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10. Fair Value of Financial Instruments (Tables)
 12 Months Ended
Dec. 31, 2012
Notes to Financial Statements  
Financial instruments carried at fair value on a recurring

 

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     $ 1,075.4     $ 5,208.0  
Liabilities                                
Derivative liabilities   $ —     $ 22.5     $ —     $ 22.5  
Embedded derivatives     —       —       82.3       82.3  
Total liabilities   $ —     $ 22.5     $ 82.3     $ 104.8  
Corporates fair value on a recurring basis

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  
Quantitative estimates about unobservable inputs

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

 

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  

 

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  
Company's financial instruments where the carrying amounts and fair values differ:

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