2. INVESTMENTS

The following tables present the composition of our investment portfolio by major security type, consistent with our internal classification of how we manage, monitor, and measure the portfolio:


($ in millions)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Net Realized Gains (Losses)¹			Fair Value		% of Total Fair Value
December 31, 2012
Fixed maturities:
U.S. government obligations	$	2,806.4	$	90.1	$	0		$	0		$	2,896.5		17.6	%
State and local government obligations		1,914.4		50.6		(.6	)		0			1,964.4		11.9
Corporate debt securities		2,982.9		124.7		(1.0	)		6.4			3,113.0		18.9
Residential mortgage-backed securities		413.4		24.0		(9.2	)		0			428.2		2.6
Commercial mortgage-backed securities		1,963.9		84.9		(.1	)		0			2,048.7		12.4
Other asset-backed securities		936.0		12.9		(.1	)		(.2	)		948.6		5.8
Redeemable preferred stocks		356.9		30.5		(12.7	)		0			374.7		2.3

Total fixed maturities		11,373.9		417.7		(23.7	)		6.2			11,774.1		71.5
Equity securities:
Nonredeemable preferred stocks		404.0		404.6		0			3.8			812.4		4.9
Common equities		1,370.3		539.0		(10.3	)		0			1,899.0		11.5
Short-term investments:
Other short-term investments		1,990.0		0		0			0			1,990.0		12.1

Total portfolio^2,3	$	15,138.2	$	1,361.3	$	(34.0	)	$	10.0		$	16,475.5		100.0	%


($ in millions)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Net Realized Gains (Losses)¹			Fair Value		% of Total Fair Value
December 31, 2011
Fixed maturities:
U.S. government obligations	$	2,842.7	$	120.3	$	0		$	0		$	2,963.0		18.6	%
State and local government obligations		1,938.6		64.1		(.6	)		0			2,002.1		12.5
Corporate debt securities		2,801.5		94.3		(6.5	)		6.9			2,896.2		18.1
Residential mortgage-backed securities		452.9		9.3		(35.3	)		0			426.9		2.7
Commercial mortgage-backed securities		1,829.8		52.3		(5.5	)		0			1,876.6		11.8
Other asset-backed securities		1,210.9		11.3		(1.3	)		(.3	)		1,220.6		7.6
Redeemable preferred stocks		379.3		18.6		(24.0	)		0			373.9		2.3

Total fixed maturities		11,455.7		370.2		(73.2	)		6.6			11,759.3		73.6
Equity securities:
Nonredeemable preferred stocks		473.7		342.6		(3.7	)		(6.3	)		806.3		5.1
Common equities		1,431.0		440.0		(25.4	)		0			1,845.6		11.6
Short-term investments:
Other short-term investments		1,551.8		0		0			0			1,551.8		9.7

Total portfolio^2,3	$	14,912.2	$	1,152.8	$	(102.3	)	$	.3		$	15,963.0		100.0	%

¹	Represents net holding period gains (losses) on certain hybrid securities (discussed below).

²	At December 31, 2012 and 2011, we had $90.9 million and $46.9 million, respectively, of net unsettled security transactions included in other assets.

³	The total fair value of the portfolio includes $1.4 billion and $2.0 billion at December 31, 2012 and 2011, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.

Our other short-term investments include commercial paper, reverse repurchase transactions, and other investments that are expected to mature within one year. At December 31, 2012 and 2011, we had $21.9 million and $10.0 million, respectively, in treasury bills issued by the Australian government, included in other short-term investments.

Included in our fixed-maturity and equity securities are hybrid securities, which are reported at fair value at December 31:


(millions)	2012		2011
Fixed maturities:
Corporate debt securities	$	176.1	$	234.9
Other asset-backed securities		16.4		15.5

Total fixed maturities		192.5		250.4
Equity securities:
Nonredeemable preferred stocks		52.8		14.2

Total hybrid securities	$	245.3	$	264.6

Certain corporate debt securities are accounted for as hybrid securities since they were acquired at a substantial premium and contain a change-in-control put option (derivative) that permits the investor, at its sole option if and when a change in control is triggered, to put the security back to the issuer at a 1% premium to par. Due to this change-in-control put option and the substantial market premium paid to acquire these securities, there is the potential that the election to put, upon the change in control, could result in an acceleration of the remaining premium paid on these securities, which would result in a loss of $12.0 million as of December 31, 2012, if all of the bonds experienced a simultaneous change in control and we elected to exercise all of our put options. The put feature limits the potential loss in value that could be experienced in the event a corporate action occurs that results in a change in control that materially diminishes the credit quality of the issuer. We are under no obligation to exercise the put option we hold if a change in control occurs.

The other asset-backed security in the table above represents one hybrid security that was acquired at a deep discount to par due to a failing auction, and contains a put option that allows the investor to put that security back to the auction at par if the auction is restored. This embedded derivative has the potential to more than double our initial investment yield.

The hybrid securities in our nonredeemable preferred stock portfolio are perpetual preferred stocks that have call features with fixed-rate coupons, whereby the change in value of the call features is a component of the overall change in value of the preferred stocks.

Our securities are reported at fair value, with the changes in fair value of these securities (other than hybrid securities and derivative instruments) reported as a component of accumulated other comprehensive income, net of deferred income taxes. The changes in fair value of the hybrid securities and derivative instruments are recorded as a component of net realized gains (losses) on securities.

At December 31, 2012, bonds and certificates of deposit in the principal amount of $139.4 million were on deposit to meet state insurance regulatory and/or rating agency requirements. We did not have any securities of any one issuer, excluding U.S. government obligations, with an aggregate cost or fair value exceeding 10% of total shareholders’ equity at December 31, 2012 or 2011. At December 31, 2012, we did not have any debt securities that were non-income producing during the preceding 12 months.

Fixed Maturities The composition of fixed maturities by maturity at December 31, 2012, was:


(millions)	Cost		Fair Value
Less than one year	$	1,432.3	$	1,462.2
One to five years		8,368.7		8,675.0
Five to ten years		1,426.3		1,484.7
Ten years or greater		146.6		152.2

Total	$	11,373.9	$	11,774.1

Asset-backed securities are classified in the maturity distribution table based upon their projected cash flows. All other securities which do not have a single maturity date are reported based upon expected average maturity. Contractual maturities may differ from expected maturities because the issuers of the securities may have the right to call or prepay obligations.

Gross Unrealized Losses As of December 31, 2012, we had $23.7 million of gross unrealized losses in our fixed-income securities and $10.3 million in our common equities. We currently do not intend to sell the fixed-income securities and determined that it is more likely than not that we will not be required to sell these securities for the period of time necessary to recover their cost bases. A review of our fixed-income securities indicated that the issuers were current with respect to their interest obligations and that there was no evidence of any deterioration of the current cash flow projections that would indicate we would not receive the remaining principal at maturity. In addition, 89% of our common stock portfolio was indexed to the Russell 1000; as such, this portfolio may contain securities in a loss position for an extended period of time, subject to possible write-downs, as described below. We may retain these securities as long as the portfolio and index correlation remain similar. To the extent there is issuer-specific deterioration, we may write-down the securities of that issuer. The remaining 11% of our common stocks are part of a managed equity strategy selected and administered by external investment advisors. If our strategy were to change and these securities were determined to be other-than-temporarily impaired, we would recognize a write-down in accordance with our stated policy.

The following tables show the composition of gross unrealized losses by major security type and by the length of time that individual securities have been in a continuous unrealized loss position:


	Total Fair		Gross Unrealized			Less than 12 Months					12 Months or Greater
	Total Fair		Gross Unrealized			Fair		Unrealized			Fair		Unrealized
(millions)	Value		Losses			Value		Losses			Value		Losses
December 31, 2012
Fixed maturities:
State and local government obligations	$	162.8	$	(.6	)	$	123.1	$	(.5	)	$	39.7	$	(.1	)
Corporate debt securities		128.2		(1.0	)		128.2		(1.0	)		0		0
Residential mortgage-backed securities		149.2		(9.2	)		40.2		(.6	)		109.0		(8.6	)
Commercial mortgage-backed securities		7.1		(.1	)		2.1		0			5.0		(.1	)
Other asset-backed securities		25.0		(.1	)		20.8		0			4.2		(.1	)
Redeemable preferred stocks		155.7		(12.7	)		24.9		0			130.8		(12.7	)

Total fixed maturities		628.0		(23.7	)		339.3		(2.1	)		288.7		(21.6	)
Equity securities:
Nonredeemable preferred stocks		0		0			0		0			0		0
Common equities		118.2		(10.3	)		100.7		(8.2	)		17.5		(2.1	)

Total equity securities		118.2		(10.3	)		100.7		(8.2	)		17.5		(2.1	)

Total portfolio	$	746.2	$	(34.0	)	$	440.0	$	(10.3	)	$	306.2	$	(23.7	)


	Total Fair Value		Gross Unrealized Losses			Less than 12 Months					12 Months or Greater
(millions)	Total Fair Value		Gross Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2011
Fixed maturities:
State and local government obligations	$	93.6	$	(.6	)	$	79.5	$	(.5	)	$	14.1	$	(.1	)
Corporate debt securities		262.7		(6.5	)		137.3		(4.6	)		125.4		(1.9	)
Residential mortgage-backed securities		308.7		(35.3	)		34.4		(2.0	)		274.3		(33.3	)
Commercial mortgage-backed securities		203.7		(5.5	)		161.4		(3.5	)		42.3		(2.0	)
Other asset-backed securities		284.2		(1.3	)		259.7		(1.0	)		24.5		(.3	)
Redeemable preferred stocks		191.4		(24.0	)		43.5		(1.5	)		147.9		(22.5	)

Total fixed maturities		1,344.3		(73.2	)		715.8		(13.1	)		628.5		(60.1	)
Equity securities:
Nonredeemable preferred stocks		19.5		(3.7	)		19.5		(3.7	)		0		0
Common equities		214.6		(25.4	)		196.7		(23.1	)		17.9		(2.3	)

Total equity securities		234.1		(29.1	)		216.2		(26.8	)		17.9		(2.3	)

Total portfolio	$	1,578.4	$	(102.3	)	$	932.0	$	(39.9	)	$	646.4	$	(62.4	)

Other-than-Temporary Impairment (OTTI) The following table shows the total non-credit portion of the OTTI recorded in accumulated other comprehensive income, reflecting the original non-credit loss at the time the credit impairment was determined:


	December 31,
(millions)	2012			2011
Fixed maturities:
Residential mortgage-backed securities	$	(44.2	)	$	(44.8	)
Commercial mortgage-backed securities		(.9	)		(1.0	)

Total fixed maturities	$	(45.1	)	$	(45.8	)

The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended December 31, 2012 and 2011, for which a portion of the OTTI losses were also recognized in accumulated other comprehensive income at the time the credit impairments were determined and recognized:


(millions)	Residential Mortgage- Backed			Commercial Mortgage- Backed			Corporate Debt			Total
Beginning balance at January 1, 2012	$	34.5		$	1.3		$	0		$	35.8
Credit losses for which an OTTI was previously recognized		.1			0			0			.1
Credit losses for which an OTTI was not previously recognized		.3			0			0			.3
Reductions for securities sold/matured		0			(.2	)		0			(.2	)
Change in recoveries of future cash flows expected to be collected^1,2		(3.8	)		(.2	)		0			(4.0	)
Reductions for previously recognized credit impairments written-down to fair value³		(4.0	)		(.3	)		0			(4.3	)

Ending balance at December 31, 2012	$	27.1		$	.6		$	0		$	27.7


(millions)	Residential Mortgage- Backed			Commercial Mortgage- Backed			Corporate Debt			Total
Beginning balance at January 1, 2011	$	32.3		$	1.0		$	6.5		$	39.8
Credit losses for which an OTTI was previously recognized		1.4			0			0			1.4
Credit losses for which an OTTI was not previously recognized		1.1			.4			0			1.5
Reductions for securities sold/matured		0			0			0			0
Change in recoveries of future cash flows expected to be collected^1,2		.8			.3			(6.5	)		(5.4	)
Reductions for previously recognized credit impairments written-down to fair value³		(1.1	)		(.4	)		0			(1.5	)

Ending balance at December 31, 2011	$	34.5		$	1.3		$	0		$	35.8

¹	Reflects expected recovery of prior period impairments that will be accreted into income over the remaining life of the security.

²	Includes $1.4 million and $2.0 million at December 31, 2012 and 2011, respectively, received in excess of the cash flows expected to be collected at the time of the write-downs.

³	Reflects reductions of prior credit impairments where the current credit impairment requires writing securities down to fair value (i.e., no remaining non-credit loss).

Although we determined that it is more likely than not that we will not be required to sell the securities prior to the recovery of their respective cost bases (which could be maturity), we are required to measure the amount of credit losses on the securities that were determined to be other-than-temporarily impaired. In that process, we considered a number of factors and inputs related to the individual securities. The methodology and significant inputs used to measure the amount of credit losses in our portfolio included: current performance indicators on the underlying assets (e.g., delinquency rates, foreclosure rates, and default rates); credit support (via current levels of subordination); historical credit ratings; and updated cash flow expectations based upon these performance indicators. In order to determine the amount of credit loss, if any, the net present value of the cash flows expected (i.e., expected recovery value) was calculated using the current book yield for each security, and was compared to its current amortized value. In the event that the net present value was below the amortized value, a credit loss was deemed to exist, and the security was written down.

Net Realized Gains (Losses) The components of net realized gains (losses) for the years ended December 31, were:


(millions)	2012			2011			2010
Gross realized gains on security sales
Fixed maturities:
U.S. government obligations	$	20.2		$	59.1		$	39.8
State and local government obligations		15.0			3.5			10.0
Corporate and other debt securities		58.1			23.0			30.3
Residential mortgage-backed securities		1.2			2.0			0
Commercial mortgage-backed securities		19.3			.3			1.0
Other asset-backed securities		.9			2.1			.8
Redeemable preferred stocks		.7			4.6			8.5

Total fixed maturities		115.4			94.6			90.4
Equity securities:
Nonredeemable preferred stocks		78.2			148.9			83.6
Common equities		167.0			11.6			13.4

Subtotal gross realized gains on security sales		360.6			255.1			187.4

Gross realized losses on security sales
Fixed maturities:
U.S. government obligations		(1.9	)		(9.3	)		(12.9	)
Corporate and other debt securities		(.6	)		(3.5	)		(.5	)
Redeemable preferred stocks		(.4	)		(2.2	)		(5.2	)

Total fixed maturities		(2.9	)		(15.0	)		(18.6	)
Equity securities:
Nonredeemable preferred stocks		(1.1	)		0			0
Common equities		(27.1	)		(36.5	)		(7.2	)

Subtotal gross realized losses on security sales		(31.1	)		(51.5	)		(25.8	)

Net realized gains (losses) on security sales
Fixed maturities:
U.S. government obligations		18.3			49.8			26.9
State and local government obligations		15.0			3.5			10.0
Corporate and other debt securities		57.5			19.5			29.8
Residential mortgage-backed securities		1.2			2.0			0
Commercial mortgage-backed securities		19.3			.3			1.0
Other asset-backed securities		.9			2.1			.8
Redeemable preferred stocks		.3			2.4			3.3

Total fixed maturities		112.5			79.6			71.8
Equity securities:
Nonredeemable preferred stocks		77.1			148.9			83.6
Common equities		139.9			(24.9	)		6.2

Subtotal net realized gains (losses) on security sales		329.5			203.6			161.6

Other-than-temporary impairment losses
Fixed maturities:
Residential mortgage-backed securities		(1.6	)		(3.3	)		(11.1	)
Commercial mortgage-backed securities		(.1	)		(.6	)		(1.9	)

Total fixed maturities		(1.7	)		(3.9	)		(13.0	)
Equity securities:
Common equities		(1.8	)		(.2	)		(.5	)

Subtotal other-than-temporary impairment losses		(3.5	)		(4.1	)		(13.5	)

Other gains (losses)
Hybrid securities		14.3			1.7			5.5
Derivative instruments		(43.1	)		(98.9	)		(58.5	)
Litigation settlements		9.6			.3			1.0

Subtotal other gains (losses)		(19.2	)		(96.9	)		(52.0	)

Total net realized gains (losses) on securities	$	306.8		$	102.6		$	96.1

Gross realized gains and losses were the result of sales transactions in our fixed-income portfolio, related to movements in credit spreads and interest rates, rebalancing of our equity-indexed portfolio, and tax management strategies. In addition, gains and losses reflect recoveries from litigation settlements and holding period valuation changes on hybrids and derivatives. Also included are write-downs for securities determined to be other-than-temporarily impaired in our fixed-maturity and/or equity portfolios.

Net Investment Income The components of net investment income for the years ended December 31, were:


(millions)	2012			2011			2010
Fixed maturities:
U.S. government obligations	$	49.8		$	58.0		$	80.8
State and local government obligations		51.1			60.0			65.4
Corporate debt securities		107.5			106.7			84.3
Residential mortgage-backed securities		16.1			18.6			21.7
Commercial mortgage-backed securities		82.2			83.4			99.1
Other asset-backed securities		20.3			24.5			21.8
Redeemable preferred stocks		24.2			33.0			45.5

Total fixed maturities		351.2			384.2			418.6
Equity securities:
Nonredeemable preferred stocks		43.8			57.7			70.6
Common equities		44.9			35.7			27.3
Short-term investments:
Other short-term investments		3.1			2.4			3.6

Investment income		443.0			480.0			520.1
Investment expenses		(15.4	)		(13.5	)		(11.9	)

Net investment income	$	427.6		$	466.5		$	508.2

Trading Securities At December 31, 2012 and 2011, we did not hold any trading securities and we did not have any net realized gains (losses) on trading securities for the years ended December 31, 2012, 2011, and 2010.

Derivative Instruments We have invested in the following derivative exposures at various times: interest rate swaps, asset-backed credit default swaps, U.S. corporate credit default swaps, cash flow hedges, and equity options.

For all derivative positions discussed below, realized holding period gains and losses are netted with any upfront cash that may be exchanged under the contract to determine if the net position should be classified either as an asset or liability. To be reported as a net derivative asset and a component of the available-for-sale portfolio, the inception-to-date realized gain on the derivative position at period end would have to exceed any upfront cash received. On the other hand, a net derivative liability would include any inception-to-date realized loss plus the amount of upfront cash received (or netted, if upfront cash was paid) and would be reported as a component of other liabilities. These net derivative assets/liabilities are not separately disclosed on the balance sheet due to their immaterial effect on our financial condition, cash flows, and results of operations.

The following table shows the status of our derivative instruments at December 31, 2012 and 2011, and for the years ended December 31, 2012, 2011, and 2010; amounts are on a pretax basis:


(millions)								Balance Sheet							Comprehensive Income Statement
	Notional Value¹								Assets (Liabilities) Fair Value						Net Realized Gains (Losses) on Securities
	December 31,								December 31,						Years ended December 31,
Derivatives designated as:	2012		2011		2010		Purpose	Classification	2012			2011			2012			2011			2010
Hedging instruments
Closed:
Ineffective cash flow hedge	$	31	$	15	$	223	Manage interest rate risk	NA	$	0		$	0		$	.6		$	.3		$	5.8

Non-hedging instruments
Assets:
Corporate credit default swaps		0		25		35	Manage credit risk	Investments - fixed maturities		0			.7			0			(.2	)		2.5

Liabilities:
Interest rate swaps		1,263		1,263		713	Manage portfolio duration	Other liabilities		(95.5	)		(76.1	)		(42.7	)		(74.0	)		(66.6	)

Closed:																0			(25.5	)		0
Interest rate swaps		0		350		0	Manage portfolio duration	NA		0			0			0			(25.5	)		0

Corporate credit default swaps		25		10		25	Manage credit risk	NA		0			0			(1.0	)		.5			(.2	)

Total		NA		NA		NA			$	(95.5	)	$	(75.4	)	$	(43.1	)	$	(98.9	)	$	(58.5	)

¹The	amounts represent the value held at year end for open positions and the maximum amount held during the year for closed positions.

NA = Not Applicable

CASH FLOW HEDGES

During the years ended December 31, 2012 and 2011, we repurchased, in the open market, $30.9 million and $15.0 million, respectively, in aggregate principal amount of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the “6.70% Debentures”). For the portion of the 6.70% Debentures we purchased, we reclassified $0.6 million and $0.3 million, in the respective years, on a pretax basis, of the unrealized gain on forecasted transactions from accumulated other comprehensive income on the balance sheet to net realized gains on securities on the comprehensive income statement.

During 2010, we finalized our tender offer for, and repurchased $222.9 million principal amount of, the 6.70% Debentures. We reclassified $5.8 million (pretax) from accumulated other comprehensive income on the balance sheet to net realized gains (losses) on securities on the comprehensive income statement, reflecting the portion of the unrealized gain on forecasted transactions that was related to the 6.70% Debentures that were repurchased pursuant to the tender offer.

In anticipation of issuing the 6.70% Debentures in 2007, we entered into a forecasted debt issuance hedge (cash flow hedge) against a possible rise in interest rates. Upon issuance of the 6.70% Debentures, the hedge was closed, and we recognized a pretax gain of $34.4 million, which was recorded as part of accumulated other comprehensive income. The $34.4 million gain, less the $0.6 million, $0.3 million, and $5.8 million reclassifications mentioned above, was deferred and is being recognized as a decrease to interest expense over the 10-year fixed interest rate term of the 6.70% Debentures.

During 2011, we issued $500 million of 3.75% Senior Notes due 2021 (the “3.75% Senior Notes”) and entered into a forecasted debt issuance hedge (cash flow hedge) against a possible rise in interest rates (see Note 4 – Debt for further discussion). Upon issuance of the 3.75% Senior Notes in August 2011, the hedge was closed and we recognized, as part of accumulated other comprehensive income, a pretax unrealized loss of $5.1 million. The $5.1 million loss was deferred and is being recognized as an increase to interest expense over the life of the 3.75% Senior Notes.

During 2012, 2011, and 2010, we recognized $2.1 million, $2.6 million, and $2.7 million, respectively, as net decreases to interest expense on our closed debt issuance cash flow hedges.

INTEREST RATE SWAPS

At December 31, 2012, 2011, and 2010, we invested in interest rate swap positions primarily to manage the fixed-income portfolio duration. During the year ended December 31, 2012, we held a 9-year interest rate swap position (opened in 2009) and two 5-year interest rate swap positions (opened in 2011); in each case, we are paying a fixed rate and receiving a variable rate, effectively shortening the duration of our fixed-income portfolio. We closed a portion of the 9-year position during 2011. The combined open positions have generated an aggregate realized loss, as interest rates have fallen since the inception of these positions. As of December 31, 2012, 2011, and 2010, the balance of the cash collateral that we had delivered to the applicable counterparty on these positions was $105.0 million, $81.7 million, and $52.2 million, respectively.

CORPORATE CREDIT DEFAULT SWAPS

Financial Services Sector – During 2012, we closed a position that was opened during 2008, on one corporate issuer within the financial services sector for which we bought credit default protection in the form of a credit default swap for a 5-year time horizon. We held this protection to reduce some of our exposure to additional valuation declines on a preferred stock position of the same issuer. As of December 31, 2011 and 2010, the balance of the cash collateral that we had received from the counterparty on the then open position was $0.7 million and $0.5 million, respectively.

Automotive Sector – We held no credit default swaps in this sector during 2012. During 2011, we closed a position where we sold credit protection in the form of a corporate credit default swap on one issuer in the automotive sector for a 5-year time horizon; the position was opened during the second quarter 2010. We would have been required to cover a $10 million notional value if a credit event had been triggered, including failure to pay or bankruptcy by the issuer. We acquired an equal par value amount of U.S. Treasury Notes with a similar maturity to cover the credit default swap’s notional exposure. As of December 31, 2010, the balance of the cash collateral that we had received from the counterparty on the then open position was $1.1 million.

Technology Sector – We held no credit default swaps in this sector during 2012 or 2011. During 2010, we opened and closed two positions on one corporate issuer within the technology sector for which we bought credit default protection in the form of credit default swaps for 2-year and 4-year time horizons. We paid $0.2 million in upfront cash when we entered into the 4-year exposure position. We held this protection to reduce our exposure to additional valuation declines on a corporate position of the same issuer due to potential future credit impairment.