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 March 31, 2015 and December 31, 2014, respectively.



Fair Values of Financial Instruments by Level:	March 31, 2015
($ in millions)	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale debt securities
U.S. government and agency [1]	$	—	$	9.2	$	81.1	$	90.3
State and political subdivision	—		43.5		201.2		244.7
Foreign government	—		73.9		10.5		84.4
Corporate	—		1,623.2		1,452.5		3,075.7
CMBS	—		251.0		6.9		257.9
RMBS	—		363.3		158.3		521.6
CDO/CLO	—		—		96.5		96.5
Other ABS	—		15.9		71.2		87.1
Total available-for-sale debt securities	—		2,380.0		2,078.2		4,458.2
Available-for-sale equity securities	—		—		29.5		29.5
Short-term investments	69.9		—		—		69.9
Derivative assets	—		135.4		—		135.4
Fair value investments	—		13.2		33.9		47.1
Separate account assets	1,707.9		—		—		1,707.9
Total assets	$	1,777.8	$	2,528.6	$	2,141.6	$	6,448.0
Liabilities
Derivative liabilities	$	—	$	77.1	$	—	$	77.1
Embedded derivatives	—		—		175.1		175.1
Total liabilities	$	—	$	77.1	$	175.1	$	252.2

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[1]	Level 3 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 three months ended March 31, 2015.



Fair Values of Financial Instruments by Level:	December 31, 2014
($ in millions)	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale debt securities
U.S. government and agency [1]	$	—	$	9.1	$	80.2	$	89.3
State and political subdivision	—		35.9		193.3		229.2
Foreign government	—		57.7		16.1		73.8
Corporate	—		1,414.7		1,417.2		2,831.9
CMBS	—		191.0		64.6		255.6
RMBS	—		424.8		151.6		576.4
CDO/CLO	—		—		83.5		83.5
Other ABS	—		4.2		77.9		82.1
Total available-for-sale debt securities	—		2,137.4		2,084.4		4,221.8
Available-for-sale equity securities	—		—		28.7		28.7
Short-term investments	79.8		—		—		79.8
Derivative assets	—		157.5		—		157.5
Fair value investments	—		13.0		33.7		46.7
Separate account assets	1,757.5		—		—		1,757.5
Total assets	$	1,837.3	$	2,307.9	$	2,146.8	$	6,292.0
Liabilities
Derivative liabilities	$	0.5	$	85.1	$	—	$	85.6
Embedded derivatives	—		—		160.3		160.3
Total liabilities	$	0.5	$	85.1	$	160.3	$	245.9

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[1]	Level 3 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 three months ended March 31, 2014.

The following tables present corporates carried at fair value and on a recurring basis by sector.



Fair Values of Corporates by Level and Sector:	March 31, 2015
($ in millions)	Level 1		Level 2		Level 3		Total
Corporates
Consumer	$	—	$	227.5	$	382.0	$	609.5
Energy	—		223.7		160.7		384.4
Financial services	—		667.5		309.0		976.5
Capital goods	—		142.6		118.7		261.3
Transportation	—		38.2		120.6		158.8
Utilities	—		137.6		243.2		380.8
Other	—		186.1		118.3		304.4
Total corporates	$	—	$	1,623.2	$	1,452.5	$	3,075.7



Fair Values of Corporates by Level and Sector:	December 31, 2014
($ in millions)	Level 1		Level 2		Level 3		Total
Corporates
Consumer	$	—	$	219.9	$	362.6	$	582.5
Energy	—		181.6		163.1		344.7
Financial services	—		574.6		321.5		896.1
Capital goods	—		142.0		125.3		267.3
Transportation	—		30.5		114.9		145.4
Utilities	—		117.9		219.3		337.2
Other	—		148.2		110.5		258.7
Total corporates	$	—	$	1,414.7	$	1,417.2	$	2,831.9

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. Transfers in and out of Level 3 occur at the beginning of each period. The securities which were transferred 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.



Level 3 Financial Assets:	Three Months Ended March 31, 2015
($ 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]	$	80.2	$	—	$	(0.4	)	$	—	$	—		$	—		$	1.3		$	81.1
State and political subdivision	193.3		6.7		(0.8		)	—		(2.1		)	—			4.1			201.2
Foreign government	16.1		—		—			0.3		(6.5		)	—			0.6			10.5
Corporate	1,417.2		113.0		(30.7		)	18.8		(92.8		)	0.4			26.6			1,452.5
CMBS	64.6		—		—			—		(57.7		)	—			—			6.9
RMBS	151.6		0.3		(4.8		)	12.0		—			(0.1		)	(0.7		)	158.3
CDO/CLO	83.5		17.0		(5.4		)	—		—			0.2			1.2			96.5
Other ABS	77.9		—		(0.9		)	—		(5.9		)	—			0.1			71.2
Total available-for-sale debt securities	2,084.4		137.0		(43.0		)	31.1		(165.0		)	0.5			33.2			2,078.2
Available-for-sale equity securities	28.7		—		—			—		—			—			0.8			29.5
Fair value investments	33.7		0.1		(0.7		)	—		—			0.8			—			33.9
Total assets	$	2,146.8	$	137.1	$	(43.7	)	$	31.1	$	(165.0	)	$	1.3		$	34.0		$	2,141.6

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[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 Assets:	Three Months Ended March 31, 2014
($ 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]	$	58.8	$	7.9	$	(2.1	)	$	—	$	—		$	—	$	1.2		$	65.8
State and political subdivision	133.8		1.3		(0.4		)	—		—			—		3.1			137.8
Foreign government	3.3		—		—			—		—			—		0.1			3.4
Corporate	1,091.9		81.8		(15.1		)	—		(62.9		)	—		26.6			1,122.3
CMBS	31.9		—		(0.2		)	—		(25.5		)	—		0.2			6.4
RMBS	176.1		0.3		(6.0		)	—		—			0.2		0.8			171.4
CDO/CLO	70.9		18.0		(2.8		)	—		—			0.5		(0.4		)	86.2
Other ABS	82.3		—		(2.9		)	—		—			0.1		(0.6		)	78.9
Total available-for-sale debt securities	1,649.0		109.3		(29.5		)	—		(88.4		)	0.8		31.0			1,672.2
Available-for-sale equity securities	11.2		—		—			—		—			—		(11.2		)	—
Fair value investments	35.6		—		(0.7		)	—		—			0.3		—			35.2
Total assets	$	1,695.8	$	109.3	$	(30.2	)	$	—	$	(88.4	)	$	1.1	$	19.8		$	1,707.4

———————


[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 March 31,
	2015		2014

Balance, beginning of period	$	160.3	$	87.8
Net purchases/(sales)	4.6		8.2
Transfers into Level 3	—		—
Transfers out of Level 3	—		—
Realized (gains) losses	10.2		12.9
Balance, end of period	$	175.1	$	108.9

Significant unobservable inputs used in the fair value measurement of Level 3 assets are yield, prepayment rate, default rate and recovery rate. 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 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.



Level 3 Assets: [1]	March 31, 2015
($ in millions)	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)

U.S. government and agency	$	81.1	Discounted cash flow	Yield	0.91% - 3.37% (2.46%)
State and political subdivision	$	88.3	Discounted cash flow	Yield	2.03% - 4.25% (3.01%)
Corporate	$	1,186.4	Discounted cash flow	Yield	0.85% - 6.56% (3.06%)
Other ABS	$	9.6	Discounted cash flow	Yield	1.61% - 2.60% (3.80%)
Fair value investments	$	1.0	Discounted cash flow	Default rate	0.18%
				Recovery rate	44.00%

———————


[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.



Level 3 Assets: [1]	December 31, 2014
($ in millions)	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)

U.S. government and agency	$	80.2	Discounted cash flow	Yield	1.02% - 3.64% (2.75%)
State and political subdivision	$	65.9	Discounted cash flow	Yield	2.34% - 4.50% (3.33%)
Corporate	$	1,053.3	Discounted cash flow	Yield	0.93% - 6.88% (3.35%)
Other ABS	$	9.8	Discounted cash flow	Yield	1.83% - 3.01% (2.01%)
Fair value investments	$	1.0	Discounted cash flow	Default rate	0.17%
				Recovery rate	44.00%

———————


[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 (“VA”) 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 credit standing adjustment (“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.



Level 3 Liabilities:	March 31, 2015
($ in millions)	Fair Value		Valuation Technique(s)	Unobservable Input	Range

Embedded derivatives (VA / FIA)	$	166.9	Budget method	Swap curve	0.31% - 2.27%
				Mortality rate	105% or 97 % 2012 IAM basic table with scale G2
				Lapse rate	0.04% - 46.44%
				CSA	3.19%
Embedded derivatives (GMAB / GMWB / COMBO)	$	8.2	Risk neutral stochastic valuation methodology	Volatility surface	8.58% - 50.72%
				Swap curve	0.22% - 2.44%
				Mortality rate	105% 2012 IAM basic table with scale G2
				Lapse rate	0.00% - 40.00%
				CSA	3.19%



Level 3 Liabilities:	December 31, 2014
($ in millions)	Fair Value		Valuation Technique(s)	Unobservable Input	Range

Embedded derivatives (VA / FIA)	$	153.9	Budget method	Swap curve	0.24% - 2.55%
				Mortality rate	105% or 97% 2012 IAM basic table with scale G2
				Lapse rate	0.04% - 46.44%
				CSA	3.08%
Embedded derivatives (GMAB / GMWB / COMBO)	$	6.4	Risk neutral stochastic valuation methodology	Volatility surface	9.89% - 67.34%
				Swap curve	0.21% - 2.76%
				Mortality rate	105% 2012 IAM basic table with scale G2
				Lapse rate	0.00% - 40.00%
				CSA	3.08%



Level 3 Assets and Liabilities by Pricing Source:	March 31, 2015
($ in millions)	Internal [1]		External [2]		Total
Assets
Available-for-sale debt securities
U.S. government and agency [3]	$	81.1	$	—	$	81.1
State and political subdivision	88.3		112.9		201.2
Foreign government	—		10.5		10.5
Corporate	1,186.4		266.1		1,452.5
CMBS	—		6.9		6.9
RMBS	—		158.3		158.3
CDO/CLO	—		96.5		96.5
Other ABS	9.6		61.6		71.2
Total available-for-sale debt securities	1,365.4		712.8		2,078.2
Available-for-sale equity securities	—		29.5		29.5
Fair value investments	1.0		32.9		33.9
Total assets	$	1,366.4	$	775.2	$	2,141.6
Liabilities
Embedded derivatives	$	175.1	$	—	$	175.1
Total liabilities	$	175.1	$	—	$	175.1

———————


[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.



Level 3 Assets and Liabilities by Pricing Source:	December 31, 2014
($ in millions)	Internal [1]		External [2]		Total
Assets
Available-for-sale debt securities
U.S. government and agency [3]	$	80.2	$	—	$	80.2
State and political subdivision	65.9		127.4		193.3
Foreign government	—		16.1		16.1
Corporate	1,053.3		363.9		1,417.2
CMBS	—		64.6		64.6
RMBS	—		151.6		151.6
CDO/CLO	—		83.5		83.5
Other ABS	9.8		68.1		77.9
Total available-for-sale debt securities	1,209.2		875.2		2,084.4
Available-for-sale equity securities	—		28.7		28.7
Fair value investments	1.0		32.7		33.7
Total assets	$	1,210.2	$	936.6	$	2,146.8
Liabilities
Embedded derivatives	$	160.3	$	—	$	160.3
Total liabilities	$	160.3	$	—	$	160.3

———————


[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:



Carrying Amounts and Fair Values of Financial Instruments:	Fair Value Hierarchy Level	March 31, 2015				December 31, 2014
($ in millions)	Fair Value Hierarchy Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Policy loans	Level 3	$	69.2	$	68.7	$	68.1	$	67.6
Cash and cash equivalents	Level 1	$	93.9	$	93.9	$	162.3	$	162.3

Financial liabilities:
Investment contracts	Level 3	$	3,425.8	$	3,427.5	$	3,306.9	$	3,308.6
Surplus notes	Level 3	$	30.0	$	30.0	$	30.0	$	30.0