10. Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Fair Value of Financial Instruments

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 December 31, 2012 and 2011, respectively.

Fair Values of Financial Instruments by Level:	As of December 31, 2012
($ in millions)	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale debt securities
U.S. government and agency	$	244.9	$	14.3	$	25.9	$	285.1
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
Derivative assets		13.8		135.6		—		149.4
Inter-company 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

There were no transfers of assets between Level 1 and Level 2 during the year ended December 31, 2012.

Fair Values of Financial Instruments by Level:	As of December 31, 2011
($ in millions)	As restated and amended
	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale debt securities
U.S. government and agency	$	96.0	$	46.4	$	31.7	$	174.1
State and political subdivision		—		34.8		48.7		83.5
Foreign government		—		28.8		3.1		31.9
Corporate		—		690.9		513.8		1,204.7
CMBS		—		246.1		35.4		281.5
RMBS		—		263.5		268.0		531.5
CDO/CLO		—		—		62.5		62.5
Other asset-backed		—		61.2		81.2		142.4
Derivative assets		16.2		87.6		—		103.8
Inter-company reinsurance derivative asset		—		—		3.5		3.5
Fair value investments		—		14.3		27.5		41.8
Separate account assets		2,546.8		—		—		2,546.8
Total assets	$	2,659.0	$	1,473.6	$	1,075.9	$	5,208.0
Liabilities
Derivative liabilities	$	—	$	22.5	$	—	$	22.5
Embedded derivatives		—		—		82.3		82.3
Total liabilities	$	—	$	22.5	$	82.3	$	104.8

There were no transfers of assets between Level 1 and Level 2 during the year ended December 31, 2011.

The following tables present corporates carried at fair value and sector.

Fair Values of Corporates by Level and Sector:	As of 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

Fair Values of Corporates by Level and Sector:	As of December 31, 2011
($ in millions)	As restated and amended
	Level 1		Level 2		Level 3		Total
Corporates
Consumer	$	—	$	205.3	$	245.9	$	451.2
Energy		—		29.8		13.2		43.0
Financial services		—		247.5		117.5		365.0
Technical/communications		—		33.4		3.5		36.9
Transportation		—		6.1		25.5		31.6
Utilities		—		111.1		82.0		193.1
Other		—		57.7		26.2		83.9
Total corporates	$	—	$	690.9	$	513.8	$	1,204.7

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.

Level 3 Financial Assets:	As of December 31, 2012
($ in millions													Realized &
													unrealized gains			Unrealized gains
	Balance,							Transfers		Transfers			(losses)			(losses)
	beginning							into		out of			included			Included
	of period		Purchases		Sales			Level 3		Level 3			in income			in OCI			Total
Assets
Available-for-sale debt securities
U.S. government and agency	$	31.7	$	3.2	$	(6.7	)	$	—	$	—		$	—		$	(2.3	)	$	25.9
State and political subdivision		48.7		41.9		(0.8	)		12.9		—			—			13.4			116.1
Foreign government		3.1		3.5		—			—		—			—			1.4			8.0
Corporate		513.8		297.1		(16.2	)		21.0		(14.2	)		—			—			801.5
CMBS		35.4		—		(0.6	)		1.1		(17.1	)		—			0.5			19.3
RMBS		268.0		1.6		(38.9	)		—		—			2.0			(10.1	)		222.6
CDO/CLO		62.5		2.8		(5.3	)		—		—			(0.3	)		(2.9)			56.8
Other asset-backed		81.2		9.5		(7.6	)		—		(1.8	)		—			(1.2	)		80.1
Inter-company reinsurance derivative asset		3.5		—		—			—		—			(3.5)			—			—
Fair value investments		27.5		5.7		(11.5	)		—		—			1.0			—			22.7
Total assets	$	1,075.4	$	365.3	$	(87.6	)	$	35.0	$	(33.1	)	$	(0.8)		$	(1.2	)	$	1,353.0

Level 3 Financial Assets:	As of December 31, 2011
($ in millions	As restated and amended
													Realized &
													unrealized gains			Unrealized gains
	Balance,							Transfers		Transfers			(losses)			(losses)
	beginning							into		out of			included			included
	of period		Purchases		Sales			Level 3		Level 3			in income			in OCI			Total
Assets
Available-for-sale debt securities
U.S. government and agency	$	24.0	$	10.0	$	(2.2	)	$	2.0	$	—		$	—		$	(2.1	)	$	31.7
State and political subdivision		13.3		31.4		—			—		—			—			4.0			48.7
Foreign government		1.4		0.9		—			1.0		—			—			(0.2	)		3.1
Corporate		337.3		185.7		(18.0	)		21.6		(9.1	)		(0.4	)		(3.3	)		513.8
CMBS		13.4		17.6		(0.8	)		4.3		—			(0.2	)		1.1			35.4
RMBS		216.1		107.7		(47.1	)		—		—			(1.6	)		(7.1	)		268.0
CDO/CLO		59.6		8.1		(1.1	)		—		—			(0.2	)		(3.9	)		62.5
Other asset-backed		57.7		33.1		(8.9	)		0.1		(4.0	)		—			3.2			81.2
Inter-company reinsurance derivative asset		(5.5)		—		—			—		—			9.0			—			3.5
Fair value investments		13.8		19.2		(3.1	)		—		—			(2.4)			—			27.5
Total assets	$	731.1	$	413.7	$	(81.2	)	$	29.0	$	(13.1	)	$	4.2		$	(8.3	)	$	1,075.4

Level 3 Financial Liabilities:	Embedded Derivatives
($ in millions)	Years Ended December 31,
	2012				2011
					As restated
					and amended
Balance, beginning of period		$	82.3			$	29.5
Net purchases/(sales)			8.4				19.6
Transfers into Level 3			--				--
Transfers out of Level 3			--				--
Realized (gains) losses(1)			(11.2	)			33.2
Balance, end of period		$	79.5			$	82.3

———————

(1) Realized gains and losses are included in net realized investment gains on the statements of 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 or default rate would decrease the fair value of the asset while an increase in prepayment rate, recovery rate, or reinvestment spread would result in an increase to the fair value of the asset. Yields are a function of the underlying treasury rates and asset spreads, and changes in default and recovery rates are dependent on overall market conditions.

The following table presents quantitative information about unobservable inputs used in the fair value measurement of internally priced assets.

Level 3 Assets:(1)	As of December 31, 2012
($ in millions)
	Fair		Valuation	Unobservable
	Value		Technique(s)	Input	Range (Weighted Average)
U.S. government and   agency	$	25.9	Spread matrix	Yield	1.46%-3.29% (2.57%)
State and political   subdivision	$	58.0	Spread matrix	Yield	3.28%
			Discounted cash flow	Yield	1.94%-3.53% (2.97%)
Corporate	$	649.6	Spread matrix	Yield	1.47%-6.33% (3.00%)
			Discounted cash flow	Yield	1.48%-5.94% (3.30%)
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%)
			Discounted cash flow	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 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 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 embedded derivative related to index credits is calculated using the swap curve, 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.

Level 3 Liabilities:	As of 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%
(EIA / VED)				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%
Total Level 3 liabilities	$	79.5

Level 3 Assets and Liabilities by Pricing Source:	As of 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
Inter-company 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.

Level 3 Assets and Liabilities by Pricing Source:	As of December 31, 2011
($ in millions)	As restated and amended
	Internal(1)		External(2)		Total
Assets
Available-for-sale debt securities
U.S. government and agency(3)	$	31.7	$	—	$	31.7
State and political subdivision		10.4		38.3		48.7
Foreign government		—		3.1		3.1
Corporate		411.6		102.2		513.8
CMBS		—		35.4		35.4
RMBS		—		268.0		268.0
CDO/CLO		61.0		1.5		62.5
Other asset-backed		3.6		77.6		81.2
Inter-company reinsurance derivative asset		3.5		—		3.5
Fair value investments		10.6		16.9		27.5
Total assets	$	532.4	$	543.0	$	1,075.4
Liabilities
Embedded derivatives	$	82.3	$	—	$	82.3
Total liabilities	$	82.3	$	—	$	82.3

———————

(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 Value		As of December 31,
of Financial Instruments:		2012						2011
($ in millions)	Fair Value							As restated and amended
	Hierarchy	Carrying			Fair			Carrying			Fair
	Level	Value			Value			Value			Value
Financial assets:
Policy loans	Level 3		$	61.0		$	60.6		$	62.5		$	62.1
Cash and cash equivalent	Level 1		$	83.1		$	83.1		$	49.5		$	49.5
Financial liabilities:
Investment contracts	Level 3		$	2,349.8		$	2,355.4		$	1,724.4		$	1,732.2

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.