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Investing Activities
 9 Months Ended
Sep. 30, 2014
Investments, Debt and Equity Securities [Abstract]  
Investing Activities
Investing Activities

Debt securities

The following tables present the debt securities available-for-sale by sector held at September 30, 2014 and December 31, 2013, respectively. The unrealized loss amounts presented below include the non-credit loss component of OTTI losses. We classify these investments into various sectors in line with industry conventions.

Fair Value and Cost of Securities:
September 30, 2014
($ in millions)
Amortized
Cost
 
Gross Unrealized Gains [1]
 
Gross Unrealized Losses [1]
 
Fair
Value
 
OTTI Recognized in AOCI [2]
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
70.3

 
$
4.8

 
$
—

 
$
75.1

 
$
—

State and political subdivision
191.3

 
9.6

 
(2.5
)
 
198.4

 
(0.2
)
Foreign government
64.1

 
4.4

 
(0.2
)
 
68.3

 
—

Corporate
2,613.9

 
108.3

 
(24.0
)
 
2,698.2

 
(1.5
)
Commercial mortgage-backed (“CMBS”)
237.3

 
17.8

 
(0.2
)
 
254.9

 
(0.4
)
Residential mortgage-backed (“RMBS”)
595.9

 
14.7

 
(6.2
)
 
604.4

 
(8.6
)
Collateralized debt obligation (“CDO”) /
  collateralized loan obligation (“CLO”)
93.3

 
0.7

 
(1.1
)
 
92.9

 
(2.7
)
Other asset-backed (“ABS”)
83.9

 
3.7

 
(3.6
)
 
84.0

 
—

Available-for-sale debt securities
$
3,950.0

 
$
164.0

 
$
(37.8
)
 
$
4,076.2

 
$
(13.4
)
———————
[1]
Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our balance sheets as a component of AOCI.
[2]
Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment. The table above presents the special category of AOCI for debt securities that are other-than-temporarily impaired when the impairment loss has been split between the credit loss component (in earnings) and the non-credit component (separate category of AOCI).

Fair Value and Cost of Securities:
December 31, 2013
($ in millions)
Amortized
Cost
 
Gross Unrealized Gains [1]
 
Gross Unrealized Losses [1]
 
Fair
Value
 
OTTI Recognized in AOCI [2]
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
66.1

 
$
3.3

 
$
(0.8
)
 
$
68.6

 
$
—

State and political subdivision
156.2

 
3.8

 
(5.4
)
 
154.6

 
(0.2
)
Foreign government
63.1

 
2.7

 
(0.3
)
 
65.5

 
—

Corporate
2,194.9

 
69.5

 
(57.1
)
 
2,207.3

 
(1.5
)
CMBS
241.9

 
13.0

 
(1.2
)
 
253.7

 
(0.4
)
RMBS
513.7

 
7.9

 
(11.8
)
 
509.8

 
(8.6
)
CDO/CLO
70.6

 
1.7

 
(1.4
)
 
70.9

 
(3.0
)
Other ABS
96.1

 
3.7

 
(3.9
)
 
95.9

 
—

Available-for-sale debt securities
$
3,402.6

 
$
105.6

 
$
(81.9
)
 
$
3,426.3

 
$
(13.7
)
———————
[1]
Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our balance sheets as a component of AOCI.
[2]
Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment. The table above presents the special category of AOCI for debt securities that are other-than-temporarily impaired when the impairment loss has been split between the credit loss component (in earnings) and the non-credit component (separate category of AOCI).

Maturities of Debt Securities:
September 30, 2014
($ in millions)
Amortized
Cost
 
Fair
Value
 
 
 
 
Due in one year or less
$
84.9

 
$
86.9

Due after one year through five years
457.3

 
480.6

Due after five years through ten years
1,500.7

 
1,542.3

Due after ten years
896.7

 
930.2

CMBS/RMBS/ABS/CDO/CLO [1]
1,010.4

 
1,036.2

Total
$
3,950.0

 
$
4,076.2

———————
[1]
CMBS, RMBS, ABS, CDO and CLO are not listed separately in the table as each security does not have a single fixed maturity.

The maturities of debt securities, as of September 30, 2014, are summarized in the table above by contractual maturity. Actual maturities may differ from contractual maturities as certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties, and we have the right to put or sell certain obligations back to the issuers.

The following table depicts the sources of available-for-sale investment proceeds and related investment gains (losses).

Sales of Available-for-Sale Securities:
($ in millions)
Nine Months Ended 
 September 30,
 
2014
 
2013
Debt securities, available-for-sale
 
 
 
Proceeds from sales
$
76.8

 
$
50.4

Proceeds from maturities/repayments
195.6

 
213.7

Gross investment gains from sales, prepayments and maturities
4.6

 
8.6

Gross investment losses from sales and maturities
(2.1
)
 
(0.3
)

Aging of Temporarily Impaired
September 30, 2014
Debt Securities:
Less than 12 months
 
Greater than 12 months
 
Total
($ in millions)
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
Debt Securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
—

 
$
—

 
$
8.7

 
$
—

 
$
8.7

 
$
—

State and political subdivision
7.0

 
(0.4
)
 
35.0

 
(2.1
)
 
42.0

 
(2.5
)
Foreign government
6.8

 
(0.2
)
 
—

 
—

 
6.8

 
(0.2
)
Corporate
356.5

 
(5.2
)
 
379.7

 
(18.8
)
 
736.2

 
(24.0
)
CMBS
4.4

 
(0.1
)
 
5.3

 
(0.1
)
 
9.7

 
(0.2
)
RMBS
72.3

 
(0.3
)
 
107.8

 
(5.9
)
 
180.1

 
(6.2
)
CDO/CLO
47.4

 
(0.5
)
 
26.5

 
(0.6
)
 
73.9

 
(1.1
)
Other ABS
6.1

 
—

 
7.7

 
(3.6
)
 
13.8

 
(3.6
)
Total temporarily impaired
  securities
$
500.5

 
$
(6.7
)
 
$
570.7

 
$
(31.1
)
 
$
1,071.2

 
$
(37.8
)
Below investment grade
$
40.4

 
$
(1.1
)
 
$
19.7

 
$
(2.1
)
 
$
60.1

 
$
(3.2
)
Number of securities
 
 
144

 
 
 
159

 
 
 
303



Aging of Temporarily Impaired
December 31, 2013
Debt Securities:
Less than 12 months
 
Greater than 12 months
 
Total
($ in millions)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Debt Securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
14.5

 
$
(0.8
)
 
$
—

 
—

 
$
14.5

 
$
(0.8
)
State and political subdivision
65.3

 
(4.4
)
 
4.0

 
(1.0
)
 
69.3

 
(5.4
)
Foreign government
17.0

 
(0.3
)
 
—

 
—

 
17.0

 
(0.3
)
Corporate
806.5

 
(38.3
)
 
120.5

 
(18.8
)
 
927.0

 
(57.1
)
CMBS
39.4

 
(1.1
)
 
3.0

 
(0.1
)
 
42.4

 
(1.2
)
RMBS
243.5

 
(8.5
)
 
40.3

 
(3.3
)
 
283.8

 
(11.8
)
CDO/CLO
30.5

 
(0.3
)
 
24.1

 
(1.1
)
 
54.6

 
(1.4
)
Other ABS
7.9

 
(0.1
)
 
8.0

 
(3.8
)
 
15.9

 
(3.9
)
Total temporarily impaired
  securities
$
1,224.6

 
$
(53.8
)
 
$
199.9

 
$
(28.1
)
 
$
1,424.5

 
$
(81.9
)
Below investment grade
$
33.7

 
$
(1.9
)
 
$
12.1

 
$
(1.7
)
 
$
45.8

 
$
(3.6
)
Number of securities
 

 
325

 
 

 
79

 
 

 
404



Unrealized losses on below-investment-grade debt securities with a fair value depressed by more than 20% of amortized cost totaled $0.6 million at September 30, 2014, of which $0.6 million was depressed by more than 20% of amortized cost for more than 12 months.

As of September 30, 2014, available-for-sale securities in an unrealized loss position for over 12 months consisted of 159 debt securities. These debt securities primarily consist of corporate securities and other ABS, which have depressed values due primarily to an increase in interest rates since the purchase of these securities. Unrealized losses were not recognized in earnings on these debt securities since the Company neither intends to sell the securities nor do we believe that it is more likely than not that it will be required to sell these securities before recovery of their amortized cost basis. Additionally, based on a security-by-security analysis, we expect to recover the entire amortized cost basis of these securities. In our evaluation of each security, management considers the actual recovery periods for these securities in previous periods of broad market declines. For securities with significant declines, individual security level analysis was performed, which considered any credit enhancements, expectations of defaults on underlying collateral and other available market data, including industry analyst reports and forecasts. Although there may be sustained losses for greater than 12 months on these securities, additional information was obtained related to company performance in the third quarter of 2014 which did not indicate that the additional losses were other-than-temporary.

Evaluating temporarily impaired available-for-sale securities

In management’s evaluation of temporarily impaired securities, many factors about individual issuers of securities as well as our best judgment in determining the cause of a decline in the estimated fair value are considered in the assessment of potential near-term recovery in the security’s value. Some of those considerations include, but are not limited to: (i) duration of time and extent to which the estimated fair value has been below cost or amortized cost; (ii) for debt securities, if the Company has the intent to sell or will more likely than not be required to sell a particular security before the decline in estimated fair value below amortized cost recovers; (iii) whether the issuer is experiencing significant financial difficulties and the potential for impairments of that issuer’s securities; (iv) pervasive issues across an entire industry sector/sub-sector; and (v) for structured securities, assessing any changes in the forecasted cash flows, the quality of underlying collateral, expectations of prepayment speeds, loss severity and payment priority of tranches held.

Other-than-temporary impairments

Management assessed all securities in an unrealized loss position in determining whether impairments were temporary or other-than-temporary. In reaching its conclusions, management exercised significant judgment and used a number of issuer-specific quantitative indicators and qualitative judgments to assess the probability of receiving a given security’s contractual cash flows. This included the issue’s implied yield to maturity, cumulative default rate based on rating, comparisons of issue-specific spreads to industry or sector spreads, specific trading activity in the issue, and other market data such as recent debt tenders and upcoming refinancing requirements. Management also reviewed fundamentals such as issuer credit and liquidity metrics, business outlook and industry conditions. Management maintains a watch list of securities that is reviewed for impairments. Each security on the watch list was evaluated, analyzed and discussed, with the positive and negative factors weighed in the ultimate determination of whether or not the security was other-than-temporarily impaired. For securities for which no OTTI was ultimately indicated at September 30, 2014, management does not have the intention to sell, nor does it expect to be required to sell, these securities prior to their recovery. OTTIs recorded in the first nine months of 2014 were immaterial.

The following table presents a roll-forward of pre-tax credit losses recognized in earnings related to available-for-sale debt securities for which a portion of the OTTI was recognized in OCI.

Credit Losses Recognized in Earnings on Available-for-Sale Debt Securities
Three Months Ended
 
Nine Months Ended
for which a Portion of the OTTI Loss was Recognized in OCI:
September 30,
 
September 30,
($ in millions)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Balance, beginning of period
$
(17.5
)
 
$
(18.5
)
 
$
(18.6
)
 
$
(17.8
)
Add: Credit losses on securities not previously impaired [1]
—

 
—

 
—

 
—

Add: Credit losses on securities previously impaired [1]
—

 
—

 
—

 
(0.7
)
Less: Credit losses on securities impaired due to intent to sell
—

 
—

 
—

 
—

Less: Credit losses on securities sold
—

 
0.3

 
1.1

 
0.3

Less: Increases in cash flows expected on previously impaired securities
—

 
—

 
—

 
—

Balance, end of period
$
(17.5
)
 
$
(18.2
)
 
$
(17.5
)
 
$
(18.2
)
———————
[1]
Additional credit losses on securities for which a portion of the OTTI loss was recognized in AOCI are included within net OTTI losses recognized in earnings on the statements of income and comprehensive income.

Limited partnerships and other investments

Limited partnerships and other investments consist of private equity investments of $8.8 million and $7.9 million as of September 30, 2014 and December 31, 2013, respectively, and direct equity investments of $2.1 million and $2.6 million as of September 30, 2014 and December 31, 2013, respectively.

Net investment income

Net investment income is comprised primarily of interest income, including amortization of premiums and accretion of discounts on structured securities, based on yields which are changed due to expectations in projected principal and interest cash flows, gains and losses on securities measured at fair value and earnings from investments accounted for under the equity method of accounting.

Sources of Net Investment Income:
Three Months Ended
 
Nine Months Ended
($ in millions)
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Debt securities [1]
$
42.3

 
$
34.7

 
$
119.9

 
$
99.3

Limited partnerships and other investments
0.8

 
0.3

 
3.1

 
1.6

Policy loans
0.8

 
0.7

 
2.4

 
2.2

Fair value investments
0.5

 
0.9

 
1.9

 
1.5

Total investment income
44.4

 
36.6

 
127.3

 
104.6

Less: Investment expenses
0.3

 
0.3

 
1.2

 
1.2

Net investment income
$
44.1

 
$
36.3

 
$
126.1

 
$
103.4


———————
[1]
Includes net investment income on short-term investments.

Net realized investment gains (losses)

Sources and Types of
Three Months Ended
 
Nine Months Ended
Net Realized Investment Gains (Losses):
September 30,
 
September 30,
($ in millions)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Total other-than-temporary debt impairments
$
(0.5
)
 
$
(0.2
)
 
$
(0.5
)
 
$
(0.5
)
Portion of gains (losses) recognized in OCI
—

 
—

 
—

 
(0.9
)
Net debt impairments recognized in earnings
$
(0.5
)
 
$
(0.2
)
 
$
(0.5
)
 
$
(1.4
)
 
 
 
 
 
 
 
 
Debt security impairments:
 

 
 

 
 

 
 

U.S. government and agency
$
—

 
$
—

 
$
—

 
$
—

State and political subdivision
—

 
—

 
—

 
—

Foreign government
—

 
—

 
—

 
—

Corporate
(0.5
)
 
—

 
(0.5
)
 
—

CMBS
—

 
—

 
—

 
(0.2
)
RMBS
—

 
(0.2
)
 
—

 
(1.0
)
CDO/CLO
—

 
—

 
—

 
(0.2
)
Other ABS
—

 
—

 
—

 
—

Net debt security impairments
(0.5
)
 
(0.2
)
 
(0.5
)
 
(1.4
)
Limited partnerships and other investment impairments
—

 
—

 
—

 
—

Impairment losses
(0.5
)
 
(0.2
)
 
(0.5
)
 
(1.4
)
Debt security transaction gains
1.7

 
3.0

 
4.6

 
8.6

Debt security transaction losses
(1.0
)
 
—

 
(2.1
)
 
(0.3
)
Limited partnerships and other investment transaction gains
—

 
—

 
—

 
—

Limited partnerships and other investment transaction losses
—

 
—

 
—

 
—

Net transaction gains (losses)
0.7

 
3.0

 
2.5

 
8.3

Derivative instruments
2.2

 
(14.0
)
 
(23.5
)
 
(30.1
)
Embedded derivatives [1]
(5.6
)
 
8.4

 
(17.7
)
 
13.7

Net realized investment gains (losses),
  excluding impairment losses
(2.7
)
 
(2.6
)
 
(38.7
)
 
(8.1
)
Net realized investment gains (losses),
  including impairment losses
$
(3.2
)
 
$
(2.8
)
 
$
(39.2
)
 
$
(9.5
)
———————
[1]
Includes the change in fair value of embedded derivatives associated with fixed index annuity indexed crediting feature and variable annuity riders. See Note 7 to these interim unaudited financial statements for additional disclosures.

Unrealized investment gains (losses)

Sources of Changes in
Three Months Ended
 
Nine Months Ended
Net Unrealized Investment Gains (Losses):
September 30,
 
September 30,
($ in millions)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Debt securities
$
(22.1
)
 
$
(3.1
)
 
$
102.5

 
$
(129.3
)
Other investments
(0.1
)
 
(0.2
)
 
0.1

 
(0.1
)
Net unrealized investment gains (losses)
$
(22.2
)
 
$
(3.3
)
 
$
102.6

 
$
(129.4
)
 
 
 
 
 
 
 
 
Net unrealized investment gains (losses)
$
(22.2
)
 
$
(3.3
)
 
$
102.6

 
$
(129.4
)
Applicable to DAC
(5.1
)
 
(1.6
)
 
26.1

 
(45.5
)
Applicable to other actuarial offsets
(10.9
)
 
(11.6
)
 
32.9

 
(68.4
)
Applicable to deferred income tax expense (benefit)
2.5

 
(0.3
)
 
22.9

 
(9.7
)
Offsets to net unrealized investment gains (losses)
(13.5
)
 
(13.5
)
 
81.9

 
(123.6
)
Net unrealized investment gains (losses) included in OCI
$
(8.7
)
 
$
10.2

 
$
20.7

 
$
(5.8
)


Non-consolidated variable interest entities

The carrying value of our investments in non-consolidated variable interest entities (“VIEs”) (based upon sponsor values and financial statements of the individual entities) for which we are not the primary beneficiary was $14.3 million and $15.6 million as of September 30, 2014 and December 31, 2013, respectively. The maximum exposure to loss is equal to the carrying amounts plus any unfunded commitments of the Company. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee. The Company has not provided nor intends to provide financial support to these entities unless contractually required. We do not have the contractual option to redeem these limited partnership interests but receive distributions based on the liquidation of the underlying assets. The Company must generally request general partner consent to transfer or sell its fund interests. The Company performs ongoing qualitative analysis of its involvement with VIEs to determine if consolidation is required.

In addition, the Company makes passive investments in structured securities issued by VIEs, for which the Company is not the manager, which are included in CMBS, RMBS, CDO/CLO and other ABS within available-for-sale debt securities, and in fair value investments, in the balance sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the size of our investment relative to the structured securities issued by the VIE, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits, and the Company’s lack of power over the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of our investment.

Issuer and counterparty credit exposure

Credit exposure related to issuers and derivatives counterparties is inherent in investments and derivative contracts with positive fair value or asset balances. We manage credit risk through the analysis of the underlying obligors, issuers and transaction structures. We review our debt security portfolio regularly to monitor the performance of obligors and assess the stability of their credit ratings. We also manage credit risk through industry and issuer diversification and asset allocation. Included in fixed maturities are below-investment-grade assets totaling $195.2 million and $137.7 million at September 30, 2014 and December 31, 2013, respectively. Maximum exposure to an issuer or derivative counterparty is defined by quality ratings, with higher quality issuers having larger exposure limits. As of September 30, 2014, we were exposed to the credit concentration risk of no issuers representing exposure greater than 10.0% of stockholder’s equity other than U.S. government and government agencies backed by the faith and credit of the U.S. government. We monitor credit exposures by actively monitoring dollar limits on transactions with specific counterparties. We have an overall limit on below-investment-grade rated issuer exposure. Additionally, the creditworthiness of counterparties is reviewed periodically. We generally use ISDA Master Agreements which include Credit Support Annexes which include collateral provisions to reduce counterparty credit exposures. To further mitigate the risk of loss on derivatives, we only enter into contracts in which the counterparty is a financial institution with a rating of A or higher from at least one Nationally Recognized Statistical Rating Organization.

As of September 30, 2014, we held derivative assets, net of liabilities, with a fair value of $74.8 million. Derivative credit exposure was diversified with 11 different counterparties. We also had debt securities of these issuers with a fair value of $74.9 million as of September 30, 2014. Our maximum amount of loss due to credit risk with these issuers was $149.7 million as of September 30, 2014. See Note 8 to these interim unaudited financial statements for additional information regarding derivatives.