PRINCIPAL FINANCIAL GROUP INC, 10-Q filed on 10/31/2012
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Oct. 24, 2012
Document and Entity Information
 
 
Entity Registrant Name
PRINCIPAL FINANCIAL GROUP INC 
 
Entity Central Index Key
0001126328 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2012 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
293,586,944 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q3 
 
Consolidated Statements of Financial Position (USD $)
In Millions, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Assets
 
 
Fixed maturities, available-for-sale (2012 and 2011 include $180.3 million and $214.2 million related to consolidated variable interest entities)
$ 51,533.9 
$ 49,006.7 
Fixed maturities, trading (2012 and 2011 both include $132.4 million related to consolidated variable interest entities)
808.0 
971.7 
Equity securities, available-for-sale
143.6 
77.1 
Equity securities, trading (2012 and 2011 include $0.0 million and $207.6 million related to consolidated variable interest entities)
237.6 
404.8 
Mortgage loans
11,297.9 
10,727.2 
Real estate
1,208.6 
1,092.9 
Policy loans
866.6 
885.1 
Other investments (2012 and 2011 include $81.3 million and $97.8 million related to consolidated variable interest entities and $114.2 million and $97.5 million measured at fair value under the fair value option)
3,172.1 
2,985.8 
Total investments
69,268.3 
66,151.3 
Cash and cash equivalents (2012 and 2011 include $0.0 million and $317.7 million related to consolidated variable interest entities)
2,279.0 
2,833.9 
Accrued investment income
614.4 
615.2 
Premiums due and other receivables
1,192.2 
1,196.5 
Deferred policy acquisition costs
2,558.5 
2,428.0 
Property and equipment
468.4 
457.2 
Goodwill
548.9 
482.3 
Other intangibles
927.4 
890.6 
Separate account assets
80,160.5 
71,364.4 
Other assets
1,175.7 
942.3 
Total assets
159,193.3 
147,361.7 
Liabilities
 
 
Contractholder funds
37,312.2 
37,676.4 
Future policy benefits and claims
21,952.0 
20,210.4 
Other policyholder funds
720.8 
548.6 
Short-term debt
28.5 
105.2 
Long-term debt
2,180.0 
1,564.8 
Income taxes currently payable
6.6 
3.1 
Deferred income taxes
951.5 
208.7 
Separate account liabilities
80,160.5 
71,364.4 
Other liabilities (2012 and 2011 include $312.5 million and $565.2 million related to consolidated variable interest entities, of which $96.4 million and $88.4 million are measured at fair value under the fair value option)
5,974.3 
6,286.2 
Total liabilities
149,286.4 
137,967.8 
Redeemable noncontrolling interest
61.0 
22.2 
Stockholders' equity
 
 
Common stock, par value $.01 per share - 2,500.0 million shares authorized, 453.3 million and 450.3 million shares issued, and 293.6 million and 301.1 million shares outstanding in 2012 and 2011
4.5 
4.5 
Additional paid-in capital
9,712.2 
9,634.7 
Retained earnings (accumulated deficit)
4,784.3 
4,402.3 
Accumulated other comprehensive income (loss)
880.8 
258.0 
Treasury stock, at cost (159.7 million and 149.2 million shares in 2012 and 2011)
(5,554.4)
(5,281.7)
Total stockholders' equity attributable to Principal Financial Group, Inc.
9,827.5 
9,017.9 
Noncontrolling interest
18.4 
353.8 
Total stockholders' equity
9,845.9 
9,371.7 
Total liabilities and stockholders' equity
159,193.3 
147,361.7 
Series A
 
 
Stockholders' equity
 
 
Preferred stock, value
   
   
Series B
 
 
Stockholders' equity
 
 
Preferred stock, value
$ 0.1 
$ 0.1 
Consolidated Statements of Financial Position (Parenthetical) (USD $)
In Millions, except Per Share data, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Fixed maturities, available-for-sale
$ 51,533.9 
$ 49,006.7 
Fixed maturities, trading
808.0 
971.7 
Equity securities, trading
237.6 
404.8 
Other investments
3,172.1 
2,985.8 
Other investments, measured at fair value under fair value option
114.2 
97.5 
Cash and cash equivalents
2,279.0 
2,833.9 
Other liabilities
5,974.3 
6,286.2 
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, authorized (in shares)
2,500.0 
2,500.0 
Common stock, issued (in shares)
453.3 
450.3 
Common stock, outstanding (in shares)
293.6 
301.1 
Treasury stock (in shares)
159.7 
149.2 
Series A
 
 
Preferred stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, liquidation preference (in dollars per share)
$ 100 
$ 100 
Preferred stock, authorized (in shares)
3.0 
3.0 
Preferred stock, issued (in shares)
3.0 
3.0 
Preferred stock, outstanding (in shares)
3.0 
3.0 
Series B
 
 
Preferred stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, liquidation preference (in dollars per share)
$ 25 
$ 25 
Preferred stock, authorized (in shares)
10.0 
10.0 
Preferred stock, issued (in shares)
10.0 
10.0 
Preferred stock, outstanding (in shares)
10.0 
10.0 
Aggregate consolidated variable interest entities
 
 
Fixed maturities, available-for-sale
180.3 
214.2 
Fixed maturities, trading
132.4 
132.4 
Equity securities, trading
 
207.6 
Other investments
81.3 
97.8 
Cash and cash equivalents
 
317.7 
Other liabilities
312.5 
565.2 
Other liabilities measured at fair value under fair value option
$ 96.4 
$ 88.4 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Revenues
 
 
 
 
Premiums and other considerations
$ 1,158.2 
$ 672.7 
$ 2,519.3 
$ 2,221.7 
Fees and other revenues
675.0 
636.4 
1,909.1 
1,892.6 
Net investment income (loss)
783.8 
815.2 
2,409.6 
2,548.6 
Net realized capital gains (losses), excluding impairment losses on available-for-sale securities
122.1 
16.9 
176.4 
99.6 
Total other-than-temporary impairment losses on available-for-sale securities
(43.6)
(12.7)
(126.4)
(67.6)
Other-than-temporary impairment losses on fixed maturities, available-for-sale reclassified to (from) other comprehensive income
9.2 
(34.9)
31.2 
(83.0)
Net impairment losses on available-for-sale securities
(34.4)
(47.6)
(95.2)
(150.6)
Net realized capital gains (losses)
87.7 
(30.7)
81.2 
(51.0)
Total revenues
2,704.7 
2,093.6 
6,919.2 
6,611.9 
Expenses
 
 
 
 
Benefits, claims and settlement expenses
1,647.0 
1,114.9 
3,969.5 
3,497.7 
Dividends to policyholders
49.7 
52.2 
149.5 
158.7 
Operating expenses
826.6 
775.4 
2,106.7 
2,232.7 
Total expenses
2,523.3 
1,942.5 
6,225.7 
5,889.1 
Income (loss) before income taxes
181.4 
151.1 
693.5 
722.8 
Income taxes (benefits)
(9.9)
76.6 
99.2 
190.3 
Net income (loss)
191.3 
74.5 
594.3 
532.5 
Net income (loss) attributable to noncontrolling interest
3.4 
(5.6)
15.3 
36.6 
Net income (loss) attributable to Principal Financial Group, Inc.
187.9 
80.1 
579.0 
495.9 
Preferred stock dividends
8.2 
8.2 
24.7 
24.7 
Net income (loss) available to common stockholders
$ 179.7 
$ 71.9 
$ 554.3 
$ 471.2 
Earnings per common share
 
 
 
 
Basic earnings per common share (in dollars per share)
$ 0.61 
$ 0.23 
$ 1.86 
$ 1.48 
Diluted earnings per common share (in dollars per share)
$ 0.60 
$ 0.23 
$ 1.84 
$ 1.47 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Net income (loss)
$ 191.3 
$ 74.5 
$ 594.3 
$ 532.5 
Other comprehensive income (loss), net:
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
296.0 
7.4 
558.0 
329.5 
Noncredit component of impairment losses on fixed maturities, available-for-sale
(4.0)
18.9 
(14.8)
45.2 
Net unrealized gains (losses) on derivative instruments
(18.2)
32.1 
27.2 
19.5 
Foreign currency translation adjustment
48.6 
(136.4)
27.2 
(64.9)
Net unrecognized postretirement benefit obligation
8.7 
(201.5)
26.2 
(174.2)
Other comprehensive income (loss)
331.1 
(279.5)
623.8 
155.1 
Comprehensive income (loss)
522.4 
(205.0)
1,218.1 
687.6 
Comprehensive income (loss) attributable to noncontrolling interest
4.2 
(5.9)
16.3 
36.3 
Comprehensive income (loss) attributable to Principal Financial Group, Inc.
$ 518.2 
$ (199.1)
$ 1,201.8 
$ 651.3 
Consolidated Statements of Stockholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common stock
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income (loss)
Treasury stock
Noncontrolling interest
Series A
Preferred stock
Series B
Preferred stock
Balances at Dec. 31, 2010
$ 9,306.4 
$ 4.5 
$ 9,563.8 
$ 3,999.4 
$ 306.7 
$ (4,725.3)
$ 157.2 
$ 0 
$ 0.1 
Increase (decrease) in stockholders' equity
 
 
 
 
 
 
 
 
 
Common stock issued
23.2 
 
23.2 
 
 
 
 
 
 
Stock-based compensation and additional related tax benefits
32.9 
 
32.9 
 
 
 
 
 
 
Treasury stock acquired, common
(456.4)
 
 
 
 
(456.4)
 
 
 
Dividends to preferred stockholders
(24.7)
 
 
(24.7)
 
 
 
 
 
Distributions to noncontrolling interest
(7.4)
 
 
 
 
 
(7.4)
 
 
Contributions from noncontrolling interest
127.0 
 
 
 
 
 
127.0 
 
 
Purchase of subsidiary shares from noncontrolling interest
(6.0)
 
(2.0)
 
 
 
(4.0)
 
 
Net income (loss) (excludes $1.6 million in 2012 attributable to redeemable noncontrolling interest)
532.5 
 
 
495.9 
 
 
36.6 
 
 
Other comprehensive income (loss) (excludes $0.9 million in 2012 attributable to redeemable noncontrolling interest)
155.1 
 
 
 
155.4 
 
(0.3)
 
 
Balances at Sep. 30, 2011
9,682.6 
4.5 
9,617.9 
4,470.6 
462.1 
(5,181.7)
309.1 
0.1 
Balances at Dec. 31, 2011
9,371.7 
4.5 
9,634.7 
4,402.3 
258.0 
(5,281.7)
353.8 
0.1 
Increase (decrease) in stockholders' equity
 
 
 
 
 
 
 
 
 
Common stock issued
24.7 
 
24.7 
 
 
 
 
 
 
Stock-based compensation and additional related tax benefits
50.1 
 
52.8 
(2.7)
 
 
 
 
 
Treasury stock acquired, common
(272.7)
 
 
 
 
(272.7)
 
 
 
Dividends to common stockholders
(169.6)
 
 
(169.6)
 
 
 
 
 
Dividends to preferred stockholders
(24.7)
 
 
(24.7)
 
 
 
 
 
Distributions to noncontrolling interest
(8.1)
 
 
 
 
 
(8.1)
 
 
Contributions from noncontrolling interest
12.1 
 
 
 
 
 
12.1 
 
 
Deconsolidation of certain variable interest entities
(353.2)
 
 
 
 
 
(353.2)
 
 
Net income (loss) (excludes $1.6 million in 2012 attributable to redeemable noncontrolling interest)
592.7 
 
 
579.0 
 
 
13.7 
 
 
Other comprehensive income (loss) (excludes $0.9 million in 2012 attributable to redeemable noncontrolling interest)
622.9 
 
 
 
622.8 
 
0.1 
 
 
Balances at Sep. 30, 2012
$ 9,845.9 
$ 4.5 
$ 9,712.2 
$ 4,784.3 
$ 880.8 
$ (5,554.4)
$ 18.4 
$ 0 
$ 0.1 
Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Consolidated Statements of Stockholders' Equity
 
Net income (loss) attributable to redeemable noncontrolling interest
$ 1.6 
Other comprehensive income (loss) attributable to redeemable noncontrolling interest
$ 0.9 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Operating activities
 
 
Net income (loss)
$ 594.3 
$ 532.5 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
Amortization of deferred policy acquisition costs
27.4 
222.9 
Additions to deferred policy acquisition costs
(303.1)
(254.3)
Accrued investment income
0.8 
2.4 
Net cash flows for trading securities
135.3 
(193.8)
Premiums due and other receivables
65.7 
(99.8)
Contractholder and policyholder liabilities and dividends
1,578.8 
868.7 
Current and deferred income taxes (benefits)
(28.7)
39.3 
Net realized capital (gains) losses
(81.2)
51.0 
Depreciation and amortization expense
109.2 
87.4 
Mortgage loans held for sale, acquired or originated
(48.2)
(117.4)
Mortgage loans held for sale, sold or repaid, net of gain
90.1 
49.9 
Real estate acquired through operating activities
(25.5)
 
Real estate sold through operating activities
4.1 
137.8 
Stock-based compensation
50.2 
32.5 
Other
204.5 
526.3 
Net adjustments
1,779.4 
1,352.9 
Net cash provided by (used in) operating activities
2,373.7 
1,885.4 
Investing activities
 
 
Available-for-sale securities: Purchases
(6,467.5)
(5,179.4)
Available-for-sale securities: Sales
946.5 
845.6 
Available-for-sale securities: Maturities
4,702.7 
4,350.3 
Mortgage loans acquired or originated
(1,811.8)
(1,070.4)
Mortgage loans sold or repaid
1,166.7 
1,269.6 
Real estate acquired
(114.8)
(43.8)
Net (purchases) sales of property and equipment
(35.6)
(32.6)
Purchases of interest in subsidiaries, net of cash acquired
(62.5)
 
Net change in other investments
(42.9)
(228.4)
Net cash provided by (used in) investing activities
(1,719.2)
(89.1)
Financing activities
 
 
Issuance of common stock
24.7 
23.2 
Acquisition of treasury stock
(272.7)
(456.4)
Proceeds from financing element derivatives
51.6 
74.7 
Payments for financing element derivatives
(38.3)
(38.6)
Excess tax benefits from share-based payment arrangements
9.8 
2.0 
Dividends to common stockholders
(169.6)
 
Dividends to preferred stockholders
(16.5)
(24.7)
Issuance of long-term debt
602.9 
2.6 
Principal repayments of long-term debt
(2.1)
(4.3)
Net proceeds from (repayments of) short-term borrowings
(81.0)
(30.7)
Investment contract deposits
4,798.7 
4,067.3 
Investment contract withdrawals
(6,126.0)
(5,836.3)
Net increase (decrease) in banking operation deposits
14.9 
(15.2)
Other
(5.8)
(3.1)
Net cash provided by (used in) financing activities
(1,209.4)
(2,239.5)
Net increase (decrease) in cash and cash equivalents
(554.9)
(443.2)
Cash and cash equivalents at beginning of period
2,833.9 
1,877.4 
Cash and cash equivalents at end of period
$ 2,279.0 
$ 1,434.2 
Nature of Operations and Significant Accounting Policies
Nature of Operations and Significant Accounting Policies

1. Nature of Operations and Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Principal Financial Group, Inc. (“PFG”), its majority-owned subsidiaries and its consolidated variable interest entities (“VIEs”), have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. These interim unaudited consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2011, included in our Form 10-K for the year ended December 31, 2011, filed with the United States Securities and Exchange Commission (“SEC”). The accompanying consolidated statement of financial position as of December 31, 2011, has been derived from the audited consolidated statement of financial position but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

 

Reclassifications have been made to prior period financial statements to conform to the September 30, 2012, presentation.

 

Accounting Changes

 

In October 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the successful acquisition of new or renewal insurance contracts. Capitalized costs should include incremental direct costs of contract acquisition, as well as certain costs related directly to acquisition activities such as underwriting, policy issuance and processing, medical and inspection and sales force contract selling. This guidance was effective for us on January 1, 2012, and we adopted the guidance retrospectively.

 

Effective January 1, 2012, we voluntarily changed our method of accounting for the cost of long duration universal life and variable universal life reinsurance contracts. In conjunction with this change, we also changed our accounting policy for estimated gross profits (“EGPs”). These changes are collectively referred to as the “Reinsurance Accounting Change”. Under our previous method, we recognized all reinsurance cash flows as part of the net cost of reinsurance and amortized this balance over the estimated lives of the underlying policies in proportion to the pattern of EGPs on the underlying policies. Under the new method, any difference between actual and expected reinsurance cash flows are recognized in earnings immediately instead of being deferred and amortized over the life of the underlying policies. In conjunction with this change, we also changed our policy for determining EGPs relating to these contracts to include the difference between actual and expected reinsurance cash flows, where previously these effects had not been included. We adopted the new policies because we believe that they better reflect the economics of our reinsurance transactions by accounting for direct claims and related reinsurance recoveries in the same period. In addition, the new policies are consistent with our intent to purchase reinsurance to protect us against large and unexpected claims.

 

Comparative amounts from prior periods have been adjusted to apply the new deferred policy acquisition cost (“DPAC”) guidance (“DPAC Guidance”) and the Reinsurance Accounting Change retrospectively in these financial statements.

 

Our retrospective adoption of the DPAC Guidance and the Reinsurance Accounting Change resulted in reductions to the opening balances of retained earnings and accumulated other comprehensive income (“AOCI”) as of January 1, 2011, as shown in the following table.

 

 

 

Impact on

 

Attributed to

 

 

 

opening
balance as of
January 1, 2011

 

DPAC
Guidance

 

Reinsurance
Accounting
Change

 

 

 

(in millions)

 

Retained earnings

 

$

(612.9

)

$

(631.7

)

$

18.8

 

Accumulated other comprehensive income

 

34.3

 

29.5

 

4.8

 

 

The following tables show the prior period financial statement line items that were affected by the DPAC Guidance and the Reinsurance Accounting Change.

 

Consolidated Statements of Financial Position

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Change attributed to

 

 

 

 

 

As

 

 

 

 

 

Reinsurance

 

 

 

As

 

originally

 

Effect of

 

DPAC

 

Accounting

 

 

 

adjusted

 

reported

 

change

 

Guidance

 

Change

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

$

2,985.8

 

$

2,988.0

 

$

(2.2

)

$

(2.2

)

$

 

Premiums due and other receivables

 

1,196.5

 

1,245.2

 

(48.7

)

 

(48.7

)

Deferred policy acquisition costs

 

2,428.0

 

3,313.5

 

(885.5

)

(884.4

)

(1.1

)

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits and claims

 

20,210.4

 

20,207.9

 

2.5

 

 

2.5

 

Other policyholder funds

 

548.6

 

543.7

 

4.9

 

7.0

 

(2.1

)

Deferred income taxes

 

208.7

 

533.4

 

(324.7

)

(307.1

)

(17.6

)

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

4,402.3

 

5,077.5

 

(675.2

)

(642.0

)

(33.2

)

Accumulated other comprehensive income

 

258.0

 

201.9

 

56.1

 

55.5

 

0.6

 

 

Consolidated Statements of Operations

 

 

 

For the three months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Change attributed to

 

 

 

 

 

As

 

 

 

 

 

Reinsurance

 

 

 

As

 

originally

 

Effect of

 

DPAC

 

Accounting

 

 

 

adjusted

 

reported

 

change

 

Guidance (1)

 

Change

 

 

 

(in millions, except per share data)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

Fees and other revenues

 

$

636.4

 

$

631.5

 

$

4.9

 

$

0.5

 

$

4.4

 

Net investment income

 

815.2

 

815.3

 

(0.1

)

(0.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

Benefits, claims and settlement expenses

 

1,114.9

 

1,131.8

 

(16.9

)

(0.1

)

(16.8

)

Operating expenses

 

775.4

 

766.6

 

8.8

 

(5.3

)

14.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

151.1

 

138.2

 

12.9

 

5.8

 

7.1

 

Income taxes

 

76.6

 

71.9

 

4.7

 

2.1

 

2.6

 

Net income

 

$

74.5

 

$

66.3

 

$

8.2

 

$

3.7

 

$

4.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

71.9

 

$

63.7

 

$

8.2

 

$

3.7

 

$

4.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.23

 

$

0.20

 

$

0.03

 

$

0.01

 

$

0.02

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.23

 

$

0.20

 

$

0.03

 

$

0.01

 

$

0.02

 

 

Consolidated Statements of Operations

 

 

 

For the nine months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Change attributed to

 

 

 

 

 

As

 

 

 

 

 

Reinsurance

 

 

 

As

 

originally

 

Effect of

 

DPAC

 

Accounting

 

 

 

adjusted

 

reported

 

change

 

Guidance (1)

 

Change (2)

 

 

 

(in millions, except per share data)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

Fees and other revenues

 

$

1,892.6

 

$

1,930.9

 

$

(38.3

)

$

0.7

 

$

(39.0

)

Net investment income

 

2,548.6

 

2,549.0

 

(0.4

)

(0.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

Benefits, claims and settlement expenses

 

3,497.7

 

3,337.0

 

160.7

 

(0.1

)

160.8

 

Operating expenses

 

2,232.7

 

2,360.9

 

(128.2

)

(7.0

)

(121.2

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

722.8

 

794.0

 

(71.2

)

7.4

 

(78.6

)

Income taxes

 

190.3

 

214.7

 

(24.4

)

3.0

 

(27.4

)

Net income

 

$

532.5

 

$

579.3

 

$

(46.8

)

$

4.4

 

$

(51.2

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

471.2

 

$

518.0

 

$

(46.8

)

$

4.4

 

$

(51.2

)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

1.48

 

$

1.63

 

$

(0.15

)

$

0.01

 

$

(0.16

)

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

1.47

 

$

1.61

 

$

(0.14

)

$

0.01

 

$

(0.15

)

 

 

(1)   In general as a result of the adoption of the DPAC Guidance we capitalize fewer expenses, which lowers earnings. During 2011, we made routine model and assumption refinements that resulted in a write-down of our DPAC asset. The DPAC Guidance was applied to a lower DPAC asset, which reduced the DPAC write-off associated with the model and assumption refinements. This positive impact to earnings more than offset the negative impact of lower capitalization during the period.

 

(2)   In the second quarter of 2011, we made various routine adjustments to our model and assumptions in our individual life insurance business. When we updated our actuarial models for the Reinsurance Accounting Change, several of the components of our integrated insurance accounting model were impacted, resulting in changes to various balance sheet and income statement line items. While the same model and assumptions were used to derive both the “as originally reported” and “as adjusted” balances, the financial statement impacts of the model and assumption changes upon adjustment were different than previously reported because of changes to the pattern of EGPs caused by the application of our Reinsurance Accounting Change.

 

The following tables show the impact of the Reinsurance Accounting Change on the current period financial statements.

 

Consolidated Statements of Financial Position

 

 

 

September 30, 2012

 

 

 

New

 

Former

 

Effect of

 

 

 

reinsurance

 

reinsurance

 

Reinsurance

 

 

 

accounting

 

accounting

 

Accounting

 

 

 

method

 

method

 

Change

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

Premiums due and other receivables

 

$

1,192.2

 

$

1,263.3

 

$

(71.1

)

Deferred policy acquisition costs

 

2,558.5

 

2,540.4

 

18.1

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Future policy benefits and claims

 

21,952.0

 

21,952.4

 

(0.4

)

Other policyholder funds

 

720.8

 

714.5

 

6.3

 

Deferred income taxes

 

951.5

 

974.2

 

(22.7

)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Retained earnings

 

4,784.3

 

4,828.7

 

(44.4

)

Accumulated other comprehensive income

 

880.8

 

882.7

 

(1.9

)

 

Consolidated Statements of Operations

 

 

 

For the three months ended September 30, 2012

 

 

 

New

 

Former

 

Effect of

 

 

 

reinsurance

 

reinsurance

 

Reinsurance

 

 

 

accounting

 

accounting

 

Accounting

 

 

 

method

 

method

 

Change

 

 

 

(in millions, except per share data)

 

Revenue

 

 

 

 

 

 

 

Fees and other revenues

 

$

675.0

 

$

674.4

 

$

0.6

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

Benefits, claims and settlement expenses

 

1,647.0

 

1,641.5

 

5.5

 

Operating expenses

 

826.6

 

827.6

 

(1.0

)

 

 

 

 

 

 

 

 

Income before income taxes

 

181.4

 

198.2

 

(16.8

)

Income tax benefits

 

(9.9

)

(3.6

)

(6.3

)

Net income

 

$

191.3

 

$

201.8

 

$

(10.5

)

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

179.7

 

$

190.2

 

$

(10.5

)

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.61

 

$

0.65

 

$

(0.04

)

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.60

 

$

0.64

 

$

(0.04

)

 

Consolidated Statements of Operations

 

 

 

For the nine months ended September 30, 2012

 

 

 

New

 

Former

 

Effect of

 

 

 

reinsurance

 

reinsurance

 

Reinsurance

 

 

 

accounting

 

accounting

 

Accounting

 

 

 

method

 

method

 

Change

 

 

 

(in millions, except per share data)

 

Revenue

 

 

 

 

 

 

 

Fees and other revenues

 

$

1,909.1

 

$

1,917.5

 

$

(8.4

)

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

Benefits, claims and settlement expenses

 

3,969.5

 

3,950.0

 

19.5

 

Operating expenses

 

2,106.7

 

2,129.7

 

(23.0

)

 

 

 

 

 

 

 

 

Income before income taxes

 

693.5

 

711.3

 

(17.8

)

Income taxes

 

99.2

 

105.8

 

(6.6

)

Net income

 

$

594.3

 

$

605.5

 

$

(11.2

)

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

554.3

 

$

565.5

 

$

(11.2

)

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

Basic earnings per common share

 

$

1.86

 

$

1.89

 

$

(0.03

)

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

1.84

 

$

1.88

 

$

(0.04

)

 

Certain of the current and prior period line items in the consolidated statements of cash flows and consolidated statements of stockholders’ equity were affected by the DPAC Guidance and the Reinsurance Accounting Change. All of the line item changes in the consolidated statements of cash flows were included in the operating activities section and the changes in the consolidated statements of stockholders’ equity have largely been addressed through the preceding disclosures.

 

Our accounting policy for DPAC follows, which has been updated from our Form 10-K for the year ended December 31, 2011, to reflect this change.

 

Deferred Policy Acquisition Costs

 

Incremental direct costs of contract acquisition as well as certain costs directly related to acquisition activities (underwriting, policy issuance and processing, medical and inspection and sales force contract selling) for the successful acquisition of new and renewal insurance policies and investment contract business are capitalized to the extent recoverable. Maintenance costs and acquisition costs that are not deferrable are charged to operations as incurred.

 

DPAC for universal life-type insurance contracts, participating life insurance policies and certain investment contracts are being amortized over the lives of the policies and contracts in relation to the emergence of EGPs or, in certain circumstances, estimated gross revenues. This amortization is adjusted in the current period when EGPs or estimated gross revenues are revised. For individual variable life insurance, individual variable annuities and group annuities that have separate account U.S. equity investment options, we utilize a mean reversion method (reversion to the mean assumption), a common industry practice, to determine the future domestic equity market growth assumption used for the amortization of DPAC. The DPAC of nonparticipating term life insurance and individual disability policies are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policyholder liabilities.

 

DPAC are subject to recoverability testing at the time of policy issue and loss recognition testing on an annual basis, or when an event occurs that may warrant loss recognition. If loss recognition is necessary, DPAC would be written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related losses and expenses.

 

Recent Accounting Pronouncements

 

In July 2012, the FASB issued authoritative guidance that amends how indefinite-lived intangible assets are tested for impairment. The amendments provide an option to perform a qualitative assessment to determine whether it is necessary to perform the annual fair value calculation impairment test. This new guidance is effective for our 2013 indefinite-lived intangible asset impairment testing and is not expected to have a material impact on our consolidated financial statements.

 

In December 2011, the FASB issued authoritative guidance related to balance sheet offsetting. The new guidance requires disclosures about assets and liabilities that are offset or have the potential to be offset. These disclosures are intended to address differences in the asset and liability offsetting requirements under U.S. GAAP and International Financial Reporting Standards. This new guidance will be effective for us for interim and annual reporting periods beginning January 1, 2013, with retrospective application required and is not expected to have a material impact on our consolidated financial statements.

 

Also in December 2011, the FASB issued authoritative guidance that requires a reporting entity to follow the real estate sales guidance when the reporting entity ceases to have a controlling financial interest in a subsidiary that is in-substance real estate as a result of a default on the subsidiary’s nonrecourse debt. This guidance will be effective for us on January 1, 2013, and is not expected to have a material impact on our consolidated financial statements.

 

In September 2011, the FASB issued authoritative guidance that amends how goodwill is tested for impairment. The amendments provide an option to perform a qualitative assessment to determine whether it is necessary to perform the annual two-step quantitative goodwill impairment test. This guidance will be effective for our 2012 goodwill impairment test and is not expected to have a material impact on our consolidated financial statements.

 

In June 2011, the FASB issued authoritative guidance that changes the presentation of comprehensive income in the financial statements. The new guidance eliminates the presentation options contained in current guidance and instead requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements that show the components of net income and other comprehensive income (“OCI”), including adjustments for items that are reclassified from OCI to net income. The guidance does not change the items that must be reported in OCI or when an item of OCI must be reclassified to net income. In December 2011, the FASB issued a final standard to defer the new requirement to present classification adjustments out of OCI to net income on the face of the financial statements. All other requirements contained in the original statement on comprehensive income are still effective. This guidance was effective for us on January 1, 2012, and did not have a material impact on our consolidated financial statements. The required disclosures are included in our consolidated financial statements. See Note 9, Stockholders’ Equity, for further details.

 

In May 2011, the FASB issued authoritative guidance that clarifies and changes fair value measurement and disclosure requirements. This guidance expands existing disclosure requirements for fair value measurements and makes other amendments but does not require additional fair value measurements. This guidance was effective for us on January 1, 2012, and did not have a material impact on our consolidated financial statements. See Note 10, Fair Value Measurements, for further details.

 

In April 2011, the FASB issued authoritative guidance that modifies the criteria for determining when repurchase agreements would be accounted for as secured borrowings as opposed to sales. The guidance was effective for us on January 1, 2012, for new transfers and modifications to existing transactions and did not have a material impact on our consolidated financial statements.

 

Also in April 2011, the FASB issued authoritative guidance which clarifies when creditors should classify a loan modification as a troubled debt restructuring (“TDR”). A TDR occurs when a creditor grants a concession to a debtor experiencing financial difficulties. Loans denoted as a TDR are considered impaired and are specifically reserved for when calculating the allowance for credit losses. This guidance also ends the indefinite deferral issued in January 2011 surrounding new disclosures on loans classified as a TDR required as part of the credit quality disclosures guidance issued in July 2010. This guidance was effective for us on July 1, 2011, and was applied retrospectively to restructurings occurring on or after January 1, 2011. This guidance did not have a material impact on our consolidated financial statements. See Note 3, Investments, for further detail.

 

In July 2010, the FASB issued authoritative guidance that requires new and expanded disclosures related to the credit quality of financing receivables and the allowance for credit losses. Reporting entities are required to provide qualitative and quantitative disclosures on the allowance for credit losses, credit quality, impaired loans, modifications and nonaccrual and past due financing receivables. The disclosures are required to be presented on a disaggregated basis by portfolio segment and class of financing receivable. Disclosures required by the guidance that relate to the end of a reporting period were effective for us in our December 31, 2010, consolidated financial statements. Disclosures required by the guidance that relate to an activity that occurs during a reporting period were effective for us on January 1, 2011, and did not have a material impact on our consolidated financial statements. See Note 3, Investments, for further details.

 

In April 2010, the FASB issued authoritative guidance addressing how investments held through the separate accounts of an insurance entity affect the entity’s consolidation analysis. This guidance clarifies that an insurance entity should not consider any separate account interests held for the benefit of policyholders in an investment to be the insurer’s interests and should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation. This guidance was effective for us on January 1, 2011, and did not have a material impact on our consolidated financial statements.

 

In January 2010, the FASB issued authoritative guidance that requires new disclosures related to fair value measurements and clarifies existing disclosure requirements about the level of disaggregation, inputs and valuation techniques. Specifically, reporting entities now must disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, in the reconciliation for Level 3 fair value measurements, a reporting entity should present separately information about purchases, sales, issuances and settlements. The guidance clarifies that a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities for disclosure of fair value measurement, considering the level of disaggregated information required by other applicable U.S. GAAP guidance and should also provide disclosures about the valuation techniques and inputs used to measure fair value for each class of assets and liabilities. This guidance was effective for us on January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements, which were effective for us on January 1, 2011. This guidance did not have a material impact on our consolidated financial statements. See Note 10, Fair Value Measurements, for further details.

 

Separate Accounts

 

At September 30, 2012 and December 31, 2011, the separate accounts include a separate account valued at $145.9 million and $146.5 million, respectively, which primarily includes shares of our stock that were allocated and issued to eligible participants of qualified employee benefit plans administered by us as part of the policy credits issued under our 2001 demutualization. These shares are included in both basic and diluted earnings per share calculations. In the consolidated statements of financial position, the separate account shares are recorded at fair value and are reported as separate account assets with a corresponding separate account liability to eligible participants of the qualified plan. Changes in fair value of the separate account shares are reflected in both the separate account assets and separate account liabilities and do not impact our results of operations.

 

Variable Interest Entities
Variable Interest Entities

2.  Variable Interest Entities

 

We have relationships with and may have a variable interest in various types of special purpose entities. Following is a discussion of our interest in entities that meet the definition of a VIE. When we are the primary beneficiary, we are required to consolidate the entity in our financial statements. The primary beneficiary of a VIE is defined as the enterprise with (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. On an ongoing basis, we assess whether we are the primary beneficiary of VIEs we have relationships with.

 

Consolidated Variable Interest Entities

 

Grantor Trusts

 

We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows by issuing an interest-only certificate and a residual certificate related to each note contributed. Each interest-only certificate entitles the holder to interest on the stated note for a specified term, while the residual certificate entitles the holder to interest payments subsequent to the term of the interest-only certificate and to all principal payments. We retained the interest-only certificates and the residual certificates were subsequently sold to third parties. We have determined these grantor trusts are VIEs due to insufficient equity to sustain them. We determined we are the primary beneficiary as a result of our contribution of securities into the trusts and our continuing interest in the trusts.

 

Collateralized Private Investment Vehicles

 

We invest in synthetic collateralized debt obligations, collateralized bond obligations, collateralized loan obligations and other collateralized structures, which are VIEs due to insufficient equity to sustain the entities (collectively known as “collateralized private investment vehicles”). The performance of the notes of these structures is primarily linked to a synthetic portfolio by derivatives; each note has a specific loss attachment and detachment point. The notes and related derivatives are collateralized by a pool of permitted investments. The investments are held by a trustee and can only be liquidated to settle obligations of the trusts. These obligations primarily include derivatives and the notes due at maturity or termination of the trusts. We determined we are the primary beneficiary for certain of these entities because we act as the investment manager of the underlying portfolio and we have an ownership interest.

 

Commercial Mortgage-Backed Securities

 

We sold commercial mortgage loans to a real estate mortgage investment conduit trust. The trust issued various commercial mortgage-backed securities (“CMBS”) certificates using the cash flows of the underlying commercial mortgages it purchased. This is considered a VIE due to insufficient equity to sustain itself. We have determined we are the primary beneficiary as we retained the special servicing role for the assets within the trust as well as the ownership of the bond class that controls the unilateral kick out rights of the special servicer.

 

Hedge Funds

 

We are a general partner with insignificant equity ownership in various hedge funds. These entities were deemed VIEs due to the equity owners not having decision-making ability. We determined we were the primary beneficiary of these entities due to our control through our management relationships, related party ownership and our fee structure in certain of these funds.

 

In the second quarter of 2012, the hedge funds were no longer consolidated. We determined we were no longer the primary beneficiary due to the increase in external ownership in the funds. As a result of deconsolidation, total assets decreased $587.2 million and liabilities and noncontrolling interest decreased $586.1 million.

 

The carrying amounts of our consolidated VIE assets, which can only be used to settle obligations of consolidated VIEs, and liabilities of consolidated VIEs for which creditors do not have recourse are as follows:

 

 

 

 

 

Collateralized

 

 

 

 

 

 

 

 

 

 

 

private investment

 

 

 

 

 

 

 

 

 

Grantor trusts

 

vehicles

 

CMBS

 

Hedge funds (2)

 

Total

 

 

 

(in millions)

 

September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale

 

$

180.3

 

$

 

$

 

$

 

$

180.3

 

Fixed maturities, trading

 

 

132.4

 

 

 

132.4

 

Other investments

 

 

 

81.3

 

 

81.3

 

Accrued investment income

 

0.5

 

 

0.6

 

 

1.1

 

Premiums due and other receivables

 

0.1

 

 

 

 

0.1

 

Total assets

 

$

180.9

 

$

132.4

 

$

81.9

 

$

 

$

395.2

 

Deferred income taxes

 

$

1.9

 

$

 

$

 

$

 

$

1.9

 

Other liabilities (1)

 

137.4

 

126.7

 

48.4

 

 

312.5

 

Total liabilities

 

$

139.3

 

$

126.7

 

$

48.4

 

$

 

$

314.4

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale

 

$

199.2

 

$

15.0

 

$

 

$

 

$

214.2

 

Fixed maturities, trading

 

 

132.4

 

 

 

132.4

 

Equity securities, trading

 

 

 

 

207.6

 

207.6

 

Other investments

 

 

 

97.5

 

0.3

 

97.8

 

Cash and cash equivalents

 

 

 

 

317.7

 

317.7

 

Accrued investment income

 

1.2

 

0.1

 

0.6

 

 

1.9

 

Premiums due and other receivables

 

 

 

 

39.1

 

39.1

 

Total assets

 

$

200.4

 

$

147.5

 

$

98.1

 

$

564.7

 

$

1,010.7

 

Deferred income taxes

 

$

2.2

 

$

 

$

 

$

 

$

2.2

 

Other liabilities (1)

 

136.9

 

143.8

 

64.5

 

220.0

 

565.2

 

Total liabilities

 

$

139.1

 

$

143.8

 

$

64.5

 

$

220.0

 

$

567.4

 

 

 

(1)           Grantor trusts contain an embedded derivative of a forecasted transaction to deliver the underlying securities; collateralized private investment vehicles include derivative liabilities and obligation to redeem notes at maturity or termination of the trust; CMBS includes obligation to the bondholders; and hedge funds include liabilities to securities brokers.

 

(2)            The consolidated statements of financial position included a $343.6 million noncontrolling interest for hedge funds as of December 31, 2011.

 

We did not provide financial or other support to investees designated as VIEs for the nine months ended September 30, 2012 and 2011.

 

Unconsolidated Variable Interest Entities

 

Invested Securities

 

We hold a variable interest in a number of VIEs where we are not the primary beneficiary. Our investments in these VIEs are reported in fixed maturities, available-for-sale; fixed maturities, trading and other investments in the consolidated statements of financial position and are described below.

 

VIEs include CMBS, residential mortgage-backed pass-through securities (“RMBS”) and other asset-backed securities (“ABS”). All of these entities were deemed VIEs because the equity within these entities is insufficient to sustain them. We determined we are not the primary beneficiary in any of the entities within these categories of investments. This determination was based primarily on the fact we do not own the class of security that controls the unilateral right to replace the special servicer or equivalent function.

 

As previously discussed, we invest in several types of collateralized private investment vehicles, which are VIEs. These include cash and synthetic structures that we do not manage. We have determined we are not the primary beneficiary of these collateralized private investment vehicles primarily because we do not control the economic performance of the entities and were not involved with the design of the entities.

 

We have invested in various VIE trusts as a debt holder. All of these entities are classified as VIEs due to insufficient equity to sustain them. We have determined we are not the primary beneficiary primarily because we do not control the economic performance of the entities and were not involved with the design of the entities.

 

We have invested in partnerships, some of which are classified as VIEs. The partnership returns are in the form of income tax credits and investment income. These entities are classified as VIEs as the general partner does not have an equity investment at risk in the entity. We have determined we are not the primary beneficiary because we are not the general partner, who makes all the significant decisions for the entity.

 

The carrying value and maximum loss exposure for our unconsolidated VIEs were as follows:

 

 

 

 

 

Maximum exposure to

 

 

 

Asset carrying value

 

loss (1)

 

 

 

(in millions)

 

September 30, 2012

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

Corporate

 

$

484.8

 

$

400.9

 

Residential mortgage-backed pass-through securities

 

3,265.3

 

3,034.6

 

Commercial mortgage-backed securities

 

3,838.4

 

4,115.9

 

Collateralized debt obligations

 

380.8

 

439.9

 

Other debt obligations

 

3,749.7

 

3,745.6

 

Fixed maturities, trading:

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

96.4

 

96.4

 

Commercial mortgage-backed securities

 

2.8

 

2.8

 

Collateralized debt obligations

 

55.7

 

55.7

 

Other debt obligations

 

17.4

 

17.4

 

Other investments:

 

 

 

 

 

Other limited partnership interests

 

126.0

 

126.0

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

Corporate

 

$

544.0

 

$

392.6

 

Residential mortgage-backed pass-through securities

 

3,343.0

 

3,155.8

 

Commercial mortgage-backed securities

 

3,413.7

 

3,894.3

 

Collateralized debt obligations

 

338.8

 

399.7

 

Other debt obligations

 

3,570.2

 

3,606.9

 

Fixed maturities, trading:

 

 

 

 

 

Residential mortgage-backed pass-through securities

 

105.6

 

105.6

 

Commercial mortgage-backed securities

 

12.0

 

12.0

 

Collateralized debt obligations

 

51.4

 

51.4

 

Other debt obligations

 

64.9

 

64.9

 

Other investments:

 

 

 

 

 

Other limited partnership interests

 

122.1

 

122.1

 

 

 

(1)         Our risk of loss is limited to our initial investment measured at amortized cost for fixed maturities, available-for-sale and other investments. Our risk of loss is limited to our initial investment measured at fair value for our fixed maturities, trading.

 

Sponsored Investment Funds

 

We are the investment manager for certain money market mutual funds that are deemed to be VIEs. We are not the primary beneficiary of these VIEs since our involvement is limited primarily to being a service provider, and our variable interest does not absorb the majority of the variability of the entities’ net assets. As of September 30, 2012 and December 31, 2011, these VIEs held $1.4 billion and $1.7 billion in total assets, respectively. We have no contractual obligation to contribute to the funds.

 

We provide asset management and other services to certain investment structures that are considered VIEs as we generally earn performance-based management fees. We are not the primary beneficiary of these entities as we do not have the obligation to absorb losses of the entities that could be potentially significant to the VIE or the right to receive benefits from these entities that could be potentially significant.

 

Investments
Investments

 

 

3.  Investments

 

Fixed Maturities and Equity Securities

 

Fixed maturities include bonds, ABS, redeemable preferred stock and certain nonredeemable preferred stock. Equity securities include mutual funds, common stock and nonredeemable preferred stock. We classify fixed maturities and equity securities as either available-for-sale or trading at the time of the purchase and, accordingly, carry them at fair value. See Note 10, Fair Value Measurements, for methodologies related to the determination of fair value. Unrealized gains and losses related to available-for-sale securities, excluding those in fair value hedging relationships, are reflected in stockholders’ equity, net of adjustments related to DPAC, sales inducements, unearned revenue reserves, policyholder liabilities, derivatives in cash flow hedge relationships and applicable income taxes. Unrealized gains and losses related to hedged portions of available-for-sale securities in fair value hedging relationships and mark-to-market adjustments on certain trading securities are reflected in net realized capital gains (losses). We also have a minimal amount of assets within trading securities portfolios that support investment strategies that involve the active and frequent purchase and sale of fixed maturities. Mark-to-market adjustments related to these trading securities are reflected in net investment income.

 

The cost of fixed maturities is adjusted for amortization of premiums and accrual of discounts, both computed using the interest method. The cost of fixed maturities and equity securities classified as available-for-sale is adjusted for declines in value that are other than temporary. Impairments in value deemed to be other than temporary are primarily reported in net income as a component of net realized capital gains (losses), with noncredit impairment losses for certain fixed maturities, available-for-sale reported in OCI. For loan-backed and structured securities, we recognize income using a constant effective yield based on currently anticipated cash flows.

 

The amortized cost, gross unrealized gains and losses, other-than-temporary impairments in AOCI and fair value of fixed maturities and equity securities available-for-sale are summarized as follows:

 

 

 

 

 

 

 

 

 

Other-than-

 

 

 

 

 

 

 

Gross

 

Gross

 

temporary

 

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

impairments in

 

 

 

 

 

cost

 

gains (1)

 

losses (1)

 

AOCI (2)

 

Fair value

 

 

 

(in millions)

 

September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

935.6

 

$

38.0

 

$

 

$

 

$

973.6

 

Non-U.S. government and agencies

 

975.3

 

227.9

 

1.6

 

 

1,201.6

 

States and political subdivisions

 

2,999.9

 

251.0

 

2.8

 

 

3,248.1

 

Corporate

 

32,210.4

 

3,076.1

 

390.6

 

19.5

 

34,876.4

 

Residential mortgage-backed pass-through securities

 

3,034.6

 

230.8

 

0.1

 

 

3,265.3

 

Commercial mortgage-backed securities

 

4,115.9

 

211.7

 

287.8

 

201.4

 

3,838.4

 

Collateralized debt obligations

 

439.9

 

4.7

 

57.1

 

6.7

 

380.8

 

Other debt obligations

 

3,745.6

 

69.8

 

(22.6

)

88.3

 

3,749.7

 

Total fixed maturities, available-for-sale

 

$

48,457.2

 

$

4,110.0

 

$

717.4

 

$

315.9

 

$

51,533.9