| Fair Value of Financial Instruments |
Fair Value of Financial Instruments
ASC 820-10 defines and establishes the framework for measuring fair value. The framework is based on inputs that are used in the valuation and a fair value hierarchy based on the quality of those inputs. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The input levels are defined as follows:
| | • | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 securities include highly liquid government bonds and exchange-traded equities. |
| | • | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Examples of such instruments include government-backed mortgage products, certain collateralized mortgage and debt obligations and certain high-yield debt securities. |
| | • | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs reflect management’s own assumptions about inputs in which market participants would use in pricing these types of assets or liabilities. Level 3 financial instruments include values which are determined using pricing models and third-party evaluation. Additionally, the determination of some fair value estimates utilizes significant management judgments or best estimates. |
The following tables present the financial instruments carried at fair value on a recurring basis by ASC 820-10 valuation hierarchy (as described above). There were no financial instruments carried at fair value on a non-recurring basis as of September 30, 2013 and December 31, 2012, respectively.
| | | | | | | | | | | | | | | | | | As of | Fair Values of Financial Instruments by Level: | September 30, 2013 | ($ in millions) | Level 1 | | Level 2 | | Level 3 | | Total | Assets | |
| | |
| | |
| | |
| Available-for-sale debt securities | | | | | | | | U.S. government and agency | $ | — |
| | $ | 13.4 |
| | $ | 59.1 |
| [1] | $ | 72.5 |
| State and political subdivision | — |
| | 19.9 |
| | 124.4 |
| | 144.3 |
| Foreign government | — |
| | 55.9 |
| | 3.3 |
| | 59.2 |
| Corporate | — |
| | 1,107.9 |
| | 1,015.2 |
| | 2,123.1 |
| CMBS | — |
| | 213.1 |
| | 41.2 |
| | 254.3 |
| RMBS | — |
| | 242.2 |
| | 190.4 |
| | 432.6 |
| CDO/CLO | — |
| | — |
| | 66.7 |
| | 66.7 |
| Other asset-backed | — |
| | 17.6 |
| | 81.8 |
| | 99.4 |
| Total available-for-sale debt securities | — |
| | 1,670.0 |
| | 1,582.1 |
| | 3,252.1 |
| Short-term investments | 55.0 |
| | — |
| | — |
| | 55.0 |
| Derivative assets | 15.3 |
| | 175.4 |
| | — |
| | 190.7 |
| Related party reinsurance derivative asset | — |
| | — |
| | — |
| | — |
| Fair value investments | — |
| | 13.7 |
| | 39.4 |
| | 53.1 |
| Separate account assets | 2,049.5 |
| | — |
| | — |
| | 2,049.5 |
| Total assets | $ | 2,119.8 |
| | $ | 1,859.1 |
| | $ | 1,621.5 |
| | $ | 5,600.4 |
| Liabilities | |
| | |
| | |
| | |
| Derivative liabilities | $ | — |
| | $ | 82.7 |
| | $ | — |
| | $ | 82.7 |
| Embedded derivatives | — |
| | — |
| | 72.6 |
| | 72.6 |
| Total liabilities | $ | — |
| | $ | 82.7 |
| | $ | 72.6 |
| | $ | 155.3 |
|
——————— | | [1] | Includes securities whose underlying collateral is an obligation of a U.S. government entity. |
There were no transfers of assets between Level 1 and Level 2 during the quarter ended September 30, 2013.
| | | | | | | | | | | | | | | | | | As of | Fair Values of Financial Instruments by Level: | December 31, 2012 | ($ in millions) | Level 1 | | Level 2 | | Level 3 | | Total | Assets | |
| | |
| | |
| | |
| Available-for-sale debt securities | | | | | | | | U.S. government and agency | $ | — |
| | $ | 14.3 |
| | $ | 25.9 |
| [1] | $ | 40.2 |
| State and political subdivision | — |
| | 14.8 |
| | 116.1 |
| | 130.9 |
| Foreign government | — |
| | 43.8 |
| | 8.0 |
| | 51.8 |
| Corporate | — |
| | 1,096.0 |
| | 801.5 |
| | 1,897.5 |
| CMBS | — |
| | 234.7 |
| | 19.3 |
| | 254.0 |
| RMBS | — |
| | 199.9 |
| | 222.6 |
| | 422.5 |
| CDO/CLO | — |
| | — |
| | 56.8 |
| | 56.8 |
| Other asset-backed | — |
| | 38.5 |
| | 80.1 |
| | 118.6 |
| Total available-for-sale debt securities | — |
| | 1,642.0 |
| | 1,330.3 |
| | 2,972.3 |
| Short-term investments | 244.9 |
| | — |
| | — |
| | 244.9 |
| Derivative assets | 13.8 |
| | 135.6 |
| | — |
| | 149.4 |
| Related party reinsurance derivative asset | — |
| | — |
| | — |
| | — |
| Fair value investments | — |
| | 15.8 |
| | 22.7 |
| | 38.5 |
| Separate account assets | 2,061.8 |
| | — |
| | — |
| | 2,061.8 |
| Total assets | $ | 2,320.5 |
| | $ | 1,793.4 |
| | $ | 1,353.0 |
| | $ | 5,466.9 |
| Liabilities | |
| | |
| | |
| | |
| Derivative liabilities | $ | — |
| | $ | 45.7 |
| | $ | — |
| | $ | 45.7 |
| Embedded derivatives | — |
| | — |
| | 79.5 |
| | 79.5 |
| Total liabilities | $ | — |
| | $ | 45.7 |
| | $ | 79.5 |
| | $ | 125.2 |
|
——————— | | [1] | Includes securities whose underlying collateral is an obligation of a U.S. government entity. |
There were no transfers of assets between Level 1 and Level 2 during the year ended December 31, 2012.
The following tables present corporates carried at fair value on a recurring basis by sector.
| | | | | | | | | | | | | | | | | | As of | Fair Values of Corporates by Level and Sector: | September 30, 2013 | ($ in millions) | Level 1 | | Level 2 | | Level 3 | | Total | Corporates | |
| | |
| | |
| | |
| Consumer | $ | — |
| | $ | 286.8 |
| | $ | 391.0 |
| | $ | 677.8 |
| Energy | — |
| | 128.0 |
| | 69.7 |
| | 197.7 |
| Financial services | — |
| | 434.3 |
| | 238.4 |
| | 672.7 |
| Technical/communications | — |
| | 72.5 |
| | 22.0 |
| | 94.5 |
| Transportation | — |
| | 20.3 |
| | 64.0 |
| | 84.3 |
| Utilities | — |
| | 77.4 |
| | 144.5 |
| | 221.9 |
| Other | — |
| | 88.6 |
| | 85.6 |
| | 174.2 |
| Total corporates | $ | — |
| | $ | 1,107.9 |
| | $ | 1,015.2 |
| | $ | 2,123.1 |
|
| | | | | | | | | | | | | | | | | | As of | Fair Values of Corporates by Level and Sector: | December 31, 2012 | ($ in millions) | Level 1 | | Level 2 | | Level 3 | | Total | Corporates | |
| | |
| | |
| | |
| Consumer | $ | — |
| | $ | 352.9 |
| | $ | 389.5 |
| | $ | 742.4 |
| Energy | — |
| | 79.6 |
| | 18.8 |
| | 98.4 |
| Financial services | — |
| | 361.9 |
| | 165.8 |
| | 527.7 |
| Technical/communications | — |
| | 45.4 |
| | 7.6 |
| | 53.0 |
| Transportation | — |
| | 9.3 |
| | 29.8 |
| | 39.1 |
| Utilities | — |
| | 116.9 |
| | 134.2 |
| | 251.1 |
| Other | — |
| | 130.0 |
| | 55.8 |
| | 185.8 |
| Total corporates | $ | — |
| | $ | 1,096.0 |
| | $ | 801.5 |
| | $ | 1,897.5 |
|
Level 3 financial assets and liabilities
The following tables set forth a summary of changes in the fair value of our Level 3 financial assets and liabilities. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The securities which were transferred as of the end of each reporting period into Level 3 were due to decreased market observability of similar assets and/or changes to significant inputs, such as downgrades or price declines. Transfers out of Level 3 were due to increased market activity on comparable assets or observability of inputs.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | Level 3 Financial Assets: | September 30, 2013 | ($ in millions) | Balance, beginning of period | | Purchases | | Sales | | Transfers into Level 3 | | Transfers out of Level 3 | | Realized and unrealized gains (losses) included in income [1] | | Unrealized gains (losses) included in OCI | | Total | Assets | |
| | |
| | | | |
| | |
| | |
| | |
| | | Available-for-sale debt securities | | | | | | | | | | | | | | | | U.S. government and agency [2] | $ | 47.1 |
| | $ | 16.4 |
| | $ | (3.1 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1.3 | ) | | $ | 59.1 |
| State and political subdivision | 104.3 |
| | 21.5 |
| | (0.3 | ) | | — |
| | — |
| | — |
| | (1.1 | ) | | 124.4 |
| Foreign government | 3.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3.3 |
| Corporate | 955.9 |
| | 62.8 |
| | (5.8 | ) | | 17.5 |
| | (6.3 | ) | | — |
| | (8.9 | ) | | 1,015.2 |
| CMBS | 33.5 |
| | 8.1 |
| | (0.3 | ) | | — |
| | — |
| | — |
| | (0.1 | ) | | 41.2 |
| RMBS | 202.5 |
| | 0.3 |
| | (8.6 | ) | | 4.7 |
| | — |
| | (0.1 | ) | | (8.4 | ) | | 190.4 |
| CDO/CLO | 67.6 |
| | 8.4 |
| | (2.8 | ) | | — |
| | — |
| | — |
| | (6.5 | ) | | 66.7 |
| Other asset-backed | 73.9 |
| | 12.8 |
| | (3.6 | ) | | — |
| | — |
| | (0.1 | ) | | (1.2 | ) | | 81.8 |
| Total available-for-sale debt securities | 1,488.1 |
| | 130.3 |
| | (24.5 | ) | | 22.2 |
| | (6.3 | ) | | (0.2 | ) | | (27.5 | ) | | 1,582.1 |
| Related party reinsurance derivative asset | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Fair value investments | 34.4 |
| | 6.5 |
| | (1.3 | ) | | — |
| | — |
| | (0.2 | ) | | — |
| | 39.4 |
| Total assets | $ | 1,522.5 |
| | $ | 136.8 |
| | $ | (25.8 | ) | | $ | 22.2 |
| | $ | (6.3 | ) | | $ | (0.4 | ) | | $ | (27.5 | ) | | $ | 1,621.5 |
|
——————— | | [1] | Reflected in realized investment gains and losses for all assets except fair value investments which are included in net investment income. |
| | [2] | Includes securities whose underlying collateral is an obligation of a U.S. government entity. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | Level 3 Financial Assets: | September 30, 2012 | ($ in millions) | Balance, beginning of period | | Purchases | | Sales | | Transfers into Level 3 | | Transfers out of Level 3 | | Realized and unrealized gains (losses) included in income [1] | | Unrealized gains (losses) included in OCI | | Total | Assets | |
| | |
| | | | |
| | |
| | |
| | |
| | | Available-for-sale debt securities | | | | | | | | | | | | | | | | U.S. government and agency [2] | $ | 27.7 |
| | $ | 0.7 |
| | $ | (0.1 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.3 |
| | $ | 28.6 |
| State and political subdivision | 90.1 |
| | 5.1 |
| | (0.4 | ) | | — |
| | — |
| | — |
| | (1.4 | ) | | 93.4 |
| Foreign government | 7.2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.6 |
| | 7.8 |
| Corporate | 664.5 |
| | 60.8 |
| | (2.1 | ) | | — |
| | (6.1 | ) | | — |
| | 15.6 |
| | 732.7 |
| CMBS | 17.8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.2 |
| | 18.0 |
| RMBS | 247.3 |
| | 1.7 |
| | (7.5 | ) | | — |
| | — |
| | (0.4 | ) | | 4.5 |
| | 245.6 |
| CDO/CLO | 57.3 |
| | — |
| | (1.9 | ) | | — |
| | — |
| | 0.2 |
| | 3.3 |
| | 58.9 |
| Other asset-backed | 71.1 |
| | 3.5 |
| | (3.2 | ) | | 13.2 |
| | — |
| | — |
| | (1.2 | ) | | 83.4 |
| Total available-for-sale debt securities | 1,183.0 |
| | 71.8 |
| | (15.2 | ) | | 13.2 |
| | (6.1 | ) | | (0.2 | ) | | 21.9 |
| | 1,268.4 |
| Related party reinsurance derivative asset | 4.2 |
| | — |
| | — |
| | — |
| | — |
| | (4.2 | ) | | — |
| | — |
| Fair value investments | 28.9 |
| | 1.9 |
| | (2.6 | ) | | — |
| | — |
| | 0.1 |
| | — |
| | 28.3 |
| Total assets | $ | 1,216.1 |
| | $ | 73.7 |
| | $ | (17.8 | ) | | $ | 13.2 |
| | $ | (6.1 | ) | | $ | (4.3 | ) | | $ | 21.9 |
| | $ | 1,296.7 |
|
——————— | | [1] | Reflected in realized investment gains and losses for all assets except fair value investments which are included in net investment income. |
| | [2] | Includes securities whose underlying collateral is an obligation of a U.S. government entity. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended | Level 3 Financial Assets: | September 30, 2013 | ($ in millions) | Balance, beginning of period | | Purchases | | Sales | | Transfers into Level 3 | | Transfers out of Level 3 | | Realized and unrealized gains (losses) included in income [1] | | Unrealized gains (losses) included in OCI | | Total | Assets | |
| | |
| | | | |
| | |
| | |
| | |
| | | Available-for-sale debt securities | | | | | | | | | | | | | | | | U.S. government and agency [2] | $ | 25.9 |
| | $ | 40.0 |
| | $ | (3.3 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (3.5 | ) | | $ | 59.1 |
| State and political subdivision | 116.1 |
| | 35.3 |
| | (0.9 | ) | | — |
| | — |
| | — |
| | (26.1 | ) | | 124.4 |
| Foreign government | 8.0 |
| | — |
| | — |
| | 1.6 |
| | (6.1 | ) | | — |
| | (0.2 | ) | | 3.3 |
| Corporate | 801.5 |
| | 250.5 |
| | (10.8 | ) | | 40.9 |
| | (10.9 | ) | | — |
| | (56.0 | ) | | 1,015.2 |
| CMBS | 19.3 |
| | 23.7 |
| | (0.3 | ) | | — |
| | (1.5 | ) | | (0.1 | ) | | 0.1 |
| | 41.2 |
| RMBS | 222.6 |
| | 1.0 |
| | (19.4 | ) | | 5.1 |
| | — |
| | (0.3 | ) | | (18.6 | ) | | 190.4 |
| CDO/CLO | 56.8 |
| | 31.1 |
| | (5.7 | ) | | — |
| | — |
| | (0.3 | ) | | (15.2 | ) | | 66.7 |
| Other asset-backed | 80.1 |
| | 13.4 |
| | (4.7 | ) | | — |
| | — |
| | — |
| | (7.0 | ) | | 81.8 |
| Total available-for-sale debt securities | 1,330.3 |
| | 395 |
| | (45.1 | ) | | 47.6 |
| | (18.5 | ) | | (0.7 | ) | | (126.5 | ) | | 1,582.1 |
| Related party reinsurance derivative asset | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Fair value investments | 22.7 |
| | 21.1 |
| | (2.5 | ) | | — |
| | — |
| | (1.9 | ) | | — |
| | 39.4 |
| Total assets | $ | 1,353.0 |
| | $ | 416.1 |
| | $ | (47.6 | ) | | $ | 47.6 |
| | $ | (18.5 | ) | | $ | (2.6 | ) | | $ | (126.5 | ) | | $ | 1,621.5 |
|
——————— | | [1] | Reflected in realized investment gains and losses for all assets except fair value investments which are included in net investment income. |
| | [2] | Includes securities whose underlying collateral is an obligation of a U.S. government entity. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended | Level 3 Financial Assets: | September 30, 2012 | ($ in millions) | Balance, beginning of period | | Purchases | | Sales | | Transfers into Level 3 | | Transfers out of Level 3 | | Realized and unrealized gains (losses) included in income [1] | | Unrealized gains (losses) included in OCI | | Total | Assets | |
| | |
| | | | |
| | |
| | |
| | |
| | | Available-for-sale debt securities | | | | | | | | | | | | | | | | U.S. government and agency [2] | $ | 31.7 |
| | $ | 2.5 |
| | $ | (3.7 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1.9 | ) | | $ | 28.6 |
| State and political subdivision | 48.7 |
| | 20.0 |
| | (0.8 | ) | | 12.9 |
| | — |
| | — |
| | 12.6 |
| | 93.4 |
| Foreign government | 3.1 |
| | 3.5 |
| | — |
| | — |
| | — |
| | — |
| | 1.2 |
| | 7.8 |
| Corporate | 513.8 |
| | 218.9 |
| | (10.3 | ) | | 20.0 |
| | (14.2 | ) | | — |
| | 4.5 |
| | 732.7 |
| CMBS | 35.4 |
| | — |
| | (0.5 | ) | | — |
| | (18.0 | ) | | — |
| | 1.1 |
| | 18.0 |
| RMBS | 268.0 |
| | 1.3 |
| | (26.9 | ) | | — |
| | — |
| | (0.9 | ) | | 4.1 |
| | 245.6 |
| CDO/CLO | 62.5 |
| | — |
| | (3.5 | ) | | — |
| | — |
| | 0.2 |
| | (0.3 | ) | | 58.9 |
| Other asset-backed | 81.2 |
| | 9.5 |
| | (5.9 | ) | | — |
| | (1.8 | ) | | — |
| | 0.4 |
| | 83.4 |
| Total available-for-sale debt securities | 1,044.4 |
| | 255.7 |
| | (51.6 | ) | | 32.9 |
| | (34.0 | ) | | (0.7 | ) | | 21.7 |
| | 1,268.4 |
| Related party reinsurance derivative asset | 3.5 |
| | — |
| | — |
| | — |
| | — |
| | (3.5 | ) | | — |
| | — |
| Fair value investments | 27.5 |
| | 2.9 |
| | (3.7 | ) | | — |
| | — |
| | 1.6 |
| | — |
| | 28.3 |
| Total assets | $ | 1,075.4 |
| | $ | 258.6 |
| | $ | (55.3 | ) | | $ | 32.9 |
| | $ | (34.0 | ) | | $ | (2.6 | ) | | $ | 21.7 |
| | $ | 1,296.7 |
|
——————— | | [1] | Reflected in realized investment gains and losses for all assets except fair value investments which are included in net investment income. |
| | [2] | Includes securities whose underlying collateral is an obligation of a U.S. government entity. |
| | | | | | | | | | | | | | | | | Level 3 Financial Liabilities: | Embedded Derivative Liabilities | ($ in millions) | Three Months Ended | | Nine Months Ended | | September 30, | | September 30, | | 2013 | | 2012 | | 2013 | | 2012 | | | | | | | | | Balance, beginning of period | $ | 76.9 |
| | $ | 87.5 |
| | $ | 79.5 |
| | $ | 82.4 |
| Net purchases/(sales) | 4.1 |
| | 2.2 |
| | 6.8 |
| | 6.8 |
| Transfers into Level 3 | — |
| | — |
| | — |
| | — |
| Transfers out of Level 3 | — |
| | — |
| | — |
| | — |
| Realized (gains) losses [1] | (8.4 | ) | | (6.6 | ) | | (13.7 | ) | | (6.1 | ) | Balance, end of period | $ | 72.6 |
| | $ | 83.1 |
| | $ | 72.6 |
| | $ | 83.1 |
|
——————— | | [1] | Realized gains and losses are included in net realized investment gains on the statements of income and comprehensive income. |
Significant unobservable inputs used in the fair value measurement of Level 3 assets are yield, prepayment rate, default rate, recovery rate and reinvestment spread. Keeping other inputs unchanged, an increase in yield, default rate or prepayment rate would decrease the fair value of the asset while an increase in recovery rate, or reinvestment spread would result in an increase to the fair value of the asset. Yields are a function of the underlying U.S. Treasury rates and asset spreads, and changes in default and recovery rates are dependent on overall market conditions.
The following tables present quantitative estimates about unobservable inputs used in the fair value measurement of significant categories of internally priced assets:
| | | | | | | | | | | | As of | Level 3 Assets: [1] | September 30, 2013 | ($ in millions) | | | | | | | | | Fair Value | | Valuation Technique(s) | | Unobservable Input | | Range (Weighted Average) | | | | | | | | | U.S. government and agency | $ | 59.1 |
| | Discounted cash flow | | Yield | | 1.08%-4.01% (2.83%) | State and political subdivision | $ | 45.5 |
| | Discounted cash flow | | Yield | | 2.36%-4.23% (3.57%) | Corporate | $ | 801.0 |
| | Discounted cash flow | | Yield | | 1.19%-6.44% (3.60%) | Other asset-backed | $ | 11.5 |
| | Discounted cash flow | | Yield | | 2.23% -3.13% (2.37%) | | |
| | | | Prepayment rate | | 2% | | | | | | Default rate | | 2.53% for 48 mos then .37% thereafter | | | | | | Recovery rate | | 10% (TRUPS) | Fair value investments | $ | 0.8 |
| | Discounted cash flow | | Default rate | | 0.35% | | | | | | Recovery rate | | 45% |
——————— | | [1] | Excludes Level 3 assets which are valued based upon non-binding independent third-party valuations or third-party price information for which unobservable inputs are not reasonably available to us. |
| | | | | | | | | | | | As of | Level 3 Assets: [1] | December 31, 2012 | ($ in millions) | Fair Value | | Valuation Technique(s) | | Unobservable Input | | Range (Weighted Average) | | | | | | | | | U.S. government and agency | $ | 25.9 |
| | Discounted cash flow | | Yield | | 1.46%-3.29% (2.57%) | State and political subdivision | $ | 58.0 |
| | Discounted cash flow | | Yield | | 1.94%-3.53% (2.94%) | Corporate | $ | 649.6 |
| | Discounted cash flow | | Yield | | 1.47%-6.33% (3.01%) | CDO/CLO | $ | 3.4 |
| | 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 | $ | 2.8 |
| | Discounted cash flow | | Yield | | 2.61%-9.50% (4.97%) | | |
| | | | Prepayment rate | | 2% | | | | | | Default rate | | 2.53% for 48 mos then .33% thereafter | | | | | | Recovery rate | | 10% (TRUPS) | Fair value investments | $ | 0.8 |
| | Discounted cash flow | | Default rate | | 0.24% | | | | | | Recovery rate | | 45% |
——————— | | [1] | Excludes Level 3 assets which are valued based upon non-binding independent third-party valuations or third-party price information for which unobservable inputs are not reasonably available to us. |
Significant unobservable inputs used in the fair value measurement of variable annuity GMAB and GMWB type liabilities are equity volatility, swap curve, mortality and lapse rates and an adjustment for non-performance risk. Keeping other inputs unchanged, an increase in the equity volatility would increase the fair value of the liability while an increase in the swap curve or CSA would result in a decrease to the fair value of the liability. The impact of changes in mortality and lapse rates are dependent on overall market conditions. The fair value of fixed indexed annuity and indexed universal life embedded derivative related to index credits is calculated using the swap curve, future option budget, mortality and lapse rates, as well as an adjustment for non-performance risk. Keeping other inputs unchanged, an increase in any of these significant unobservable inputs would result in a decrease of the fixed indexed annuity embedded derivative liability.
The following tables present quantitative estimates about unobservable inputs used in the fair value measurement of internally priced liabilities:
| | | | | | | | | | | | As of | Level 3 Liabilities: | September 30, 2013 | ($ in millions) | Fair Value | | Valuation Technique(s) | | Unobservable Input | | Range | | | | | | | | | Embedded derivatives | $ | 69.0 |
| | Budget method | | Swap curve | | 0.22%-3.46% | (FIA) | | | | | Mortality rate | | 75% of A2000 basic table | | | | | | Lapse rate | | 0.60%-35.00% | | | | | | CSA | | 3.99% | Embedded derivatives (GMAB / GMWB) | $ | 3.6 |
| | Risk neutral stochastic
valuation methodology | | Volatility surface | | 11.46%-51.22% | | | | | | Swap curve | | 0.14%-3.88% | | | | | | Mortality rate | | 75% of A2000 basic table | | | | | | Lapse rate | | 0.00%-60.00% | | | | | | CSA | | 3.99% |
| | | | | | | | | | | | As of | Level 3 Liabilities: | December 31, 2012 | ($ in millions) | Fair Value | | Valuation Technique(s) | | Unobservable Input | | Range | | | | | | | | | Embedded derivatives | $ | 51.2 |
| | Budget method | | Swap curve | | 0.21%-2.50% | (FIA) | | | | | Mortality rate | | 75% of A2000 basic table | | | | | | Lapse rate | | 1.00%-35.00% | | | | | | CSA | | 4.47% | Embedded derivatives (GMAB / GMWB) | $ | 28.3 |
| | Risk neutral stochastic
valuation methodology | | Volatility surface | | 11.67%-50.83% | | | | | | Swap curve | | 0.36%-3.17% | | | | | | Mortality rate | | 75% of A2000 basic table | | | | | | Lapse rate | | 0.00%-60.00% | | | | | | CSA | | 4.47% |
| | | | | | | | | | | | | | As of | Level 3 Assets and Liabilities by Pricing Source: | September 30, 2013 | ($ in millions) | Internal [1] | | External [2] | | Total | Assets | |
| | |
| | |
| Available-for-sale debt securities | | | | | | U.S. government and agency [3] | $ | 59.1 |
| | $ | — |
| | $ | 59.1 |
| State and political subdivision | 45.5 |
| | 78.9 |
| | 124.4 |
| Foreign government | — |
| | 3.3 |
| | 3.3 |
| Corporate | 801.0 |
| | 214.2 |
| | 1,015.2 |
| CMBS | — |
| | 41.2 |
| | 41.2 |
| RMBS | — |
| | 190.4 |
| | 190.4 |
| CDO/CLO | — |
| | 66.7 |
| | 66.7 |
| Other asset-backed | 11.5 |
| | 70.3 |
| | 81.8 |
| Total available-for-sale debt securities | 917.1 |
| | 665.0 |
| | 1,582.1 |
| Related party reinsurance derivative asset | — |
| | — |
| | — |
| Fair value investments | 0.8 |
| | 38.6 |
| | 39.4 |
| Total assets | $ | 917.9 |
| | $ | 703.6 |
| | $ | 1,621.5 |
| Liabilities | |
| | |
| | |
| Embedded derivatives | $ | 72.6 |
| | $ | — |
| | $ | 72.6 |
| Total liabilities | $ | 72.6 |
| | $ | — |
| | $ | 72.6 |
|
——————— | | [1] | Represents valuations reflecting both internally-derived and market inputs, as well as third-party information or quotes. |
| | [2] | Represents unadjusted prices from independent pricing services, third-party financial statements and independent indicative broker quotes where pricing inputs are not readily available. |
| | [3] | Includes securities whose underlying collateral is an obligation of a U.S. government entity. |
| | | | | | | | | | | | | | As of | Level 3 Assets and Liabilities by Pricing Source: | December 31, 2012 | ($ in millions) | Internal [1] | | External [2] | | Total | Assets | |
| | |
| | |
| Available-for-sale debt securities | | | | | | U.S. government and agency [3] | $ | 25.9 |
| | $ | — |
| | $ | 25.9 |
| State and political subdivision | 58.0 |
| | 58.1 |
| | 116.1 |
| Foreign government | — |
| | 8.0 |
| | 8.0 |
| Corporate | 649.6 |
| | 151.9 |
| | 801.5 |
| CMBS | — |
| | 19.3 |
| | 19.3 |
| RMBS | — |
| | 222.6 |
| | 222.6 |
| CDO/CLO | 3.4 |
| | 53.4 |
| | 56.8 |
| Other asset-backed | 2.8 |
| | 77.3 |
| | 80.1 |
| Total available-for-sale debt securities | 739.7 |
| | 590.6 |
| | 1,330.3 |
| Related party reinsurance derivative asset | — |
| | — |
| | — |
| Fair value investments | 0.8 |
| | 21.9 |
| | 22.7 |
| Total assets | $ | 740.5 |
| | $ | 612.5 |
| | $ | 1,353.0 |
| Liabilities | |
| | |
| | |
| Embedded derivatives | $ | 79.5 |
| | $ | — |
| | $ | 79.5 |
| Total liabilities | $ | 79.5 |
| | $ | — |
| | $ | 79.5 |
|
——————— | | [1] | Represents valuations reflecting both internally-derived and market inputs, as well as third-party information or quotes. |
| | [2] | Represents unadjusted prices from independent pricing services, third-party financial statements and independent indicative broker quotes where pricing inputs are not readily available. |
| | [3] | Includes securities whose underlying collateral is an obligation of a U.S. government entity. |
Financial instruments not carried at fair value
The Company is required by U.S. GAAP to disclose the fair value of certain financial instruments including those that are not carried at fair value. The following table discloses the Company’s financial instruments where the carrying amounts and fair values differ:
| | | | | | | | | | | | | | | | | | | | | | As of | | As of | Carrying Amounts and Fair Values | | | September 30, 2013 | | December 31, 2012 | of Financial Instruments: | Fair Value Hierarchy Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | ($ in millions) | | | | | Financial assets: | | | | | | | | | | Policy loans | Level 3 | | $ | 65.6 |
| | $ | 65.1 |
| | $ | 61.0 |
| | $ | 60.6 |
| Cash and cash equivalents | Level 1 | | $ | 218.1 |
| | $ | 218.1 |
| | $ | 83.1 |
| | $ | 83.1 |
| | | | | | | | | | | Financial liabilities: | | | |
| | |
| | |
| | |
| Investment contracts | Level 3 | | $ | 2,660.9 |
| | $ | 2,662.0 |
| | $ | 2,349.8 |
| | $ | 2,355.4 |
|
Fair value of policy loans
The fair value of fixed rate policy loans is calculated using a discounted cash flow model based upon current U.S. Treasury rates and historical loan repayment patterns. For floating rate policy loans the fair value is the amount due, excluding interest, as of the reporting date.
Fair value of investment contracts
We determine the fair value of guaranteed interest contracts by using a discount rate based upon the appropriate U.S. Treasury rate to calculate the present value of projected contractual liability payments through final maturity. We determine the fair value of deferred annuities and supplementary contracts without life contingencies with an interest guarantee of one year or less at the amount of the policy reserve. In determining the fair value of deferred annuities and supplementary contracts without life contingencies with interest guarantees greater than one year, we use a discount rate based upon the appropriate U.S. Treasury rate to calculate the present value of the projected account value of the policy at the end of the current guarantee period.
Deposit type funds, including pension deposit administration contracts, dividend accumulations and other funds left on deposit not involving life contingencies, have interest guarantees of less than one year for which interest credited is closely tied to rates earned on owned assets. For these liabilities, we assume fair value to be equal to the stated liability balances.
The fair value of these investment contracts are categorized as Level 3. |