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Investments
 9 Months Ended
Sep. 30, 2013
Investments
Investments — The following tables present the composition of our investment portfolio by major security type, consistent with our classification of how we manage, monitor, and measure the portfolio:
 
($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Realized
Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
3,691.2

 
$
61.8

 
$
(11.3
)
 
$
0

 
$
3,741.7

 
20.8
%
State and local government obligations
2,125.7

 
29.9

 
(17.0
)
 
0

 
2,138.6

 
11.9

Foreign government obligations2
15.9

 
0

 
0

 
0

 
15.9

 
.1

Corporate debt securities
3,118.8

 
67.0

 
(28.9
)
 
.7

 
3,157.6

 
17.6

Residential mortgage-backed securities
994.9

 
31.5

 
(16.5
)
 
0

 
1,009.9

 
5.6

Commercial mortgage-backed securities
2,224.1

 
49.0

 
(33.1
)
 
0

 
2,240.0

 
12.4

Other asset-backed securities
1,143.3

 
7.4

 
(2.0
)
 
.2

 
1,148.9

 
6.4

Redeemable preferred stocks
331.0

 
24.5

 
(10.4
)
 
0

 
345.1

 
1.9

Total fixed maturities
13,644.9

 
271.1

 
(119.2
)
 
.9

 
13,797.7

 
76.7

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
442.1

 
280.5

 
(4.8
)
 
8.2

 
726.0

 
4.0

Common equities
1,422.3

 
908.8

 
(5.0
)
 
0

 
2,326.1

 
12.9

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Other short-term investments
1,146.1

 
0

 
0

 
0

 
1,146.1

 
6.4

Total portfolio3,4
$
16,655.4

 
$
1,460.4

 
$
(129.0
)
 
$
9.1

 
$
17,995.9

 
100.0
%

($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Realized
Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
3,433.7

 
$
110.4

 
$
(.1
)
 
$
0

 
$
3,544.0

 
20.6
%
State and local government obligations
1,898.9

 
61.0

 
(.4
)
 
0

 
1,959.5

 
11.4

Foreign government obligations
0

 
0

 
0

 
0

 
0

 
0

Corporate debt securities
2,687.8

 
128.8

 
(.4
)
 
6.3

 
2,822.5

 
16.4

Residential mortgage-backed securities
399.5

 
21.6

 
(12.4
)
 
0

 
408.7

 
2.4

Commercial mortgage-backed securities
1,998.2

 
90.7

 
(1.3
)
 
0

 
2,087.6

 
12.2

Other asset-backed securities
1,077.9

 
14.5

 
(.1
)
 
0

 
1,092.3

 
6.4

Redeemable preferred stocks
368.0

 
27.1

 
(14.5
)
 
0

 
380.6

 
2.2

Total fixed maturities
11,864.0

 
454.1

 
(29.2
)
 
6.3

 
12,295.2

 
71.6

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
430.1

 
416.8

 
0

 
1.5

 
848.4

 
4.9

Common equities
1,101.5

 
543.8

 
(6.1
)
 
0

 
1,639.2

 
9.6

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Other short-term investments
2,394.1

 
0

 
0

 
0

 
2,394.1

 
13.9

Total portfolio3,4
$
15,789.7

 
$
1,414.7

 
$
(35.3
)
 
$
7.8

 
$
17,176.9

 
100.0
%
 
($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Realized
Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
2,806.4

 
$
90.1

 
$
0

 
$
0

 
$
2,896.5

 
17.6
%
State and local government obligations
1,914.4

 
50.6

 
(.6
)
 
0

 
1,964.4

 
11.9

Foreign government obligations
0

 
0

 
0

 
0

 
0

 
0

Corporate debt securities
2,982.9

 
124.7

 
(1.0
)
 
6.4

 
3,113.0

 
18.9

Residential mortgage-backed securities
413.4

 
24.0

 
(9.2
)
 
0

 
428.2

 
2.6

Commercial mortgage-backed securities
1,963.9

 
84.9

 
(.1
)
 
0

 
2,048.7

 
12.4

Other asset-backed securities
936.0

 
12.9

 
(.1
)
 
(.2
)
 
948.6

 
5.8

Redeemable preferred stocks
356.9

 
30.5

 
(12.7
)
 
0

 
374.7

 
2.3

Total fixed maturities
11,373.9

 
417.7

 
(23.7
)
 
6.2

 
11,774.1

 
71.5

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
404.0

 
404.6

 
0

 
3.8

 
812.4

 
4.9

Common equities
1,370.3

 
539.0

 
(10.3
)
 
0

 
1,899.0

 
11.5

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Other short-term investments
1,990.0

 
0

 
0

 
0

 
1,990.0

 
12.1

Total portfolio3,4
$
15,138.2

 
$
1,361.3

 
$
(34.0
)
 
$
10.0

 
$
16,475.5

 
100.0
%
 
1Represents net holding period gains (losses) on certain hybrid securities (discussed below).
2Reflects an Australian government obligation at September 30, 2013.
3At September 30, 2013, we had $63.7 million of net unsettled security transactions, including collateral on open derivative positions, recognized in other liabilities, compared to $32.4 million and $90.9 million recognized in other assets at September 30, 2012 and December 31, 2012, respectively.
4The total fair value of the portfolio at September 30, 2013 and 2012, and December 31, 2012 included $1.3 billion, $1.6 billion, and $1.4 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company.

Our other short-term investments include commercial paper, reverse repurchase transactions, and other investments that are expected to mature within one year. We had $278.1 million, $798.1 million, and $581.0 million of open reverse repurchase commitments at September 30, 2013 and 2012, and December 31, 2012, respectively. At these dates, we did not hold any repurchase transactions where we lent collateral. To the extent our repurchase transactions were with the same counterparty and subject to an enforceable master netting arrangement, we could elect to offset these transactions. Historically, we have chosen to report these transactions on a gross basis on our balance sheets.

Included in our fixed-maturity and equity securities are hybrid securities, which are reported at fair value:
 
 
September 30,
 
December 31,
2012

(millions)
2013

 
2012

 
Fixed maturities:
 
 
 
 
 
Corporate debt securities
$
171.8

 
$
177.5

 
$
176.1

Other asset-backed securities
15.3

 
16.4

 
16.4

Total fixed maturities
187.1

 
193.9

 
192.5

Equity securities:
 
 
 
 
 
Nonredeemable preferred stocks
57.3

 
50.5

 
52.8

Total hybrid securities
$
244.4

 
$
244.4

 
$
245.3


Certain corporate debt securities are accounted for as hybrid securities since they were acquired at a substantial premium and contain a change-in-control put option (derivative) that permits the investor, at its sole option if and when a change in control is triggered, to put the security back to the issuer at a 1% premium to par. Due to this change-in-control put option and the substantial market premium paid to acquire these securities, there is the potential that the election to put, upon the change in control, could result in an acceleration of the remaining premium paid on these securities, which would result in a loss of $12.3 million as of September 30, 2013, if all of the bonds experienced a simultaneous change in control and we elected to exercise all of our put options. The put feature limits the potential loss in value that could be experienced in the event a corporate action occurs that results in a change in control that materially diminishes the credit quality of the issuer. We are under no obligation to exercise the put option we hold if a change in control occurs.
The other asset-backed security in the table above represents one hybrid security that was acquired at a deep discount to par due to a failing auction, and contains a put option that allows the investor to put that security back to the auction at par if the auction is restored. This embedded derivative has the potential to more than double our initial investment yield.
The hybrid securities in our nonredeemable preferred stock portfolio are perpetual preferred stocks that have call features with fixed-rate coupons, whereby the change in value of the call features is a component of the overall change in value of the preferred stocks.
Our securities are reported at fair value, with the changes in fair value of these securities (other than hybrid securities and derivative instruments) reported as a component of accumulated other comprehensive income, net of deferred income taxes. The changes in fair value of the hybrid securities and derivative instruments are recorded as a component of net realized gains (losses) on securities.
Fixed Maturities The composition of fixed maturities by maturity at September 30, 2013, was:
 
(millions)
Cost

 
Fair Value

Less than one year
$
2,032.1

 
$
2,063.1

One to five years
8,610.3

 
8,767.3

Five to ten years
2,834.8

 
2,794.5

Ten years or greater
114.2

 
119.3

Total1
$
13,591.4

 
$
13,744.2

 
1Excludes $53.5 million related to our open interest rate swap positions.
Asset-backed securities are classified across the maturity distribution table based upon their projected distribution of cash flows. All other securities that do not have a single maturity date are reported at their expected maturity date. Contractual maturities may differ from expected maturities because the issuers of the securities may have the right to call or prepay obligations.
Gross Unrealized Losses As of September 30, 2013, we had $124.0 million of gross unrealized losses in our fixed-income securities (i.e., fixed-maturity securities, nonredeemable preferred stocks, and short-term investments) and $5.0 million in our common equities. We currently do not intend to sell the fixed-income securities and determined that it is more likely than not that we will not be required to sell these securities for the period of time necessary to recover their cost bases. A review of our fixed-income securities indicated that the issuers were current with respect to their interest obligations and that there was no evidence of any deterioration of the current cash flow projections that would indicate we would not receive the remaining principal at maturity. In addition, 88% of our common stock portfolio was indexed to the Russell 1000; as such, this portfolio may contain securities in a loss position for an extended period of time, subject to possible write-downs, as described below. We may retain these securities as long as the portfolio and index correlation remain similar. To the extent there is issuer specific deterioration, we may write-down the securities of that issuer. The remaining 12% of our common stocks are part of a managed equity strategy selected and administered by external investment advisors. If our strategy were to change and these securities were determined to be other-than-temporarily impaired, we would recognize a write-down in accordance with our stated policy.
The following tables show the composition of gross unrealized losses by major security type and by the length of time that individual securities have been in a continuous unrealized loss position:
 
 
 
 
 
 
Less than 12 Months
 
12 Months or Greater
(millions)
Total Fair Value

 
Gross Unrealized Losses

 
Fair Value

 
Unrealized Losses

 
Fair Value

 
Unrealized Losses

September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
969.1

 
$
(11.3
)
 
$
969.1

 
$
(11.3
)
 
$
0

 
$
0

State and local government obligations
728.3

 
(17.0
)
 
666.7

 
(16.2
)
 
61.6

 
(.8
)
Corporate debt securities
1,174.2

 
(28.9
)
 
1,113.4

 
(28.5
)
 
60.8

 
(.4
)
Residential mortgage-backed securities
663.0

 
(16.5
)
 
585.5

 
(12.4
)
 
77.5

 
(4.1
)
Commercial mortgage-backed securities
993.3

 
(33.1
)
 
993.2

 
(33.0
)
 
.1

 
(.1
)
Other asset-backed securities
282.8

 
(2.0
)
 
282.8

 
(2.0
)
 
0

 
0

Redeemable preferred stocks
158.4

 
(10.4
)
 
36.2

 
(.2
)
 
122.2

 
(10.2
)
Total fixed maturities
4,969.1

 
(119.2
)
 
4,646.9

 
(103.6
)
 
322.2

 
(15.6
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
123.6

 
(4.8
)
 
123.6

 
(4.8
)
 
0

 
0

Common equities
47.3

 
(5.0
)
 
43.0

 
(4.7
)
 
4.3

 
(.3
)
Total equity securities
170.9

 
(9.8
)
 
166.6

 
(9.5
)
 
4.3

 
(.3
)
Total portfolio
$
5,140.0

 
$
(129.0
)
 
$
4,813.5

 
$
(113.1
)
 
$
326.5

 
$
(15.9
)
 
 
Total Fair Value

 
Gross Unrealized Losses

 
Less than 12 Months
 
12 Months or Greater
(millions)
 
 
Fair Value

 
Unrealized Losses

 
Fair Value

 
Unrealized Losses

September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
83.1

 
$
(.1
)
 
$
83.1

 
$
(.1
)
 
$
0

 
$
0

State and local government obligations
61.4

 
(.4
)
 
29.1

 
(.2
)
 
32.3

 
(.2
)
Corporate debt securities
35.9

 
(.4
)
 
14.2

 
(.1
)
 
21.7

 
(.3
)
Residential mortgage-backed securities
177.2

 
(12.4
)
 
30.0

 
(.5
)
 
147.2

 
(11.9
)
Commercial mortgage-backed securities
44.0

 
(1.3
)
 
31.4

 
(.1
)
 
12.6

 
(1.2
)
Other asset-backed securities
21.0

 
(.1
)
 
9.0

 
0

 
12.0

 
(.1
)
Redeemable preferred stocks
164.1

 
(14.5
)
 
24.7

 
(.4
)
 
139.4

 
(14.1
)
Total fixed maturities
586.7

 
(29.2
)
 
221.5

 
(1.4
)
 
365.2

 
(27.8
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
0

 
0

 
0

 
0

 
0

 
0

Common equities
80.8

 
(6.1
)
 
54.4

 
(3.4
)
 
26.4

 
(2.7
)
Total equity securities
80.8

 
(6.1
)
 
54.4

 
(3.4
)
 
26.4

 
(2.7
)
Total portfolio
$
667.5

 
$
(35.3
)
 
$
275.9

 
$
(4.8
)
 
$
391.6

 
$
(30.5
)

 
Total Fair Value

 
Gross Unrealized Losses

 
Less than 12 Months
 
12 Months or Greater
(millions)
 
 
Fair Value

 
Unrealized Losses

 
Fair Value

 
Unrealized Losses

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

State and local government obligations
162.8

 
(.6
)
 
123.1

 
(.5
)
 
39.7

 
(.1
)
Corporate debt securities
128.2

 
(1.0
)
 
128.2

 
(1.0
)
 
0

 
0

Residential mortgage-backed securities
149.2

 
(9.2
)
 
40.2

 
(.6
)
 
109.0

 
(8.6
)
Commercial mortgage-backed securities
7.1

 
(.1
)
 
2.1

 
0

 
5.0

 
(.1
)
Other asset-backed securities
25.0

 
(.1
)
 
20.8

 
0

 
4.2

 
(.1
)
Redeemable preferred stocks
155.7

 
(12.7
)
 
24.9

 
0

 
130.8

 
(12.7
)
Total fixed maturities
628.0

 
(23.7
)
 
339.3

 
(2.1
)
 
288.7

 
(21.6
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
0

 
0

 
0

 
0

 
0

 
0

Common equities
118.2

 
(10.3
)
 
100.7

 
(8.2
)
 
17.5

 
(2.1
)
Total equity securities
118.2

 
(10.3
)
 
100.7

 
(8.2
)
 
17.5

 
(2.1
)
Total portfolio
$
746.2

 
$
(34.0
)
 
$
440.0

 
$
(10.3
)
 
$
306.2

 
$
(23.7
)

Other-Than-Temporary Impairment (OTTI) The following table shows the total non-credit portion of the OTTI recorded in accumulated other comprehensive income, reflecting the original non-credit loss at the time the credit impairment was determined:
 
 
September 30,
 
December 31,
2012

(millions)
2013

 
2012

 
Fixed maturities:
 
 
 
 
 
Residential mortgage-backed securities
$
(44.1
)
 
$
(44.2
)
 
$
(44.2
)
Commercial mortgage-backed securities
(.9
)
 
(.9
)
 
(.9
)
Total fixed maturities
$
(45.0
)
 
$
(45.1
)
 
$
(45.1
)


The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended September 30, 2013 and 2012, for which portions of the OTTI losses were also recognized in accumulated other comprehensive income at the time the credit impairments were determined and recognized:
 
 
Three Months Ended September 30, 2013
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at June 30, 2013
$
26.9

 
$
.5

 
$
27.4

Credit losses for which an OTTI was previously recognized
0

 
0

 
0

Credit losses for which an OTTI was not previously recognized
0

 
0

 
0

Reductions for securities sold/matured
0

 
0

 
0

Change in recoveries of future cash flows expected to be collected1
(2.4
)
 
(.1
)
 
(2.5
)
Reductions for previously recognized credit impairments written-down to fair value2
0

 
0

 
0

Balance at September 30, 2013
$
24.5

 
$
.4

 
$
24.9

 
Nine Months Ended September 30, 2013
 
Mortgage-Backed
 
 
(millions)
Residential

 
Commercial

 
Total

Balance at December 31, 2012
$
27.1

 
$
.6

 
$
27.7

Credit losses for which an OTTI was previously recognized
0

 
0

 
0

Credit losses for which an OTTI was not previously recognized
0

 
0

 
0

Reductions for securities sold/matured
0

 
0

 
0

Change in recoveries of future cash flows expected to be collected1
(2.4
)
 
(.2
)
 
(2.6
)
Reductions for previously recognized credit impairments written-down to fair value2
(.2
)
 
0

 
(.2
)
Balance at September 30, 2013
$
24.5

 
$
.4

 
$
24.9


 
Three Months Ended September 30, 2012
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at June 30, 2012
$
28.1

 
$
.7

 
$
28.8

Credit losses for which an OTTI was previously recognized
0

 
0

 
0

Credit losses for which an OTTI was not previously recognized
0

 
0

 
0

Reductions for securities sold/matured
0

 
0

 
0

Change in recoveries of future cash flows expected to be collected1
(.4
)
 
(.1
)
 
(.5
)
Reductions for previously recognized credit impairments written-down to fair value2
0

 
0

 
0

Balance at September 30, 2012
$
27.7

 
$
.6

 
$
28.3

 
Nine Months Ended September 30, 2012
 
Mortgage-Backed
 
 
(millions)
Residential

 
Commercial

 
Total

Balance at December 31, 2011
$
34.5

 
$
1.3

 
$
35.8

Credit losses for which an OTTI was previously recognized
.1

 
0

 
.1

Credit losses for which an OTTI was not previously recognized
.2

 
0

 
.2

Reductions for securities sold/matured
0

 
(.2
)
 
(.2
)
Change in recoveries of future cash flows expected to be collected1
(3.1
)
 
(.2
)
 
(3.3
)
Reductions for previously recognized credit impairments written-down to fair value2
(4.0
)
 
(.3
)
 
(4.3
)
Balance at September 30, 2012
$
27.7

 
$
.6

 
$
28.3


1Reflects expected recovery of prior period impairments that will be accreted into income over the remaining life of the security, net of any current quarter decreases in expected cash flows on previously recorded reductions.
2Reflects reductions of prior credit impairments where the current credit impairment requires writing securities down to fair value (i.e., no remaining non-credit loss).
Although we determined that it is more likely than not that we will not be required to sell the securities prior to the recovery of their respective cost bases (which could be maturity), we are required to measure and report the amount of credit losses on the securities that were determined to be other-than-temporarily impaired. In that process, we considered a number of factors and inputs related to the individual securities. The methodology and significant inputs used to measure the amount of credit losses in our portfolio included: current performance indicators on the underlying assets (e.g., delinquency rates, foreclosure rates, and default rates); credit support (via current levels of subordination); historical credit ratings; and updated cash flow expectations based upon these performance indicators. In order to determine the amount of credit loss, if any, the net present value of the cash flows expected (i.e., expected recovery value) was calculated using the current book yield for each security, and was compared to its current amortized value. In the event that the net present value was below the amortized value, a credit loss was deemed to exist, and the security was written down.

Realized Gains/Losses
The components of net realized gains (losses) for the three and nine months ended September 30, were:
 
Three Months
 
Nine months
(millions)
2013

 
2012

 
2013

 
2012

Gross realized gains on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
$
3.1

 
$
.2

 
$
6.8

 
$
9.8

State and local government obligations
0

 
0

 
6.8

 
12.1

Corporate and other debt securities
1.7

 
23.0

 
38.4

 
49.1

Residential mortgage-backed securities
.3

 
.6

 
2.4

 
.6

Commercial mortgage-backed securities
.1

 
9.5

 
8.4

 
14.0

Other asset-backed securities
0

 
.9

 
0

 
.9

Redeemable preferred stocks
0

 
.1

 
0

 
.5

Total fixed maturities
5.2

 
34.3

 
62.8

 
87.0

Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
11.9

 
20.6

 
113.1

 
57.5

Common equities
11.1

 
153.4

 
26.1

 
163.2

Subtotal gross realized gains on security sales
28.2

 
208.3

 
202.0

 
307.7

Gross realized losses on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
(.8
)
 
(.5
)
 
(2.2
)
 
(1.4
)
Corporate and other debt securities
(2.1
)
 
(.6
)
 
(3.1
)
 
(.6
)
Commercial mortgage-backed securities
0

 
0

 
(.7
)
 
0

Redeemable preferred stocks
0

 
(.3
)
 
(.1
)
 
(.3
)
Total fixed maturities
(2.9
)
 
(1.4
)
 
(6.1
)
 
(2.3
)
Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
0

 
(1.1
)
 
0

 
(1.1
)
Common equities
(.1
)
 
(22.5
)
 
(.4
)
 
(27.0
)
Subtotal gross realized losses on security sales
(3.0
)
 
(25.0
)
 
(6.5
)
 
(30.4
)
Net realized gains (losses) on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
2.3

 
(.3
)
 
4.6

 
8.4

State and local government obligations
0

 
0

 
6.8

 
12.1

Corporate and other debt securities
(.4
)
 
22.4

 
35.3

 
48.5

Residential mortgage-backed securities
.3

 
.6

 
2.4

 
.6

Commercial mortgage-backed securities
.1

 
9.5

 
7.7

 
14.0

Other asset-backed securities
0

 
.9

 
0

 
.9

Redeemable preferred stocks
0

 
(.2
)
 
(.1
)
 
.2

Total fixed maturities
2.3

 
32.9

 
56.7

 
84.7

Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
11.9

 
19.5

 
113.1

 
56.4

Common equities
11.0

 
130.9

 
25.7

 
136.2

Subtotal net realized gains (losses) on security sales
25.2

 
183.3

 
195.5

 
277.3

Other-than-temporary impairment losses
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Residential mortgage-backed securities
(.1
)
 
(.4
)
 
(.5
)
 
(1.4
)
Commercial mortgage-backed securities
0

 
0

 
0

 
(.1
)
Total fixed maturities
(.1
)
 
(.4
)
 
(.5
)
 
(1.5
)
Equity securities:
 
 
 
 
 
 
 
Common equities
(1.8
)
 
0

 
(3.2
)
 
(.7
)
Subtotal other-than-temporary impairment losses
(1.9
)
 
(.4
)
 
(3.7
)
 
(2.2
)
Other gains (losses)
 
 
 
 
 
 
 
Hybrid securities
3.5

 
5.2

 
2.3

 
12.1

Derivative instruments
(1.2
)
 
(16.3
)
 
45.0

 
(42.8
)
Litigation settlements
2.3

 
.1

 
2.3

 
.3

Subtotal other gains (losses)
4.6

 
(11.0
)
 
49.6

 
(30.4
)
Total net realized gains (losses) on securities
$
27.9

 
$
171.9

 
$
241.4

 
$
244.7


Gross realized gains and losses were predominately the result of sales transactions in our fixed-income portfolio related to movements in credit spreads and interest rates. In addition, gains and losses reflect sales of common stocks, holding period valuation changes on hybrids and derivatives and write-downs for securities determined to be other-than-temporarily impaired in our fixed-maturity and equity portfolios.

Trading Securities At September 30, 2013 and 2012, and December 31, 2012, we did not hold any trading securities and did not have any net realized gains (losses) on trading securities for the three and nine months ended September 30, 2013 and 2012.
Derivative Instruments We have invested in the following derivative exposures at various times: interest rate swaps, asset-backed credit default swaps, U.S. corporate debt credit default swaps, cash flow hedges, and equity options.
For all derivative positions discussed below, realized holding period gains and losses are netted with any upfront cash that may be exchanged under the contract to determine if the net position should be classified either as an asset or liability. To be reported as an asset and a component of the available-for-sale portfolio, the inception-to-date realized gain on the derivative position at period end would have to exceed any upfront cash received (net derivative asset). On the other hand, a net derivative liability would include any inception-to-date realized loss plus the amount of upfront cash received (or netted, if upfront cash was paid) and would be reported as a component of other liabilities. These net derivative assets/liabilities are not separately disclosed on the balance sheet due to their immaterial effect on our financial condition and cash flows.
The following table shows the status of our derivative instruments at September 30, 2013 and 2012, and December 31, 2012, and for the three and nine months ended September 30, 2013 and 2012; amounts are on a pretax basis:
 
(millions)
 
 
 
 
Balance Sheet2
 
Comprehensive Income Statement
 
 
 
 
 
 
 
Assets (Liabilities)
Fair Value
 
Net Realized
Gains (Losses) on Securities
 
Notional Value1
 
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
September 30,
 
Dec. 31,
 
 
 
 
 
September 30,
 
Dec. 31,
 
September 30,
 
September 30,
Derivatives designated as:
2013

 
2012

 
2012

 
Purpose
 
Classification
 
2013

 
2012

 
2012

 
2013

 
2012

 
2013

 
2012

Hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ineffective cash flow hedge
$
54

 
$
31

 
$
31

 
Manage interest 
rate risk
 
NA
 
$
0

 
$
0

 
$
0

 
$
.8

 
$
0

 
$
.8

 
$
.6

Non-hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
750

 
0

 
0

 
Manage portfolio
duration
 
Investments—
fixed maturities
 
53.5

 
0

 
0

 
(2.0
)
 
0

 
48.2

 
0

Corporate credit default swaps
0

 
25

 
0

 
Manage credit risk
 
Investments—
fixed maturities
 
0

 
.3

 
0

 
0

 
(.4
)
 
0

 
(.7
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
0

 
1,263

 
1,263

 
Manage portfolio
duration
 
Other liabilities
 
0

 
(101.6
)
 
(95.5
)
 
0

 
(15.9
)
 
0

 
(42.7
)
Closed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
1,263

 
0

 
0

 
Manage portfolio
duration
 
NA
 
0

 
0

 
0

 
0

 
0

 
(4.0
)
 
0

Corporate credit default swaps
0

 
0

 
25

 
Manage credit risk
 
NA
 
0

 
0

 
0

 
0

 
0

 
0

 
0

Total
NA

 
NA

 
NA

 
 
 
 
 
$
53.5

 
$
(101.3
)
 
$
(95.5
)
 
$
(1.2
)
 
$
(16.3
)
 
$
45.0

 
$
(42.8
)
NA= Not Applicable
1The amounts represent the value held at quarter and year end for open positions and the maximum amount held during the period for closed positions.
2To the extent we hold both derivative assets and liabilities with the same counterparty that are subject to an enforceable master netting arrangement, we expect that we will report them on a gross basis on our balance sheets, consistent with our historical presentation.

CASH FLOW HEDGES
During both the third quarter and first nine months of 2013, we repurchased, in the open market, $54.1 million, in aggregate principal amount of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the “6.70% Debentures”), compared to $0.5 million, $30.9 million, and $30.9 million, during the third quarter, first nine months, and full year of 2012, respectively. For the portion of the 6.70% Debentures we repurchased, we reclassified $0.8 million, on a pretax basis, of the unrealized gain on forecasted transactions from accumulated other comprehensive income on the balance sheet to net realized gains on securities on the comprehensive income statement during both the third quarter and first nine months of 2013, compared to $0, $0.6 million, and $0.6 million, during the third quarter, first nine months, and full year of 2012, respectively.
INTEREST RATE SWAPS
During the periods ended September 30, 2013 and 2012, and December 31, 2012, we invested in interest rate swap positions, primarily to manage the fixed-income portfolio duration. During the beginning of the second quarter 2013, we opened three ten-year interest rate swap positions; in each case, we are paying a fixed rate and receiving a variable rate, effectively shortening the duration of our fixed-income portfolio. We closed three interest rate swap positions during the beginning of the second quarter 2013. The closed positions were a 9-year interest rate swap position (opened in 2009) and two 5-year interest rate swap positions (opened in 2011); in each case, we were paying a fixed rate and receiving a variable rate.
The fair value gain of $53.5 million, as reflected on the balance sheet, on the $750 million notional value swaps was the result of rising interest rates since the positions were opened, while the fair value losses of $101.6 million and $95.5 million on the $1,263 million notional value swaps resulted from an overall decline in interest rates from the inception of the trades. As of September 30, 2013, the balance of the cash collateral that we had received from the applicable counterparties on the open positions was $49.3 million. As of September 30, 2012 and December 31, 2012, the balance of the cash collateral that we had delivered to the applicable counterparty on the then open positions was $107.2 million and $105.0 million, respectively.
CORPORATE CREDIT DEFAULT SWAPS
Financial Services Sector – We held no credit default swaps in this sector during 2013 or at December 31, 2012. During the three and nine months ended September 30, 2012, we held one position, which was opened during the third quarter 2008, on a corporate issuer within the financial services sector for which we bought credit default protection in the form of a credit default swap for a 5-year time horizon. We held this protection to reduce some of our exposure to additional valuation declines on a preferred stock position of the same issuer. As of September 30, 2012, the balance of the cash collateral that we had received from the counterparty on the then open position was $0.3 million.