XNYS:SYA Symetra Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-33808

 

 

SYMETRA FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-0978027

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

777 108th Avenue NE, Suite 1200

Bellevue, Washington 98004

(Address of principal executive offices, including zip code)

(425) 256-8000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 3, 2012, the Registrant had 119,083,786 common voting shares outstanding, with a par value of $0.01 per share.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
   PART I – FINANCIAL INFORMATION   

Item 1:

   Condensed Financial Statements:   
  

Consolidated Balance Sheets

     5   
  

Consolidated Statements of Income

     6   
  

Consolidated Statements of Comprehensive Income

     7   
  

Consolidated Statements of Changes in Stockholders’ Equity

     8   
  

Consolidated Statements of Cash Flows

     9   
  

Condensed Notes to Consolidated Financial Statements

     10   

Item 2:

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   

Item 3:

   Quantitative and Qualitative Disclosures about Market Risk      66   

Item 4:

   Controls and Procedures      66   
   PART II – OTHER INFORMATION   

Item 1:

   Legal Proceedings      67   

Item 1A:

   Risk Factors      67   

Item 6:

   Exhibits      67   

Signatures

     68   

 

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Unless the context otherwise requires, references in this quarterly report on Form 10-Q to “we,” “our,” “us” and “the Company” are to Symetra Financial Corporation together with its subsidiaries. References to “Symetra” refer to Symetra Financial Corporation on a stand-alone, non-consolidated basis.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of current or historical facts, included or referenced in this report that address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. The words “will,” “believe,” “intend,” “plan,” “expect,” “anticipate,” “project,” “estimate,” “predict,” “potential” and similar expressions also are intended to identify forward-looking statements. These forward-looking statements include, among others, statements with respect to the Company’s:

 

   

estimates or projections of revenues, net income (loss), net income (loss) per share, adjusted operating income (loss), adjusted operating income (loss) per share, market share or other financial forecasts;

 

   

trends in operations, financial performance and financial condition;

 

   

financial and operating targets or plans; and

 

   

business and growth strategy, including prospective products, services and distribution partners.

These statements are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors believed to be appropriate under the circumstances. Whether actual results and developments will conform to the Company’s expectations and predictions is subject to a number of risks, uncertainties and contingencies that could cause actual results to differ materially from expectations, including, among others:

 

   

the effects of fluctuations in interest rates or a prolonged low interest rate environment;

 

   

general economic, market or business conditions, including further economic downturns or other adverse conditions in the global and domestic capital and credit markets;

 

   

the effects of changes in monetary policy, government programs to stimulate mortgage refinancing and significant increases in corporate refinance activity;

 

   

the performance of our investment portfolio;

 

   

the continued availability of quality commercial mortgage loan investments and our continued capacity to invest in commercial mortgage loans;

 

   

our ability to successfully execute on our Grow & Diversify strategy;

 

   

recorded reserves for future policy benefits and claims subsequently proving to be inadequate or inaccurate;

 

   

deviations from assumptions used in setting prices for insurance and annuity products, or establishing cash flow testing reserves;

 

   

continued viability of certain products under various economic, regulatory and other conditions;

 

   

market pricing and competitive trends related to insurance products and services;

 

   

changes in amortization of deferred policy acquisition costs and deferred sales inducements;

 

   

financial strength or credit ratings changes;

 

   

the availability and cost of capital and financing;

 

   

the continued availability and cost of reinsurance coverage;

 

   

changes in laws or regulations, or their interpretation, including those that could increase the Company’s business costs, reserve levels and required capital levels;

 

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the ability of subsidiaries to pay dividends to Symetra;

 

   

the effects of implementation of the Patient Protection and Affordable Care Act (“PPACA”);

 

   

the effects of implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd Frank Act”); and

 

   

the risks that are described in Part II, Item 1A — “Risk Factors” in this report; Part I, Item 1A — “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011; and Item 1A — “Risk Factors” in Part II of our Form 10-Q for the quarter ended March 31, 2012.

Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company or its business or operations. We assume no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise.

 

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PART I – Financial Information

 

Item 1. Condensed Financial Statements

CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)

 

     As of
June 30, 2012
     As of
December 31, 2011
 
     (Unaudited)      (As adjusted)  
ASSETS      

Investments:

     

Available-for-sale securities:

     

Fixed maturities, at fair value (amortized cost: $21,164.0 and $21,061.4, respectively)

   $ 23,300.8      $ 22,905.2  

Marketable equity securities, at fair value (cost: $51.9 and $52.4, respectively)

     49.8        50.3  

Trading securities:

     

Marketable equity securities, at fair value (cost: $479.1 and $365.4, respectively)

     501.8        381.7  

Mortgage loans, net

     2,827.8        2,517.6  

Policy loans

     67.8        69.0  

Investments in limited partnerships (includes $27.9 and $27.8 measured at fair value, respectively)

     247.7        226.9  

Other invested assets

     41.9        21.0  
  

 

 

    

 

 

 

Total investments

     27,037.6        26,171.7  

Cash and cash equivalents

     172.6        242.3  

Accrued investment income

     272.7        269.4  

Reinsurance recoverables

     293.4        295.6  

Deferred policy acquisition costs

     173.2        186.0  

Receivables and other assets

     249.0        222.5  

Separate account assets

     799.4        795.8  
  

 

 

    

 

 

 

Total assets

   $ 28,997.9      $ 28,183.3  
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Funds held under deposit contracts

   $ 22,941.0      $ 22,449.5  

Future policy benefits

     391.5        391.2  

Policy and contract claims

     160.1        170.9  

Other policyholders’ funds

     113.8        129.0  

Notes payable

     449.3        449.2  

Deferred income tax liabilities, net

     508.7        395.0  

Other liabilities

     255.7        287.8  

Separate account liabilities

     799.4        795.8  
  

 

 

    

 

 

 

Total liabilities

     25,619.5        25,068.4  

Commitments and contingencies (Note 10)

     

Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued

     —           —     

Common stock, $0.01 par value; 750,000,000 shares authorized; 119,131,119 issued and outstanding as of June 30, 2012; 118,637,379 issued and outstanding as of December 31, 2011

     1.2        1.2  

Additional paid-in capital

     1,457.6        1,454.6  

Retained earnings

     731.6        631.8  

Accumulated other comprehensive income, net of taxes

     1,188.0        1,027.3  
  

 

 

    

 

 

 

Total stockholders’ equity

     3,378.4        3,114.9  
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 28,997.9      $ 28,183.3  
  

 

 

    

 

 

 

See accompanying notes.

 

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CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2012     2011     2012     2011  
           (As adjusted)           (As adjusted)  

Revenues:

        

Premiums

   $ 146.8     $ 119.4     $ 297.1     $ 240.3  

Net investment income

     319.2       312.2       639.7       622.2  

Policy fees, contract charges, and other

     48.8       45.9       95.1       90.6  

Net realized investment gains (losses):

        

Total other-than-temporary impairment losses on securities

     (11.1     (3.1     (14.7     (4.0

Less: portion of losses recognized in other comprehensive income

     1.7       0.3       2.8       0.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses recognized in earnings

     (9.4     (2.8     (11.9     (3.7

Other net realized investment gains

     3.0       16.9       31.4       33.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized investment gains (losses)

     (6.4     14.1       19.5       29.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     508.4       491.6       1,051.4       982.8  

Benefits and expenses:

        

Policyholder benefits and claims

     104.5       83.7       209.7       176.0  

Interest credited

     230.3       225.1       459.8       453.4  

Other underwriting and operating expenses

     92.6       76.1       175.6       148.0  

Interest expense

     8.2       8.0       16.4       16.0  

Amortization of deferred policy acquisition costs

     15.4       16.4       31.2       32.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     451.0       409.3       892.7       826.1  

Income from operations before income taxes

     57.4       82.3       158.7       156.7  

Provision (benefit) for income taxes:

        

Current

     18.6       31.1       12.3       42.3  

Deferred

     (5.0     (6.9     27.2       2.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total provision for income taxes

     13.6       24.2       39.5       45.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 43.8     $ 58.1     $ 119.2     $ 111.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 0.32     $ 0.42     $ 0.86     $ 0.81  

Diluted

   $ 0.32     $ 0.42     $ 0.86     $ 0.81  

Weighted-average number of common shares outstanding:

        

Basic

     138.090       137.523       137.933       137.408  

Diluted

     138.094       137.532       137.936       137.417  

Cash dividends declared per common share

   $ 0.07     $ 0.06     $ 0.14     $ 0.11  

See accompanying notes.

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2012     2011     2012     2011  
           (As adjusted)           (As adjusted)  

Net income

   $ 43.8     $ 58.1     $ 119.2     $ 111.6  

Other comprehensive income, net of taxes:

        

Changes in unrealized gains and losses on available-for-sale securities, net of reclassification adjustments (net of taxes of $109.9, $104.8, $103.3 and $107.8)

     203.8       194.6       191.9       200.3  

Other-than-temporary impairments on debt securities not related to credit losses (net of taxes of $(0.6), $(0.1), $(1.0) and $(0.1))

     (1.1     (0.2     (1.8     (0.2

Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and deferred sales inducements (net of taxes of $(9.0), $(15.4), $(16.5) and $(15.2))

     (16.6     (28.7     (30.6     (28.3

Impact of cash flow hedges (net of taxes of $0.9, $0.1, $0.6 and $0.1)

     1.8       0.3       1.2       0.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     187.9       166.0       160.7       172.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 231.7     $ 224.1     $ 279.9     $ 283.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions)

(Unaudited)

 

     Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income
     Total
Stockholders’
Equity
 

Balances as of January 1, 2011

   $ 1.2      $ 1,450.2      $ 496.7     $ 432.5      $ 2,380.6  

Cumulative effect of adoption—new accounting standard (net of taxes of $(12.9))

     —           —           (29.1     5.1        (24.0

Comprehensive income:

             

Net income, as adjusted

     —           —           111.6       —           111.6  

Other comprehensive income, as adjusted

     —           —           —          172.1        172.1  
             

 

 

 

Total comprehensive income, as adjusted

                283.7  

Stock-based compensation

     —           2.1        —          —           2.1  

Dividends declared

     —           —           (15.1     —           (15.1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balances as of June 30, 2011, as adjusted

   $ 1.2      $ 1,452.3      $ 564.1     $ 609.7      $ 2,627.3  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balances as of January 1, 2012, as adjusted

   $ 1.2      $ 1,454.6      $ 631.8     $ 1,027.3      $ 3,114.9  

Comprehensive income:

             

Net income

     —           —           119.2       —           119.2  

Other comprehensive income

     —           —           —          160.7        160.7  
             

 

 

 

Total comprehensive income

                279.9  

Stock-based compensation

     —           3.0        —          —           3.0  

Dividends declared

     —           —           (19.4     —           (19.4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balances as of June 30, 2012

   $ 1.2      $ 1,457.6      $ 731.6     $ 1,188.0      $ 3,378.4  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying notes.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     For the Six Months Ended
June 30,
 
     2012     2011  
           (As adjusted)  

Cash flows from operating activities

    

Net income

   $ 119.2     $ 111.6  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Net realized investment gains

     (19.5     (29.7

Accretion and amortization of invested assets, net

     23.6       23.3  

Accrued interest on fixed maturities

     (9.9     (15.0

Amortization and depreciation

     13.3       12.8  

Deferred income tax provision

     27.2       2.8  

Interest credited on deposit contracts

     459.8       453.4  

Mortality and expense charges and administrative fees

     (57.4     (53.8

Changes in:

    

Accrued investment income

     (3.3     (10.5

Deferred policy acquisition costs, net

     (7.9     (20.0

Future policy benefits

     0.3       1.2  

Policy and contract claims

     (10.8     9.8  

Current income taxes

     (27.1     (1.4

Other assets and liabilities

     (27.8     (34.6

Other, net

     2.1       1.4  
  

 

 

   

 

 

 

Total adjustments

     362.6       339.7  
  

 

 

   

 

 

 

Net cash provided by operating activities

     481.8       451.3  

Cash flows from investing activities

    

Purchases of:

    

Fixed maturities and marketable equity securities

     (2,008.1     (2,535.0

Other invested assets and investments in limited partnerships

     (62.4     (16.1

Issuances of mortgage loans

     (419.5     (425.7

Maturities, calls, paydowns, and other repayments

     785.6       950.8  

Sales of:

    

Fixed maturities and marketable equity securities

     995.1       803.1  

Other invested assets and investments in limited partnerships

     6.3       12.1  

Repayments of mortgage loans

     93.3       52.1  

Other, net

     0.6       2.7  
  

 

 

   

 

 

 

Net cash used in investing activities

     (609.1     (1,156.0

Cash flows from financing activities

    

Policyholder account balances:

    

Deposits

     956.6       1,261.8  

Withdrawals

     (875.0     (724.4

Cash dividends paid on common stock

     (19.4     (15.1

Other, net

     (4.6     (4.8
  

 

 

   

 

 

 

Net cash provided by financing activities

     57.6       517.5  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (69.7     (187.2

Cash and cash equivalents at beginning of period

     242.3       274.6  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 172.6     $ 87.4  
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Non-cash transactions during the period:

    

Investments in limited partnerships and capital obligations incurred

   $ 5.2     $ 13.5  

Fixed maturities exchanges

     68.6       69.8  

See accompanying notes.

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

1. Description of Business

Symetra Financial Corporation is a Delaware corporation that, through its subsidiaries, offers products and services that include retirement, group health and employee benefits products and life insurance, marketed through benefits consultants, financial institutions and independent agents and advisors in all states and the District of Columbia. The Company’s principal products include medical stop-loss insurance, fixed and variable deferred annuities, single premium immediate annuities, individual life insurance and bank-owned life insurance.

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying interim condensed financial statements include, on a consolidated basis, the accounts of Symetra Financial Corporation and its subsidiaries, which are wholly-owned and are collectively referred to as “the Company”. All significant intercompany transactions and balances have been eliminated.

The interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP), including the rules and regulations of the Securities and Exchange Commission (SEC), for interim reporting. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that may affect the amounts reported in the interim condensed consolidated financial statements and accompanying notes. These interim condensed consolidated financial statements are unaudited but in management’s opinion include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation. Certain reclassifications have been made to prior year financial information for it to conform to the current period presentation. In addition, prior period financial information, including information for the three and six months ended June 30, 2011 and as of December 31, 2011 has been restated to reflect the retrospective adoption of the new accounting standard for deferred policy acquisition costs (DAC). Restated information has been labeled “as adjusted” where applicable.

These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the twelve months ended December 31, 2012.

Adoption of New Accounting Pronouncements

ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued Accounting Standards Update (ASU) 2010-26, Financial Services—Insurance (Topic 944)—Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU limits the amount of deferrable acquisition costs to those incremental costs directly related to the successful acquisition of an insurance contract and clarifies which costs are included in that definition. The Company’s adoption of this standard results in more distribution and new business processing and underwriting costs being expensed as incurred.

Under the new standard, the Company defers costs that are directly related to the successful acquisition or renewal of insurance contracts. These costs include commissions, premium taxes and premium based assessments, the portion of wholesaler distribution costs directly related to contract acquisition, third-party underwriting costs related to contracts that are successfully acquired, and a portion of the salaries and benefits related to employee time spent on the processing of successfully acquired contracts. While the Company has restated DAC amortization to reflect the retrospective reduction in costs deferred, its policies and methodology for amortization have not changed.

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

The Company retrospectively adopted this standard on January 1, 2012. The Company believes retrospective adoption provides users the most useful financial information because it is comparable between financial periods. The Company has restated its financial information as of December 31, 2011 and for the three and six months ended June 30, 2011 in these condensed financial statements, as shown below:

 

     As  Previously
Reported
    Adjustment     As Adjusted  
     As of December 31, 2011  

Consolidated Balance Sheets

      

Deferred policy acquisition costs

   $ 215.4     $ (29.4   $ 186.0  

Deferred income tax liabilities, net

     405.3       (10.3     395.0  

Retained earnings

     664.7       (32.9     631.8  

Accumulated other comprehensive income, net of taxes

     1,013.5       13.8       1,027.3  
     For the Three Months Ended  
     June 30, 2011  

Consolidated Statements of Income

      

Other underwriting and operating expenses

   $ 70.5     $ 5.6     $ 76.1  

Amortization of deferred policy acquisition costs

     20.0       (3.6     16.4  

Deferred income tax provision

     (6.2     (0.7     (6.9

Net income

     59.4       (1.3     58.1  

Net income per common share:

      

Basic

   $ 0.43     $ (0.01   $ 0.42  

Diluted

   $ 0.43     $ (0.01   $ 0.42  

Consolidated Statements of Comprehensive Income

      

Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and deferred sales inducements, net of taxes

   $ (30.8   $ 2.1     $ (28.7
     For the Six Months Ended  
     June 30, 2011  

Consolidated Statements of Income

      

Other underwriting and operating expenses

   $ 136.5     $ 11.5     $ 148.0  

Amortization of deferred policy acquisition costs

     40.1       (7.4     32.7  

Deferred income tax provision

     4.2       (1.4     2.8  

Net income

     114.3       (2.7     111.6  

Net income per common share:

      

Basic

   $ 0.83     $ (0.02   $ 0.81  

Diluted

   $ 0.83     $ (0.02   $ 0.81  

Consolidated Statements of Comprehensive Income

      

Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and deferred sales inducements, net of taxes

   $ (35.0   $ 6.7     $ (28.3

Consolidated Statements of Cash Flows

      

Deferred income tax provision

   $ 4.2     $ (1.4   $ 2.8  

Changes in deferred policy acquisition costs, net

     (24.0     4.0       (20.0

ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurements (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs. This ASU establishes common definitions of fair value and requirements for measurement and disclosure between U.S. GAAP and International Financial Reporting Standards (IFRS). The measurement principles are generally consistent with current U.S. GAAP and the changes did not have a material impact on our condensed financial statements. Enhanced disclosures include quantitative information about unobservable inputs to Level 3 measurements, when available; qualitative information about the sensitivity of Level 3 measurements to alternative inputs; and classification within the fair value hierarchy of all fair value measurements disclosed. The Company adopted this standard on January 1, 2012. See Note 6 for the Company’s disclosures related to fair value measurements. The Company did not have material Level 3 measurements as of June 30, 2012.

 

11


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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

ASU 2011-05, Presentation of Comprehensive Income and ASU 2011-12 Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income. This ASU requires the components of net income and other comprehensive income (OCI) to be presented either in one continuous statement, referred to as the statement of comprehensive income, or in two separate but consecutive statements. While the new standard changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or OCI under current accounting standards.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This ASU indefinitely defers the requirement to present reclassification adjustments out of accumulated other comprehensive income (AOCI) by component in both the statement in which net income is presented and the statement in which OCI is presented.

The Company adopted the standards on January 1, 2012 and included the statements of comprehensive income as separate statements in the condensed consolidated financial statements.

3. Earnings Per Share

Basic earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period, adjusted for the potential issuance of common stock if dilutive.

The Company’s outstanding warrants, exercisable for 18.976 common shares, are considered participating securities because the terms of the agreements entitle the holders to receive any dividends declared on the common stock concurrently with the holders of outstanding shares of common stock, on a one-to-one basis. As a result, the warrants are potential common stock securities that are included in weighted-average common shares outstanding for purposes of computing basic and diluted earnings per share using the two-class method.

The Company has issued equity instruments to employees that are included in the computation of earnings per share, including restricted stock, stock options and shares issued under the employee stock purchase plan. The restricted shares are considered participating securities because the holders are entitled to receive any dividends declared on the common stock concurrently with the holders of outstanding shares of common stock, on a one-to-one basis. Participating restricted stock is included in basic and diluted earnings per share based on the application of the two-class method. Estimated shares to be issued under the employee stock purchase plan were included in diluted earnings per share based on the application of the treasury stock method. For the three and six months ended June 30, 2012 and 2011, 2.950 stock options were excluded from the computation of diluted earnings per share, based on the application of the treasury stock method, because they were antidilutive.

The following table presents information relating to the Company’s calculations of basic and diluted earnings per share:

 

     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2012      2011      2012      2011  
            (As adjusted)             (As adjusted)  

Numerator:

           

Net income

   $ 43.8      $ 58.1      $ 119.2      $ 111.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted-average common shares outstanding—basic

     138.090        137.523        137.933        137.408  

Add: dilutive effect of certain equity instruments

     0.004        0.009        0.003        0.009  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding—diluted

     138.094        137.532        137.936        137.417  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share:

           

Basic

   $ 0.32      $ 0.42      $ 0.86      $ 0.81  

Diluted

   $ 0.32      $ 0.42      $ 0.86      $ 0.81  

 

12


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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

4. Investments

The following tables summarize the Company’s available-for-sale fixed maturities and marketable equity securities. The other-than-temporary impairments (OTTI) in AOCI represent the amount of cumulative non-credit OTTI losses recorded in AOCI for securities that also had a credit-related impairment.

 

    

Cost or

Amortized

    

Gross

Unrealized

    

Gross

Unrealized

    Fair      OTTI in  
     Cost      Gains      Losses     Value      AOCI  

As of June 30, 2012

             

Fixed maturities:

             

U.S. government and agencies

   $ 162.9      $ 4.6      $ (0.1   $ 167.4      $ (0.1

State and political subdivisions

     611.8        40.5        (0.6     651.7        (0.1

Corporate securities

     15,309.4        1,755.4        (118.6     16,946.2        (15.9

Residential mortgage-backed securities

     2,983.1        255.4        (8.3     3,230.2        (16.6

Commercial mortgage-backed securities

     1,642.9        156.2        (2.1     1,797.0        (1.8

Other debt obligations

     453.9        54.8        (0.4     508.3        (3.8
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     21,164.0        2,266.9        (130.1     23,300.8        (38.3

Marketable equity securities, available-for-sale

     51.9        —           (2.1     49.8        —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 21,215.9      $ 2,266.9      $ (132.2   $ 23,350.6      $ (38.3
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
    

Cost or

Amortized

    

Gross

Unrealized

    

Gross

Unrealized

    Fair      OTTI in  
     Cost      Gains      Losses     Value      AOCI  

As of December 31, 2011

             

Fixed maturities:

             

U.S. government and agencies

   $ 60.3      $ 3.8      $ —        $ 64.1      $ (0.1

State and political subdivisions

     609.1        28.0        (1.8     635.3        (0.1

Corporate securities

     14,817.1        1,572.2        (185.0     16,204.3        (16.5

Residential mortgage-backed securities

     3,388.4        254.2        (17.6     3,625.0        (33.9

Commercial mortgage-backed securities

     1,698.1        143.0        (4.1     1,837.0        (2.6

Other debt obligations

     488.4        52.9        (1.8     539.5        (4.1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     21,061.4        2,054.1        (210.3     22,905.2        (57.3

Marketable equity securities, available-for-sale

     52.4        0.2        (2.3     50.3        —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 21,113.8      $ 2,054.3      $ (212.6   $ 22,955.5      $ (57.3
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

The following tables summarize gross unrealized losses and fair values of the Company’s available-for-sale investments. The tables are aggregated by investment category and present separately those securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more.

 

     Less Than 12 Months      12 Months or More  
     Fair     

Gross

Unrealized

    # of      Fair     

Gross

Unrealized

    # of  
     Value      Losses     Securities      Value      Losses     Securities  

As of June 30, 2012

               

Fixed maturities:

               

U.S. government and agencies

   $ 30.2      $ (0.1     1      $ —         $ —          —     

State and political subdivisions

     17.3        —          5        47.0        (0.6     6  

Corporate securities

     562.9        (20.7     121        493.5        (97.9     83  

Residential mortgage-backed securities

     44.1        (0.4     24        138.8        (7.9     25  

Commercial mortgage-backed securities

     79.8        (0.4     11        34.7        (1.7     15  

Other debt obligations

     8.7        (0.3     4        3.3        (0.1     3  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

   $ 743.0      $ (21.9     166      $ 717.3      $ (108.2     132  

Marketable equity securities, available-for-sale

     44.4        (1.0     2        5.0        (1.1     1  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 787.4      $ (22.9     168      $ 722.3      $ (109.3     133  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

13


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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

     Less Than 12 Months      12 Months or More  
     Fair     

Gross

Unrealized

    # of      Fair     

Gross

Unrealized

    # of  
     Value      Losses     Securities      Value      Losses     Securities  

As of December 31, 2011

               

Fixed maturities:

               

State and political subdivisions

   $ 18.3      $ (0.2     2      $ 87.9      $ (1.6     11  

Corporate securities

     883.2        (50.9     202        601.9        (134.1     66  

Residential mortgage-backed securities

     72.5        (0.8     27        166.1        (16.8     26  

Commercial mortgage-backed securities

     40.0        (0.7     5        54.6        (3.4     18  

Other debt obligations

     80.4        (1.6     9        14.0        (0.2     4  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

   $ 1,094.4      $ (54.2     245      $ 924.5      $ (156.1     125  

Marketable equity securities, available-for-sale

     44.7        (1.2     3        5.0        (1.1     1  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,139.1      $ (55.4     248      $ 929.5      $ (157.2     126  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Based on National Association of Insurance Commissioners (NAIC) ratings as of June 30, 2012 and December 31, 2011, the Company held below-investment-grade fixed maturities with fair values of $1,383.2 and $1,508.1, respectively, and amortized costs of $1,410.5 and $1,583.7, respectively. These holdings amounted to 5.9% and 6.6% of the Company’s investments in fixed maturities at fair value as of June 30, 2012 and December 31, 2011, respectively.

The following table summarizes the amortized cost and fair value of fixed maturities as of June 30, 2012, by contractual years to maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

 

     Amortized      Fair  
     Cost      Value  

One year or less

   $ 520.5      $ 530.1  

Over one year through five years

     3,504.8        3,755.0  

Over five years through ten years

     7,676.2        8,525.7  

Over ten years

     4,421.9        5,002.5  

Residential mortgage-backed securities

     2,983.1        3,230.2  

Commercial mortgage-backed securities

     1,642.9        1,797.0  

Other asset-backed securities

     414.6        460.3  
  

 

 

    

 

 

 

Total fixed maturities

   $ 21,164.0      $ 23,300.8  
  

 

 

    

 

 

 

The following table summarizes the Company’s net investment income:

 

     For the Three Months Ended     For the Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Fixed maturities

   $ 281.4     $ 283.1     $ 565.7     $ 569.8  

Marketable equity securities, available-for-sale

     1.2       1.1       1.7       1.7  

Marketable equity securities, trading

     2.9       2.2       5.6       3.1  

Mortgage loans

     41.7       31.3       82.6       59.2  

Policy loans

     0.9       1.0       1.9       2.0  

Investments in limited partnerships

     (4.3     (1.3     (8.3     (3.9

Other

     2.1       1.4       3.9       2.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     325.9       318.8       653.1       634.6  

Investment expenses

     (6.7     (6.6     (13.4     (12.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 319.2     $ 312.2     $ 639.7     $ 622.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

14


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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

The following table summarizes the Company’s net realized investment gains (losses):

 

     For the Three Months Ended     For the Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Fixed maturities:

        

Gross gains on sales

   $ 23.1     $ 29.7     $ 33.0     $ 32.4  

Gross losses on sales

     (5.8     (1.5     (7.9     (7.6

Net impairment losses recognized in earnings

     (9.4     (2.8     (11.9     (3.7

Other (1)

     (2.4     (2.2     1.2       6.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturities

     5.5       23.2       14.4       27.1  

Marketable equity securities, trading (2)

     (9.4     (7.7     8.6       4.5  

Other invested assets

     (2.5     (0.7     (3.5     (0.2

DAC and deferred sales inducement adjustment

     —          (0.7     —          (1.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized investment gains (losses)

   $ (6.4   $ 14.1     $ 19.5     $ 29.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) This includes net gains on calls and redemptions and changes in the fair value of the Company’s convertible securities held as of period end totaling $(3.2), $(3.0), $0.6 and $(1.3) for the three and six months ended June 30, 2012 and 2011, respectively.
(2) This includes changes in the fair value of trading securities held as of period end, totaling $(9.1), $(7.3), $7.5 and $3.2 of net gains (losses) for the three and six months ended June 30, 2012 and 2011, respectively.

Other-Than-Temporary Impairments

The Company’s review of investment securities for OTTI includes both quantitative and qualitative criteria. Quantitative criteria include the length of time and amount that each security is in an unrealized loss position (i.e., is underwater) and for fixed maturities, whether expected future cash flows indicate that a credit loss exists.

While all securities are monitored for impairment, the Company’s experience indicates that securities for which the cost or amortized cost exceeds fair value by less than 20% do not represent a significant risk of impairment and, often, fair values recover over time as the factors that caused the declines improve. If the estimated fair value has declined and remained below cost or amortized cost by 20% or more for at least six months, the Company further analyzes the decrease in fair value to determine whether it is an other-than-temporary decline. To make this determination for each security, the Company considers, among other factors:

 

   

Extent and duration of the decline in fair value below cost or amortized cost;

 

   

The financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations, earnings potential or compliance with terms and covenants of the security;

 

   

Changes in the financial condition of the security’s underlying collateral;

 

   

Any downgrades of the security by a rating agency;

 

   

Any reduction or elimination of dividends or non-payment of scheduled interest;

 

   

Other indications that a credit loss has occurred; and

 

   

For fixed maturities, the Company’s intent to sell or whether it is more likely than not the Company will be required to sell the fixed maturity prior to recovery of its amortized cost, considering any regulatory developments and the Company’s liquidity needs.

For fixed maturities, the Company concludes that an OTTI has occurred if the present value of the cash flows expected to be collected is less than the amortized cost of the security (i.e., a credit loss exists). In order to determine the amount of the credit loss, the Company calculates the recovery value by discounting the current expectations of future cash flows it will recover. The discount rate is the effective interest rate implicit in the underlying fixed maturity, which is the original effective yield for corporate securities or current effective yield for mortgage-backed securities.

 

15


Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

Determination of Credit-Related OTTI on Corporate Securities

To determine the recovery value for a corporate security, the Company performs an analysis related to the underlying issuer including, but not limited to, the following:

 

   

Expected cash flows of the issuer;

 

   

Fundamentals of the industry in which the issuer operates;

 

   

Fundamentals of the issuer to determine what the Company would recover if the issuer were to file for bankruptcy, compared to the price at which the market is trading;

 

   

Earnings multiples for an issuer’s industry or sector of the industry, divided by the outstanding debt to determine an expected recovery value of the security in the case of a liquidation;

 

   

Expectations regarding defaults and recovery rates;

 

   

Changes to the rating of the security by a rating agency; and

 

   

Additional available market information.

Determination of Credit-Related OTTI on Structured Securities

To determine the recovery value for a structured security, including residential mortgage-, commercial mortgage- and other asset-backed securities, the Company performs an analysis related to the security including, but not limited to, the following:

 

   

Expected cash flows from the security, including potential variability of prepayments;

 

   

Level of creditworthiness;

 

   

Delinquency ratios and loan-to-value ratios;

 

   

Average cumulative collateral values, vintage year and level of subordination; and

 

   

Susceptibility to fair value fluctuations due to changes in the interest rate environment.

The following table presents the severity and duration of the gross unrealized losses on the Company’s underwater available-for-sale securities, after the recognition of OTTI:

 

     As of June 30, 2012     As of December 31, 2011  
     Fair     

Gross

Unrealized

    Fair     

Gross

Unrealized

 
     Value      Losses     Value      Losses  

Fixed maturities

          

Underwater by 20% or more:

          

Less than 6 consecutive months

   $ 20.9      $ (6.4   $ 204.0      $ (77.1

6 consecutive months or more

     145.5        (63.8     56.0        (30.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total underwater by 20% or more

     166.4        (70.2     260.0        (107.3

All other underwater fixed maturities

     1,293.9        (59.9     1,758.9        (103.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total underwater fixed maturities

   $ 1,460.3      $ (130.1   $ 2,018.9      $ (210.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Marketable equity securities, available-for-sale

          

Underwater by 20% or more:

          

Less than 6 consecutive months

   $ —         $ —        $ —         $ —     

6 consecutive months or more

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total underwater by 20% or more

     —           —          —           —     

All other underwater marketable equity securities, available-for-sale

     49.4        (2.1     49.7        (2.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total underwater marketable equity securities, available-for-sale

   $ 49.4      $ (2.1   $ 49.7      $ (2.3
  

 

 

    

 

 

   

 

 

    

 

 

 

 

16


Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

The Company reviewed its available-for-sale investments with unrealized losses as of June 30, 2012 in accordance with its impairment policy and determined, after the recognition of other-than-temporary impairments, that the remaining declines in fair value were temporary. The Company did not intend to sell its underwater securities, and it was not more likely than not that the Company will be required to sell the securities before recovery of cost or amortized cost. For fixed maturities, this conclusion is supported by the Company’s spread analyses, cash flow modeling and expected continuation of contractually required principal and interest payments.

Changes in the amount of credit-related OTTI recognized in net income where the portion related to other factors was recognized in OCI were as follows:

 

     For the Three Months Ended     For the Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Balance, beginning of period

   $ 32.0     $ 52.2     $ 32.5     $ 68.0  

Increases recognized in the current period:

        

For which an OTTI was not previously recognized

     —          0.2       0.9       0.6  

For which an OTTI was previously recognized

     1.0       —          1.3       —     

Decreases attributable to:

        

Securities sold or paid down during the period

     (0.8     (2.1     (2.5     (18.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 32.2     $ 50.3     $ 32.2     $ 50.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

5. Mortgage Loans

The Company originates and manages a portfolio of mortgage loans which are secured by first-mortgage liens on income-producing commercial real estate, primarily in the retail, industrial and office building sectors. All loans are underwritten consistently using standards based on loan-to-value (LTV) ratios and debt-service coverage ratios (DSCR) as well as detailed market, property and borrower analyses. The Company’s mortgage loan portfolio is considered a single portfolio segment and class of financing receivable, which is consistent with how the Company assesses and monitors the risk and performance of the portfolio. A large majority of these loans have personal guarantees, and all loans are inspected and evaluated annually. The Company’s mortgage loan portfolio is diversified by geographic region, loan size and scheduled maturities. As of June 30, 2012, 29.9% of the commercial mortgage loans were located in California, primarily in the Los Angeles area, 11.1% were located in Washington and 10.6% were located in Texas.

Allowance for Mortgage Loans

The allowance for losses on mortgage loans provides for the risk of credit loss inherent in the lending process. The allowance includes a portfolio reserve for probable incurred but not specifically identified losses and, as needed, specific reserves for impaired loans. The allowance for losses on mortgage loans is evaluated as of each reporting period and adjustments are recorded when appropriate. To assist in its evaluation of the allowance for loan losses, the Company utilizes the following credit quality indicators to categorize its loans as lower, medium or higher risk:

 

   

Lower Risk Loans – Loans with an LTV ratio of less than 65%, and a DSCR of greater than 1.50.

 

   

Medium Risk Loans – Loans that have an LTV ratio of less than 65% but a DSCR below 1.50, or loans with an LTV ratio between 65% and 80%, and a DSCR of greater than 1.50.

 

   

Higher Risk Loans – All loans with an LTV ratio greater than 80%, or loans which have an LTV ratio between 65% and 80%, and a DSCR of less than 1.50.

Specific reserves are established for impaired loans, for which the Company considers it probable that amounts due according to the terms of the loan agreement will not be collected, and for loans with terms modified in a troubled debt restructuring.

 

17


Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

The following table sets forth the Company’s mortgage loans by risk category:

 

     As of June 30, 2012     As of December 31, 2011  
     Carrying
Value
    % of Total     Carrying
Value
    % of
Total
 

Lower risk

   $ 1,609.1       56.9    $ 1,395.5       55.5 

Medium risk

     612.3       21.7       617.0       24.5  

Higher risk

     607.3       21.4       504.7       20.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit quality indicator total

     2,828.7       100.0      2,517.2       100.0 

Loans specifically evaluated for impairment (1)

     7.6         8.3    

Other (2)

     (8.5       (7.9  
  

 

 

     

 

 

   

Total

   $ 2,827.8       $ 2,517.6    
  

 

 

     

 

 

   

 

(1) As of June 30, 2012 and December 31, 2011, reserve amounts of $1.9 and $0.3, respectively, were established for loans specifically evaluated for impairment.
(2) Includes the allowance for loan losses and deferred fees and costs.

In developing its portfolio reserve for incurred but not specifically identified losses, the Company evaluates loans by risk category as well as its past loan experience, commercial real estate market conditions, and third party data for expected losses on loans with similar LTV ratios and DSCRs. Each loan’s LTV ratio and DSCR is updated annually, primarily during the third quarter.

The following table summarizes the Company’s allowance for mortgage loan losses, which includes portfolio and specific reserves:

 

     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2012     2011      2012     2011  

Allowance at beginning of period

   $ 8.0     $ 7.1      $ 7.4     $ 7.1  

Provision for specific loans

     0.7       —           1.9       —     

Provision for loans not specifically identified

     0.7       —           0.7       —     

Write-off for foreclosed property

     (0.4     —           (1.0     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Allowance at end of period

   $ 9.0     $ 7.1      $ 9.0     $ 7.1  
  

 

 

   

 

 

    

 

 

   

 

 

 

Non-performing loans, defined generally as those in default, close to being in default or more than 90 days past due, are placed on non-accrual status. As of June 30, 2012, one loan with an outstanding principal balance of $7.6, was considered in default and was assessed in our provision for specific loans.

6. Fair Value of Financial Instruments

The Company determines the fair value of its financial instruments based on the fair value hierarchy, which requires an entity to maximize its use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has categorized its financial instruments into the three-level hierarchy, which gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The level within which a fair value measurement falls is determined based on the lowest-level input that is significant to the fair value measurement. The Company’s financial assets recorded at fair value on the consolidated balance sheets and financial instruments not carried at fair value, but disclosed at fair value are categorized as follows:

 

   

Level 1 — Unadjusted quoted prices in active markets for identical instruments. This level primarily consists of exchange-traded marketable equity securities and actively traded mutual fund investments.

 

   

Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. This level includes those financial instruments that are valued using industry-standard pricing methodologies or models. All significant inputs are observable or derived from observable information in the marketplace. Financial instruments in this category primarily include corporate fixed maturities, government or agency securities and mortgage-backed securities.

 

18


Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

   

Level 3 — Instruments whose significant value drivers are unobservable. This includes financial instruments for which fair value is estimated based on industry-standard pricing methodologies and internally developed models utilizing significant inputs not based on or corroborated by readily available market information. In limited circumstances, this category may also utilize non-binding broker quotes. This category primarily consists of funds held under deposit contracts and mortgage loans.

The following tables present the fair value of the Company’s financial instruments classified by the valuation hierarchy described above. The financial instruments are separated between those accounted for at fair value on a recurring basis and those not carried at fair value, but for which disclosure of fair value is provided. The Company does not have any financial liabilities accounted for at fair value on a recurring basis.

 

     As of June 30, 2012  
     Carrying
Amount
     Fair Value      Level 1      Level 2      Level 3      Level 3 %  

Recurring measurements:

                 

Financial assets:

                 

Fixed maturities, available-for-sale:

                 

U.S. government and agencies

   $ 167.4      $ 167.4      $ —         $ 167.4      $ —           —     

State and political subdivisions

     651.7        651.7        —           651.7        —           —     

Corporate securities

     16,946.2        16,946.2        —           16,847.9        98.3        0.4

Residential mortgage-backed securities

     3,230.2        3,230.2        —           3,213.5        16.7        0.1  

Commercial mortgage-backed securities

     1,797.0        1,797.0        —           1,781.9        15.1        0.1  

Other debt obligations

     508.3        508.3        —           464.5        43.8        0.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities, available-for-sale

     23,300.8        23,300.8        —           23,126.9        173.9        0.8  

Marketable equity securities, available-for-sale

     49.8        49.8        0.5        44.3        5.0        —     

Marketable equity securities, trading

     501.8        501.8        501.6        —           0.2        —     

Investments in limited partnerships, private equity funds

     27.9        27.9        —           —           27.9        0.1  

Other invested assets

     24.6        24.6        2.5        13.0        9.1        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments carried at fair value

     23,904.9        23,904.9        504.6        23,184.2        216.1        0.9  

Separate account assets

     799.4        799.4        799.4        —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,704.3      $ 24,704.3      $ 1,304.0      $ 23,184.2      $ 216.1        0.9
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Carrying
Amount
     Fair Value      Level 1      Level 2      Level 3  

Other financial instruments subject to fair value disclosure requirements:

              

Financial assets:

              

Mortgage loans

   $ 2,827.8      $ 3,087.7      $ —         $ —         $ 3,087.7  

Investments in limited partnerships, tax credit investments

     219.8        219.4        —           219.4        —     

Cash and cash equivalents

     172.6        172.6        172.6        —           —     

Financial liabilities:

              

Funds held under deposit contracts:

              

Deferred annuities

   $ 10,498.1      $ 10,393.8      $ —         $ —         $ 10,393.8  

Income annuities

     6,627.3        8,181.8        —           —           8,181.8  

Notes payable:

              

Capital Efficient Notes (CENts)

     149.9        145.3        —           —           145.3  

Senior notes

     299.4        307.4        —           —           307.4  

 

19


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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

     As of December 31, 2011  
     Carrying
Amount
     Fair Value      Level 1      Level 2      Level 3      Level 3 %  

Recurring measurements:

                 

Financial assets:

                 

Fixed maturities, available-for-sale:

                 

U.S. government and agencies

   $ 64.1      $ 64.1      $ —         $ 64.1      $ —           —     

State and political subdivisions

     635.3        635.3        —           635.3        —           —     

Corporate securities (1)

     16,204.3        16,204.3        —           16,112.9        91.4        0.4

Residential mortgage-backed securities

     3,625.0        3,625.0        —           3,625.0        —           —     

Commercial mortgage-backed securities

     1,837.0        1,837.0        —           1,821.1        15.9        0.1  

Other debt obligations (1)

     539.5        539.5        —           459.6        79.9        0.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities, available-for-sale

     22,905.2        22,905.2        —           22,718.0        187.2        0.8  

Marketable equity securities, available-for-sale

     50.3        50.3        0.5        44.8        5.0        —     

Marketable equity securities, trading

     381.7        381.7        381.1        —           0.6        —     

Investments in limited partnerships, private equity funds

     27.8        27.8        —           —           27.8        0.1  

Other invested assets

     15.8        15.8        2.8        8.2        4.8        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments carried at fair value

     23,380.8        23,380.8        384.4        22,771.0        225.4        0.9  

Separate account assets

     795.8        795.8        795.8        —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,176.6      $ 24,176.6      $ 1,180.2      $ 22,771.0      $ 225.4        0.9
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Carrying
Amount
     Fair Value      Level 1      Level 2      Level 3  

Other financial instruments subject to fair value disclosure requirements:

              

Financial assets:

              

Mortgage loans

   $ 2,517.6      $ 2,685.7      $ —         $ —         $ 2,685.7  

Investments in limited partnerships, tax credit investments

     199.1        202.6        —           202.6        —     

Cash and cash equivalents

     242.3        242.3        242.3        —           —     

Financial liabilities:

              

Funds held under deposit contracts:

              

Deferred annuities

   $ 10,158.1      $ 9,985.1      $ —         $ —         $ 9,985.1  

Income annuities

     6,605.6        7,786.1        —           —           7,786.1  

Notes payable:

              

Capital Efficient Notes (CENts)

     149.9        138.0        —           —           138.0  

Senior notes

     299.3        304.8        —           —           304.8  

 

(1) These amounts include certain privately placed fixed maturities that are valued primarily using observable inputs. These securities, totaling $733.8, were included in Level 3 in the prior year financial statements. During the first quarter of 2012, upon further evaluation and review of the valuation methodology, the Company determined that they are more appropriately reflected as Level 2 measurements as the unobservable inputs were not significant to the overall valuation. This evaluation did not result in a change to the fair value amounts reported.

Financial Instruments Measured at Fair Value

Fixed Maturities

The vast majority of the Company’s fixed maturities have been classified as Level 2 measurements. To make this assessment, the Company determines whether the market for a security is active and if significant pricing inputs are observable. The Company predominantly utilizes third party independent pricing services to assist management in determining the fair value of its fixed maturity securities. As of June 30, 2012 and December 31, 2011, respectively, pricing services provided prices for 95.6% and 95.9% of the Company’s fixed maturities.

The Company analyzes the prices received from the pricing services to ensure they represent a reasonable estimate of fair value, including analytical reviews of prices between reporting periods. The Company also performs procedures to gain assurance on the overall reasonableness and consistent use of inputs, valuation methodologies and compliance with fair value accounting standards. This includes an annual review of pricing methodologies and inputs by asset class and performing annual due diligence procedures,

 

20


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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

including deep-dive analyses, back-testing of selected sales activity to determine whether there were significant differences between the market price used to value the security prior to sale and the actual sales price, and corroboration of prices by obtaining multiple pricing quotes for selected securities. Based upon its analyses, the Company has not adjusted prices obtained from the pricing services.

The pricing services provide prices where observable inputs are available, utilizing evaluated pricing models that vary by asset class. If sufficient objectively verifiable information about a security’s valuation is not available, the pricing services will not provide a valuation for the security. In these situations, the security’s fair value is determined using internal pricing models.

As of June 30, 2012, the Company had $860.9, or 3.7%, of its fixed maturities invested in private placement securities. The use of significant observable inputs in determining the fair value of the Company’s investments in private placement securities resulted in the classification of $788.9, or 91.6%, as Level 2 measurements as of June 30, 2012. As of December 31, 2011, the Company had $936.4, or 4.1%, of its fixed maturities invested in private placement securities, of which $816.9, or 87.2%, were classified as Level 2 measurements.

Corporate Securities

As of June 30, 2012 and December 31, 2011, the fair value of the Company’s corporate securities classified as Level 2 measurements was $16,847.9 and $16,112.9, respectively. The following table presents additional information about the composition of the Level 2 corporate securities:

 

     As of June 30, 2012      As of December 31, 2011  
     Amount     % of Total     # of Securities      Amount     % of Total     # of Securities  

Significant security sectors:

             

Industrials

   $ 3,247.9       19.3     230      $ 3,182.4       19.8     247  

Consumer staples

     2,778.8       16.5       166        2,689.6       16.7       170  

Consumer discretionary

     1,995.7       11.8       172        1,708.6       10.6       192  

Financials

     1,924.9       11.4       202        1,879.3       11.7       243  

Weighted-average coupon rate

     5.97          6.09    

Weighted-average remaining years to contractual maturity

     10.7            11.2      

The majority of corporate securities classified as Level 2 measurements are priced by independent pricing services utilizing evaluated pricing models. The significant inputs for security evaluations include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and other reference data, including market research publications. Because many corporate securities do not trade on a daily basis, evaluated pricing applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations.

As of June 30, 2012, $689.3, or 4.1%, of Level 2 corporate securities were privately placed. These securities were valued using a matrix pricing approach. The significant inputs to the measurement are the base credit spread, treasury yield and expected future cash flows of the security, which are all observable inputs. The base spread is determined based on trades of similar publicly-traded securities, and the expected future cash flows are based on the contractual terms of the security. The valuation approach also incorporates an illiquidity spread, determined based on premiums demanded by investors for privately placed securities. The illiquidity spread is an unobservable input, which ranges from 0 to 25 basis points and is based on the credit quality of the security. The illiquidity spread does not significantly impact the resulting valuation.

Residential Mortgage-backed Securities

As of June 30, 2012 and December 31, 2011, the fair value of the Company’s residential mortgage-backed securities (RMBS) classified as Level 2 measurements was $3,213.5 and $3,625.0, respectively. These securities were primarily fixed-rate, with a weighted-average coupon rate of 4.75% and 4.87% as of June 30, 2012 and December 31, 2011, respectively. Agency securities comprised 89.6% and 90.0% of the Company’s Level 2 RMBS as of June 30, 2012 and December 31, 2011, respectively.

 

21


Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

The following table presents additional information about the composition of the Level 2 non-agency RMBS securities:

 

     As of June 30, 2012     As of December 31, 2011  
     Fair Value      % of Total     Fair Value      % of Total  

Highest Rating Agency Rating

          

AAA

   $ 112.4        33.5   $ 102.5        28.3

AA through BBB

     26.6        8.0       41.8        11.5  

BB & below

     195.7        58.5       217.9        60.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-agency RMBS

   $ 334.7        100.0   $ 362.2        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Non-agency RMBS with super senior subordination

   $ 207.5        62.0   $ 216.8        59.9

As of June 30, 2012 and December 31, 2011, the Company’s non-agency Level 2 RMBS had a weighted-average credit enhancement of 8.9% and 9.4%, respectively. As of June 30, 2012 and December 31, 2011, $135.8 and $152.3, or 40.6% and 42.0%, respectively, of the Company’s non-agency Level 2 RMBS had an origination or vintage year of 2004 and prior.

Level 2 RMBS securities are priced by independent pricing services that utilize evaluated pricing models. The significant observable inputs for security evaluations include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and other reference data, including market research publications. Because many RMBS do not trade on a daily basis, evaluated pricing applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations. In addition, the pricing services use models and processes to develop prepayment and interest rate scenarios. The pricing services monitor market indicators, industry and economic events, and their models take into account market convention.

Commercial Mortgage-backed Securities

As of June 30, 2012 and December 31, 2011, the fair value of the Company’s commercial mortgage-backed securities (CMBS) classified as Level 2 measurements was $1,781.9 and $1,821.1, respectively. The weighted-average coupon rate on these securities was 5.13% and 5.23% as of June 30, 2012 and December 31, 2011, respectively. The following table presents additional information about the composition of the underlying collateral of Level 2 CMBS securities:

 

     As of June 30, 2012     As of December 31, 2011  
     % of Total     % of Total  

Significant underlying collateral locations:

    

New York

     19.7     18.3

California

     12.6       13.0  

Texas

     7.4       7.5  

Significant underlying collateral property types:

    

Retail shopping centers

     33.7     35.0

Office buildings

     30.9       29.7  

The Company’s Level 2 CMBS securities were primarily non-agency securities, which comprised 74.6% and 72.1% of Level 2 CMBS as of June 30, 2012 and December 31, 2011, respectively. The non-agency Level 2 CMBS had an estimated weighted-average credit enhancement of 28.9% and 29.2% as of June 30, 2012 and December 31, 2011, respectively, and 94.8% and 94.9% were in the most senior tranche as of June 30, 2012 and December 31, 2011, respectively.

Level 2 CMBS securities are priced by independent pricing services that utilize evaluated pricing models. The significant observable inputs for security evaluations include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, new issues, monthly payment information and other reference data, including market research publications. Because many CMBS do not trade on a daily basis, evaluated pricing applications apply available information through processes, such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations.

 

22


Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

Marketable Equity Securities

Marketable equity securities are investments in common stock, including real estate investment trusts (REITs), certain nonredeemable preferred stocks and investments in mutual funds. The securities primarily consist of investments in publicly traded companies and actively traded mutual fund investments. When the fair values of the Company’s marketable equity securities are based on quoted market prices in active markets for identical assets, they are classified as Level 1 measurements. The fair values of nonredeemable preferred stocks are valued by our independent pricing services utilizing evaluated pricing models and are classified as Level 2 measurements. These valuations are created based on benchmark curves using industry standard inputs and exchange prices of underlying securities and common stock of the same issuer.

Investments in Limited Partnerships

Investments in limited partnerships recorded at fair value are investments in private equity funds. The Company utilizes the fair value option for these investments, regardless of ownership percentage, to standardize the related accounting and reporting. The fair value is approximated based upon the Company’s proportionate interest in the underlying partnership or fund’s net asset value (NAV). The Company is generally unable to liquidate these investments during the term of the partnership or fund, which range from five to twelve years. As such, the Company classifies these securities as Level 3 measurements.

Separate Accounts

Separate account assets are primarily invested in mutual funds with published NAVs, which are classified as Level 1 measurements.

Rollforward of Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

The following tables present additional information about assets measured at fair value on a recurring basis and for which significant unobservable inputs (Level 3) were utilized to determine fair value for the three and six months ended June 30, 2012:

 

                                  Unrealized Gain (Loss)              
                                  Included in:              
    Balance as
of April 1,
2012
    Purchases     Sales     Transfers
In and/or
(Out) of
Level 3(1)
    Other(2)     Net
Income(3)
    Other
Comprehensive
Income
    Realized
Gains
(Losses)(3)
    Balance as of
June 30,
2012
 

Types of Investments:

                 

Corporate securities

  $ 61.3     $ 20.0     $ —        $ 16.6     $ (1.1   $ 0.9     $ 0.6     $ —        $ 98.3  

Residential mortgage-backed securities

    2.7       16.9       —          (2.7     —          —          (0.2     —          16.7  

Commercial mortgage-backed securities

    15.5       —          —          —          (0.4     —          —          —          15.1  

Other debt obligations

    42.6       —          —          —          (0.2     —          1.4       —          43.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturities, available-for-sale

    122.1       36.9       —          13.9       (1.7     0.9       1.8       —          173.9  

Marketable equity securities, available-for-sale

    5.0       —          —          —          —          —          —          —          5.0  

Marketable equity securities, trading

    0.2       —          —          —          —          —          —          —          0.2  

Investments in limited partnerships

    24.3       5.5       —          —          (2.1     (0.8     —          1.0       27.9  

Other invested assets

    8.7       0.8       —          —          0.9       (1.3     —          —          9.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3

  $ 160.3     $ 43.2     $ —        $ 13.9     $ (2.9   $ (1.2   $ 1.8     $ 1.0     $ 216.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                  Unrealized Gain (Loss)              
                                  Included in:              
    Balance as of
January 1,
2012
    Purchases     Sales     Transfers
In and/or
(Out) of
Level 3(1)
    Other(2)     Net
Income(3)
    Other
Comprehensive
Income
    Realized
Gains
(Losses)(3)
    Balance as of
June 30,
2012
 

Types of Investments:

                 

Corporate securities

  $ 91.4     $ 20.0     $ —        $ (15.5   $ (1.0   $ 0.3     $ 3.2     $ (0.1   $ 98.3  

Residential mortgage-backed securities

    —          16.9       —          —          —          —          (0.2     —          16.7  

Commercial mortgage-backed securities

    15.9       —          —          —          (0.7     —          (0.1     —          15.1  

Other debt obligations

    79.9       —          —          (13.5     (25.4     —          2.3       0.5       43.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturities, available-for-sale

    187.2       36.9       —          (29.0     (27.1     0.3       5.2       0.4       173.9  

Marketable equity securities, available-for-sale

    5.0       —          —          —          —          —          —          —          5.0  

Marketable equity securities, trading

    0.6       —          —          (0.4     —          —          —          —          0.2  

Investments in limited partnerships

    27.8       5.7       —          —          (6.2     (0.7     —          1.3       27.9  

Other invested assets

    4.8       3.1       —          —          0.9       0.3       —          —          9.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3

  $ 225.4     $ 45.7     $ —        $ (29.4   $ (32.4   $ (0.1   $ 5.2     $ 1.7     $ 216.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

 

(1) Transfers into and/or out of Level 3 are reported at the value as of the beginning of the period in which the transfer occurs. Gross transfers into Level 3 were $17.2 and $40.3 for the three and six months ended June 30, 2012, respectively. Gross transfers out of Level 3 were $(3.3) and $(69.7) for the three and six months ended June 30, 2012, respectively.
(2) Other is comprised of transactions such as pay downs, calls, amortization and redemptions.
(3) Realized and unrealized gains and losses for investments in limited partnerships are included in net investment income.

The following tables present additional information about assets measured at fair value on a recurring basis and for which significant unobservable inputs (Level 3) were utilized to determine fair value for the three and six months ended June 30, 2011:

 

                                  Unrealized Gain (Loss)              
                                  Included in:              
    Balance as of
April 1,
2011
    Purchases     Sales     Transfers
In and/or
(Out) of
Level 3(1)
    Other(2)     Net
Income(3)
    Other
Comprehensive
Income
    Realized
Gains
(Losses)(3)
    Balance as of
June 30,
2011
 

Types of Investments:

                 

Corporate securities

    132.4       2.2       (1.3     (28.4     (1.6     —          1.6       0.2       105.1  

Commercial mortgage-backed securities

    17.7       —          —          —          (1.1     —          0.2       —          16.8  

Other debt obligations

    78.7       —          —          —          (0.3     —          0.8       —          79.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturities, available-for-sale

    228.8       2.2       (1.3     (28.4     (3.0     —          2.6       0.2       201.1  

Marketable equity securities, available-for-sale

    1.8       —          —          —          —          —          3.2       —          5.0  

Marketable equity securities, trading

    0.7       7.9       —          —          —          0.8       —          —          9.4  

Investments in limited partnerships

    34.9       2.3       —          —          (8.5     0.5       —          1.2       30.4  

Other invested assets

    4.4       1.5       —          —          —          (0.4     0.5       —          6.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3

  $ 270.6     $ 13.9     $ (1.3   $ (28.4   $ (11.5   $ 0.9     $ 6.3     $ 1.4     $ 251.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                  Unrealized Gain (Loss)              
                                  Included in:              
    Balance as of
January 1,
2011
    Purchases     Sales     Transfers
In and/or
(Out) of
Level 3(1)
    Other(2)     Net
Income(3)
    Other
Comprehensive
Income
    Realized
Gains
(Losses)(3)
    Balance as of
June 30,
2011
 

Types of Investments:

                 

Corporate securities

    115.5       3.2       (9.8     (4.5     (3.7     —          8.1       (3.7     105.1  

Commercial mortgage-backed securities

    19.1       —          —          —          (2.5     —          0.2       —          16.8  

Other debt obligations

    90.1       —          (10.8     —          (0.6     —          2.2       (1.7     79.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturities, available-for-sale

    224.7       3.2       (20.6     (4.5     (6.8     —          10.5       (5.4     201.1  

Marketable equity securities, available-for-sale

    1.8       —          —          —          —          —          3.2       —          5.0  

Marketable equity securities, trading

    0.6       7.9       —          —          —          0.9       —          —          9.4  

Investments in limited partnerships

    36.5       2.4       —          —          (12.3     1.8       —          2.0       30.4  

Other invested assets

    3.8       1.5       —          —          —          0.2       0.5       —          6.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3

  $ 267.4     $ 15.0     $ (20.6   $ (4.5   $ (19.1   $ 2.9     $ 14.2     $ (3.4   $ 251.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Transfers into and/or out of Level 3 are reported at the value as of the beginning of the period in which the transfer occurs. Gross transfers into Level 3 were $0.9 and $0.0 for the three and six months ended June 30, 2011, respectively. Gross transfers out of Level 3 were $(29.3) and $(4.5) for the three and six months ended June 30, 2011, respectively.
(2) Other is comprised of transactions such as pay downs, calls, amortization and redemptions.
(3) Realized and unrealized gains and losses for investments in limited partnerships are included in net investment income.

Other Financial Instruments Subject to Fair Value Disclosure Requirements

Cash and cash equivalents consist of demand bank deposits and short-term highly liquid investments with original maturities of three months or less at the time of purchase. Cash equivalents are reported at cost, which approximates fair value, and were $163.5 and $234.0 as of June 30, 2012 and December 31, 2011, respectively.

The fair values of the Company’s mortgage loans were measured by discounting the projected future cash flows using the current rate at which the loans would be made to borrowers with similar credit ratings and for the same maturities.

Investments in limited partnerships associated with tax credit investments are carried at amortized cost. Fair value was estimated based on the discounted cash flows over the remaining life of the tax credits, using the original internal rate of return for each investment.

The fair values of funds held under deposit contracts related to investment-type contracts are estimated using an income approach, based on the present value of the discounted cash flows. Cash flows were projected using best estimates for lapses, mortality and expenses, and discounted at a risk-free rate plus a nonperformance risk spread. The carrying value of this balance excludes $5,815.6 and $5,685.8 of liabilities related to insurance contracts as of June 30, 2012 and December 31, 2011, respectively.

 

24


Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

The fair values of the Company’s notes payable were based on nonbinding quotes provided by third-parties. This fair value measurement assumes that liabilities were transferred to a market participant of equal credit standing and without consideration for any optional redemption features.

7. Deferred Policy Acquisition Costs (DAC) and Deferred Sales Inducements (DSI)

The following table provides a reconciliation of the beginning and ending balance for DAC:

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2012     2011     2012     2011  
           (As adjusted)           (As adjusted)  

Unamortized balance at beginning of period, as adjusted(1)

   $ 372.3     $ 356.6     $ 368.4     $ 342.5  

Deferral of acquisition costs

     19.3       22.8       39.0       53.9  

Adjustments related to investment gains

     —          (0.5     —          (1.2

Amortization

     (15.4     (16.4     (31.2     (32.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Unamortized balance at end of period

     376.2       362.5       376.2       362.5  

Accumulated effect of net unrealized investment gains

     (203.0     (154.7     (203.0     (154.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 173.2     $ 207.8     $ 173.2     $ 207.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The restated accumulated effect of net unrealized investment gains as of January 1, 2012 and 2011 were $(182.4) and $(129.5), respectively.

The following table provides a reconciliation of the beginning and ending balance for DSI, which are included in other assets on the consolidated balance sheets:

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Unamortized balance at beginning of period

   $ 146.9     $ 116.4     $ 142.0     $ 105.8  

Capitalizations

     12.5       18.1       25.8       35.2  

Adjustments related to investment gains

     —          (0.2     —          (0.5

Amortization

     (8.9     (7.4     (17.3     (13.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Unamortized balance at end of period

     150.5       126.9       150.5       126.9  

Accumulated effect of net unrealized investment gains

     (114.2     (62.3     (114.2     (62.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 36.3     $ 64.6     $ 36.3     $ 64.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

8. Stockholders’ Equity

The following table provides a reconciliation of changes in outstanding shares of common stock:

 

     Common Shares  

Balance as of January 1, 2011

     118.216  

Restricted stock issued, net

     0.298  

Employee stock purchase plan shares issued

     0.124  

Treasury stock (1)

     (0.001
  

 

 

 

Balance as of December 31, 2011

     118.637  
  

 

 

 

Balance as of January 1, 2012

     118.637  

Restricted stock issued, net

     0.417  

Employee stock purchase plan shares issued

     0.080  

Treasury stock (1)

     (0.003
  

 

 

 

Balance as of June 30, 2012

     119.131  
  

 

 

 

 

(1) Represents shares repurchased and subsequently retired to satisfy employee income tax withholding pursuant to the Company’s Equity Plan.

 

25


Table of Contents

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data, unless otherwise stated)

(Unaudited)

 

The consolidated statements of comprehensive income presents the changes in unrealized gains and losses on available for sale securities net of reclassification adjustments. The following table summarizes the adjustments to OCI for amounts reclassified from AOCI to net income during the period:

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2012      2011     2012     2011  

Reclassifications included in net income for:

         

Net realized investment (gains) losses (net of taxes of $1.4, $(5.4), $(8.1) and $(11.1))

   $ 2.3      $ (10.1   $ (15.2