Investments

Fixed Maturity Securities

At December 31, 2012 and 2011, all fixed maturity securities were classified as available-for-sale. The amortized cost and fair values of securities by security type are shown as follows.



	December 31, 2012
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
	(in millions of dollars)
United States Government and Government Agencies and Authorities	$	1,020.9	$	329.0	$	1.1	$	1,348.8
States, Municipalities, and Political Subdivisions	1,498.4		316.2		7.8		1,806.8
Foreign Governments	1,280.4		226.6		—		1,507.0
Public Utilities	9,294.3		1,865.0		15.1		11,144.2
Mortgage/Asset-Backed Securities	1,927.9		289.1		0.5		2,216.5
All Other Corporate Bonds	22,696.6		4,245.3		31.5		26,910.4
Redeemable Preferred Stocks	33.0		6.3		—		39.3
Total Fixed Maturity Securities	$	37,751.5	$	7,277.5	$	56.0	$	44,973.0



	December 31, 2011
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
	(in millions of dollars)
United States Government and Government Agencies and Authorities	$	1,005.8	$	299.7	$	1.1	$	1,304.4
States, Municipalities, and Political Subdivisions	1,377.8		222.6		8.8		1,591.6
Foreign Governments	1,139.4		237.3		—		1,376.7
Public Utilities	9,015.7		1,646.2		28.6		10,633.3
Mortgage/Asset-Backed Securities	2,634.6		344.1		5.5		2,973.2
All Other Corporate Bonds	21,411.6		3,314.8		176.3		24,550.1
Redeemable Preferred Stocks	55.8		3.5		1.9		57.4
Total Fixed Maturity Securities	$	36,640.7	$	6,068.2	$	222.2	$	42,486.7

As of December 31, 2012 and 2011, we held no fixed maturity securities for which a portion of an other-than-temporary impairment had previously been recognized in other comprehensive income.

The following charts indicate the length of time our fixed maturity securities have been in a gross unrealized loss position.



	December 31, 2012
	Less Than 12 Months				12 Months or Greater
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
	(in millions of dollars)
United States Government and Government Agencies and Authorities	$	—	$	—	$	6.5	$	1.1
States, Municipalities, and Political Subdivisions	30.8		0.9		42.1		6.9
Public Utilities	110.3		3.9		147.6		11.2
Mortgage/Asset-Backed Securities	4.4		—		3.8		0.5
All Other Corporate Bonds	441.3		7.0		396.8		24.5
Total Fixed Maturity Securities	$	586.8	$	11.8	$	596.8	$	44.2



	December 31, 2011
	Less Than 12 Months				12 Months or Greater
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
	(in millions of dollars)
United States Government and Government Agencies and Authorities	$	—	$	—	$	6.3	$	1.1
States, Municipalities, and Political Subdivisions	51.6		1.3		75.3		7.5
Public Utilities	192.0		7.9		142.2		20.7
Mortgage/Asset-Backed Securities	94.2		4.8		19.6		0.7
All Other Corporate Bonds	1,703.9		65.5		684.9		110.8
Redeemable Preferred Stocks	—		—		20.9		1.9
Total Fixed Maturity Securities	$	2,041.7	$	79.5	$	949.2	$	142.7

The following is a distribution of the maturity dates for fixed maturity securities. The maturity dates have not been adjusted for possible calls or prepayments.



	December 31, 2012
	Total Amortized Cost		Unrealized Gain Position				Unrealized Loss Position
	Total Amortized Cost		Gross Gain		Fair Value		Gross Loss		Fair Value
	(in millions of dollars)
1 year or less	$	956.4	$	21.2	$	934.1	$	0.5	$	43.0
Over 1 year through 5 years	5,922.8		628.1		6,449.8		5.0		96.1
Over 5 years through 10 years	9,752.3		1,606.4		10,997.0		7.6		354.1
Over 10 years	19,192.1		4,732.7		23,200.2		42.4		682.2
	35,823.6		6,988.4		41,581.1		55.5		1,175.4
Mortgage/Asset-Backed Securities	1,927.9		289.1		2,208.3		0.5		8.2
Total Fixed Maturity Securities	$	37,751.5	$	7,277.5	$	43,789.4	$	56.0	$	1,183.6



	December 31, 2011
	Total Amortized Cost		Unrealized Gain Position				Unrealized Loss Position
	Total Amortized Cost		Gross Gain		Fair Value		Gross Loss		Fair Value
	(in millions of dollars)
1 year or less	$	715.1	$	16.0	$	701.4	$	0.1	$	29.6
Over 1 year through 5 years	5,161.5		449.8		4,949.0		20.7		641.6
Over 5 years through 10 years	9,630.5		1,266.3		9,903.8		52.8		940.2
Over 10 years	18,499.0		3,992.0		21,082.2		143.1		1,265.7
	34,006.1		5,724.1		36,636.4		216.7		2,877.1
Mortgage/Asset-Backed Securities	2,634.6		344.1		2,859.4		5.5		113.8
Total Fixed Maturity Securities	$	36,640.7	$	6,068.2	$	39,495.8	$	222.2	$	2,990.9

At December 31, 2012, the fair value of investment-grade fixed maturity securities was $41,813.7 million, with a gross unrealized gain of $7,076.2 million and a gross unrealized loss of $23.4 million. The gross unrealized loss on investment-grade fixed maturity securities was 41.8 percent of the total gross unrealized loss on fixed maturity securities. Unrealized losses on investment-grade fixed maturity securities principally relate to changes in interest rates or changes in market or sector credit spreads which occurred subsequent to the acquisition of the securities.

At December 31, 2012, the fair value of below-investment-grade fixed maturity securities was $3,159.3 million, with a gross unrealized gain of $201.3 million and a gross unrealized loss of $32.6 million. The gross unrealized loss on below-investment-grade fixed maturity securities was 58.2 percent of the total gross unrealized loss on fixed maturity securities. Generally, below-investment-grade fixed maturity securities are more likely to develop credit concerns than investment-grade securities. At December 31, 2012, the unrealized losses in our below-investment-grade fixed maturity securities were generally due to credit spreads in certain industries or sectors and, to a lesser extent, credit concerns related to specific securities. For each specific security in an unrealized loss position, we believe that there are positive factors which mitigate credit concerns and that the securities for which we have not recorded an other-than-temporary impairment will recover in value.

As of December 31, 2012, we held 45 individual investment-grade fixed maturity securities and 29 individual below-investment-grade fixed maturity securities that were in an unrealized loss position, of which 16 investment-grade fixed maturity securities and 18 below-investment-grade fixed maturity securities had been in an unrealized loss position continuously for over one year.

In determining when a decline in fair value below amortized cost of a fixed maturity security is other than temporary, we evaluate the following factors:


•	Whether we expect to recover the entire amortized cost basis of the security


•	Whether we intend to sell the security or will be required to sell the security before the recovery of its amortized cost basis


•	Whether the security is current as to principal and interest payments


•	The significance of the decline in value


•	The time period during which there has been a significant decline in value


•	Current and future business prospects and trends of earnings


•	The valuation of the security's underlying collateral


•	Relevant industry conditions and trends relative to their historical cycles


•	Market conditions


•	Rating agency and governmental actions


•	Bid and offering prices and the level of trading activity


•	Adverse changes in estimated cash flows for securitized investments


•	Changes in fair value subsequent to the balance sheet date


•	Any other key measures for the related security

We evaluate available information, including the factors noted above, both positive and negative, in reaching our conclusions. In particular, we also consider the strength of the issuer's balance sheet, its debt obligations and near term funding requirements, cash flow and liquidity, the profitability of its core businesses, the availability of marketable assets which could be sold to increase liquidity, its industry fundamentals and regulatory environment, and its access to capital markets. Although available and applicable factors are considered in our analysis, our expectation of recovering the entire amortized cost basis of the security, whether we intend to sell the security, whether it is more likely than not we will be required to sell the security before recovery of its amortized cost, and whether the security is current on principal and interest payments are the most critical factors in determining whether impairments are other than temporary. The significance of the decline in value and the length of time during which there has been a significant decline are also important factors, but we generally do not record an impairment loss based solely on these two factors, since often other more relevant factors will impact our evaluation of a security.

While determining other-than-temporary impairments is a judgmental area, we utilize a formal, well-defined, and disciplined process to monitor and evaluate our fixed income investment portfolio, supported by issuer specific research and documentation as of the end of each period. The process results in a thorough evaluation of problem investments and the recording of losses on a timely basis for investments determined to have an other-than-temporary impairment.

If we determine that the decline in value of an investment is other than temporary, the investment is written down to fair value, and an impairment loss is recognized in the current period, either in earnings or in both earnings and other comprehensive income, as applicable. For those fixed maturity securities with an unrealized loss for which we have not recognized an other-than-temporary impairment, we believe we will recover the entire amortized cost, we do not intend to sell the security, and we do not believe it is more likely than not we will be required to sell the security before recovery of its amortized cost. There have been no defaults in the repayment obligations of any securities for which we have not recorded an other-than-temporary impairment.

Other-than-temporary impairment losses on fixed maturity securities which we intend to sell or more likely than not will be required to sell before recovery in value are recognized in earnings and equal the entire difference between the security's amortized cost basis and its fair value. For securities which we do not intend to sell and it is not more likely than not that we will be required to sell before recovery in value, other-than-temporary impairment losses recognized in earnings generally represent the difference between the amortized cost of the security and the present value of our best estimate of cash flows expected to be collected, discounted using the effective interest rate implicit in the security at the date of acquisition. The determination of cash flows is inherently subjective, and methodologies may vary depending on the circumstances specific to the security. The timing and amount of our cash flow estimates are developed using historical and forecast financial information from the issuer, including its current and projected liquidity position. We also consider industry analyst reports and forecasts, sector credit ratings, future business prospects and earnings trends, issuer refinancing capabilities, actual and/or potential asset sales by the issuer, and other data relevant to the collectibility of the contractual cash flows of the security. We take into account the probability of default, expected recoveries, third party guarantees, quality of collateral, and where our debt security ranks in terms of subordination. We may use the estimated fair value of collateral as a proxy for the present value of cash flows if we believe the security is dependent on the liquidation of collateral for recovery of our investment. For fixed maturity securities for which we have recognized an other-than-temporary impairment loss through earnings, if through subsequent evaluation there is a significant increase in expected cash flows, the difference between the new amortized cost basis and the cash flows expected to be collected is accreted as net investment income.

The following table presents the before-tax credit related portion of an other-than-temporary impairment on a fixed maturity security still held for the periods shown for which a portion of the other-than-temporary impairment was recognized in other comprehensive income. This fixed maturity security was sold during 2011. We held no fixed maturity securities during 2012 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income.



	Year Ended December 31
	2012		2011			2010
	(in millions of dollars)
Balance at Beginning of Year	$	—	$	8.5		$	18.3
Sales or Maturities of Securities	—		(8.5		)	(9.8		)
Balance at End of Year	$	—	$	—		$	8.5

At December 31, 2012, we had non-binding commitments of $29.0 million to fund private placement fixed maturity securities.

Variable Interest Entities

We invest in variable interests issued by variable interest entities. These investments include tax credit partnerships, private equity partnerships, and special purpose entities. For those variable interests that are not consolidated in our financial statements, we are not the primary beneficiary because we have neither the power to direct the activities that are most significant to economic performance nor the responsibility to absorb a majority of the expected losses. The determination of whether we are the primary beneficiary is performed at the time of our initial investment and at the date of each subsequent reporting period.

As of December 31, 2012, the carrying amount of our variable interest entity investments that are not consolidated under the provisions of GAAP was $447.1 million, comprised of $331.5 million of tax credit partnerships and $115.6 million of private equity partnerships. These variable interest entity investments are reported as other long-term investments in our consolidated balance sheets.

Additionally, we recognize a liability for all legally binding unfunded commitments to these partnerships, with a corresponding recognition of an invested asset. Our liability for legally binding unfunded commitments to the tax credit partnerships was $83.7 million at December 31, 2012. Contractually, we are a limited partner in these investments, and our maximum exposure to loss is limited to the carrying value of our investment. We also had non-binding commitments of $71.3 million to fund certain private equity partnerships at December 31, 2012, the amount of which may or may not be funded.

We are the sole beneficiary of a special purpose entity which is consolidated under the provisions of GAAP. This entity is a securitized asset trust containing a highly rated bond for principal protection and several partnership equity investments. We contributed the bond and partnership investments into the trust at the time it was established. The trust supports our investment objectives and allows us to maintain our investment in the partnerships while at the same time protecting the principal of the investment. There are no restrictions on the assets held in this trust, and the trust is free to dispose of the assets at any time. Because the assets in the trust are not liquid investments, we periodically provide funding to the underlying partnerships in the trust upon satisfaction of contractual notice from the partnerships. The fair values of the bond and partnerships were $140.8 million and $8.0 million, respectively, as of December 31, 2012. The bonds are reported as fixed maturity securities, and the partnerships are reported as other long-term investments in our consolidated balance sheets. At December 31, 2012, we had no commitments to fund the underlying partnerships, nor did we fund any amounts to the partnerships during the years ended December 31, 2012, 2011, or 2010.

Mortgage Loans

Our mortgage loan portfolio is well diversified by both geographic region and property type to reduce risk of concentration. All of our mortgage loans are collateralized by commercial real estate. When issuing a new loan, our general policy is not to exceed a loan-to-value ratio, or the ratio of the loan balance to the estimated fair value of the underlying collateral, of 75 percent. We update the loan-to-value ratios at least every three years for each loan, and properties undergo a general inspection at least every two years. Our general policy for newly issued loans is to have a debt service coverage ratio greater than 1.25 times on a normalized 25 year amortization period. We update our debt service coverage ratios annually.

Mortgage loans by property type and geographic region are as follows:



	December 31
	2012				2011
	(in millions of dollars)
	Carrying		Percent of		Carrying		Percent of
	Amount		Total		Amount		Total
Property Type
Apartment	$	34.0	2.0	%	$	28.0	1.8	%
Industrial	513.4		30.0		502.0		31.1
Mixed	78.4		4.6		93.5		5.8
Office	713.4		41.6		659.3		40.9
Retail	373.5		21.8		322.4		20.0
Other	—		—		7.1		0.4
Total	$	1,712.7	100.0	%	$	1,612.3	100.0	%



Region
New England	$	114.3	6.7	%	$	147.0	9.1	%
Mid-Atlantic	160.0		9.3		174.1		10.8
East North Central	224.7		13.1		212.7		13.2
West North Central	160.8		9.4		151.2		9.4
South Atlantic	440.9		25.7		383.8		23.8
East South Central	79.6		4.7		52.4		3.3
West South Central	159.5		9.3		160.4		9.9
Mountain	90.5		5.3		69.5		4.3
Pacific	282.4		16.5		261.2		16.2
Total	$	1,712.7	100.0	%	$	1,612.3	100.0	%

We evaluate each of our mortgage loans individually for impairment and assign an internal credit quality rating based on a comprehensive rating system used to evaluate the credit risk of the loan. The factors we use to derive our internal credit ratings may include the following:


•	Loan-to-value ratio


•	Debt service coverage ratio based on current operating income


•	Property location, including regional economics, trends and demographics


•	Age, condition, and construction quality of property


•	Current and historical occupancy of property


•	Lease terms relative to market


•	Tenant size and financial strength


•	Borrower's financial strength


•	Borrower's equity in transaction


•	Additional collateral, if any

Although all available and applicable factors are considered in our analysis, loan-to-value and debt service coverage ratios are the most critical factors in determining whether we will initially issue the loan and also in assigning values and determining impairment. We assign an overall rating to each loan using an internal rating scale of Aa (highest quality) to B (lowest quality). We review and adjust, as needed, our internal credit quality ratings on an annual basis. This review process is performed more frequently for mortgage loans deemed to have a higher risk of delinquency.

Mortgage loans, sorted by the applicable credit quality indicators, are as follows:



	December 31
	2012		2011
	(in millions of dollars)
Internal Rating
Aa	$	11.5	$	10.9
A	659.4		712.6
Baa	994.5		855.0
Ba	34.2		20.7
B	13.1		13.1
Total	$	1,712.7	$	1,612.3



Loan-to-Value Ratio
<= 65%	$	624.7	$	578.4
> 65% <= 75%	858.8		802.3
> 75% <= 85%	142.5		165.1
> 85%	86.7		66.5
Total	$	1,712.7	$	1,612.3

Based on an analysis of the above risk factors, as well as other current information, if we determine that it is probable we will be unable to collect all amounts due under the contractual terms of a mortgage loan, we establish an allowance for credit loss. If we expect to foreclose on the property, the amount of the allowance typically equals the excess carrying value of the mortgage loan over the fair value of the underlying collateral. If we expect to retain the mortgage loan until payoff, the allowance equals the excess carrying value of the mortgage loan over the expected future cash flows of the loan. The projection of future cash flows and the determination of whether a borrower can make the contractual payments is inherently subjective, and methodologies may vary depending on the circumstances specific to a loan. Additions and reductions to our allowance for credit losses on mortgage loans are reported as a component of net realized investment gains and losses. There have been no changes to our accounting policies or methodology from the prior period regarding estimating the allowance for credit losses on our mortgage loans.

The activity in the allowance for credit losses is as follows:



	Year Ended December 31
	2012			2011		2010
	(in millions of dollars)
Balance at Beginning of Year	$	1.5		$	1.5	$	3.2
Provision	1.8			—		2.4
Charge-offs, Net of Recoveries	(1.8		)	—		(4.1		)
Balance at End of Year	$	1.5		$	1.5	$	1.5

Impaired mortgage loans are as follows:



	December 31, 2012
	(in millions of dollars)
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With No Related Allowance Recorded	$	4.3	$	4.3	$	—
With an Allowance Recorded	13.1		14.6		1.5
Total	$	17.4	$	18.9	$	1.5

	December 31, 2011
	(in millions of dollars)
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With No Related Allowance Recorded	$	9.4	$	9.4	$	—
With an Allowance Recorded	13.1		14.6		1.5
Total	$	22.5	$	24.0	$	1.5

For the years ended December 31, 2012, 2011, and 2010, our average investment in impaired mortgage loans was $19.1 million, $21.3 million, and $22.9 million, respectively. For each of the years ended December 31, 2012 and 2011, we recognized $0.8 million of interest income on mortgage loans subsequent to impairment. During 2010, no interest income was recognized on mortgage loans subsequent to impairment.

A summary of our troubled debt restructurings is as follows:



	Year Ended December 31
	2012		2011		2010
	(in millions of dollars)
Foreclosure
Carrying Amount	$	17.3	$	19.9	$	7.2
Number of Loans	3		2		1

Payoff/Sale
Carrying Amount	$	—	$	3.2	$	4.7
Realized Loss	$	—	$	0.2	$	1.4
Number of Loans	—		1		3

We had no realized losses on loan foreclosures for the years ended December 31, 2012, 2011, and 2010 other than the initial impairment losses recognized prior to foreclosure.

For mortgage loans that are past due regarding principal and/or interest payments and for which collection of investment income is uncertain, we discontinue the accrual of investment income. At December 31, 2012 and 2011 we had no mortgage loans greater than 90 days past due for which we were still accruing interest income. At December 31, 2012, we held one mortgage loan for which we had discontinued the accrual of investment income that was greater than 90 days past due and had a carrying value of $4.3 million. At December 31, 2011, we held one mortgage loan that was greater than 90 days past due and had a carrying value of $9.4 million.

At December 31, 2012, we had non-binding commitments of $47.3 million to fund certain commercial mortgage loans, the amount of which may or may not be funded.

Transfers of Financial Assets

To manage our cash position more efficiently, we may enter into repurchase agreements with unaffiliated financial institutions. We generally use repurchase agreements as a means to finance the purchase of invested assets or for short-term general business purposes until projected cash flows become available from our operations or existing investments. Our repurchase agreements are typically outstanding for less than 30 days. We post collateral through our repurchase agreement transactions whereby the counterparty commits to purchase securities with the agreement to resell them to us at a later, specified date. The fair value of collateral posted is generally 102 percent of the cash received.

Our investment policy also permits us to lend fixed maturity securities to unaffiliated financial institutions in short-term securities lending agreements. These agreements increase our investment income with minimal risk. Our securities lending policy requires that a minimum of 102 percent of the fair value of the securities loaned be maintained as collateral. Generally, cash is received as collateral under these agreements and is typically reinvested in short-term investments. In the event that securities are received as collateral, we are not permitted to sell or re-post them.

We account for all of our securities lending agreements and repurchase agreements as collateralized financings. As of December 31, 2012, the carrying amount of fixed maturity securities loaned to third parties under our securities lending program was $452.8 million, for which we received collateral in the form of cash and securities of $455.8 million and $14.5 million, respectively. As of December 31, 2011, the carrying amount of fixed maturity securities loaned to third parties under our securities lending program was $319.1 million, for which we received collateral in the form of cash and securities of $312.3 million and $16.7 million, respectively. We had no outstanding repurchase agreements at December 31, 2012 and 2011.

Net Investment Income



	Year Ended December 31
	2012		2011		2010
	(in millions of dollars)
Fixed Maturity Securities	$	2,404.0	$	2,425.2	$	2,401.9
Derivative Financial Instruments	28.9		22.9		17.2
Mortgage Loans	107.1		100.1		91.1
Policy Loans	14.8		14.1		13.9
Other Long-term Investments	15.2		13.1		18.5
Short-term Investments	4.3		2.9		3.2
Gross Investment Income	2,574.3		2,578.3		2,545.8
Less Investment Expenses	26.9		26.9		28.2
Less Investment Income on PFA Assets	16.1		17.4		18.8
Less Amortization of Tax Credit Partnerships	16.1		14.4		3.3
Net Investment Income	$	2,515.2	$	2,519.6	$	2,495.5

Realized Investment Gain and Loss

Realized investment gains and losses reported in our consolidated statements of income are as follows:



	Year Ended December 31
	2012			2011			2010
	(in millions of dollars)
Fixed Maturity Securities
Gross Gains on Sales	$	29.3		$	74.0		$	61.1
Gross Losses on Sales	(20.4		)	(24.0		)	(41.3		)
Other-Than-Temporary Impairment Loss	—			(19.9		)	(15.9		)
Mortgage Loans and Other Invested Assets
Gross Gains on Sales	5.0			7.1			7.9
Gross Losses on Sales	(4.3		)	(0.5		)	(0.5		)
Impairment Loss	(1.9		)	(0.6		)	(3.8		)
Embedded Derivative in Modified Coinsurance Arrangement	51.8			(39.4		)	21.1
Foreign Currency Transactions	(3.3		)	(1.6		)	(3.9		)
Net Realized Investment Gain (Loss)	$	56.2		$	(4.9	)	$	24.7