NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As used in this Form 10-Q, the terms StanCorp, Company, we, us and
our refer to StanCorp Financial Group, Inc. and its subsidiaries, unless the context otherwise requires.
1.
|
ORGANIZATION, PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
|
StanCorp, headquartered in Portland, Oregon, is a holding company and conducts business through wholly-owned
operating subsidiaries throughout the United States. Through its subsidiaries, StanCorp has the authority to underwrite insurance products in all 50 states. The Company collectively views and operates its businesses as Insurance Services and Asset
Management. Insurance Services contains two reportable product segments, Employee Benefits and Individual Disability. Asset Management is reported as a separate reportable segment. See Note 5Segments.
StanCorp has the following wholly-owned operating subsidiaries: Standard Insurance Company (Standard), The Standard
Life Insurance Company of New York, Standard Retirement Services, Inc. (Standard Retirement Services), StanCorp Equities, Inc. (StanCorp Equities), StanCorp Mortgage Investors, LLC (StanCorp Mortgage Investors),
StanCorp Investment Advisers, Inc. (StanCorp Investment Advisers), StanCorp Real Estate, LLC (StanCorp Real Estate) and Standard Management, Inc. (Standard Management).
Standard, the Companys largest subsidiary, underwrites group and individual disability insurance and annuity products,
group life and accidental death and dismemberment (AD&D) insurance, and provides group dental and group vision insurance, absence management services and retirement plan products. Founded in 1906, Standard is domiciled in Oregon,
licensed in all states except New York, and licensed in the District of Columbia and the U.S. territories of Guam, Puerto Rico and the Virgin Islands.
The Standard Life Insurance Company of New York was organized in 2000 and is licensed to provide group and individual
disability insurance, group life and AD&D insurance and group dental and vision insurance in New York.
The
Standard
is a service mark of StanCorp and its subsidiaries and is used as a brand mark and marketing name by Standard and The Standard Life Insurance Company of New York.
Standard Retirement Services administers and services StanCorps retirement plans group annuity contracts and trust
products. Retirement plan products are offered in all 50 states through Standard or Standard Retirement Services.
StanCorp
Equities is a limited broker-dealer and member of the Financial Industry Regulatory Authority. As a wholesaler, StanCorp Equities activities are limited to soliciting and supporting third-party broker-dealers and investment advisers that offer
or advise their retirement plan clients on using an unregistered group annuity contract or a mutual fund trust platform.
StanCorp Mortgage Investors originates and services fixed-rate commercial mortgage loans for the investment portfolios of the
Companys insurance subsidiaries. StanCorp Mortgage Investors also generates additional fee income from the origination and servicing of commercial mortgage loans participated to institutional investors.
StanCorp Investment Advisers is a Securities and Exchange Commission (SEC) registered investment adviser providing
performance analysis, fund selection support, model portfolios and other investment advisory, financial planning, and investment management services to its retirement plan clients, individual investors and subsidiaries of StanCorp.
StanCorp Real Estate is a property management company that owns and manages the Hillsboro, Oregon home office properties and
other properties held for investment and held for sale. StanCorp Real Estate also manages the Portland, Oregon home office properties.
Standard Management manages certain real estate properties held for sale from time to time in conjunction with the
Companys real estate business.
Standard holds interests in tax-advantaged investments. These interests are accounted
for under the equity method of accounting. The total investment in these interests was $269.0 million and $192.4 million at June 30, 2014 and December 31, 2013, respectively.
The accompanying unaudited condensed consolidated financial statements of StanCorp and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in conformance with the requirements of Form 10-Q pursuant to the rules and regulations of the SEC. As
such, they do not include all of the information and disclosures required by GAAP for complete financial statements. Intercompany balances and transactions have been eliminated on a consolidated basis. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the financial statement date, and the reported amounts of
revenues and expenses during the period. Actual results may differ from those estimates. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the Companys financial condition at June 30, 2014, and for the results of operations for the three and six months ended June 30, 2014 and 2013, and cash flows for the six
months ended June 30, 2014 and 2013. Interim results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. This report should be read
in conjunction with the Companys 2013 annual report on Form 10-K.
6
2.
|
NET INCOME PER COMMON SHARE
|
Net income per basic common share was calculated by dividing net income by the weighted-average number of
common shares outstanding. Net income per diluted common share was calculated using the treasury stock method and reflects the dilutive effects of stock awards and potential exercises of dilutive outstanding stock options. The computation of diluted
weighted-average net income per common share does not include stock options with an option exercise price greater than the average market price because they are antidilutive and inclusion would increase net income per common share.
The following table sets forth the calculation of net income per basic and diluted weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
Net income (In millions)
|
|
$
|
41.9
|
|
|
$
|
57.7
|
|
|
$
|
92.0
|
|
|
$
|
104.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
43,311,156
|
|
|
|
44,257,095
|
|
|
|
43,602,275
|
|
|
|
44,341,158
|
|
Stock options
|
|
|
370,758
|
|
|
|
130,813
|
|
|
|
394,160
|
|
|
|
97,236
|
|
Stock awards
|
|
|
28,149
|
|
|
|
10,212
|
|
|
|
31,312
|
|
|
|
6,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average common shares outstanding
|
|
|
43,710,063
|
|
|
|
44,398,120
|
|
|
|
44,027,747
|
|
|
|
44,445,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.97
|
|
|
$
|
1.30
|
|
|
$
|
2.11
|
|
|
$
|
2.36
|
|
Diluted
|
|
|
0.96
|
|
|
|
1.30
|
|
|
|
2.09
|
|
|
|
2.35
|
|
|
|
|
|
|
Antidilutive shares not included in net income per diluted common share calculation
|
|
|
152,335
|
|
|
|
1,182,979
|
|
|
|
211,746
|
|
|
|
1,293,609
|
|
3.
|
SHARE-BASED COMPENSATION
|
The Company has two active share-based compensation plans: the 2002 Stock Incentive Plan (2002
Plan) and the 1999 Employee Share Purchase Plan (ESPP). The 2002 Plan authorizes the Board of Directors to grant incentive or non-statutory stock options and stock awards to eligible employees and certain specified parties. The
Companys ESPP allows eligible employees to purchase StanCorp common stock at a discount. Of the 7,000,000 shares of common stock authorized for the 2002 Plan, 2,621,413 shares or options for shares remain available for grant at June 30,
2014. Of the 3,500,000 shares authorized for the ESPP, 1,401,908 shares remain available for issuance at June 30, 2014.
The following table sets forth the total compensation cost and related income tax benefit under the Companys share-based
compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Compensation cost
|
|
$
|
1.1
|
|
|
$
|
1.3
|
|
|
$
|
3.1
|
|
|
$
|
2.7
|
|
Related income tax benefit
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
1.1
|
|
|
|
0.9
|
|
2002 Plan
The Company has provided two types of share-based compensation pursuant to the 2002 Plan: option grants and stock awards.
Option Grants
Options
are granted to officers and certain non-officer employees. Options are granted with an exercise price per share equal to the closing market price of StanCorp common stock on the grant date. Options typically vest in four equal installments on the
first four anniversaries of the vesting reference date.
The Company granted options to purchase 105,060 and 163,367
options for the first six months of 2014 and 2013, respectively, at a weighted-average per share exercise price of $63.74 and $38.56, respectively. The fair value of each option award granted was estimated using the Black-Scholes option pricing
model as of the grant date. The weighted-average grant date fair value of options granted for the first six months of 2014 and 2013 was $24.53 and $13.64, respectively.
The compensation cost of stock options is recognized over the vesting period, which is also the period over which the grantee
must provide services to the Company. At June 30, 2014, the total compensation cost related to unvested option awards that had not yet been recognized in the financial statements was $6.6 million. This compensation cost will be recognized over
a weighted-average remaining period of 2.3 years.
Stock Award Grants
The Company currently grants three types of stock awards: restricted stock unit awards (RSUs), performance-based
stock awards (Performance Shares) and non-employee director stock awards (Director Stock Grants). Under the 2002 Plan, the Company had 959,556 shares available for issuance as stock award grants at June 30, 2014.
7
RSUs
The Company grants annual RSUs to officers and senior officers of the Company. RSUs typically cliff vest three years from the
grant date. The actual number of shares issued is based on continued employment with a portion of shares withheld to cover required tax withholding.
The Company granted 45,869 and 59,823 RSUs for the first six months of 2014 and 2013, respectively. The fair value of the RSUs
is determined based on the closing market price of StanCorp common stock on the grant date.
The compensation cost of RSUs
is recognized over the vesting period, which is the period over which the grantee must provide services to the Company. At June 30, 2014, the total compensation cost related to unvested RSUs that had not yet been recognized in the financial
statements was $3.7 million. This cost will be recognized over a weighted-average remaining period of 1.9.
Performance Shares
The Company grants Performance Shares to designated senior officers as long term incentive compensation. The payout for these
awards is based on the Companys financial performance over a three-year period. Performance Share grants represent the maximum number of shares of StanCorp common stock issuable to the designated senior officers if specified criteria are met.
The actual number of shares issued at the end of the performance period is based on continued employment and satisfaction of Company financial performance conditions, with a portion of the shares withheld to cover required tax withholding.
The Company granted 77,634 and 117,172 Performance Shares for the first six months of 2014 and 2013, respectively.
The Company issued 8,846 of StanCorp common stock under previous performance share awards for the first six months of 2014 and
no shares for the first six months of 2013.
The fair value of Performance Shares is based on the closing market price of
StanCorp common stock on the grant date.
The compensation cost of Performance Shares is based on an estimate of the number
of shares that will be earned and cost is recognized over the vesting period. The cost the Company will ultimately recognize as a result of these stock awards is dependent on the Companys financial performance. Assuming that the maximum
performance is achieved for each performance goal, $14.4 million in additional compensation cost would be recognized through 2016. Assuming that the maximum performance is achieved, this cost would be recognized over a weighted-average period of 1.4
years. The target payout is 50% of the maximum performance shares. Assuming that the target performance is achieved for each performance goal, $5.9 million in additional compensation cost would be recognized through 2016.
Director Stock Grants
Each non-employee director receives annual stock grants with a fair value equal to $100,000 based on the closing market price
of StanCorp common stock on the day of the annual shareholder meeting. The stock grants generally vest after one year.
The
Company issued 14,418 and 20,099 shares of StanCorp common stock for the first six months of 2014 and 2013, respectively.
Employee Share Purchase
Plan
The Companys ESPP allows eligible employees to purchase StanCorp common stock at a 5% discount of the
lesser of the closing market price of StanCorp common stock on either the commencement date or the final date of each six-month offering period. Under the terms of the plan, each eligible employee may elect to have the lesser of up to 5% of the
employees gross total cash compensation or $5,000 per offering period withheld to purchase StanCorp common stock. No employee may purchase StanCorp common stock having a fair market value in excess of $25,000 in any calendar year.
The following table sets forth the compensation cost and related income tax benefit under the Companys ESPP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Compensation cost
|
|
$
|
0.1
|
|
|
$
|
---
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Related income tax benefit
|
|
|
0.1
|
|
|
|
---
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Pension Benefits
The Company has two non-contributory defined benefit pension plans: the employee pension plan and the agent pension plan. The
employee pension plan is generally limited to eligible employees of the Company whose date of employment began before 2003 and a participant is entitled to a normal retirement benefit at age 65. The agent pension plan is for former field employees
and agents. The defined benefit pension plans provide benefits based on years of service and final average pay. The employee pension plan is sponsored by StanCorp and the agent pension plan is sponsored by Standard. Both plans are administered by
Standard Retirement Services and are closed to new participants.
8
The Company recognizes the funded status of the pension plans as an asset or
liability on the balance sheet. The funded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation as of the year-end balance sheet date.
The following table sets forth the components of net periodic benefit (credit) cost and other changes in plan assets and
benefit obligations recognized in other comprehensive income for pension benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
Components of net periodic benefit (credit) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2.2
|
|
|
$
|
2.5
|
|
|
$
|
4.4
|
|
|
$
|
5.1
|
|
Interest cost
|
|
|
4.8
|
|
|
|
4.2
|
|
|
|
9.6
|
|
|
|
8.3
|
|
Expected return on plan assets
|
|
|
(8.3)
|
|
|
|
(7.3)
|
|
|
|
(16.7)
|
|
|
|
(14.6)
|
|
Amortization of prior service cost
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Amortization of net actuarial loss
|
|
|
0.1
|
|
|
|
2.4
|
|
|
|
0.2
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (credit) cost
|
|
|
(1.1)
|
|
|
|
1.9
|
|
|
|
(2.2)
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other changes in plan assets and benefit obligation recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(0.1)
|
|
|
|
(0.1)
|
|
|
|
(0.3)
|
|
|
|
(0.3)
|
|
Amortization of net actuarial loss
|
|
|
(0.1)
|
|
|
|
(2.4)
|
|
|
|
(0.2)
|
|
|
|
(4.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
|
(0.2)
|
|
|
|
(2.5)
|
|
|
|
(0.5)
|
|
|
|
(5.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit (credit) cost and other comprehensive income
|
|
$
|
(1.3)
|
|
|
$
|
(0.6)
|
|
|
$
|
(2.7)
|
|
|
$
|
(1.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits Other Than Pensions
Standard sponsors and administers a postretirement benefit plan that includes medical, prescription drug benefits and group
term life insurance. Eligible retirees are required to contribute specified amounts for medical and prescription drug benefits that are determined periodically and are based on length of service and age at retirement. As of 2006, participation in
the postretirement benefit plan was closed to new participants. An amendment announced at the end of 2012 reduced future benefits to plan participants that did not retire by July 1, 2013.
The Company recognizes the funded status of the postretirement benefit plan as an asset or liability on the balance sheet. The
funded status is measured as the difference between the fair value of the plan assets and the accumulated benefit obligation.
The following table sets forth the components of net periodic benefit cost (credit) and other amounts recognized in other
comprehensive income for postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
Components of net periodic benefit cost (credit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
Expected return on plan assets
|
|
|
(0.2)
|
|
|
|
(0.2)
|
|
|
|
(0.4)
|
|
|
|
(0.4)
|
|
Amortization of prior service cost
|
|
|
---
|
|
|
|
(13.2)
|
|
|
|
---
|
|
|
|
(26.4)
|
|
Amortization of net actuarial loss (gain)
|
|
|
---
|
|
|
|
2.9
|
|
|
|
(0.6)
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (credit)
|
|
|
---
|
|
|
|
(10.3)
|
|
|
|
(0.6)
|
|
|
|
(20.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other changes in plan assets and benefit obligation recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
---
|
|
|
|
13.2
|
|
|
|
---
|
|
|
|
26.4
|
|
Amortization of net actuarial (loss) gain
|
|
|
---
|
|
|
|
(2.9)
|
|
|
|
0.6
|
|
|
|
(5.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
|
---
|
|
|
|
10.3
|
|
|
|
0.6
|
|
|
|
20.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit credit and other comprehensive income
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation Plans
Eligible employees are covered by a qualified deferred compensation plan sponsored by Standard under which a portion of the
employee contribution is matched. Employees not eligible for the employee pension plan are eligible for an additional non-elective employer contribution. Contributions to the plan were $2.3 million and $2.3 million for the second quarters of 2014
and 2013, respectively and $6.0 million and $5.6 million for the first six months of 2014 and 2013, respectively.
9
Eligible executive officers, directors, agents and group producers may
participate in one of several non-qualified deferred compensation plans under which a portion of the deferred compensation for participating executive officers, agents and group producers is matched. The liability for the plans was $12.2 million and
$11.6 million at June 30, 2014 and December 31, 2013, respectively.
Non-Qualified Supplemental Retirement Plan
Eligible executive officers are covered by a non-qualified supplemental retirement plan (non-qualified plan). Under
the non-qualified plan, a participant is entitled to a normal retirement benefit once the participant reaches age 65. A participant can also receive a normal, unreduced retirement benefit once the sum of his or her age plus years of service is at
least 90. The Company recognizes the unfunded status of the non-qualified plan in other liabilities on the balance sheet. The unfunded status was $31.6 million and $31.1 million at June 30, 2014 and December 31, 2013, respectively.
Expenses were $1.2 million and $0.8 million for the second quarters of 2014 and 2013, respectively and $1.9 million and $1.6 million for the first six months of 2014 and 2013, respectively. The net loss and prior service cost, net of tax, excluded
from the net periodic benefit cost and reported as a component of accumulated other comprehensive income (AOCI) was $5.2 million and $5.7 million at June 30, 2014 and December 31, 2013, respectively.
The Company collectively views and operates its businesses as Insurance Services and Asset Management.
Insurance Services contains two reportable product segments, Employee Benefits and Individual Disability. Insurance Services offers group and individual disability insurance, group life and AD&D insurance, group dental and group vision
insurance, and absence management services. Asset Management is reported as a separate reportable segment. Asset Management provides investment and asset management products and services. Asset Management offers full-service 401(k) plans, 403(b)
plans, 457 plans, defined benefit plans, money purchase pension plans, profit sharing plans and non-qualified deferred compensation products and services. Asset Management also offers investment advisory and management services, financial planning
services, origination and servicing of fixed-rate commercial mortgage loans, individual fixed-rate annuity products, group annuity contracts and retirement plan trust products. The Other category includes return on capital not allocated to the
product segments, holding company expenses, operations of certain unallocated subsidiaries, interest on debt, unallocated expenses, net capital gains and losses primarily related to the impairment or the disposition of the Companys invested
assets and adjustments made in consolidation. Resources are allocated and performance is evaluated at the segment level.
Intersegment revenues are comprised of administrative fees charged by Asset Management to manage the fixed maturity
securitiesavailable-for-sale (fixed maturity securities) and commercial mortgage loan portfolios for the Companys insurance subsidiaries. Intersegment fees are determined based on the level of assets in the insurance
subsidiaries fixed maturity securities and commercial mortgage loan portfolios.
The following table sets forth
intersegment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
Intersegment administrative fees
|
|
$
|
4.8
|
|
|
$
|
4.6
|
|
|
$
|
9.6
|
|
|
$
|
9.3
|
|
10
The following table sets forth premiums, administrative fees and net investment
income by major product line or category within each of the Companys segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group life and AD&D
|
|
$
|
202.9
|
|
|
$
|
214.5
|
|
|
$
|
403.1
|
|
|
$
|
429.9
|
|
Group long term disability
|
|
|
189.4
|
|
|
|
198.0
|
|
|
|
378.6
|
|
|
|
398.3
|
|
Group short term disability
|
|
|
57.5
|
|
|
|
59.6
|
|
|
|
111.8
|
|
|
|
115.5
|
|
Group other
|
|
|
19.4
|
|
|
|
19.2
|
|
|
|
38.6
|
|
|
|
38.3
|
|
Experience rated refunds
|
|
|
(1.9)
|
|
|
|
(4.3)
|
|
|
|
(5.4)
|
|
|
|
(8.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Employee Benefits
|
|
|
467.3
|
|
|
|
487.0
|
|
|
|
926.7
|
|
|
|
973.2
|
|
Individual Disability
|
|
|
48.9
|
|
|
|
46.7
|
|
|
|
97.0
|
|
|
|
93.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Services premiums
|
|
|
516.2
|
|
|
|
533.7
|
|
|
|
1,023.7
|
|
|
|
1,066.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Management:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plans
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
1.2
|
|
|
|
1.4
|
|
Individual annuities
|
|
|
2.9
|
|
|
|
1.2
|
|
|
|
4.4
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asset Management premiums
|
|
|
3.0
|
|
|
|
1.4
|
|
|
|
5.6
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
$
|
519.2
|
|
|
$
|
535.1
|
|
|
$
|
1,029.3
|
|
|
$
|
1,071.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Benefits
|
|
$
|
4.2
|
|
|
$
|
3.4
|
|
|
$
|
8.4
|
|
|
$
|
6.9
|
|
Individual Disability
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Services administrative fees
|
|
|
4.3
|
|
|
|
3.5
|
|
|
|
8.5
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Management:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plans
|
|
|
24.7
|
|
|
|
23.6
|
|
|
|
48.7
|
|
|
|
45.8
|
|
Other financial services businesses
|
|
|
8.4
|
|
|
|
7.9
|
|
|
|
16.6
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asset Management administrative fees
|
|
|
33.1
|
|
|
|
31.5
|
|
|
|
65.3
|
|
|
|
61.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other administrative fees
|
|
|
(4.8)
|
|
|
|
(4.6)
|
|
|
|
(9.6)
|
|
|
|
(9.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative fees
|
|
$
|
32.6
|
|
|
$
|
30.4
|
|
|
$
|
64.2
|
|
|
$
|
59.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Benefits
|
|
$
|
62.1
|
|
|
$
|
67.0
|
|
|
$
|
124.5
|
|
|
$
|
135.6
|
|
Individual Disability
|
|
|
13.0
|
|
|
|
12.9
|
|
|
|
26.1
|
|
|
|
26.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Services net investment income
|
|
|
75.1
|
|
|
|
79.9
|
|
|
|
150.6
|
|
|
|
161.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Management:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plans
|
|
|
28.8
|
|
|
|
25.0
|
|
|
|
55.8
|
|
|
|
49.2
|
|
Individual annuities
|
|
|
39.4
|
|
|
|
42.0
|
|
|
|
79.7
|
|
|
|
88.2
|
|
Other financial services businesses
|
|
|
4.0
|
|
|
|
3.7
|
|
|
|
6.2
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asset Management net investment income
|
|
|
72.2
|
|
|
|
70.7
|
|
|
|
141.7
|
|
|
|
144.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other net investment income
|
|
|
2.5
|
|
|
|
3.5
|
|
|
|
8.1
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income
|
|
$
|
149.8
|
|
|
$
|
154.1
|
|
|
$
|
300.4
|
|
|
$
|
313.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The following tables set forth select segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Benefits
|
|
|
Individual
Disability
|
|
|
Total
Insurance
Services
|
|
|
Asset
Management
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
(In millions)
|
|
Three Months Ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
467.3
|
|
|
$
|
48.9
|
|
|
$
|
516.2
|
|
|
$
|
3.0
|
|
|
$
|
---
|
|
|
$
|
519.2
|
|
Administrative fees
|
|
|
4.2
|
|
|
|
0.1
|
|
|
|
4.3
|
|
|
|
33.1
|
|
|
|
(4.8)
|
|
|
|
32.6
|
|
Net investment income
|
|
|
62.1
|
|
|
|
13.0
|
|
|
|
75.1
|
|
|
|
72.2
|
|
|
|
2.5
|
|
|
|
149.8
|
|
Net capital losses
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(0.5)
|
|
|
|
(0.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
533.6
|
|
|
|
62.0
|
|
|
|
595.6
|
|
|
|
108.3
|
|
|
|
(2.8)
|
|
|
|
701.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits to policyholders
|
|
|
382.2
|
|
|
|
38.8
|
|
|
|
421.0
|
|
|
|
5.2
|
|
|
|
---
|
|
|
|
426.2
|
|
Interest credited
|
|
|
1.2
|
|
|
|
---
|
|
|
|
1.2
|
|
|
|
39.4
|
|
|
|
---
|
|
|
|
40.6
|
|
Operating expenses
|
|
|
78.7
|
|
|
|
6.8
|
|
|
|
85.5
|
|
|
|
30.1
|
|
|
|
(0.3)
|
|
|
|
115.3
|
|
Commissions and bonuses
|
|
|
29.7
|
|
|
|
11.6
|
|
|
|
41.3
|
|
|
|
8.4
|
|
|
|
---
|
|
|
|
49.7
|
|
Premium taxes
|
|
|
7.3
|
|
|
|
0.8
|
|
|
|
8.1
|
|
|
|
---
|
|
|
|
---
|
|
|
|
8.1
|
|
Interest expense
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
7.9
|
|
|
|
7.9
|
|
Net decrease (increase) in DAC, VOBA and other intangible assets
|
|
|
1.8
|
|
|
|
(3.0)
|
|
|
|
(1.2)
|
|
|
|
3.2
|
|
|
|
---
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
500.9
|
|
|
|
55.0
|
|
|
|
555.9
|
|
|
|
86.3
|
|
|
|
7.6
|
|
|
|
649.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
32.7
|
|
|
$
|
7.0
|
|
|
$
|
39.7
|
|
|
$
|
22.0
|
|
|
$
|
(10.4)
|
|
|
$
|
51.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Benefits
|
|
|
Individual
Disability
|
|
|
Total
Insurance
Services
|
|
|
Asset
Management
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
(In millions)
|
|
Three Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
487.0
|
|
|
$
|
46.7
|
|
|
$
|
533.7
|
|
|
$
|
1.4
|
|
|
$
|
---
|
|
|
$
|
535.1
|
|
Administrative fees
|
|
|
3.4
|
|
|
|
0.1
|
|
|
|
3.5
|
|
|
|
31.5
|
|
|
|
(4.6)
|
|
|
|
30.4
|
|
Net investment income
|
|
|
67.0
|
|
|
|
12.9
|
|
|
|
79.9
|
|
|
|
70.7
|
|
|
|
3.5
|
|
|
|
154.1
|
|
Net capital losses
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(2.6)
|
|
|
|
(2.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
557.4
|
|
|
|
59.7
|
|
|
|
617.1
|
|
|
|
103.6
|
|
|
|
(3.7)
|
|
|
|
717.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits to policyholders
|
|
|
390.2
|
|
|
|
29.6
|
|
|
|
419.8
|
|
|
|
4.3
|
|
|
|
---
|
|
|
|
424.1
|
|
Interest credited
|
|
|
1.3
|
|
|
|
---
|
|
|
|
1.3
|
|
|
|
39.0
|
|
|
|
---
|
|
|
|
40.3
|
|
Operating expenses
|
|
|
77.9
|
|
|
|
6.4
|
|
|
|
84.3
|
|
|
|
28.8
|
|
|
|
(8.7)
|
|
|
|
104.4
|
|
Commissions and bonuses
|
|
|
31.1
|
|
|
|
11.4
|
|
|
|
42.5
|
|
|
|
8.3
|
|
|
|
---
|
|
|
|
50.8
|
|
Premium taxes
|
|
|
8.1
|
|
|
|
1.0
|
|
|
|
9.1
|
|
|
|
---
|
|
|
|
---
|
|
|
|
9.1
|
|
Interest expense
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
8.6
|
|
|
|
8.6
|
|
Net decrease (increase) in DAC, VOBA and other intangible assets
|
|
|
2.2
|
|
|
|
(3.5)
|
|
|
|
(1.3)
|
|
|
|
2.5
|
|
|
|
---
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
510.8
|
|
|
|
44.9
|
|
|
|
555.7
|
|
|
|
82.9
|
|
|
|
(0.1)
|
|
|
|
638.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
46.6
|
|
|
$
|
14.8
|
|
|
$
|
61.4
|
|
|
$
|
20.7
|
|
|
$
|
(3.6)
|
|
|
$
|
78.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Benefits
|
|
|
Individual
Disability
|
|
|
Total
Insurance
Services
|
|
|
Asset
Management
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
(In millions)
|
|
Six Months Ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
926.7
|
|
|
$
|
97.0
|
|
|
$
|
1,023.7
|
|
|
$
|
5.6
|
|
|
$
|
---
|
|
|
$
|
1,029.3
|
|
Administrative fees
|
|
|
8.4
|
|
|
|
0.1
|
|
|
|
8.5
|
|
|
|
65.3
|
|
|
|
(9.6)
|
|
|
|
64.2
|
|
Net investment income
|
|
|
124.5
|
|
|
|
26.1
|
|
|
|
150.6
|
|
|
|
141.7
|
|
|
|
8.1
|
|
|
|
300.4
|
|
Net capital losses
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(1.6)
|
|
|
|
(1.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,059.6
|
|
|
|
123.2
|
|
|
|
1,182.8
|
|
|
|
212.6
|
|
|
|
(3.1)
|
|
|
|
1,392.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits to policyholders
|
|
|
752.6
|
|
|
|
64.8
|
|
|
|
817.4
|
|
|
|
9.9
|
|
|
|
---
|
|
|
|
827.3
|
|
Interest credited
|
|
|
1.9
|
|
|
|
---
|
|
|
|
1.9
|
|
|
|
82.2
|
|
|
|
---
|
|
|
|
84.1
|
|
Operating expenses
|
|
|
156.1
|
|
|
|
13.6
|
|
|
|
169.7
|
|
|
|
60.0
|
|
|
|
(1.3)
|
|
|
|
228.4
|
|
Commissions and bonuses
|
|
|
63.0
|
|
|
|
22.7
|
|
|
|
85.7
|
|
|
|
15.8
|
|
|
|
---
|
|
|
|
101.5
|
|
Premium taxes
|
|
|
15.4
|
|
|
|
1.8
|
|
|
|
17.2
|
|
|
|
---
|
|
|
|
---
|
|
|
|
17.2
|
|
Interest expense
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
16.3
|
|
|
|
16.3
|
|
Net (increase) decrease in DAC, VOBA and other intangible assets
|
|
|
(0.7)
|
|
|
|
(4.8)
|
|
|
|
(5.5)
|
|
|
|
6.3
|
|
|
|
---
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
988.3
|
|
|
|
98.1
|
|
|
|
1,086.4
|
|
|
|
174.2
|
|
|
|
15.0
|
|
|
|
1,275.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
71.3
|
|
|
$
|
25.1
|
|
|
$
|
96.4
|
|
|
$
|
38.4
|
|
|
$
|
(18.1)
|
|
|
$
|
116.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,773.4
|
|
|
$
|
2,353.9
|
|
|
$
|
8,127.3
|
|
|
$
|
13,679.5
|
|
|
$
|
649.9
|
|
|
$
|
22,456.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Benefits
|
|
|
Individual
Disability
|
|
|
Total
Insurance
Services
|
|
|
Asset
Management
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
(In millions)
|
|
Six Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
973.2
|
|
|
$
|
93.7
|
|
|
$
|
1,066.9
|
|
|
$
|
4.4
|
|
|
$
|
---
|
|
|
$
|
1,071.3
|
|
Administrative fees
|
|
|
6.9
|
|
|
|
0.1
|
|
|
|
7.0
|
|
|
|
61.4
|
|
|
|
(9.3)
|
|
|
|
59.1
|
|
Net investment income
|
|
|
135.6
|
|
|
|
26.3
|
|
|
|
161.9
|
|
|
|
144.0
|
|
|
|
7.4
|
|
|
|
313.3
|
|
Net capital losses
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(4.2)
|
|
|
|
(4.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,115.7
|
|
|
|
120.1
|
|
|
|
1,235.8
|
|
|
|
209.8
|
|
|
|
(6.1)
|
|
|
|
1,439.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits to policyholders
|
|
|
797.1
|
|
|
|
58.7
|
|
|
|
855.8
|
|
|
|
10.1
|
|
|
|
---
|
|
|
|
865.9
|
|
Interest credited
|
|
|
2.2
|
|
|
|
---
|
|
|
|
2.2
|
|
|
|
84.7
|
|
|
|
---
|
|
|
|
86.9
|
|
Operating expenses
|
|
|
153.8
|
|
|
|
12.6
|
|
|
|
166.4
|
|
|
|
57.0
|
|
|
|
(13.9)
|
|
|
|
209.5
|
|
Commissions and bonuses
|
|
|
66.1
|
|
|
|
22.3
|
|
|
|
88.4
|
|
|
|
16.2
|
|
|
|
---
|
|
|
|
104.6
|
|
Premium taxes
|
|
|
16.6
|
|
|
|
2.0
|
|
|
|
18.6
|
|
|
|
---
|
|
|
|
---
|
|
|
|
18.6
|
|
Interest expense
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
17.1
|
|
|
|
17.1
|
|
Net (increase) decrease in DAC, VOBA and other intangible assets
|
|
|
(0.7)
|
|
|
|
(5.1)
|
|
|
|
(5.8)
|
|
|
|
3.9
|
|
|
|
---
|
|
|
|
(1.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,035.1
|
|
|
|
90.5
|
|
|
|
1,125.6
|
|
|
|
171.9
|
|
|
|
3.2
|
|
|
|
1,300.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
80.6
|
|
|
$
|
29.6
|
|
|
$
|
110.2
|
|
|
$
|
37.9
|
|
|
$
|
(9.3)
|
|
|
$
|
138.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,824.2
|
|
|
$
|
2,273.6
|
|
|
$
|
8,097.8
|
|
|
$
|
11,749.2
|
|
|
$
|
499.6
|
|
|
$
|
20,346.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Assets and liabilities recorded at fair value are disclosed using a three-level hierarchy. The
classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information
obtained from independent sources while unobservable inputs reflect the Companys estimates about market data.
The
fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: Level 1 inputs are based upon quoted prices in active markets for identical assets or liabilities that the Company can access at
the measurement date. Level 2 inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all
significant assumptions are observable in the market. Level 3 inputs are generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Companys estimates of
assumptions that market participants would use in pricing the asset or liability.
There are three types of valuation
techniques used to measure assets and liabilities recorded at fair value:
|
|
|
The market approach uses prices or other relevant information generated by market transactions involving identical or comparable assets or
liabilities.
|
|
|
|
The income approach uses the present value of cash flows or earnings.
|
|
|
|
The cost approach, which uses replacement costs more readily adaptable for valuing physical assets.
|
The Company uses both the market and income approach in its fair value measurements. These measurements are discussed in more
detail below.
The following tables set forth the carrying value and the estimated fair value of each financial instrument:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
(In millions)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
Corporate bonds
|
|
$
|
6,946.1
|
|
|
$
|
6,946.1
|
|
|
$
|
---
|
|
|
$
|
6,862.8
|
|
|
$
|
83.3
|
|
U.S. government and agency bonds
|
|
|
316.9
|
|
|
|
316.9
|
|
|
|
---
|
|
|
|
316.9
|
|
|
|
---
|
|
U.S. state and political subdivision bonds
|
|
|
139.8
|
|
|
|
139.8
|
|
|
|
---
|
|
|
|
139.8
|
|
|
|
---
|
|
Foreign government bonds
|
|
|
65.6
|
|
|
|
65.6
|
|
|
|
---
|
|
|
|
65.6
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
7,468.4
|
|
|
$
|
7,468.4
|
|
|
$
|
---
|
|
|
$
|
7,385.1
|
|
|
$
|
83.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans, net
|
|
$
|
5,453.3
|
|
|
$
|
5,894.2
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
5,894.2
|
|
|
|
|
|
|
|
S&P 500 Index options
|
|
|
14.4
|
|
|
|
14.4
|
|
|
|
---
|
|
|
|
---
|
|
|
|
14.4
|
|
Policy loans
|
|
|
2.3
|
|
|
|
2.3
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2.3
|
|
Separate account assets
|
|
|
7,133.5
|
|
|
|
7,133.5
|
|
|
|
7,003.2
|
|
|
|
130.3
|
|
|
|
---
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other policyholder funds, investment-type contracts
|
|
$
|
5,587.3
|
|
|
$
|
5,811.5
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
5,811.5
|
|
Index-based interest guarantees
|
|
|
68.3
|
|
|
|
68.3
|
|
|
|
---
|
|
|
|
---
|
|
|
|
68.3
|
|
Interest rate swaps
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
---
|
|
|
|
1.6
|
|
|
|
---
|
|
Short-term debt
|
|
|
1.9
|
|
|
|
1.7
|
|
|
|
---
|
|
|
|
1.7
|
|
|
|
---
|
|
Long-term debt
|
|
|
504.3
|
|
|
|
534.9
|
|
|
|
---
|
|
|
|
534.9
|
|
|
|
---
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
(In millions)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
Corporate bonds
|
|
$
|
6,545.7
|
|
|
$
|
6,545.7
|
|
|
$
|
---
|
|
|
$
|
6,429.7
|
|
|
$
|
116.0
|
|
U.S. government and agency bonds
|
|
|
353.2
|
|
|
|
353.2
|
|
|
|
---
|
|
|
|
353.2
|
|
|
|
---
|
|
U.S. state and political subdivision bonds
|
|
|
140.3
|
|
|
|
140.3
|
|
|
|
---
|
|
|
|
140.3
|
|
|
|
---
|
|
Foreign government bonds
|
|
|
65.5
|
|
|
|
65.5
|
|
|
|
---
|
|
|
|
65.5
|
|
|
|
---
|
|
S&P 500 Index options
|
|
|
15.8
|
|
|
|
15.8
|
|
|
|
---
|
|
|
|
---
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
7,120.5
|
|
|
$
|
7,120.5
|
|
|
$
|
---
|
|
|
$
|
6,988.7
|
|
|
$
|
131.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans, net
|
|
$
|
5,405.1
|
|
|
$
|
5,769.6
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
5,769.6
|
|
Policy loans
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2.5
|
|
Separate account assets
|
|
|
6,393.2
|
|
|
|
6,393.2
|
|
|
|
6,249.2
|
|
|
|
144.0
|
|
|
|
---
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds, investment-type contracts
|
|
$
|
5,469.8
|
|
|
$
|
5,632.7
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
5,632.7
|
|
Index-based interest guarantees
|
|
|
67.6
|
|
|
|
67.6
|
|
|
|
---
|
|
|
|
---
|
|
|
|
67.6
|
|
Short-term debt
|
|
|
1.5
|
|
|
|
1.9
|
|
|
|
---
|
|
|
|
1.9
|
|
|
|
---
|
|
Long-term debt
|
|
|
551.9
|
|
|
|
553.6
|
|
|
|
---
|
|
|
|
553.6
|
|
|
|
---
|
|
Financial Instruments Not Recorded at Fair Value
The Company did not elect to measure and record commercial mortgage loans, policy loans, other policyholders funds that are
investment-type contracts, short-term debt, or long-term debt at fair value on the consolidated balance sheets.
For
disclosure purposes, the fair values of commercial mortgage loans were estimated using an option-adjusted discounted cash flow valuation. The valuation includes both observable market inputs and estimated model parameters.
Significant observable inputs to the valuation include:
|
|
|
Indicative quarter-end pricing for a package of loans similar to those originated by the Company near quarter-end.
|
|
|
|
U.S. Government treasury yields.
|
|
|
|
Indicative yields from industrial bond issues.
|
|
|
|
The contractual terms of nearly every mortgage subject to valuation.
|
Significant estimated parameters include:
|
|
|
A liquidity premium that is estimated from historical loan sales and is applied over and above base yields.
|
|
|
|
Adjustments in interest rate spread based on an aggregate portfolio loan-to-value ratio, estimated from historical differential yields with respect
to loan-to-value ratios.
|
|
|
|
Projected prepayment activity.
|
For policy loans, the carrying value represents historical cost but approximates fair value. While potentially financial
instruments, policy loans are an integral component of the insurance contract and have no maturity date.
The fair value of
other policyholder funds that are investment-type contracts was calculated using the income approach in conjunction with the cost of capital method. The parameters used for discounting in the calculation were estimated using the perspective of the
principal market for the contracts under consideration. The principal market consists of other insurance carriers with similar contracts on their books.
The fair value for long-term debt was predominantly based on quoted market prices as of June 30, 2014 and
December 31, 2013, and trades occurring close to June 30, 2014 and December 31, 2013.
Financial Instruments Measured and Recorded at
Fair Value
Fixed maturity securities, S&P 500 Index options, interest rate swaps and index-based interest
guarantees embedded in indexed annuities (index-based interest guarantees) are recorded at fair value on a recurring basis. In the Companys consolidated statements of income and comprehensive income, unrealized gains and losses are
reported in other comprehensive income for fixed maturity securities. For interest rate swaps that are designated as a fair value hedge, the change in the fair values of the interest rate swap and the hedged item are reported in capital gains and
losses. The change in fair value for S&P 500 Index options is reported in net investment income. The change in fair value for index-based interest guarantees is reported in interest credited.
Separate account assets represent segregated funds held for the exclusive benefit of contract holders. The activities of the
account primarily relate to participant-directed 401(k) contracts. Separate account assets are recorded at fair value on a recurring basis, with changes in fair value recorded to separate account liabilities. Separate account assets consist of
mutual funds. The mutual funds fair value is determined through Level 1 and Level 2 inputs. The majority of the separate account assets are valued using quoted prices in an active market with the remainder of the assets valued using quoted
prices from an independent pricing service. The Company reviews the values obtained from the pricing service for reasonableness through analytical procedures and performance reviews.
15
Fixed maturity securities are comprised of the following classes:
|
|
|
U.S. government and agency bonds.
|
|
|
|
U.S. state and political subdivision bonds.
|
|
|
|
Foreign government bonds.
|
The fixed maturity securities are diversified across industries, issuers and maturities. The Company calculates fair values for
all classes of fixed maturity securities using valuation techniques described below. They are placed into three levels depending on the valuation technique used to determine the fair value of the securities.
The Company uses an independent pricing service to assist management in determining the fair value of these assets. The pricing
service incorporates a variety of information observable in the market in its valuation techniques, including:
|
|
|
Reported trading prices.
|
|
|
|
Relative credit information.
|
The pricing service also takes into account perceived market movements and sector news, as well as a bonds terms and
conditions, including any features specific to that issue that may influence risk, and thus marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant
or additional inputs may be necessary. The Company generally obtains one value from its primary external pricing service. On a case-by-case basis, the Company may obtain further quotes or prices from additional parties as needed.
The pricing service provides quoted market prices when available. Quoted prices are not always available due to bond market
inactivity. The pricing service obtains a broker quote when sufficient information, such as security structure or other market information, is not available to produce a valuation. Valuations and quotes obtained from third-party commercial pricing
services are non-binding and do not represent quotes on which one may execute the disposition of the assets.
The
significant unobservable inputs used in the fair value measurement of the reporting entitys bonds are valuations and quotes received from secondary pricing service, analytical reviews and broker quotes. Significant increases or decreases in
any of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, a change in the assumption used for the pricing evaluation is accompanied by a directionally similar change in the assumption used
for the methodologies.
The Company performs control procedures over the external valuations at least quarterly through a
combination of procedures that include an evaluation of methodologies used by the pricing service, analytical reviews and performance analysis of the prices against statistics, trends, and secondary pricing sources, back testing of sales activity
and maintenance of a securities watch list. As necessary, the Company compares prices received from the pricing service to prices independently estimated by the Company utilizing discounted cash flow models or through performing independent
valuations of inputs and assumptions similar to those used by the pricing service in order to ensure prices represent a reasonable estimate of fair value. Although the Company does identify differences from time to time as a result of these
validation procedures, the Company did not make any significant adjustments as of June 30, 2014 or December 31, 2013.
S&P 500 Index options and certain fixed maturity securities were valued using Level 3 inputs. The Level 3 fixed maturity
securities were valued using matrix pricing, independent broker quotes and other standard market valuation methodologies. The fair value was determined using inputs that were not observable or could not be derived principally from, or corroborated
by, observable market data. These inputs included assumptions regarding liquidity, estimated future cash flows and discount rates. Unobservable inputs to these valuations are based on managements judgment or estimation obtained from the best
sources available. The Companys valuations maximize the use of observable inputs, which include an analysis of securities in similar sectors with comparable maturity dates and bond ratings. Broker quotes are validated by management for
reasonableness in conjunction with information obtained from matrix pricing and other sources.
The Company calculates the
fair value for its S&P 500 Index options using the Black-Scholes option pricing model and parameters derived from market sources. The Companys valuations maximize the use of observable inputs, which include direct price quotes from the
Chicago Board Options Exchange (CBOE) and values for on-the-run treasury securities and London Interbank Offered Rate (LIBOR) as reported by Bloomberg. Unobservable inputs are estimated from the best sources available to the
Company and include estimates of future gross dividends to be paid on the stocks underlying the S&P 500 Index, estimates of bid ask spreads, and estimates of implied volatilities on options. Valuation parameters are calibrated to replicate the
actual end-of-day market quotes for options trading on the CBOE. The Company performs additional validation procedures such as the daily observation of market activity and conditions and the tracking and analyzing of actual quotes provided by
banking counterparties each time the Company purchases options from them. Additionally, in order to help validate the values derived through the procedures noted above, the Company obtains indicators of value from representative investment banks.
16
The Company uses the discounted cash flow valuation model to determine the fair
value of the interest rate swaps. The inputs used in the model are observable in the market. The interest rate swaps qualify as Level 2 under the fair value hierarchy since their valuation is based off a model for which all significant assumptions
are observable in the market.
The Company uses the income approach valuation technique to determine the fair value of
index-based interest guarantees. The liability is the present value of future cash flows attributable to the projected index growth in excess of cash flows driven by fixed interest rate guarantees for the indexed annuity product. Level 3 assumptions
for policyholder behavior and future index crediting rate declarations significantly influence the calculation. Index-based interest guarantees are included in the other policyholder funds line on the Companys consolidated balance sheet.
While valuations for the S&P 500 Index options are sensitive to a number of variables, valuations for S&P 500 Index
options purchased are most sensitive to changes in the estimates of bid ask spreads, or the S&P 500 Index value, and the implied volatilities of this index. Significant fluctuations in any of those inputs in isolation would result in a
significantly lower or higher fair value measurement. Generally, an increase or decrease used in the assumption for the implied volatilities and in the S&P 500 Index value would result in a directionally similar change in the fair value of the
asset.
Valuations for the index-based interest guarantees are sensitive to a number of variables, but are most sensitive
to the S&P 500 Index value, the implied volatilities of this index and the interest rate environment. Generally, a significant increase or decrease used in the assumption for the implied volatilities and in the S&P 500 Index value would
result in a directionally similar change, while an increase or decrease in interest rate environment would result in a directionally opposite change in the fair value of the liability.
Valuations for commercial mortgage loans measured at fair value on a nonrecurring basis using significant unobservable Level 3
inputs are sensitive to a number of variables, but are most sensitive to net operating income and the applied capitalization rate. Generally, an increase or decrease resulting from a change in the stabilized net operating income from the
collateralized property would result in a directionally similar change in the fair value of the asset. An increase or decrease in the assumption for the capitalization rate would result in a directionally opposite change in the fair value of the
asset.
Valuations for real estate acquired in satisfaction of debt through foreclosure or acceptance of deeds in lieu of
foreclosure on commercial mortgage loans (Real Estate Owned) measured at fair value on a nonrecurring basis using significant unobservable Level 3 inputs are sensitive to a number of variables. They are most sensitive to the reductions
taken on appraisals obtained, which may result in a fair value and carrying value below the appraised value. Generally, an increase in the reductions taken on appraisals obtained would result in a reduction in the fair value of the asset.
The following table sets forth quantitative information regarding significant unobservable inputs used in Level 3 valuation of
assets and liabilities measured and recorded at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Fair
Value
|
|
|
Range
of inputs
|
|
|
Fair
Value
|
|
|
Range
of inputs
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
S&P 500 Index options
|
|
Black-Scholes option
pricing model
|
|
Various assumptions
|
|
$
|
14.4
|
|
|
|
(a)
|
|
|
$
|
15.8
|
|
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index-based interest guarantees
|
|
Discounted cash flow
|
|
Expected future option purchase
|
|
$
|
68.3
|
|
|
|
1% -
4%
|
|
|
$
|
67.6
|
|
|
|
1% - 6%
|
|
|
|
|
|
Various assumptions
|
|
|
|
|
|
|
(b)
|
|
|
|
|
|
|
|
(b)
|
|
|
|
Black-Scholes option pricing model
|
|
Various assumptions
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans
|
|
Appraisals
|
|
Reduction on appraisal
|
|
$
|
54.6
|
|
|
|
0% -
27%
|
|
|
$
|
68.7
|
|
|
|
0% - 13%
|
|
|
|
Cash flows
|
|
Capitalization rate (c)
|
|
|
|
|
|
|
7% - 14%
|
|
|
|
|
|
|
|
7% - 16%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Owned
|
|
Appraisals
|
|
Reduction on appraisal
|
|
$
|
8.9
|
|
|
|
0% - 25%
|
|
|
$
|
35.2
|
|
|
|
0% - 53%
|
|
|
(a)
|
Represents various assumptions derived from market data, which include estimates of bid ask spreads and the implied volatilities for the S&P 500
Index.
|
|
(b)
|
Represents various actuarial assumptions which include combined lapse, mortality and withdrawal decrement rates which generally have a range of
inputs from 5%-36% for both June 30, 2014 and December 31, 2013.
|
|
(c)
|
Capitalization rates are used as an internal analysis in converting the underlying property income to an estimated property value.
|
17
The following tables set forth the reconciliation for all assets and liabilities
measured at fair value on a recurring basis using significant unobservable Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2014
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
U.S.
Government
and Agency
Bonds
|
|
|
U.S. State
and Political
Subdivision
Bonds
|
|
|
Corporate
Bonds
|
|
|
S&P 500
Index
Options
|
|
|
Total
Assets
|
|
|
Index-
Based
Interest
Guarantees
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
114.1
|
|
|
$
|
15.4
|
|
|
$
|
129.5
|
|
|
$
|
69.8
|
|
Total realized/unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
0.8
|
|
Included in other comprehensive income (loss)
|
|
|
---
|
|
|
|
---
|
|
|
|
(0.2)
|
|
|
|
---
|
|
|
|
(0.2)
|
|
|
|
---
|
|
Purchases, issuances, sales and settlements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2.3
|
|
|
|
2.3
|
|
|
|
---
|
|
Issuances
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
0.9
|
|
Sales
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Settlements
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(5.7)
|
|
|
|
(5.7)
|
|
|
|
(3.2)
|
|
Transfers into level 3
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Transfers out of level 3
|
|
|
---
|
|
|
|
---
|
|
|
|
(30.6)
|
|
|
|
---
|
|
|
|
(30.6)
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
83.3
|
|
|
$
|
14.4
|
|
|
$
|
97.7
|
|
|
$
|
68.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2013
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
U.S.
Government
and Agency
Bonds
|
|
|
U.S. State
and Political
Subdivision
Bonds
|
|
|
Corporate
Bonds
|
|
|
S&P 500
Index
Options
|
|
|
Total
Assets
|
|
|
Index-
Based
Interest
Guarantees
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1.1
|
|
|
$
|
1.7
|
|
|
$
|
76.3
|
|
|
$
|
15.3
|
|
|
$
|
94.4
|
|
|
$
|
63.6
|
|
Total realized/unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
(1.7)
|
|
Included in other comprehensive income (loss)
|
|
|
---
|
|
|
|
---
|
|
|
|
(1.0)
|
|
|
|
---
|
|
|
|
(1.0)
|
|
|
|
---
|
|
Purchases, issuances, sales and settlements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
---
|
|
Issuances
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
1.8
|
|
Sales
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Settlements
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(5.5)
|
|
|
|
(5.5)
|
|
|
|
(1.1)
|
|
Transfers into level 3
|
|
|
---
|
|
|
|
---
|
|
|
|
7.0
|
|
|
|
---
|
|
|
|
7.0
|
|
|
|
---
|
|
Transfers out of level 3
|
|
|
(1.1)
|
|
|
|
(1.7)
|
|
|
|
(30.4)
|
|
|
|
---
|
|
|
|
(33.2)
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
51.9
|
|
|
$
|
13.7
|
|
|
$
|
65.6
|
|
|
$
|
62.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2014
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
U.S.
Government
and Agency
Bonds
|
|
|
U.S. State
and Political
Subdivision
Bonds
|
|
|
Corporate
Bonds
|
|
|
S&P 500
Index
Options
|
|
|
Total
Assets
|
|
|
Index-
Based
Interest
Guarantees
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
116.0
|
|
|
$
|
15.8
|
|
|
$
|
131.8
|
|
|
$
|
67.6
|
|
Total realized/unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
4.4
|
|
|
|
4.4
|
|
|
|
4.0
|
|
Included in other comprehensive income (loss)
|
|
|
---
|
|
|
|
---
|
|
|
|
(2.1)
|
|
|
|
---
|
|
|
|
(2.1)
|
|
|
|
---
|
|
Purchases, issuances, sales and settlements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
4.1
|
|
|
|
4.1
|
|
|
|
---
|
|
Issuances
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
1.8
|
|
Sales
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Settlements
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(9.9)
|
|
|
|
(9.9)
|
|
|
|
(5.1)
|
|
Transfers into Level 3
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Transfers out of Level 3
|
|
|
---
|
|
|
|
---
|
|
|
|
(30.6)
|
|
|
|
---
|
|
|
|
(30.6)
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
83.3
|
|
|
$
|
14.4
|
|
|
$
|
97.7
|
|
|
$
|
68.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2013
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
U.S.
Government
and Agency
Bonds
|
|
|
U.S. State
and Political
Subdivision
Bonds
|
|
|
Corporate
Bonds
|
|
|
S&P 500
Index
Options
|
|
|
Total
Assets
|
|
|
Index-
Based
Interest
Guarantees
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1.1
|
|
|
$
|
1.7
|
|
|
$
|
80.4
|
|
|
$
|
11.3
|
|
|
$
|
94.5
|
|
|
$
|
57.4
|
|
Total realized/unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
7.2
|
|
|
|
7.2
|
|
|
|
4.5
|
|
Included in other comprehensive income (loss)
|
|
|
---
|
|
|
|
---
|
|
|
|
(5.1)
|
|
|
|
---
|
|
|
|
(5.1)
|
|
|
|
---
|
|
Purchases, issuances, sales and settlements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
4.6
|
|
|
|
4.6
|
|
|
|
---
|
|
Issuances
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2.9
|
|
Sales
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Settlements
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(9.4)
|
|
|
|
(9.4)
|
|
|
|
(2.2)
|
|
Transfers into Level 3
|
|
|
---
|
|
|
|
---
|
|
|
|
7.0
|
|
|
|
---
|
|
|
|
7.0
|
|
|
|
---
|
|
Transfers out of Level 3
|
|
|
(1.1)
|
|
|
|
(1.7)
|
|
|
|
(30.4)
|
|
|
|
---
|
|
|
|
(33.2)
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
51.9
|
|
|
$
|
13.7
|
|
|
$
|
65.6
|
|
|
$
|
62.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For all periods disclosed above, fixed maturity securities transferred into Level 3 from Level
2 are the result of the Company being unable to obtain observable assumptions for these investments in the market. Fixed maturity securities transferred out of Level 3 into Level 2 are the result of the Company being able to obtain observable
assumptions for these investments in the market. There were no transfers between Level 1 and Level 2 for the second quarters and first six months of 2014 and 2013.
The following table sets forth the changes in unrealized gains (losses) included in net income relating to positions that the
Company continued to hold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Index options
|
|
$
|
1.7
|
|
|
$
|
(0.7)
|
|
|
$
|
3.6
|
|
|
$
|
4.2
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(1.6)
|
|
|
$
|
---
|
|
|
$
|
(1.6)
|
|
|
$
|
---
|
|
Index-based interest guarantees
|
|
|
(3.6)
|
|
|
|
1.2
|
|
|
|
(7.2)
|
|
|
|
(5.3)
|
|
19
Changes in the fair value of fixed maturity securities are recorded to other
comprehensive income. Changes in the fair values of the interest rate swap and the hedged item are recorded in capital gains and losses. Changes in the fair value of the S&P 500 Index options are recorded to net investment income. Changes in the
fair value of the index-based interest guarantees are recorded to interest credited and are sensitive to a number of variables and assumptions. The interest credited amount includes negative interest on policyholder funds due to changes in the Level
3 actuarial assumptions of $1.3 million for the second quarter and first six months of 2014 and $1.4 million for the second quarter and first six months of 2013.
Certain assets and liabilities are measured at fair value on a nonrecurring basis, such as impaired commercial mortgage loans
with specific allowances for losses and Real Estate Owned. The impaired commercial mortgage loans and Real Estate Owned are valued using Level 3 measurements. These Level 3 inputs are reviewed for reasonableness by management and evaluated on a
quarterly basis. The commercial mortgage loan measurements include valuation of the market value of the asset using general underwriting procedures and appraisals. Real Estate Owned is initially recorded at net realizable value, which includes an
estimate for disposal costs. These amounts may be adjusted in a subsequent period as additional information is received.
The following table sets forth the assets measured at fair value on a nonrecurring basis as of June 30, 2014 that the
Company continued to hold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Commercial mortgage loans
|
|
$
|
54.6
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
54.6
|
|
Real Estate Owned
|
|
|
8.9
|
|
|
|
---
|
|
|
|
---
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value on a nonrecurring basis
|
|
$
|
63.5
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
63.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans measured on a nonrecurring basis with a carrying amount of $77.1
million were written down to their fair value of $54.6 million, less selling costs, at June 30, 2014. The specific commercial mortgage loan loss allowance related to these commercial mortgage loans was $28.0 million at June 30, 2014. The
Real Estate Owned measured on a nonrecurring basis as of June 30, 2014, and still held at June 30, 2014 had net capital losses totaling $0.9 million for the first six months 2014. Real Estate Owned measured on a nonrecurring basis
represents newly acquired properties or properties whose value has been adjusted based on pending sale or other market information.
The following table sets forth the assets measured at fair value on a nonrecurring basis as of December 31, 2013 that the
Company continued to hold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Commercial mortgage loans
|
|
$
|
68.7
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
68.7
|
|
Real Estate Owned
|
|
|
35.2
|
|
|
|
---
|
|
|
|
---
|
|
|
|
35.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value on a nonrecurring basis
|
|
$
|
103.9
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
103.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans measured on a nonrecurring basis with a carrying amount of $87.7
million were written down to their fair value of $68.7 million, less selling costs, at December 31, 2013. The specific commercial mortgage loan loss allowance related to these commercial mortgage loans was $25.9 million at December 31,
2013. The Real Estate Owned measured on a nonrecurring basis as of December 31, 2013, and still held at December 31, 2013 had capital losses totaling $7.2 million for 2013. See Note 7InvestmentsCommercial Mortgage
Loans for further disclosures regarding the commercial mortgage loan loss allowance.
20
Fixed Maturity Securities
The following tables set forth amortized costs, gross unrealized gains and losses and fair values of the Companys fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
6,549.0
|
|
|
$
|
417.5
|
|
|
$
|
(20.4)
|
|
|
$
|
6,946.1
|
|
U.S. government and agency bonds
|
|
|
279.2
|
|
|
|
37.8
|
|
|
|
(0.1)
|
|
|
|
316.9
|
|
U.S. state and political subdivision bonds
|
|
|
129.5
|
|
|
|
10.7
|
|
|
|
(0.4)
|
|
|
|
139.8
|
|
Foreign government bonds
|
|
|
58.7
|
|
|
|
6.9
|
|
|
|
---
|
|
|
|
65.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
7,016.4
|
|
|
$
|
472.9
|
|
|
$
|
(20.9)
|
|
|
$
|
7,468.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
6,282.1
|
|
|
$
|
339.6
|
|
|
$
|
(76.0)
|
|
|
$
|
6,545.7
|
|
U.S. government and agency bonds
|
|
|
320.8
|
|
|
|
32.8
|
|
|
|
(0.4)
|
|
|
|
353.2
|
|
U.S. state and political subdivision bonds
|
|
|
134.3
|
|
|
|
6.8
|
|
|
|
(0.8)
|
|
|
|
140.3
|
|
Foreign government bonds
|
|
|
58.9
|
|
|
|
6.6
|
|
|
|
---
|
|
|
|
65.5
|
|
S&P 500 Index options
|
|
|
15.8
|
|
|
|
----
|
|
|
|
---
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
6,811.9
|
|
|
$
|
385.8
|
|
|
$
|
(77.2)
|
|
|
$
|
7,120.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the amortized costs and fair values of the Companys fixed
maturity securities by contractual maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
555.9
|
|
|
$
|
567.6
|
|
|
$
|
486.2
|
|
|
$
|
495.1
|
|
Due after one year through five years
|
|
|
3,188.3
|
|
|
|
3,396.8
|
|
|
|
2,974.5
|
|
|
|
3,168.9
|
|
Due after five years through ten years
|
|
|
2,430.3
|
|
|
|
2,529.6
|
|
|
|
2,497.5
|
|
|
|
2,524.6
|
|
Due after ten years
|
|
|
841.9
|
|
|
|
974.4
|
|
|
|
853.7
|
|
|
|
931.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
7,016.4
|
|
|
$
|
7,468.4
|
|
|
$
|
6,811.9
|
|
|
$
|
7,120.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual maturities may differ from contractual maturities because borrowers may have the right
to call or prepay obligations. Callable bonds, excluding bonds with make-whole provisions and bonds with provisions that allow the borrower to prepay near maturity, represented 4.0%, or $297.1 million, of the Companys fixed maturity securities
portfolio at June 30, 2014. At June 30, 2014, the Company did not have any direct exposure to sub-prime or Alt-A mortgages in its fixed maturity securities portfolio.
21
Gross Unrealized Losses
The following tables set forth the gross unrealized losses and fair value of investments, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
Total
|
|
|
Less than 12 months
|
|
|
12 or more months
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
|
|
|
(Dollars in millions)
|
|
Unrealized losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
509
|
|
|
$
|
20.4
|
|
|
|
127
|
|
|
$
|
1.3
|
|
|
|
382
|
|
|
$
|
19.1
|
|
U.S. government and agency bonds
|
|
|
7
|
|
|
|
0.2
|
|
|
|
2
|
|
|
|
0.1
|
|
|
|
5
|
|
|
|
0.1
|
|
U.S. state and political subdivision bonds
|
|
|
4
|
|
|
|
0.3
|
|
|
|
---
|
|
|
|
---
|
|
|
|
4
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
520
|
|
|
$
|
20.9
|
|
|
|
129
|
|
|
$
|
1.4
|
|
|
|
391
|
|
|
$
|
19.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of securities with unrealized losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
509
|
|
|
$
|
948.4
|
|
|
|
127
|
|
|
$
|
229.6
|
|
|
|
382
|
|
|
$
|
718.8
|
|
U.S. government and agency bonds
|
|
|
7
|
|
|
|
12.4
|
|
|
|
2
|
|
|
|
5.7
|
|
|
|
5
|
|
|
|
6.7
|
|
U.S. state and political subdivision bonds
|
|
|
4
|
|
|
|
6.7
|
|
|
|
---
|
|
|
|
---
|
|
|
|
4
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
520
|
|
|
$
|
967.5
|
|
|
|
129
|
|
|
$
|
235.3
|
|
|
|
391
|
|
|
$
|
732.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
Total
|
|
|
Less than 12 months
|
|
|
12 or more months
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
|
|
|
(Dollars in millions)
|
|
Unrealized losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
908
|
|
|
$
|
76.0
|
|
|
|
848
|
|
|
$
|
66.3
|
|
|
|
60
|
|
|
$
|
9.7
|
|
U.S. government and agency bonds
|
|
|
9
|
|
|
|
0.4
|
|
|
|
9
|
|
|
|
0.4
|
|
|
|
---
|
|
|
|
---
|
|
U.S. state and political subdivision bonds
|
|
|
10
|
|
|
|
0.8
|
|
|
|
10
|
|
|
|
0.8
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
927
|
|
|
$
|
77.2
|
|
|
|
867
|
|
|
$
|
67.5
|
|
|
|
60
|
|
|
$
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of securities with unrealized losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
908
|
|
|
$
|
1,663.8
|
|
|
|
848
|
|
|
$
|
1,557.7
|
|
|
|
60
|
|
|
$
|
106.1
|
|
U.S. government and agency bonds
|
|
|
9
|
|
|
|
16.9
|
|
|
|
9
|
|
|
|
16.9
|
|
|
|
---
|
|
|
|
---
|
|
U.S. state and political subdivision bonds
|
|
|
10
|
|
|
|
15.4
|
|
|
|
10
|
|
|
|
15.4
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
927
|
|
|
$
|
1,696.1
|
|
|
|
867
|
|
|
$
|
1,590.0
|
|
|
|
60
|
|
|
$
|
106.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses on the fixed maturity securities set forth above were partly due to
increases in market interest rates subsequent to their purchase by the Company and have also been affected by overall economic factors. The Company expects the fair value of these fixed maturity securities to recover as the fixed maturity securities
approach their maturity dates or sooner if market yields for such fixed maturity securities decline. The Company does not believe that any of the fixed maturity securities are impaired due to credit quality or due to any company or industry specific
event. Based on managements evaluation of the securities and the Companys intent to hold the securities, and as it is unlikely that the Company will be required to sell the securities, none of the unrealized losses summarized in this
table are considered other-than-temporary.
Commercial Mortgage Loans
The Company underwrites mortgage loans on commercial property throughout the United States. In addition to real estate
collateral, the Company requires either partial or full recourse on most loans. At June 30, 2014, the Company did not have any direct exposure to sub-prime or Alt-A mortgages in its commercial mortgage loan portfolio.
22
The following table sets forth the commercial mortgage loan portfolio by property
type, by geographic region within the U.S. and by U.S. state:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
(Dollars in millions)
|
|
Property type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
2,658.4
|
|
|
|
48.7 %
|
|
|
$
|
2,629.2
|
|
|
|
48.6 %
|
|
Industrial
|
|
|
1,000.8
|
|
|
|
18.4
|
|
|
|
1,008.7
|
|
|
|
18.7
|
|
Office
|
|
|
994.5
|
|
|
|
18.2
|
|
|
|
982.4
|
|
|
|
18.2
|
|
Apartment and other
|
|
|
309.7
|
|
|
|
5.7
|
|
|
|
289.9
|
|
|
|
5.4
|
|
Hotel/motel
|
|
|
271.5
|
|
|
|
5.0
|
|
|
|
276.3
|
|
|
|
5.1
|
|
Commercial
|
|
|
218.4
|
|
|
|
4.0
|
|
|
|
218.6
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage loans, net
|
|
$
|
5,453.3
|
|
|
|
100.0 %
|
|
|
$
|
5,405.1
|
|
|
|
100.0 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic region*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pacific
|
|
$
|
1,941.3
|
|
|
|
35.6 %
|
|
|
$
|
1,910.1
|
|
|
|
35.3 %
|
|
South Atlantic
|
|
|
1,095.2
|
|
|
|
20.1
|
|
|
|
1,090.0
|
|
|
|
20.2
|
|
West South Central
|
|
|
683.8
|
|
|
|
12.6
|
|
|
|
672.8
|
|
|
|
12.4
|
|
Mountain
|
|
|
612.2
|
|
|
|
11.2
|
|
|
|
611.4
|
|
|
|
11.3
|
|
East North Central
|
|
|
478.5
|
|
|
|
8.8
|
|
|
|
473.8
|
|
|
|
8.8
|
|
Middle Atlantic
|
|
|
227.6
|
|
|
|
4.2
|
|
|
|
223.0
|
|
|
|
4.1
|
|
West North Central
|
|
|
181.5
|
|
|
|
3.3
|
|
|
|
186.9
|
|
|
|
3.5
|
|
East South Central
|
|
|
170.9
|
|
|
|
3.1
|
|
|
|
166.6
|
|
|
|
3.1
|
|
New England
|
|
|
62.3
|
|
|
|
1.1
|
|
|
|
70.5
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage loans, net
|
|
$
|
5,453.3
|
|
|
|
100.0 %
|
|
|
$
|
5,405.1
|
|
|
|
100.0 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. state:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
1,465.4
|
|
|
|
26.9 %
|
|
|
$
|
1,455.5
|
|
|
|
26.9 %
|
|
Texas
|
|
|
627.4
|
|
|
|
11.5
|
|
|
|
618.8
|
|
|
|
11.5
|
|
Florida
|
|
|
333.1
|
|
|
|
6.1
|
|
|
|
331.6
|
|
|
|
6.1
|
|
Georgia
|
|
|
309.2
|
|
|
|
5.7
|
|
|
|
310.7
|
|
|
|
5.8
|
|
Other states
|
|
|
2,718.2
|
|
|
|
49.8
|
|
|
|
2,688.5
|
|
|
|
49.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage loans, net
|
|
$
|
5,453.3
|
|
|
|
100.0 %
|
|
|
$
|
5,405.1
|
|
|
|
100.0 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Geographic regions obtained from the American Council of Life Insurers Mortgage Loan Portfolio Profile.
|
Due to the concentration of commercial mortgage loans in California, the Company could be exposed to potential losses as a
result of an economic downturn in California as well as certain catastrophes, such as earthquakes and fires, which may affect the region.
The carrying value of commercial mortgage loans represents the outstanding principal balance less a loan loss allowance for
probable uncollectible amounts. The commercial mortgage loan loss allowance is estimated based on evaluating known and inherent risks in the loan portfolio and consists of a general and a specific loan loss allowance.
Impairment Evaluation
The Company monitors its commercial mortgage loan portfolio for potential impairment by evaluating the portfolio and individual
loans. Key factors that are monitored include:
|
|
|
Refinancing and restructuring history.
|
|
|
|
Request for payment forbearance history.
|
If the analysis above indicates a loan might be impaired, it is further analyzed through the consideration of the following
additional factors:
If it is determined a loan is impaired, a specific allowance is recorded.
23
General Loan Loss Allowance
The general loan loss allowance is based on the Companys analysis of factors including changes in the size and
composition of the loan portfolio, debt coverage ratios, loan to value ratios, actual loan loss experience and individual loan analysis.
Specific Loan
Loss Allowance
An impaired commercial mortgage loan is a loan where the Company does not expect to receive contractual
principal and interest in accordance with the terms of the original loan agreement. A specific allowance for losses is recorded when a loan is considered to be impaired and it is probable that all amounts due will not be collected based on the terms
of the original note. The Company also holds specific loan loss allowances on certain performing commercial mortgage loans that it continues to monitor and evaluate. Impaired commercial mortgage loans without specific allowances for losses are those
for which the Company has determined that it remains probable that all amounts due will be collected although the timing or nature may be outside the original contractual terms. In addition, for impaired commercial mortgage loans, the Company
evaluates the cost to dispose of the underlying collateral, any significant out of pocket expenses the loan may incur and other quantitative information management has concerning the loan. Portions of loans that are deemed uncollectible are written
off against the allowance, and recoveries, if any, are credited to the allowance.
The following table sets forth changes
in the commercial mortgage loan loss allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
Commercial mortgage loan loss allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
43.5
|
|
|
$
|
42.8
|
|
|
$
|
43.6
|
|
|
$
|
46.6
|
|
|
|
|
|
|
Provision
|
|
|
0.5
|
|
|
|
5.9
|
|
|
|
2.2
|
|
|
|
9.0
|
|
Recoveries (Charge-offs), net
|
|
|
0.4
|
|
|
|
(1.9)
|
|
|
|
(1.4)
|
|
|
|
(8.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
44.4
|
|
|
$
|
46.8
|
|
|
$
|
44.4
|
|
|
$
|
46.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific loan loss allowance
|
|
$
|
28.0
|
|
|
$
|
25.5
|
|
|
$
|
28.0
|
|
|
$
|
25.5
|
|
General loan loss allowance
|
|
|
16.4
|
|
|
|
21.3
|
|
|
|
16.4
|
|
|
|
21.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage loan loss allowance
|
|
$
|
44.4
|
|
|
$
|
46.8
|
|
|
$
|
44.4
|
|
|
$
|
46.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in the commercial mortgage loan loss allowance at June 30, 2014 compared to
June 30, 2013 was primarily due to fewer commercial mortgage loans with a general loan loss allowance. This decrease was partially offset by an increase in the specific loan loss allowance. The decrease in charge-offs was primarily due to lower
losses related to foreclosures, accepted deeds in lieu of foreclosure and other related charges associated with commercial mortgage loans leaving the portfolio during the second quarter and first six months of 2014.
24
The following table sets forth the recorded investment in commercial mortgage
loans:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Commercial mortgage loans collectively evaluated for impairment
|
|
$
|
5,395.4
|
|
|
$
|
5,334.4
|
|
Commercial mortgage loans individually evaluated for impairment
|
|
|
102.3
|
|
|
|
114.3
|
|
Commercial mortgage loan loss allowance
|
|
|
(44.4)
|
|
|
|
(43.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage loans, net
|
|
$
|
5,453.3
|
|
|
$
|
5,405.1
|
|
|
|
|
|
|
|
|
|
|
The Company assesses the credit quality of its commercial mortgage loan portfolio quarterly by
reviewing the performance of its portfolio, which includes evaluating its performing and nonperforming commercial mortgage loans. Nonperforming commercial mortgage loans include all commercial mortgage loans that are 60 days or more past due and
commercial mortgage loans that are not 60 days past due but are not substantially performing to other original contractual terms.
The following tables set forth performing and nonperforming commercial mortgage loans by property type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
Retail
|
|
|
Industrial
|
|
|
Office
|
|
|
Apartment
and Other
|
|
|
Hotel/
Motel
|
|
|
Commercial
|
|
|
Total
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
Performing commercial mortgage loans
|
|
$
|
2,651.8
|
|
|
$
|
1,000.5
|
|
|
$
|
990.5
|
|
|
$
|
309.5
|
|
|
$
|
271.5
|
|
|
$
|
218.4
|
|
|
$
|
5,442.2
|
|
Nonperforming commercial mortgage loans
|
|
|
6.6
|
|
|
|
0.3
|
|
|
|
4.0
|
|
|
|
0.2
|
|
|
|
---
|
|
|
|
---
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage loans
|
|
$
|
2,658.4
|
|
|
$
|
1,000.8
|
|
|
$
|
994.5
|
|
|
$
|
309.7
|
|
|
$
|
271.5
|
|
|
$
|
218.4
|
|
|
$
|
5,453.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
Retail
|
|
|
Industrial
|
|
|
Office
|
|
|
Apartment
and Other
|
|
|
Hotel/
Motel
|
|
|
Commercial
|
|
|
Total
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
Performing commercial mortgage loans
|
|
$
|
2,624.2
|
|
|
$
|
1,004.6
|
|
|
$
|
979.6
|
|
|
$
|
289.9
|
|
|
$
|
276.3
|
|
|
$
|
218.6
|
|
|
$
|
5,393.2
|
|
Nonperforming commercial mortgage loans
|
|
|
5.0
|
|
|
|
4.1
|
|
|
|
2.8
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgage loans
|
|
$
|
2,629.2
|
|
|
$
|
1,008.7
|
|
|
$
|
982.4
|
|
|
$
|
289.9
|
|
|
$
|
276.3
|
|
|
$
|
218.6
|
|
|
$
|
5,405.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
The following tables set forth impaired commercial mortgage loans identified in
managements specific review of probable loan losses and the related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Amount on
Nonaccrual
Status
|
|
|
|
|
|
(In millions)
|
|
Impaired commercial mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without specific loan loss allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
17.1
|
|
|
$
|
17.1
|
|
|
$
|
---
|
|
|
$
|
7.1
|
|
Office
|
|
|
3.3
|
|
|
|
3.3
|
|
|
|
---
|
|
|
|
1.7
|
|
Industrial
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
---
|
|
|
|
---
|
|
Commercial
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
---
|
|
|
|
---
|
|
Apartment and other
|
|
|
2.8
|
|
|
|
2.8
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired commercial mortgage loans without specific loan loss allowances
|
|
|
25.2
|
|
|
|
25.2
|
|
|
|
---
|
|
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With specific loan loss allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
53.2
|
|
|
|
53.2
|
|
|
|
16.8
|
|
|
|
18.4
|
|
Office
|
|
|
9.3
|
|
|
|
9.3
|
|
|
|
3.3
|
|
|
|
1.4
|
|
Industrial
|
|
|
6.2
|
|
|
|
6.2
|
|
|
|
2.7
|
|
|
|
0.4
|
|
Commercial
|
|
|
7.9
|
|
|
|
7.9
|
|
|
|
5.2
|
|
|
|
1.6
|
|
Apartment and other
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
---
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired commercial mortgage loans with specific loan loss allowances
|
|
|
77.1
|
|
|
|
77.1
|
|
|
|
28.0
|
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired commercial mortgage loans
|
|
$
|
102.3
|
|
|
$
|
102.3
|
|
|
$
|
28.0
|
|
|
$
|
30.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Amount on
Nonaccrual
Status
|
|
|
|
|
|
(In millions)
|
|
Impaired commercial mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without specific loan loss allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
16.1
|
|
|
$
|
16.1
|
|
|
$
|
---
|
|
|
$
|
7.6
|
|
Office
|
|
|
3.9
|
|
|
|
3.9
|
|
|
|
---
|
|
|
|
1.5
|
|
Industrial
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
---
|
|
|
|
---
|
|
Commercial
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
---
|
|
|
|
---
|
|
Apartment and other
|
|
|
3.8
|
|
|
|
3.8
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired commercial mortgage loans without specific loan loss allowances
|
|
|
26.6
|
|
|
|
26.6
|
|
|
|
---
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With specific loan loss allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
58.5
|
|
|
|
58.5
|
|
|
|
16.1
|
|
|
|
21.6
|
|
Office
|
|
|
9.7
|
|
|
|
9.7
|
|
|
|
3.8
|
|
|
|
0.9
|
|
Industrial
|
|
|
12.6
|
|
|
|
12.6
|
|
|
|
2.4
|
|
|
|
1.4
|
|
Commercial
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
3.6
|
|
|
|
2.5
|
|
Apartment and other
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired commercial mortgage loans with specific loan loss allowances
|
|
|
87.7
|
|
|
|
87.7
|
|
|
|
25.9
|
|
|
|
26.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired commercial mortgage loans
|
|
$
|
114.3
|
|
|
$
|
114.3
|
|
|
$
|
25.9
|
|
|
$
|
35.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in the carrying value of impaired commercial mortgage loans at June 30, 2014
compared to December 31, 2013 was primarily due to a decrease in commercial mortgage loans with a specific allowance in the Companys industrial and retail segments for the second quarter of 2014 associated with a small number of
borrowers. At June 30, 2014 and December 31, 2013, the Company did not have any commercial mortgage loans greater than 90 days delinquent that were accruing interest.
A modification is considered to be a troubled debt restructuring when the debtor is experiencing financial difficulties and the
restructured terms constitute a concession. Granting payment forbearance is not a modification of the loan if the payment forbearance is considered to be an insignificant timing difference associated with the borrowing. The Company evaluates all
restructured
26
commercial mortgage loans for indications of troubled debt restructurings and the potential losses related to these restructurings. If a loan is considered a troubled debt restructuring, the
Company impairs the loan and records a specific allowance for estimated losses. In some cases, the recorded investment in the loan may increase post-restructuring. The Company assessed all restructurings that occurred during the period to determine
if they were troubled debt restructurings. The Company did not identify any troubled debt restructurings that were not already considered impaired.
The following tables set forth information related to the troubled debt restructurings of financing receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2014
|
|
|
Six Months Ended
June 30, 2014
|
|
|
|
Number
of Loans
|
|
|
Pre-
Restructuring
Recorded
Investment
|
|
|
Post-
Restructuring
Recorded
Investment
|
|
|
Number
of Loans
|
|
|
Pre-
Restructuring
Recorded
Investment
|
|
|
Post-
Restructuring
Recorded
Investment
|
|
|
|
|
|
(Dollars in millions)
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
1
|
|
|
$
|
0.8
|
|
|
$
|
0.7
|
|
|
|
1
|
|
|
$
|
0.8
|
|
|
$
|
0.7
|
|
Industrial
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2
|
|
|
|
1.7
|
|
|
|
1.9
|
|
Commercial
|
|
|
1
|
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
1
|
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
|
2
|
|
|
$
|
3.5
|
|
|
$
|
3.4
|
|
|
|
4
|
|
|
$
|
5.2
|
|
|
$
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2013
|
|
|
Six Months Ended
June 30, 2013
|
|
|
|
Number
of Loans
|
|
|
Pre-
Restructuring
Recorded
Investment
|
|
|
Post-
Restructuring
Recorded
Investment
|
|
|
Number
of Loans
|
|
|
Pre-
Restructuring
Recorded
Investment
|
|
|
Post-
Restructuring
Recorded
Investment
|
|
|
|
|
|
(Dollars in millions)
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
3
|
|
|
$
|
2.6
|
|
|
$
|
2.7
|
|
|
|
6
|
|
|
$
|
4.5
|
|
|
$
|
7.6
|
|
Office
|
|
|
3
|
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
3
|
|
|
|
1.6
|
|
|
|
1.6
|
|
Commercial
|
|
|
1
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
1
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
|
7
|
|
|
$
|
5.1
|
|
|
$
|
5.2
|
|
|
|
10
|
|
|
$
|
7.0
|
|
|
$
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no troubled debt restructurings identified in the previous 12 months that
subsequently defaulted during the first six months of 2014.
The following table sets forth the average recorded investment
in impaired commercial mortgage loans before specific loan loss allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
Average recorded investment
|
|
$
|
104.6
|
|
|
$
|
112.8
|
|
|
$
|
107.8
|
|
|
$
|
108.5
|
|
Interest Income
The Company records interest income in net investment income and continues to recognize interest income on delinquent
commercial mortgage loans until the loans are more than 90 days delinquent. Interest income and accrued interest receivable are reversed when a loan is more than 90 days delinquent. For loans that are less than 90 days delinquent, management may
reverse interest income and the accrued interest receivable if there is a question on the collectability of the interest. Interest income on loans in the 90-day delinquent category is recognized in the period the cash is collected. The Company
resumes the recognition of interest income when the loan becomes less than 90 days delinquent and management determines it is probable that the loan will remain performing.
The amount of interest income recognized on impaired commercial mortgage loans was $0.9 million and $1.4 million for the second
quarters of 2014 and 2013, respectively, and was $2.2 million and $2.4 million for the first six months of 2014 and 2013, respectively. The cash received by the Company in payment of interest on impaired commercial mortgage loans was $1.0 million
and $1.1 million for the second quarters of 2014 and 2013, respectively, and was $1.8 million and $2.0 million for the first six months of 2014 and 2013, respectively.
27
The following tables set forth the aging of commercial mortgage loans by property
type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
30 Days
Past Due
|
|
|
60 Days
Past Due
|
|
|
Greater Than
90 Days
Past Due
|
|
|
Total
Past Due
|
|
|
Allowance
Related
to Past Due
|
|
|
Current,
Net
|
|
|
Total
Commercial
Mortgage
Loans
|
|
|
|
|
|
(In millions)
|
|
Commercial mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
8.5
|
|
|
$
|
8.5
|
|
|
$
|
(1.9)
|
|
|
$
|
2,651.8
|
|
|
$
|
2,658.4
|
|
Industrial
|
|
|
0.2
|
|
|
|
---
|
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
(0.8)
|
|
|
|
1,000.3
|
|
|
|
1,000.8
|
|
Office
|
|
|
1.5
|
|
|
|
---
|
|
|
|
4.6
|
|
|
|
6.1
|
|
|
|
(0.6)
|
|
|
|
989.0
|
|
|
|
994.5
|
|
Apartment and other
|
|
|
---
|
|
|
|
---
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
---
|
|
|
|
309.5
|
|
|
|
309.7
|
|
Hotel/motel
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
271.5
|
|
|
|
271.5
|
|
Commercial
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
218.4
|
|
|
|
218.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
mortgage loans
|
|
$
|
1.7
|
|
|
$
|
---
|
|
|
$
|
14.4
|
|
|
$
|
16.1
|
|
|
$
|
(3.3)
|
|
|
$
|
5,440.5
|
|
|
$
|
5,453.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
30 Days
Past Due
|
|
|
60 Days
Past Due
|
|
|
Greater Than
90 Days
Past Due
|
|
|
Total
Past Due
|
|
|
Allowance
Related
to Past Due
|
|
|
Current,
Net
|
|
|
Total
Commercial
Mortgage
Loans
|
|
|
|
|
|
(In millions)
|
|
Commercial mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
2.8
|
|
|
$
|
0.3
|
|
|
$
|
6.1
|
|
|
$
|
9.2
|
|
|
$
|
(1.5)
|
|
|
$
|
2,621.5
|
|
|
$
|
2,629.2
|
|
Industrial
|
|
|
---
|
|
|
|
3.3
|
|
|
|
1.8
|
|
|
|
5.1
|
|
|
|
(0.9)
|
|
|
|
1,004.5
|
|
|
|
1,008.7
|
|
Office
|
|
|
1.3
|
|
|
|
---
|
|
|
|
3.7
|
|
|
|
5.0
|
|
|
|
(0.9)
|
|
|
|
978.3
|
|
|
|
982.4
|
|
Apartment and other
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
289.9
|
|
|
|
289.9
|
|
Hotel/motel
|
|
|
6.3
|
|
|
|
---
|
|
|
|
---
|
|
|
|
6.3
|
|
|
|
---
|
|
|
|
270.0
|
|
|
|
276.3
|
|
Commercial
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
218.6
|
|
|
|
218.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
mortgage loans
|
|
$
|
10.4
|
|
|
$
|
3.6
|
|
|
$
|
11.6
|
|
|
$
|
25.6
|
|
|
$
|
(3.3)
|
|
|
$
|
5,382.8
|
|
|
$
|
5,405.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company closely monitors all past due commercial mortgage loans. Additional attention is
given to those loans at least 60 days past due. Commercial mortgage loans that were at least 60 days past due totaled $14.4 million and $15.2 million at June 30, 2014 and December 31, 2013, respectively. Commercial mortgage loans at least
60 days past due were 0.26% and 0.28% of the commercial mortgage loan portfolio at June 30, 2014 and December 31, 2013, respectively. Commercial mortgage loans that have been granted payment forbearance are not considered to be past due
and totaled $32.3 million and $40.1 million at June 30, 2014 and December 31, 2013, respectively.
Net Investment Income
The following table sets forth net investment income summarized by investment type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
Fixed maturity securities
|
|
$
|
72.8
|
|
|
$
|
76.3
|
|
|
$
|
147.6
|
|
|
$
|
152.7
|
|
S&P 500 Index options
|
|
|
2.4
|
|
|
|
1.2
|
|
|
|
4.4
|
|
|
|
7.2
|
|
Commercial mortgage loans
|
|
|
84.7
|
|
|
|
83.9
|
|
|
|
167.0
|
|
|
|
167.3
|
|
Real estate
|
|
|
0.2
|
|
|
|
(0.3)
|
|
|
|
0.2
|
|
|
|
(0.6)
|
|
Other
|
|
|
2.1
|
|
|
|
2.4
|
|
|
|
4.4
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income
|
|
|
162.2
|
|
|
|
163.5
|
|
|
|
323.6
|
|
|
|
331.4
|
|
Investment expenses
|
|
|
(6.4)
|
|
|
|
(5.7)
|
|
|
|
(13.4)
|
|
|
|
(11.3)
|
|
Tax-advantaged investment operating losses
|
|
|
(6.0)
|
|
|
|
(3.7)
|
|
|
|
(9.8)
|
|
|
|
(6.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
149.8
|
|
|
$
|
154.1
|
|
|
$
|
300.4
|
|
|
$
|
313.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Realized Gross Capital Gains and Losses
The following table sets forth gross capital gains and losses by investment type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
Gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
1.5
|
|
|
$
|
5.0
|
|
|
$
|
3.4
|
|
|
$
|
7.6
|
|
Commercial mortgage loans
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
1.0
|
|
|
|
1.0
|
|
Real Estate Owned
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
1.1
|
|
|
|
0.3
|
|
Other
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross capital gains
|
|
|
2.5
|
|
|
|
5.7
|
|
|
|
5.5
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
(0.6)
|
|
|
|
(0.4)
|
|
|
|
(1.1)
|
|
|
|
(1.0)
|
|
Provision for commercial mortgage loan losses
|
|
|
(0.5)
|
|
|
|
(5.9)
|
|
|
|
(2.2)
|
|
|
|
(9.0)
|
|
Real Estate Owned
|
|
|
(0.8)
|
|
|
|
(0.4)
|
|
|
|
(1.7)
|
|
|
|
(1.4)
|
|
Other
|
|
|
(1.1)
|
|
|
|
(1.6)
|
|
|
|
(2.1)
|
|
|
|
(1.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross capital losses
|
|
|
(3.0)
|
|
|
|
(8.3)
|
|
|
|
(7.1)
|
|
|
|
(13.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net capital losses
|
|
$
|
(0.5)
|
|
|
$
|
(2.6)
|
|
|
$
|
(1.6)
|
|
|
$
|
(4.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Deposited as Collateral
Securities deposited for the benefit of policyholders in various states, in accordance with state regulations, amounted to $7.3
million at June 30, 2014 and $7.4 million at December 31, 2013.
The Company is a member of the Federal Home Loan
Bank of Seattle (FHLB of Seattle). The Company issues collateralized funding agreements to the FHLB of Seattle and invests the cash received from advances to support various spread-based businesses and enhance its asset-liability
management. Membership also provides an additional funding source and access to financial services that can be used as an alternative source of liquidity. At June 30, 2014, the Company had $40.4 million outstanding under funding agreements with
the FHLB of Seattle. The Company had no outstanding funding agreements with the FHLB of Seattle at December 31, 2013. At June 30, 2014, the Company pledged $123.0 million of commercial mortgage loans as collateral to the FHLB of Seattle
for its outstanding advances. There were no assets pledged as collateral to the FLHB of Seattle at December 31, 2013.
8.
|
DERIVATIVE FINANCIAL INSTRUMENTS
|
The Company uses derivative financial instruments to mitigate business risks including interest rate risk exposure. The
derivative instruments used by the Company include interest rate swaps, index-based guarantees and S&P 500 Index options.
Interest Rate Swaps
In the second quarter of 2014, the Company began more extensive use of interest rate swaps to reduce risks from
changes in interest rates, to manage interest rate exposures arising from asset and liability mismatches, and to protect the value of investments held on the balance sheet. The interest rate swaps used by the Company are designed to qualify for
hedge accounting. Therefore, changes in the fair value of the interest rate swaps, as well as the offsetting gain or loss on the hedged items attributable to the hedged risk, are recognized in capital gains and losses during the period of change in
fair value. Valuations for interest rate swaps are sensitive to changes in the interest rate environment.
Interest income,
interest expense and fees related to interest rate swaps are recorded as a component of net investment income.
Interest
rate swaps are recognized as either other invested assets or other liabilities in the consolidated balance sheets and are reported at fair value. To qualify for hedge accounting, the Company formally documents the risk management objective and
strategy for undertaking the hedging transaction and the designation of the hedge as either a fair value hedge or a cash flow hedge. This is done at the inception of the hedging transaction. Included in this documentation is how the hedging
instrument is expected to hedge the designated risk related to specific assets or liabilities on the balance sheet as well as a description of the method that will be used to retrospectively and prospectively assess the hedging instruments
effectiveness and the method that will be used to measure ineffectiveness and how this ineffectiveness will be accounted for.
A derivative instrument designated as part of a hedging relationship must be assessed as being highly effective in offsetting
the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout the life of the designated hedging relationship, using qualitative and quantitative methods. Qualitative methods include
comparison of critical terms of the derivative to the hedged item. Quantitative methods include regression or other statistical analysis of changes in the fair value or cash flows associated with the hedge relationship.
In the event a hedged item is disposed, the Company will terminate the related derivative instrument and recognize the gain or
loss on termination in the consolidated statements of income.
Cash settlement activity of derivative contracts is reported
in the consolidated statements of cash flows as a component of proceeds from or acquisition of other invested assets.
29
In the consolidated balance sheets, the Company offsets fair value amounts
recognized for interest rate swaps executed with the same counterparty under a master netting agreement and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from those master
netting agreements.
Index-based Interest Guarantees
The Company sells indexed annuities, which permit the holder to elect a fixed interest rate return or an indexed return, where
interest credited to the contracts is based on the performance of the S&P 500 Index, subject to an upper limit or cap and minimum guarantees. The index-based interest guarantees do not qualify for hedge accounting. Policyholders may elect to
rebalance between interest crediting options at renewal dates annually. At each renewal date, the Company has the opportunity to re-price the indexed component by changing the cap, subject to minimum guarantees. The Company estimates the fair value
of the index-based interest guarantees for the current period and for all future reset periods until contract maturity. Changes in the fair value of the index-based interest guarantees are recorded as interest credited. The liability represents an
estimate of the cost of the options to be purchased in the future to manage the risk related to the index-based interest guarantees. The liability for index-based interest guarantees is the present value of future cash flows attributable to the
projected index growth that is in excess of cash flows attributable to fixed interest rates guarantees. The excess cash flows are discounted back to the date of the balance sheet using current market indicators for future interest rates and option
costs. Cash flows depend on actuarial estimates for policyholder lapse behavior and managements discretion in setting renewal index-based interest guarantees.
S&P 500 Index Options
The Company purchases S&P 500 Index options for its interest crediting strategy used in its indexed annuity product. The
S&P 500 Index options do not qualify for hedge accounting. The S&P 500 Index options are purchased from investment banks and are selected in a manner that supports the amount of interest that is expected to be credited in the current year to
annuity policyholder accounts that are dependent on the performance of the S&P 500 Index. The purchase of S&P 500 Index options is a pivotal part of the Companys risk management strategy for indexed annuity products. The S&P 500
Index options are exclusively used for risk management. While valuations of the S&P 500 Index options are sensitive to a number of variables, valuations for S&P 500 Index options purchased are most sensitive to changes in the S&P 500
Index value and the implied volatilities of this index. Changes in fair value of the S&P 500 Index options are recorded to net investment income. The Company generally purchases two S&P 500 Index option contracts per month, which have expiry
dates of one year from the date of purchase.
Option premiums paid for the Companys index option contracts were $2.3
million and $2.7 million for the second quarters of 2014 and 2013, respectively, and $4.1 million and $4.6 million for the first six months of 2014 and 2013, respectively. The Company received $5.7 million and $5.5 million for options exercised for
the second quarters of 2014 and 2013, respectively, and $9.9 million and $9.4 million for the first six months of 2014 and 2013, respectively.
The following table sets forth the gross notional amount and the fair value of the Companys derivative assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
Notional
Amount
|
|
|
Fair
Value
|
|
|
Notional
Amount
|
|
|
Fair
Value
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Qualifying Fair Value Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
350.0
|
|
|
$
|
1.6
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
|
|
|
|
Non-Qualifying Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other invested assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Index options
|
|
|
355.1
|
|
|
|
14.4
|
|
|
|
350.5
|
|
|
|
15.8
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index-based interest guarantees
|
|
|
---
(1)
|
|
|
|
68.3
|
|
|
|
---
(1)
|
|
|
|
67.6
|
|
|
(1)
|
The underlying factors for index-based guarantees vary by contract and other criteria, such as floors and ceilings on rates and future payouts.
|
30
The following table sets forth the gross amounts of derivative instruments
recorded on the balance sheet and the collateral pledged related to the derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Offsetting of Interest Rate Swaps
|
|
|
|
|
|
|
Interest rate swaps, liabilities
|
|
$
|
(1.8)
|
|
|
$
|
---
|
|
Interest rate swaps, assets
|
|
|
0.2
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate swaps
|
|
|
(1.6)
|
|
|
|
---
|
|
Accrued interest payable
|
|
|
(0.7)
|
|
|
|
---
|
|
Collateral pledged
|
|
|
7.5
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
$
|
5.2
|
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the amount of gains or losses recognized in the consolidated
statements of income from the change in fair value of the Companys derivative assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Qualifying Fair Value Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net capital losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(1.6)
|
|
|
$
|
---
|
|
|
$
|
(1.6)
|
|
|
$
|
---
|
|
|
|
|
|
|
Non-Qualifying Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Index options
|
|
|
2.4
|
|
|
|
1.2
|
|
|
|
4.4
|
|
|
|
7.2
|
|
|
|
|
|
|
Interest credited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index-based interest guarantees
|
|
|
(0.8)
|
|
|
|
1.7
|
|
|
|
(4.0)
|
|
|
|
(4.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses)
|
|
$
|
---
|
|
|
$
|
2.9
|
|
|
$
|
(1.2)
|
|
|
$
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fluctuations in the fair value of the interest rate swaps are driven by changes in the
interest rate environment. Fluctuations in the fair value of the S&P 500 Index options are related to the volatility of the S&P 500 Index. Changes in fair value of the index-based interest guarantees are sensitive to a number of variables,
but are most sensitive to changes in the interest rate environment.
As a result of the Companys annual update of the
key assumptions used to value index-based interest guarantees, a process known as unlocking, interest credited decreased $1.3 million for the second quarter and first six months of 2014 and $1.4 million for the second quarter and first
six months of 2013.
The ineffective portion of derivatives accounted for using hedge accounting was not material to the
results of operations of the Company for the second quarters of 2014 and 2013 and for the first six months of 2014 and 2013.
Counterparty Credit Risk
Interest rate swaps
The Company uses a central counterparty (CCP) to clear all of its interest rate swaps and has a master agreement
with the CCP. The master agreement allows the Company to net payments and receipts for interest rate swaps cleared through the CCP. By using the master agreement, the Company is only exposed to the default of the CCP. Transactions with the CCP
require the Company to pledge initial and variation margin collateral. The Company has pledged cash as collateral to the CCP. The Company maintains beneficial ownership of the collateral, which is classified as cash and cash equivalents on the
Companys unaudited condensed consolidated balance sheets as of June 30, 2014.
31
S&P 500 Index options
The Company is exposed to the credit worthiness of the institutions from which it purchases its S&P 500 Index options and
these institutions continued abilities to perform according to the terms of the contracts. The current values for the credit exposure have been affected by fluctuations in the S&P 500 Index. The Companys maximum credit exposure would
require an increase of 3.7% in the value of the S&P 500 Index. The maximum credit risk is calculated using the cap strike price of the Companys S&P 500 Index options less the floor price, multiplied by the notional amount of the
S&P 500 Index options.
The following table sets forth the fair value of the Companys S&P 500 Index options
and its maximum credit risk exposure related to these instruments:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
Assets at
Fair Value
|
|
|
Maximum
Credit Risk
|
|
|
|
|
|
(In millions)
|
|
Counterparty:
|
|
|
|
|
|
|
|
|
The Bank of New York Mellon
|
|
$
|
10.7
|
|
|
$
|
13.7
|
|
Goldman Sachs
|
|
|
3.7
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14.4
|
|
|
$
|
18.7
|
|
|
|
|
|
|
|
|
|
|
9.
|
DEFERRED ACQUISITION COSTS (DAC), VALUE OF BUSINESS ACQUIRED (VOBA) AND OTHER INTANGIBLE ASSETS
|
DAC, VOBA and other acquisition related intangible assets are generally originated through the issuance of
new business or the purchase of existing business, either by purchasing blocks of insurance policies from other insurers or by the outright purchase of other companies. The Companys other intangible assets are subject to impairment tests on an
annual basis or more frequently if circumstances indicate that carrying values may not be recoverable.
The following table
sets forth activity for DAC, VOBA and other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2014
|
|
|
Year Ended
December 31, 2013
|
|
|
|
|
|
(In millions)
|
|
Carrying value at beginning of period:
|
|
|
|
|
|
|
|
|
DAC
|
|
$
|
319.1
|
|
|
$
|
284.9
|
|
VOBA
|
|
|
20.1
|
|
|
|
23.4
|
|
Other intangible assets
|
|
|
32.1
|
|
|
|
38.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total balance at beginning of period
|
|
|
371.3
|
|
|
|
346.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred or acquired during period:
|
|
|
|
|
|
|
|
|
DAC
|
|
|
36.7
|
|
|
|
76.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred or acquired during period
|
|
|
36.7
|
|
|
|
76.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized during period:
|
|
|
|
|
|
|
|
|
DAC
|
|
|
(36.0)
|
|
|
|
(42.7)
|
|
VOBA
|
|
|
(1.1)
|
|
|
|
(3.3)
|
|
Other intangible assets
|
|
|
(2.9)
|
|
|
|
(6.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized during period
|
|
|
(40.0)
|
|
|
|
(52.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value at end of period, net:
|
|
|
|
|
|
|
|
|
DAC
|
|
|
319.8
|
|
|
|
319.1
|
|
VOBA
|
|
|
19.0
|
|
|
|
20.1
|
|
Other intangible assets
|
|
|
29.2
|
|
|
|
32.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying value at end of period, net
|
|
$
|
368.0
|
|
|
$
|
371.3
|
|
|
|
|
|
|
|
|
|
|
The Company defers certain acquisition costs that vary with and are directly related to the
origination of new business. Certain costs related to obtaining new business and acquiring business through reinsurance agreements have been deferred and will be amortized to accomplish matching against related future premiums or gross profits as
appropriate. The Company normally defers certain acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting, and certain printing costs. Assumptions used in developing DAC and amortization amounts each
period include the amount of business in-force, expected future persistency, withdrawals, interest rates and profitability. These assumptions are modified to reflect actual experience when appropriate. Additional amortization of DAC is charged to
current earnings, to the extent it is determined that future premiums or gross profits are not adequate to cover the remaining amounts deferred. Changes in actual persistency are reflected in the calculated DAC balance. Costs that are not directly
associated with the acquisition of new business are not deferred as DAC and are charged to expense as incurred. Generally, annual commissions are considered expenses and are not deferred.
32
DAC for group and individual disability insurance products and group life
insurance products is amortized over the life of related policies in proportion to future premiums. The Company amortizes DAC for group disability and life insurance products over the initial premium rate guarantee period, which averages 2.5 years.
DAC for individual disability insurance products is amortized in proportion to future premiums over the life of the contract, averaging 20 to 25 years with approximately 50% and 75% expected to be amortized by years 10 and 15, respectively.
The Companys individual deferred annuities and group annuity products are classified as investment contracts. DAC related
to these products is amortized over the life of related policies in proportion to expected gross profits
.
For the Companys individual deferred annuities, DAC is generally amortized over 30 years with approximately 55% and 95% expected
to be amortized by years 5 and 15, respectively. DAC for group annuity products is amortized over 10 years with approximately 80% expected to be amortized by year five.
VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. The Company has
established VOBA for a block of individual disability business assumed from Minnesota Life Insurance Company (Minnesota Life) and a block of group disability and group life business assumed from Teachers Insurance and Annuity Association
of America (TIAA). VOBA is generally amortized in proportion to future premiums for group and individual disability insurance products and group life products. However, the VOBA related to the TIAA transaction associated with an in-force
block of group long term disability claims for which no ongoing premium is received is amortized in proportion to expected gross profits. If actual premiums or future profitability are inconsistent with the Companys assumptions, the Company
could be required to make adjustments to VOBA and related amortization. The VOBA associated with the TIAA transaction is amortized in proportion to expected gross profits with an amortization period of up to 20 years. For the VOBA associated with
the Minnesota Life block of business assumed, the amortization period is up to 30 years and is amortized in proportion to future premiums. The accumulated amortization of VOBA was $69.8 million and $68.7 million at June 30, 2014 and
December 31, 2013, respectively.
The following table sets forth the amount of DAC and VOBA balances amortized in
proportion to expected gross profits and the percentage of the total balance of DAC and VOBA amortized in proportion to expected gross profits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
(Dollars in millions)
|
|
DAC
|
|
$
|
73.7
|
|
|
|
23.0 %
|
|
|
$
|
80.1
|
|
|
|
25.1 %
|
|
VOBA
|
|
|
4.0
|
|
|
|
21.1
|
|
|
|
4.3
|
|
|
|
21.4
|
|
Key assumptions, which will affect the determination of expected gross profits for determining
DAC and VOBA balances, are:
|
|
|
Interest rates, which affect both investment income and interest credited.
|
|
|
|
Stock market performance.
|
|
|
|
Capital gains and losses.
|
|
|
|
Claim termination rates.
|
|
|
|
Amount of business in-force.
|
These assumptions are modified to reflect actual experience when appropriate. Although a change in a single assumption may have
an impact on the calculated amortization of DAC or VOBA for balances associated with investment contracts, it is the relationship of that change to the changes in other key assumptions that determines the ultimate impact on DAC or VOBA amortization.
Because actual results and trends related to these assumptions vary from those assumed, the Company revises these assumptions annually to reflect its current best estimate of expected gross profits. As a result of this process, known as
unlocking, the cumulative balances of DAC and VOBA are adjusted with an offsetting benefit or charge to income to reflect changes in the period of the revision. An unlocking event generally occurs as a result of actual experience or
future expectations differing from previous estimates. As a result of unlocking, the amortization schedule for future periods is also adjusted.
The following table sets forth the impact of unlocking on DAC and VOBA balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(In millions)
|
|
Decrease to DAC and VOBA
|
|
$
|
0.7
|
|
|
$
|
1.2
|
|
|
$
|
0.8
|
|
|
$
|
1.2
|
|
Significant, unanticipated changes in key assumptions, which affect the determination of
expected gross profits, may result in a large unlocking event that could have a material effect on the Companys financial position or results of operations. However, future changes in DAC and VOBA balances due to changes in underlying
assumptions are not expected to be material.
The Companys other intangible assets are subject to amortization and
consist of certain customer lists from Asset Management business acquired and an individual disability marketing agreement. Customer lists have a combined estimated weighted-average
33
remaining life of 6.6 years. The marketing agreement that accompanied the Minnesota Life transaction provides access to Minnesota Life agents, some of whom now market Standards individual
disability insurance products. The Minnesota Life marketing agreement will be fully amortized by the end of 2023. The accumulated amortization of other intangible assets was $45.5 million and $42.6 million at June 30, 2014 and December 31,
2013, respectively.
The following table sets forth the estimated net amortization of VOBA and other intangible assets for
the remainder of 2014 and for each of the next five years:
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
(In millions)
|
|
|
|
2014
|
|
$
|
3.9
|
|
2015
|
|
|
6.9
|
|
2016
|
|
|
5.6
|
|
2017
|
|
|
4.2
|
|
2018
|
|
|
4.2
|
|
2019
|
|
|
4.0
|
|
10.
|
COMMITMENTS AND CONTINGENCIES
|
Litigation Contingencies
In the normal course of business, the Company is involved in various legal actions and other state and federal proceedings. A
number of actions or proceedings were pending at June 30, 2014. In some instances, lawsuits include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual
liability or other compensatory damages. In the opinion of management, the ultimate liability, if any, arising from the actions or proceedings is not expected to have a material effect on the Companys business, financial position, results of
operations or cash flows.
Senior Unsecured Revolving Credit Facility (Facility) Contingencies
The Company maintains a $250 million Facility. Upon the request of StanCorp and with the consent of the lenders under the
Facility, the Facility can be increased to $350 million. The termination date of the Facility is June 22, 2018. The Company expects to use the Facility for working capital, general corporate purposes and for the issuance of letters of credit.
Under the agreement, the Company is subject to two financial covenants, which are based on the Companys ratio of
total debt to total capitalization and consolidated net worth. The Company is also subject to covenants that limit subsidiary indebtedness. The Facility is subject to pricing levels based upon the Companys publicly announced debt ratings and
includes an interest rate option at the election of the borrower of a base rate plus the applicable margin or LIBOR plus the applicable margin, plus facility and utilization fees. At June 30, 2014, the Company was in compliance with all
financial covenants under the Facility and had no outstanding balance on the Facility.
Other Financing Obligations
The Company has $250 million of 5.00% 10-year senior notes (Senior Notes), which mature on August 15,
2022. Interest is paid semi-annually on February 15 and August 15.
The Company has $252.9 million of 6.90%
junior subordinated debentures (Subordinated Debt), which matures on June 1, 2067 and is non-callable prior to June 1, 2017. In the first quarter of 2014, the Company repurchased $47.1 million in principal amount of
Subordinated Debt. Interest is payable semi-annually on June 1 and December 1 until June 1, 2017, and quarterly thereafter at a floating rate equal to three-month LIBOR plus 2.51%. StanCorp has the option to defer interest payments
for up to five years. The declaration and payment of dividends to shareholders would be restricted if the Company elected to defer interest payments on its Subordinated Debt. If elected, the restriction would be in place during the interest deferral
period. The Company is currently not deferring interest on the Subordinated Debt.
In the normal course of business, the
Company commits to fund commercial mortgage loans generally up to 90 days in advance. At June 30, 2014, the Company had outstanding commitments to fund commercial mortgage loans totaling $196.8 million, with fixed interest rates ranging from
4.00% to 6.00%. These commitments generally have fixed expiration dates. A small percentage of commitments expire due to the borrower failing to deliver the required items by the expiration date. In these cases, the Company will retain the
commitment fee and good faith deposit. Alternatively, if the Company terminates a commitment due to the disapproval of a commitment requirement, the commitment fee and good faith deposit may be refunded to the borrower, less an administrative fee.
34
11.
|
ACCOUNTING PRONOUNCEMENTS
|
Accounting Standards Update (ASU) No. 2014-01,
Accounting for Investments in Qualified
Affordable Housing Projects
In January 2014, the Financial Accounting Standards Board (FASB) issued
ASU No. 2014-01,
Accounting for Investments in Qualified Affordable Housing Projects
. The main objective of ASU No. 2014-01 is to provide guidance on accounting for investments in affordable housing projects that qualify for low
income housing tax credits. Under this guidance, entities could make a policy election to account for qualified affordable housing projects under the proportionate amortization method (PAM) of accounting. Under PAM, the cost of low
income housing tax credit investments is amortized in each period as a proportion of the tax credits and benefits of tax losses received in that period and allows the benefits from tax losses on the asset, the losses that reduce the asset balance of
the investment and the tax credits to be recorded in the income tax expense line on the consolidated statements of income.
ASU No. 2014-01 is effective for annual periods and interim reporting periods within those annual periods beginning after
December 15, 2014. Early adoption is permitted. The Company currently invests in affordable housing projects that qualify for low income housing tax credits and is assessing the impact of accounting for these investments under the PAM.
ASU No. 2014-09, Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
. The main objective of ASU
No. 2014-09 is to provide a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This ASU
does not apply to insurance contracts, financial instruments, and various other topics with the FASB Accounting Standards Codification. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.
ASU No. 2014-09 is effective for annual periods and interim reporting periods within those annual periods beginning after
December 15, 2016. Early adoption is not permitted. The Companys revenue is primarily from insurance contracts and financial instruments, therefore, the Company does not expect this ASU to have a material effect on its results of
operations.
Income taxes may differ from the amount computed by applying the federal corporate tax rate of 35% to
pre-tax income because of the net results of permanent differences between book and taxable income, tax credits and because of the inclusion of state and local income taxes, net of the federal tax benefit.
The following table sets forth the combined federal and state effective income tax rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
Combined federal and state effective income tax rates
|
|
|
18.3 %
|
|
|
|
26.5 %
|
|
|
|
21.2 %
|
|
|
|
24.7 %
|
|
The decreases in the effective tax rates for the second quarter and first six months of 2014
compared to the same periods of 2013 were primarily due to lower taxable income relative to permanent book-to-tax differences for the second quarter of 2014, along with a higher utilization of tax credits due to purchases of tax-advantaged
investments during the first six months of 2014.
35
13.
|
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
The following table sets forth the changes in accumulated other comprehensive income (loss) by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized
Gains (Losses) on
Fixed
Maturity
Securities
Available-for-Sale
|
|
|
Employee
Benefit
Plans
|
|
|
Total
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Balance, January 1, 2013
|
|
$
|
383.0
|
|
|
$
|
(73.7)
|
|
|
$
|
309.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, net of tax
before reclassification
adjustment
(1)
|
|
|
(205.3)
|
|
|
|
41.2
|
|
|
|
(164.1)
|
|
Amounts reclassified from accumulated
other comprehensive income, net of
tax
(2)
|
|
|
(4.5)
|
|
|
|
(6.0)
|
|
|
|
(10.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive (loss) income, net of tax
|
|
|
(209.8)
|
|
|
|
35.2
|
|
|
|
(174.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
173.2
|
|
|
|
(38.5)
|
|
|
|
134.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
before reclassification
adjustment
(3)
|
|
|
92.3
|
|
|
|
(0.4)
|
|
|
|
91.9
|
|
Amounts reclassified from accumulated
other comprehensive (loss) income, net of
tax
(4)
|
|
|
(1.5)
|
|
|
|
0.8
|
|
|
|
(0.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income, net of tax
|
|
|
90.8
|
|
|
|
0.4
|
|
|
|
91.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2014
|
|
$
|
264.0
|
|
|
$
|
(38.1)
|
|
|
$
|
225.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of tax benefit of $111.1 million for net unrealized losses on fixed maturity securities and net of tax expense of $22.2 million for employee
benefits.
|
|
(2)
|
Net of tax benefits of $3.1 million for net unrealized gains on fixed maturity securities and $3.2 million for employee benefits, respectively.
|
|
(3)
|
Net of tax expense of $47.2 million for net unrealized gains on fixed maturity securities and net of tax benefit of $0.3 million for employee
benefits.
|
|
(4)
|
Net of tax benefit of $0.8 million for net unrealized gains on fixed maturity securities and net of tax expense of $0.5 million for employee
benefits.
|
36