past due and for which we have discontinued the accrual of interest. This loan was modified in a troubled debt restructuring during the first quarter of 2014 but defaulted on its restructured payment terms during the second quarter of 2014. We did not recognize an additional impairment loss at the time of default, as we believe the fair value of the underlying property exceeds the carrying value of the loan. At December 31, 2013, we held no mortgage loans that were past due regarding principal and/or interest payments.

The activity in the allowance for credit losses is as follows:



	Three Months Ended September 30				Nine Months Ended September 30
	2014		2013		2014		2013
	(in millions of dollars)
Balance at Beginning of Period	$	4.5	$	1.5	$	1.5	$	1.5
Provision	—		—		3.0		—
Balance at End of Period	$	4.5	$	1.5	$	4.5	$	1.5

Impaired mortgage loans are as follows:



	September 30, 2014
	(in millions of dollars)
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With an Allowance Recorded	$	31.2	$	35.7	$	4.5

	December 31, 2013
	(in millions of dollars)
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With an Allowance Recorded	$	13.1	$	14.6	$	1.5

Our average investment in impaired mortgage loans was $31.2 million and $27.2 million for the three and nine months ended September 30, 2014, respectively, and $13.1 million and $15.5 million for the three and nine months ended September 30, 2013, respectively. Interest income recognized on mortgage loans subsequent to impairment was $0.2 million and $0.9 million for the three and nine months ended September 30, 2014, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2013, respectively.

At September 30, 2014, we had non-binding commitments of $80.9 million to fund certain commercial mortgage loans, the amount of which may or may not be funded.

Transfers of Financial Assets

To manage our cash position more efficiently, we may enter into repurchase agreements with unaffiliated financial institutions. We generally use repurchase agreements as a means to finance the purchase of invested assets or for short-term general business purposes until projected cash flows become available from our operations or existing investments. Our repurchase agreements are typically outstanding for less than 30 days. We post collateral through our repurchase agreement transactions whereby the counterparty commits to purchase securities with the agreement to resell them to us at a later, specified date. The fair value of collateral posted is generally 102 percent of the cash received.

Our investment policy also permits us to lend fixed maturity securities to unaffiliated financial institutions in short-term securities lending agreements. These agreements increase our investment income with minimal risk. Our securities lending policy requires that a minimum of 102 percent of the fair value of the securities loaned be maintained as collateral. Generally, cash is received as collateral under these agreements and is typically reinvested in short-term investments. In the event that securities are received as collateral, we are not permitted to sell or re-post them.

We account for all of our securities lending agreements and repurchase agreements as collateralized financings. As of September 30, 2014, the carrying amount of fixed maturity securities loaned to third parties under our securities lending program was $174.1 million, for which we received collateral in the form of cash and securities of $70.2 million and $110.4 million, respectively. As of December 31, 2013, the carrying amount of fixed maturity securities loaned to third parties under our securities lending program was $201.6 million, for which we received collateral in the form of cash and securities of $76.5 million and $132.9 million, respectively. We had no outstanding repurchase agreements at September 30, 2014 or December 31, 2013.

Offsetting of Financial Instruments

We enter into master netting agreements with each of our derivatives counterparties. These agreements provide for conditional rights of set-off upon the occurrence of an early termination event. An early termination event is considered a default, and it allows the non-defaulting party to offset its contracts in a loss position against any gain positions or payments due to the defaulting party. Under our agreements, default type events are defined as failure to pay or deliver as contractually agreed, misrepresentation, bankruptcy, or merger without assumption. See Note 5 for further discussion of collateral related to our derivative contracts.

We have securities lending agreements with unaffiliated financial institutions that post collateral to us in return for the use of our fixed maturity securities. A right of set-off exists that allows us to keep and apply collateral received in the event of default by the counterparty. Default within a securities lending agreement would typically occur if the counterparty failed to return the securities borrowed from us as contractually agreed. In addition, if we default by not returning collateral received, the counterparty has a right of set-off against our securities or any other amounts due to us.

Shown below are our financial instruments that either meet the accounting requirements that allow them to be offset in our balance sheets or that are subject to an enforceable master netting arrangement or similar agreement. Our accounting policy is to not offset these financial instruments in our balance sheets. Net amounts disclosed below have been reduced by the amount of collateral pledged to or received from our counterparties.



	September 30, 2014
	Gross Amount						Gross Amount Not
	of Recognized		Gross Amount		Net Amount		Offset in Balance Sheet
	Financial		Offset in		Presented in		Financial			Cash			Net
	Instruments		Balance Sheet		Balance Sheet		Instruments			Collateral			Amount
	(in millions of dollars)
Financial Assets:
Derivatives	$	15.1	$	—	$	15.1	$	(6.3	)	$	(8.1	)	$	0.7
Securities Lending	174.1		—		174.1		(103.9		)	(70.2		)	—
Total	$	189.2	$	—	$	189.2	$	(110.2	)	$	(78.3	)	$	0.7

Financial Liabilities:
Derivatives	$	107.2	$	—	$	107.2	$	(76.9	)	$	—		$	30.3
Securities Lending	70.2		—		70.2		(70.2		)	—			—
Total	$	177.4	$	—	$	177.4	$	(147.1	)	$	—		$	30.3



	December 31, 2013
	Gross Amount						Gross Amount Not
	of Recognized		Gross Amount		Net Amount		Offset in Balance Sheet
	Financial		Offset in		Presented in		Financial			Cash			Net
	Instruments		Balance Sheet		Balance Sheet		Instruments			Collateral			Amount
	(in millions of dollars)
Financial Assets:
Derivatives	$	10.8	$	—	$	10.8	$	(9.5	)	$	(1.1	)	$	0.2
Securities Lending	201.6		—		201.6		(125.1		)	(76.5		)	—
Total	$	212.4	$	—	$	212.4	$	(134.6	)	$	(77.6	)	$	0.2

Financial Liabilities:
Derivatives	$	135.6	$	—	$	135.6	$	(98.6	)	$	—		$	37.0
Securities Lending	76.5		—		76.5		(76.5		)	—			—
Total	$	212.1	$	—	$	212.1	$	(175.1	)	$	—		$	37.0

Net Investment Income

Net investment income reported in our consolidated statements of income is as follows:



	Three Months Ended September 30				Nine Months Ended September 30
	2014		2013		2014		2013
	(in millions of dollars)
Fixed Maturity Securities	$	578.8	$	584.2	$	1,749.5	$	1,771.3
Derivatives	10.1		8.9		30.3		25.6
Mortgage Loans	25.8		28.5		80.8		81.6
Policy Loans	4.2		4.0		12.1		11.6
Other Long-term Investments	2.6		4.0		18.3		14.5
Short-term Investments	0.6		0.5		1.7		1.9
Gross Investment Income	622.1		630.1		1,892.7		1,906.5
Less Investment Expenses	7.0		7.2		21.9		21.1
Less Investment Income on Participation Fund Account Assets	3.7		3.9		11.3		11.8
Less Amortization of Tax Credit Partnerships	5.0		3.5		11.5		10.9
Net Investment Income	$	606.4	$	615.5	$	1,848.0	$	1,862.7

Realized Investment Gain and Loss

Realized investment gains and losses, which for sales are based upon specific identification of the investments sold, are as follows:



	Three Months Ended September 30						Nine Months Ended September 30
	2014			2013			2014			2013
	(in millions of dollars)
Fixed Maturity Securities
Gross Gains on Sales	$	3.2		$	4.3		$	5.1		$	13.5
Gross Losses on Sales	(0.4		)	(33.0		)	(6.9		)	(40.1		)
Other-Than-Temporary Impairment Loss	—			—			—			(0.8		)
Mortgage Loans and Other Invested Assets
Gross Gains on Sales	1.8			5.6			11.6			14.6
Gross Losses on Sales	(0.1		)	—			(0.7		)	—
Impairment Loss	—			(1.0		)	(3.4		)	(2.0		)
Embedded Derivative in Modified Coinsurance Arrangement	(2.3		)	(0.3		)	18.6			18.5
All Other Derivatives	(0.7		)	(1.0		)	11.6			(1.5		)
Foreign Currency Transactions	(0.3		)	(0.7		)	(2.5		)	(4.7		)
Net Realized Investment Gain (Loss)	$	1.2		$	(26.1	)	$	33.4		$	(2.5	)