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7. Investing Activities

12 Months Ended

Dec. 31, 2012

Debt securities

The following tables present the fixed maturity and equity securities available-for-sale by sector held at December 31, 2012 and 2011, respectively. The unrealized loss amounts presented below include the noncredit loss component of OTTI losses. We classify these investments into various sectors in line with industry conventions.

Fair Value and Cost of Securities:	December 31, 2012
($ in millions)			Gross		Gross					OTTI
	Amortized		Unrealized		Unrealized			Fair		Recognized
	Cost		Gains(1)		Losses(1)			Value		in AOCI(2)

U.S. government and agency	$	280.7	$	4.8	$	(0.4	)	$	285.1	$	—
State and political subdivision		120.5		10.9		(0.5	)		130.9		(0.2	)
Foreign government		44.4		7.4		—			51.8		—
Corporate		1,776.9		144.6		(24.0	)		1,897.5		(1.5	)
Commercial mortgage-backed (“CMBS”)		229.6		26.0		(1.6	)		254.0		(0.6	)
Residential mortgage-backed (“RMBS”)		412.6		17.5		(7.6	)		422.5		(13.8	)
CDO/CLO		59.2		1.8		(4.2	)		56.8		(6.5	)
Other asset-backed		119.1		6.0		(6.5	)		118.6		1.2
Available-for-sale debt securities	$	3,043.0	$	219.0	$	(44.8	)	$	3,217.2	$	(21.4	)

———————

(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. 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).

(2)

Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment.

Fair Value and Cost of Securities:	December 31, 2011
($ in millions)	As restated and amended
			Gross		Gross					OTTI
	Amortized		Unrealized		Unrealized			Fair		Recognized
	Cost		Gains(1)		Losses(1)			Value		in AOCI(2)

U.S. government and agency	$	162.2	$	12.4	$	(0.5	)	$	174.1	$	—
State and political subdivision		78.3		5.7		(0.5	)		83.5		—
Foreign government		30.5		1.8		(0.4	)		31.9		—
Corporate		1,157.4		84.8		(37.5	)		1,204.7		(1.5	)
Commercial mortgage-backed (“CMBS”)		273.3		12.1		(3.9	)		281.5		(5.1	)
Residential mortgage-backed (“RMBS”)		538.6		13.3		(20.4	)		531.5		(21.6	)
CDO/CLO		74.0		0.7		(12.2	)		62.5		(8.4	)
Other asset-backed		146.6		3.1		(7.3	)		142.4		0.7
Available-for-sale debt securities	$	2,460.9	$	133.9	$	(82.7	)	$	2,512.1	$	(35.9	)

———————

(1)

(2)

Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment.

Maturities of Debt Securities:	December 31, 2012
($ in millions)	Amortized		Fair
	Cost		Value

Due in one year or less	$	292.3	$	293.3
Due after one year through five years		351.0		376.8
Due after five years through ten years		939.2		1,015.4
Due after ten years		640.1		679.9
CMBS/RMBS/ABS/CDO/CLO(1)		820.4		851.8
Total	$	3,043.0	$	3,217.2

———————

(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 December 31, 2012, 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:	As of December 31,
($ in millions)	2012				2011				2010
					As restated				As restated
					and amended				and amended
Fixed maturities, available-for-sale
Proceeds from sales		$	501.4			$	325.8			$	359.1
Proceeds from maturities/repayments			380.4				213.8				222.8
Gross investment gains from sales, prepayments and maturities			22.8				2.5				3.4
Gross investment losses from sales and maturities			(0.7	)			(0.7	)			(4.1	)

Aging of Temporarily Impaired	As of December 31, 2012
Debt Securities:	Less than 12 months					Greater than 12 months					Total
($ in millions)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Debt Securities
U.S. government and agency	$	—	$	—		$	3.5	$	(0.4	)	$	3.5	$	(0.4	)
State and political subdivision		4.8		(0.3	)		1.0		(0.2	)		5.8		(0.5	)
Foreign government		—		—			—		—			—		—
Corporate		114.5		(1.7	)		64.7		(22.3	)		179.2		(24.0	)
CMBS		0.7		(0.1	)		10.6		(1.5	)		11.3		(1.6	)
RMBS		24.1		(0.2	)		52.6		(7.4	)		76.7		(7.6	)
CDO/CLO		—		—			39.0		(4.2	)		39.0		(4.2	)
Other asset-backed		0.9		—			10.7		(6.5	)		11.6		(6.5	)
Total temporarily impaired securities	$	145.0	$	(2.3	)	$	182.1	$	(42.5	)	$	327.1	$	(44.8	)

Below investment grade	$	7.8	$	(0.5	)	$	63.4	$	(25.4	)	$	71.2	$	(25.9	)

Number of securities				48					89					137

Unrealized losses on below-investment-grade debt securities with a fair value depressed by more than 20% of amortized cost totaled $21.6 million at December 31, 2012, of which $21.6 million was depressed by more than 20% of amortized cost for more than 12 months.

These securities were considered to be temporarily impaired at December 31, 2012 because each of these securities had performed, and are expected to perform, in accordance with original contractual terms. In addition, management does not have the intention to sell nor does it expect to be required to sell these securities prior to their recovery.

Aging of Temporarily Impaired	As of December 31, 2011
Debt Securities:	As restated and amended
($ in millions)	Less than 12 months					Greater than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Debt Securities
U.S. government and agency	$	—	$	—		$	3.5	$	(0.5	)	$	3.5	$	(0.5	)
State and political subdivision		15.4		—			0.9		(0.5	)		16.3		(0.5	)
Foreign government		7.2		(0.4	)		—		—			7.2		(0.4	)
Corporate		113.4		(3.5	)		69.3		(34.0	)		182.7		(37.5	)
CMBS		50.3		(1.2	)		6.9		(2.7	)		57.2		(3.9	)
RMBS		78.0		(3.3	)		91.1		(17.1	)		169.1		(20.4	)
CDO/CLO		4.8		(0.4	)		40.6		(11.8	)		45.4		(12.2	)
Other asset-backed		24.4		(0.2	)		16.5		(7.1	)		40.9		(7.3	)
Total temporarily impaired securities	$	293.5	$	(9.0	)	$	228.8	$	(73.7	)	$	522.3	$	(82.7	)

Below investment grade	$	25.3	$	(1.6	)	$	74.8	$	(50.2	)	$	100.1	$	(51.8	)

Number of securities				129					139					268

Unrealized losses on below-investment-grade debt securities with a fair value depressed by more than 20% of amortized cost totaled $46.5 million at December 31, 2011, of which $42.5 million was depressed by more than 20% of amortized cost for more than 12 months.

These securities were considered to be temporarily impaired at December 31, 2011 because each of these securities had performed, and are expected to perform, in accordance with original contractual terms. In addition, management does not have the intention to sell nor does it expect to be required to sell these securities prior to their recovery.

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 fixed maturity 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 December 31, 2012, management does not have the intention to sell, nor does it expect to be required to sell, these securities prior to their recovery.

Fixed income OTTIs recorded in 2012 were primarily concentrated in structured securities. These impairments were driven primarily by increased collateral default rates. In our judgment, these credit events or other adverse conditions of the collateral have caused, or will most likely lead to, a deficiency in the contractual cash flows related to the investment. Therefore, based upon these credit events, we have determined that OTTIs exist. Total debt impairments recognized through earnings related to such credit-related circumstances were $2.8 million in 2012, $2.8 million in 2011 and $10.8 million in 2010. Total equity impairments recognized through earnings were $0.4 million in 2011. There were no equity impairments recognized in 2012 and 2010. There were no limited partnerships and other investment OTTIs in 2012, 2011 and 2010.

In addition to these credit-related impairments recognized through earnings, we impaired securities to fair value through other comprehensive loss for any impairments related to non-credit related factors. These types of impairments were driven primarily by market or sector credit spread widening or by a lack of liquidity in the securities. The amount of impairments recognized as an adjustment to other comprehensive loss due to these factors was $2.2 million in 2012, $6.9 million in 2011 and $10.1 million in 2010.

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

Credit Losses Recognized in Earnings on Debt Securities for	As of December 31,
which a Portion of the OTTI Loss was Recognized in OCI:	2012			2011			2010
($ in millions)				As restated			As restated
				and amended			and amended

Balance, beginning of period	$	(21.3	)	$	(19.9	)	$	(15.0	)
Add: Credit losses on securities not previously impaired(1)		(1.4	)		(1.0	)		(1.9	)
Add: Credit losses on securities previously impaired(1)		(1.2	)		(1.4	)		(7.7	)
Less: Credit losses on securities impaired due to intent to sell		—			—			—
Less: Credit losses on securities sold		6.1			1.0			1.9
Less: Credit losses upon adoption of new accounting guidance(2)		—			—			2.8
Less: Increases in cash flows expected on previously impaired securities		—			—			—
Balance, end of period	$	(17.8	)	$	(21.3	)	$	(19.9	)

———————

(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 comprehensive income.
(2)	Adjustment relates to the impact of adoption in 2010 of Accounting Standards Update 2010-11Derivatives and Hedging (Topic 815), Scope Exception Related to Embedded Credit Derivatives.

Limited partnerships and other investments

Limited partnerships and other investments consist of private equity investments of $6.7 million and $4.7 million as of December 31, 2012 and 2011, respectively.

Statutory deposits

Pursuant to certain statutory requirements, as of December 31, 2012 and 2011, we had on deposit securities with a fair value of $2.4 million and $7.6 million, respectively, in insurance department special deposit accounts. We are not permitted to remove the securities from these accounts without approval of the regulatory authority.

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 private equity investments accounted for under equity method accounting.

Sources of Net Investment Income:	Years Ended December 31,
($ in millions)	2012		2011		2010
			As restated		As restated
			and amended		and amended

Debt securities	$	122.5	$	94.8	$	67.2
Policy loans		3.1		3.1		3.0
Limited partnerships and other investments		2.2		1.8		2.4
Fair value investments		4.0		2.8		3.0
Cash and cash equivalents		—		—		—
Total investment income		131.8		102.5		75.6
Less: Investment expenses		0.9		1.4		1.4
Net investment income	$	130.9	$	101.1	$	74.2

Net realized investment gains (losses)

Sources and Types of Net Realized Investment Gains (Losses):	Years Ended December 31,
($ in millions)	2012			2011			2010
				As restated			As restated
				and amended			and amended

Total other-than-temporary debt impairments	$	(5.0	)	$	(9.7	)	$	(20.9	)
Portion of loss recognized in OCI		2.2			6.9			10.1
Net debt impairments recognized in earnings	$	(2.8	)	$	(2.8	)	$	(10.8	)

Debt security impairments:
U.S. government and agency	$	—		$	—		$	—
State and political subdivision		(0.1	)		—			—
Foreign government		—			—			—
Corporate		—			(0.4	)		(0.8	)
CMBS		(0.1	)		(0.4	)		(1.6	)
RMBS		(1.9	)		(1.5	)		(4.7	)
CDO/CLO		(0.4	)		(0.4	)		(3.6	)
Other asset-backed		(0.3	)		(0.1	)		(0.1	)
Net debt security impairments		(2.8	)		(2.8	)		(10.8	)
Equity security impairments		—			(0.4	)		—
Impairment losses		(2.8	)		(3.2	)		(10.8	)
Debt security transaction gains		22.8			2.5			3.4
Debt security transaction losses		(0.7	)		(0.7	)		(4.1	)
Limited partnerships and other investment gains		—			0.1			0.6
Limited partnerships and other investment losses		(0.3	)		(0.1	)		(0.8	)
Net transaction gains (losses)		21.8			1.8			(0.9	)
Derivative instruments		(49.0	)		6.2			(22.8	)
Embedded derivatives(1)		11.2			(33.2	)		12.2
Related party reinsurance derivatives		(3.5	)		9.0			(1.7	)
Assets valued at fair value		—			—			1.6
Net realized investment losses, excluding impairment losses		(19.5	)		(16.2	)		(11.6	)
Net realized investment losses, including impairment losses	$	(22.3	)	$	(19.4	)	$	(22.4	)

———————

(1)	Includes the change in fair value of embedded derivatives associated with variable annuity GMWB, GMAB and COMBO riders. See Note 8 to these financial statements for additional disclosures.

Unrealized investment gains (losses)

Sources of Changes in Net Unrealized Investment Gains (Losses):	Years Ended December 31,
($ in millions)	2012			2011			2010
				As restated			As restated
				and amended			and amended

Debt securities	$	123.0		$	77.2		$	101.5
Equity securities		—			0.1			(0.1	)
Other investments		(0.2	)		(0.1	)		0.5
Net unrealized investment gains	$	122.8		$	77.2		$	101.9

Net unrealized investment gains	$	122.8		$	77.2		$	101.9
Applicable deferred policy acquisition cost		29.2			37.4			64.2
Applicable other actuarial offsets		59.9			20.1			8.7
Applicable deferred income tax expense (benefit)		24.9			4.2			9.2
Offsets to net unrealized investment gains (losses)		114.0			61.7			82.1
Net unrealized investment gains included in OCI	$	8.8		$	15.5		$	19.8

Non-consolidated variable interest entities

We hold limited partnership interests with various VIEs primarily as a passive investor in private equity limited partnerships and through direct investments, in which the general partners are not related parties. As the Company is not the general partner in any VIE structures, consolidation is based on evaluation of the primary beneficiary. This analysis includes a review of the VIE’s capital structure, nature of the VIE’s operations and purpose and the Company’s involvement with the entity. When determining the need to consolidate a VIE, the design of the VIE is evaluated as well as any exposed risks of the Company’s investment. As we do not have both: (i) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity; and (ii) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant, we do not consolidate these VIEs. These investments are accounted for under the equity method of accounting and are included in limited partnerships and other investments on our balance sheets. We reassess our VIE determination with respect to an entity on an ongoing basis.

The carrying value of our investments in non-consolidated VIEs (based upon sponsor values and financial statements of the individual entities) for which we are not the primary beneficiary was $2.1 million and $1.2 million as of December 31, 2012 and 2011, 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.

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. Maximum exposure to an issuer or derivative counterparty is defined by quality ratings, with higher quality issuers having larger exposure limits. As of December 31, 2012, we were exposed to the credit concentration risk of one single issuer, Goldman Sachs International, representing 10.1% 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. Included in fixed maturities are below-investment-grade assets totaling $182.5 million and $147.4 million at December 31, 2012 and 2011, respectively. 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 December 31, 2012, we held derivative assets, net of liabilities, with a fair value of $103.7 million. Derivative credit exposure was diversified with 11 different counterparties. We also had debt securities of these issuers with a fair value of $30.6 million as of December 31, 2012. Our maximum amount of loss due to credit risk with these issuers was $134.3 million as of December 31, 2012. See Note 9 to these financial statements for more information regarding derivatives.