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EX-31.1 - EXHIBIT 31.1 - Symetra Financial CORPsya-20150630exhibit311.htm
EX-31.2 - EXHIBIT 31.2 - Symetra Financial CORPsya-20150630exhibit312.htm
EX-32.2 - EXHIBIT 32.2 - Symetra Financial CORPsya-20150630exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - Symetra Financial CORPsya-20150630exhibit321.htm
EX-10.1 - EXHIBIT 10.1 - Symetra Financial CORPsya-20150630exhibit101.htm


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-33808
SYMETRA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
Delaware
 
20-0978027
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
777 108th Avenue NE, Suite 1200
Bellevue, Washington 98004
(Address of principal executive offices, including zip code)
(425) 256-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of July 31, 2015, the Registrant had 116,134,057 common voting shares outstanding, with a par value of $0.01 per share.




TABLE OF CONTENTS
 

2



Unless the context otherwise requires, references in this quarterly report on Form 10-Q to "we," "our," "us" and "the Company" are to Symetra Financial Corporation together with its subsidiaries. References to "Symetra" refer to Symetra Financial Corporation on a stand-alone, non-consolidated basis.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of current or historical facts, included or referenced in this report that address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. The words "may," "will," "believe," "intend," "plan," "expect," "anticipate," "project," "estimate," "predict," "potential" and similar expressions also are intended to identify forward-looking statements. These forward-looking statements may include, among others, statements with respect to the Company's:
estimates or projections of revenues, net income (loss), net income (loss) per share, adjusted operating income (loss), adjusted operating income (loss) per share, market share or other financial forecasts, as well as statements describing factors and conditions that might affect those forecasts;
trends in operations, financial performance and financial condition;
financial and operating targets or plans;
business and growth strategy, including prospective products, services and distribution partners, including statements about management’s intentions regarding those strategies; and
initiatives, such as our previously announced stock repurchase program, that are intended or expected to impact our financial condition, results of operations, and liquidity and capital resources.
These statements are based on various assumptions and analyses made by the Company in light of information currently known to management, and considering management's experience and perception of historical trends, current conditions and expected future developments, as well as other factors believed to be appropriate under the circumstances. Whether actual results and developments will conform to our expectations and predictions is subject to a number of risks, uncertainties and contingencies that could cause actual results to differ materially from expectations, or that could cause management to deviate from currently expected or intended courses of actions, including, among others:
effects of fluctuations in interest rates, including a prolonged low interest rate environment or a rapidly rising interest rate environment, as well as management’s ability to anticipate and timely respond to any such fluctuations;
general economic, market or business conditions, including economic downturns or other adverse conditions in the global and domestic capital and credit markets;
effects of significant increases in corporate refinance activity, including bond prepayments;
performance of our investment portfolio;
continued availability of quality commercial mortgage loan investments and our continued capacity to invest in commercial mortgage loans;
our ability to successfully execute on our strategies;
accuracy and adequacy of our recorded reserves, including the actuarial and other assumptions upon which those reserves are established, adjusted and maintained;
persistency of our inforce blocks of business;
deviations from assumptions used in setting prices for insurance and annuity products, or establishing cash flow testing reserves;
continued viability of certain products under various economic, regulatory and other conditions;
market pricing and competitive trends related to insurance products and services;
effects of implementation of the Patient Protection and Affordable Care Act (PPACA), including the direct effects upon our business, but also including the effects upon our competitors and our customers;
changes in assumptions that affect the timing of amortization of our deferred policy acquisition costs and deferred sales inducements;
financial strength or credit ratings changes, particularly ours but also of other companies in our industry sector;

3



retention of our key personnel and distribution partners;
availability and cost of capital and financing;
adequacy and collectibility of reinsurance that we have purchased, as well as the continued availability and cost of reinsurance coverage;
continued availability of tax credit investments, and the continuation of current tax treatment of such investments;
changes in laws or regulations, or their interpretation, including those that could increase our business costs, reserve levels and required capital levels, or that could restrict the manner in which we do business;
effects of the U.S. Department of Labor’s proposed rule expanding the circumstances in which a person is considered a fiduciary with respect to distribution of IRAs and employer-sponsored retirement plans, including the effects upon our distributors, competitors and customers;
ability of subsidiaries to pay dividends to Symetra;
our ability to implement effective risk management policies and procedures, including hedging strategies;
our ability to maintain adequate telecommunications, information technology, or other operational systems, including during the transition of IT services to a combination of new service providers and internal management;
our ability to prevent or timely detect and remediate any unauthorized access to or disclosure of customer information and other sensitive business data;
initiation of regulatory investigations or litigation against us and the results of any regulatory proceedings;
effects of changes in national monetary and fiscal policy;
effects of implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd Frank Act); and
the risks that are described in Part II, Item 1A — "Risk Factors" in this report; and Part I, Item 1A — "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014.
Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company or its business or operations. We assume no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise.

4



PART I – Financial Information
Item 1. Condensed Financial Statements
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data) 
 
As of  
 June 30, 2015
 
As of  
 December 31, 2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Investments:
 
 
 
Available-for-sale securities:
 
 
 
Fixed maturities, at fair value (amortized cost: $24,635.4 and $23,646.5, respectively)
$
25,938.4

 
$
25,379.4

Marketable equity securities, at fair value (cost: $85.3 and $112.9, respectively)
92.4

 
120.5

Trading securities:
 
 
 
Marketable equity securities, at fair value (cost: $474.9 and $453.4, respectively)
538.7

 
532.0

Mortgage loans, net
4,431.1

 
4,130.1

Policy loans
60.0

 
61.9

Investments in limited partnerships (includes $57.0 and $71.5 at fair value, respectively)
280.1

 
309.9

Other invested assets (includes $98.3 and $95.8 at fair value, respectively)
102.9

 
100.5

Total investments
31,443.6

 
30,634.3

Cash and cash equivalents
300.1

 
158.8

Accrued investment income
304.6

 
304.9

Reinsurance recoverables
341.3

 
328.7

Deferred policy acquisition costs
490.8

 
395.1

Receivables and other assets
255.6

 
230.1

Separate account assets
933.1

 
949.8

Total assets
$
34,069.1

 
$
33,001.7

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Funds held under deposit contracts
$
27,824.4

 
$
26,602.6

Future policy benefits
424.4

 
415.9

Policy and contract claims
167.6

 
141.8

Other policyholders' funds
134.8

 
115.7

Notes payable
697.4

 
697.2

Deferred income tax liabilities, net
244.6

 
396.7

Other liabilities
472.6

 
321.4

Separate account liabilities
933.1

 
949.8

Total liabilities
30,898.9

 
29,641.1

Commitments and contingencies (Note 10)

 

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

 

Common stock, $0.01 par value; 750,000,000 shares authorized; 125,187,360 issued and 116,134,057 outstanding as of June 30, 2015; 124,850,754 issued and 115,797,451 outstanding as of December 31, 2014
1.2

 
1.2

Additional paid-in capital
1,474.3

 
1,469.5

Treasury stock, at cost; 9,053,303 shares as of both June 30, 2015 and December 31, 2014
(134.6
)
 
(134.6
)
Retained earnings
1,077.6

 
1,033.9

Accumulated other comprehensive income, net of taxes
751.7

 
990.6

Total stockholders' equity
3,170.2

 
3,360.6

Total liabilities and stockholders' equity
$
34,069.1

 
$
33,001.7

See accompanying notes.

5



CONSOLIDATED STATEMENTS OF INCOME
(In millions, except share and per share data)
(Unaudited)
 
 
For the Three Months Ended 
 June 30,
 
For the Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Premiums
$
178.8

 
$
154.7

 
$
359.1

 
$
308.5

Net investment income
330.4

 
319.0

 
654.4

 
643.4

Policy fees, contract charges, and other
54.4

 
48.1

 
106.0

 
94.7

Net realized gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on securities
(3.8
)
 
(1.4
)
 
(12.8
)
 
(2.5
)
Less: portion recognized in other comprehensive income (loss)
1.2

 

 
2.2

 

Net impairment losses on securities recognized in earnings
(2.6
)
 
(1.4
)
 
(10.6
)
 
(2.5
)
Other net realized gains (losses)
(26.0
)
 
26.7

 
(24.2
)
 
48.5

Net realized gains (losses)
(28.6
)
 
25.3

 
(34.8
)
 
46.0

Total revenues
535.0

 
547.1

 
1,084.7

 
1,092.6

Benefits and expenses:
 
 
 
 
 
 
 
Policyholder benefits and claims
138.2

 
110.1

 
280.3

 
211.3

Interest credited
242.9

 
236.3

 
478.1

 
470.5

Other underwriting and operating expenses
100.0

 
92.6

 
199.2

 
180.5

Interest expense
11.0

 
8.3

 
22.2

 
16.5

Amortization of deferred policy acquisition costs
22.7

 
16.6

 
44.3

 
36.5

Total benefits and expenses
514.8

 
463.9

 
1,024.1

 
915.3

Income from operations before income taxes
20.2

 
83.2

 
60.6

 
177.3

Provision (benefit) for income taxes:
 
 
 
 
 
 
 
Current
7.5

 
17.4

 
14.0

 
27.5

Deferred
(18.5
)
 
(5.7
)
 
(23.4
)
 
(1.0
)
Total provision (benefit) for income taxes
(11.0
)
 
11.7

 
(9.4
)
 
26.5

Net income
$
31.2

 
$
71.5

 
$
70.0

 
$
150.8

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.62

 
$
0.60

 
$
1.29

Diluted
$
0.27

 
$
0.62

 
$
0.60

 
$
1.29

Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
116,126,572

 
115,960,740

 
116,013,800

 
116,706,421

Diluted
116,129,915

 
115,964,207

 
116,017,226

 
116,710,475

Cash dividends declared per common share
$
0.11

 
$
0.10

 
$
0.22

 
$
0.20

See accompanying notes.

6



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
 
 
For the Three Months Ended 
 June 30,
 
For the Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
31.2

 
$
71.5

 
$
70.0

 
$
150.8

Other comprehensive income (loss), net of taxes and reclassification adjustments:
 
 
 
 
 
 
 
Changes in unrealized gains (losses) on available-for-sale securities (net of taxes of $(236.4), $119.3, $(149.5) and $246.3)
(438.9
)
 
221.3

 
(277.5
)
 
457.2

Other-than-temporary impairments on fixed maturities not related to credit losses (net of taxes of $(0.4), $0.0, $(0.8) and $0.0)
(0.8
)
 

 
(1.4
)
 

Impact of net unrealized (gains) losses on deferred policy acquisition costs and deferred sales inducements (net of taxes of $35.9, $(17.0), $19.5 and $(28.8))
66.6

 
(31.7
)
 
36.0

 
(53.5
)
Impact of cash flow hedges (net of taxes of $(15.0), $(1.8), $2.2 and $(3.6))
(28.0
)
 
(3.3
)
 
4.0

 
(6.7
)
Other comprehensive income (loss)
(401.1
)
 
186.3

 
(238.9
)
 
397.0

Total comprehensive income (loss)
$
(369.9
)
 
$
257.8

 
$
(168.9
)
 
$
547.8

See accompanying notes.

7



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
(Unaudited)
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders'
Equity
Balances as of January 1, 2014
$
1.2

 
$
1,464.6

 
$
(93.4
)
 
$
975.9

 
$
593.6

 
$
2,941.9

Net income

 

 

 
150.8

 

 
150.8

Other comprehensive income (loss)

 

 

 

 
397.0

 
397.0

Stock-based compensation

 
3.4

 

 

 

 
3.4

Shares repurchased

 

 
(41.2
)
 

 

 
(41.2
)
Dividends declared

 

 

 
(23.3
)
 

 
(23.3
)
Balances as of June 30, 2014
$
1.2

 
$
1,468.0

 
$
(134.6
)
 
$
1,103.4

 
$
990.6

 
$
3,428.6

Balances as of January 1, 2015
$
1.2

 
$
1,469.5

 
$
(134.6
)
 
$
1,033.9

 
$
990.6

 
$
3,360.6

Net income

 

 

 
70.0

 

 
70.0

Other comprehensive income (loss)

 

 

 

 
(238.9
)
 
(238.9
)
Stock-based compensation

 
4.8

 

 

 

 
4.8

Dividends declared

 

 

 
(26.3
)
 

 
(26.3
)
Balances as of June 30, 2015
$
1.2

 
$
1,474.3

 
$
(134.6
)
 
$
1,077.6

 
$
751.7

 
$
3,170.2

See accompanying notes.

8



CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
For the Six Months Ended 
 June 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
70.0

 
$
150.8

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized (gains) losses
34.8

 
(46.0
)
Accretion and amortization of invested assets, net
55.7

 
44.0

Accrued interest on fixed maturities
(5.4
)
 
(6.0
)
Amortization and depreciation
11.0

 
12.4

Deferred income tax provision (benefit)
(23.4
)
 
(1.0
)
Interest credited on deposit contracts
478.1

 
470.5

Mortality and expense charges and administrative fees
(77.0
)
 
(66.5
)
Changes in:
 
 
 
Accrued investment income
0.3

 
(0.3
)
Deferred policy acquisition costs, net
(58.5
)
 
(44.3
)
Future policy benefits
8.5

 
7.4

Policy and contract claims
25.8

 
(3.2
)
Current income taxes
(12.8
)
 
(22.8
)
Other assets and liabilities
(4.0
)
 
(13.1
)
Other, net
2.5

 
2.3

Total adjustments
435.6

 
333.4

Net cash provided by (used in) operating activities
505.6

 
484.2

Cash flows from investing activities
 
 
 
Purchases of:
 
 
 
Fixed maturities and marketable equity securities
(3,286.7
)
 
(2,934.3
)
Other invested assets and investments in limited partnerships
(46.7
)
 
(49.8
)
Issuances of mortgage loans
(471.0
)
 
(321.3
)
Maturities, calls, paydowns, and other repayments
934.8

 
872.2

Sales of:
 
 
 
Fixed maturities and marketable equity securities
1,481.7

 
1,368.9

Other invested assets and investments in limited partnerships
35.4

 
25.4

Repayments of mortgage loans
170.1

 
118.9

Other, net
1.3

 
8.8

Net cash provided by (used in) investing activities
(1,181.1
)
 
(911.2
)
Cash flows from financing activities
 
 
 
Policyholder account balances:
 
 
 
Deposits
1,842.9

 
1,503.0

Withdrawals
(1,002.6
)
 
(962.6
)
Cash dividends paid on common stock
(25.5
)
 
(23.3
)
Shares repurchased

 
(41.2
)
Other, net
2.0

 
(6.9
)
Net cash provided by (used in) financing activities
816.8

 
469.0

Net increase (decrease) in cash and cash equivalents
141.3

 
42.0

Cash and cash equivalents at beginning of period
158.8

 
76.0

Cash and cash equivalents at end of period
$
300.1

 
$
118.0

Supplemental disclosures of cash flow information
 
 
 
Non-cash transactions during the period:
 
 
 
Fixed maturities exchanges
$
84.8

 
$
67.4

Investments in limited partnerships and capital obligations incurred
5.5

 
4.1

See accompanying notes.

9

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except share, per share and percentage data, unless otherwise stated)
(Unaudited)


1. Description of Business
Symetra Financial Corporation is a Delaware corporation that, through its subsidiaries, offers products and services that serve the retirement, employment-based benefits and life insurance markets. These products and services are marketed through financial institutions, broker-dealers, benefits consultants, and independent agents and advisors in all states and the District of Columbia. The Company's principal products include fixed, fixed indexed and variable deferred annuities, single premium immediate annuities, medical stop-loss insurance, limited benefit medical insurance, group life and disability income (DI) insurance, individual life insurance and institutional life insurance including bank-owned life insurance (BOLI) and variable corporate owned life insurance (COLI). The Company also services its block of structured settlement annuities.
The accompanying interim condensed financial statements include, on a consolidated basis, the accounts of Symetra Financial Corporation and its subsidiaries, which are wholly-owned and collectively referred to as "Symetra" or "the Company."
2. Summary of Significant Accounting Policies
The interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP), including the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that may affect the amounts reported in the interim condensed consolidated financial statements and accompanying notes. These interim condensed consolidated financial statements are unaudited and in management's opinion include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior year financial information to conform to the current period presentation.
The provision (benefit) for income taxes on the consolidated statements of income reflects the Company's estimated effective tax rate for the year. The difference between this rate and the U.S. federal income tax rate of 35% was primarily due to benefits from the Company's tax credit investments.
These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. Financial results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2015.

10



Accounting Pronouncements
Standard
 
Description
 
Date of adoption / effective date
 
Effect on the financial statements or other significant matters
Accounting Pronouncements Newly Adopted
Update No. 2014-01, Investments (Topic 323) – Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects

 
This standard provides companies with the option to elect the proportional method of amortization for qualified affordable housing (LIHTC) investments if certain criteria are met. Under this method, a company would amortize the cost of its investment in proportion to the tax credits and other tax benefits received. Amortization would be presented as a component of income tax expense. The standard does not apply to other types of tax credit investments.
 
January 1, 2015
 
The Company adopted the standard but did not elect the proportional method of amortization for its LIHTC investments. The Company has included the required disclosures about such investments in Note 4.
Accounting Pronouncements Not Yet Adopted
Update No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement 

 
This standard provides companies with guidance on how to account for a cloud computing arrangement including a software license. Under the standard, if a cloud computing arrangement includes a software license, a company should account for the fees associated with the software license consistent with the acquisition of other software licenses. If the cloud computing arrangement does not include a software license, it should be accounted for as a service contract.
 
January 1, 2016.
Companies may adopt the standard prospectively or retrospectively, and early adoption is permitted.
 
The Company is currently evaluating the impact of the standard on its consolidated financial statements and its plans for adoption.
Update No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
 
This standard amends disclosure requirements for companies that use the practical expedient to measure the fair value of certain investments using the net asset value per share. Under the standard, companies are no longer required to categorize fair value measurements for these investments in the fair value hierarchy.
 
January 1, 2016.
Companies must adopt this presentation retrospectively, and early adoption is permitted.
 
Upon adoption, the Company will apply the new disclosure requirements to its investments in limited partnerships that are valued using the practical expedient.
Update No. 2015-09, Financial Services - Insurance (Topic 944): Disclosures about Short-Duration Contracts
 
This standard amends disclosure requirements for the liability for unpaid claims and claim adjustment expenses on short-duration contracts for insurance entities. Under the standard, companies must include certain additional quantitative and qualitative information about these liabilities in its financial statements.
 
January 1, 2016 for annual disclosures; January 1, 2017 for interim disclosures.
Companies must present information retrospectively, and early adoption is permitted.
 
Upon adoption, the Company will apply the new disclosure requirements to its short duration contracts, which are primarily related to employment-based benefit products.
3. Earnings Per Share
Basic earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period, adjusted for the potential issuance of common stock if dilutive.
Participating securities, which include restricted stock issued to the Company's employees, are those for which the instrument holders are entitled to receive any dividends declared on the common stock concurrently with the holders of

11

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except share, per share and percentage data, unless otherwise stated)
(Unaudited)

outstanding shares of common stock, on a one-to-one basis. Participating securities are included in basic and diluted earnings per share, based on the application of the two-class method, for the portion of the period for which the securities were outstanding.
For both the three and six months ended June 30, 2015 and 2014, 2,650,000 stock options were excluded from the computation of diluted earnings per share, based on the application of the treasury stock method, because they were anti-dilutive.
The following table presents information relating to the Company's calculations of basic and diluted earnings per share:
 
For the Three Months Ended 
 June 30,
 
For the Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net income
$
31.2

 
$
71.5

 
$
70.0

 
$
150.8

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding — basic
116,126,572

 
115,960,740

 
116,013,800

 
116,706,421

Add: dilutive effect of certain equity instruments
3,343

 
3,467

 
3,426

 
4,054

Weighted-average common shares outstanding — diluted
116,129,915

 
115,964,207

 
116,017,226

 
116,710,475

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.62

 
$
0.60

 
$
1.29

Diluted
$
0.27

 
$
0.62

 
$
0.60

 
$
1.29

 
4. Investments
The following tables summarize the Company's available-for-sale fixed maturities and marketable equity securities:

Cost or
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value
As of June 30, 2015







Fixed maturities:







U.S. government and agencies
$
387.4

 
$
4.7

 
$
(1.4
)
 
$
390.7

State and political subdivisions
851.5

 
37.1

 
(1.8
)
 
886.8

Corporate securities
18,881.2

 
1,191.7

 
(150.9
)
 
19,922.0

Residential mortgage-backed securities
2,585.7

 
144.9

 
(10.4
)
 
2,720.2

Commercial mortgage-backed securities
1,151.4

 
55.5

 
(3.6
)
 
1,203.3

Collateralized loan obligations
235.5

 
0.8

 
(2.0
)
 
234.3

Other debt obligations
542.7

 
39.4

 
(1.0
)
 
581.1

Total fixed maturities
24,635.4

 
1,474.1

 
(171.1
)
 
25,938.4

Marketable equity securities, available-for-sale
85.3

 
8.5

 
(1.4
)
 
92.4

Total
$
24,720.7

 
$
1,482.6

 
$
(172.5
)
 
$
26,030.8


12

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except share, per share and percentage data, unless otherwise stated)
(Unaudited)

 
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
As of December 31, 2014
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government and agencies
$
404.8

 
$
6.1

 
$
(1.0
)
 
$
409.9

State and political subdivisions
789.7

 
40.1

 
(0.6
)
 
829.2

Corporate securities
17,768.7

 
1,511.5

 
(87.7
)
 
19,192.5

Residential mortgage-backed securities
2,772.0

 
155.9

 
(6.5
)
 
2,921.4

Commercial mortgage-backed securities
1,262.6

 
73.0

 
(1.7
)
 
1,333.9

Other debt obligations
648.7

 
44.5

 
(0.7
)
 
692.5

Total fixed maturities
23,646.5

 
1,831.1

 
(98.2
)
 
25,379.4

Marketable equity securities, available-for-sale
112.9

 
8.6

 
(1.0
)
 
120.5

Total
$
23,759.4

 
$
1,839.7

 
$
(99.2
)
 
$
25,499.9

The following tables summarize gross unrealized losses and fair values of the Company's available-for-sale investments. The tables are aggregated by investment category and present separately those securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more.
 
Less Than 12 Months
 
12 Months or More
 
Fair
Value
 
Gross
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Gross
Unrealized
Losses
 
# of
Securities
As of June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$
106.7

 
$
(1.4
)
 
11

 
$

 
$

 

State and political subdivisions
97.7

 
(1.6
)
 
23

 
6.5

 
(0.2
)
 
3

Corporate securities
4,326.2

 
(118.6
)
 
370

 
318.7

 
(32.3
)
 
44

Residential mortgage-backed securities
325.8

 
(5.3
)
 
53

 
123.2

 
(5.1
)
 
25

Commercial mortgage-backed securities
141.9

 
(2.4
)
 
11

 
15.8

 
(1.2
)
 
5

Collateralized loan obligations
82.2

 
(2.0
)
 
11

 

 

 

Other debt obligations
76.5

 
(1.0
)
 
7

 

 

 

Total fixed maturities
5,157.0

 
(132.3
)
 
486

 
464.2

 
(38.8
)
 
77

Marketable equity securities, available-for-sale
18.0

 
(1.1
)
 
13

 
3.8

 
(0.3
)
 
5

Total
$
5,175.0

 
$
(133.4
)
 
499

 
$
468.0

 
$
(39.1
)
 
82


13

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except share, per share and percentage data, unless otherwise stated)
(Unaudited)

 
 
Less Than 12 Months
 
12 Months or More
 
Fair
Value
 
Gross
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Gross
Unrealized
Losses
 
# of
Securities
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$
38.4

 
$
(0.2
)
 
7

 
$
59.9

 
$
(0.8
)
 
2

State and political subdivisions
9.3

 
(0.1
)
 
3

 
39.3

 
(0.5
)
 
12

Corporate securities
1,348.8

 
(44.0
)
 
235

 
1,064.0

 
(43.7
)
 
75

Residential mortgage-backed securities
191.5

 
(1.1
)
 
15

 
241.0

 
(5.4
)
 
40

Commercial mortgage-backed securities
54.9

 
(0.2
)
 
4

 
52.8

 
(1.5
)
 
8

Other debt obligations
81.7

 
(0.2
)
 
10

 
29.9

 
(0.5
)
 
3

Total fixed maturities
1,724.6

 
(45.8
)
 
274

 
1,486.9

 
(52.4
)
 
140

Marketable equity securities, available-for-sale
14.9

 
(0.7
)
 
11

 
3.3

 
(0.3
)
 
7

Total
$
1,739.5

 
$
(46.5
)
 
285

 
$
1,490.2

 
$
(52.7
)
 
147

Based on National Association of Insurance Commissioners (NAIC) ratings as of June 30, 2015 and December 31, 2014, the Company held below-investment-grade fixed maturities with fair values of $1,142.9 and $1,126.6, respectively, and amortized costs of $1,122.9 and $1,111.9, respectively. These holdings amounted to 4.4% of the Company's investments in fixed maturities at fair value as of both June 30, 2015 and December 31, 2014.
The following table summarizes the amortized cost and fair value of fixed maturities as of June 30, 2015, by contractual years to maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
 
Amortized
Cost
 
Fair
Value
One year or less
$
691.3

 
$
700.8

Over one year through five years
5,851.9

 
6,258.0

Over five years through ten years
9,684.1

 
9,891.6

Over ten years
3,980.6

 
4,440.6

Residential mortgage-backed securities
2,585.7

 
2,720.2

Commercial mortgage-backed securities
1,151.4

 
1,203.3

Collateralized loan obligations
235.5

 
234.3

Other asset-backed securities
454.9

 
489.6

Total fixed maturities
$
24,635.4

 
$
25,938.4


14

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except share, per share and percentage data, unless otherwise stated)
(Unaudited)

The following table summarizes the Company's net investment income:
 
For the Three Months Ended 
 June 30,
 
For the Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Fixed maturities
$
285.0

 
$
275.5

 
$
563.3

 
$
559.0

Marketable equity securities
4.5

 
5.0

 
8.8

 
9.0

Mortgage loans
61.4

 
51.5

 
118.5

 
101.6

Policy loans
0.8

 
1.0

 
1.6

 
1.7

Investments in limited partnerships (1)
(13.5
)
 
(6.6
)
 
(25.7
)
 
(13.3
)
Other
1.1

 
1.1

 
5.4

 
2.2

Total investment income
339.3

 
327.5

 
671.9

 
660.2

Investment expenses
(8.9
)
 
(8.5
)
 
(17.5
)
 
(16.8
)
Net investment income
$
330.4

 
$
319.0

 
$
654.4

 
$
643.4

____________________
 
 
 
 
 
 
 
(1)
This includes net gains (losses) on changes in the fair value of investments held as of period end for which the Company has elected the fair value option, totaling $(5.4) and $(0.3) for the three months ended June 30, 2015 and 2014, respectively, and $(10.5) and $(0.3) for the six months ended June 30, 2015 and 2014, respectively.

 The following table summarizes the Company's net realized gains (losses):
 
For the Three Months Ended 
 June 30,
 
For the Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Fixed maturities:
 
 
 
 
 
 
 
Gross gains on sales
$
3.5

 
$
10.8

 
$
7.9

 
$
19.5

Gross losses on sales
(10.2
)
 
(0.6
)
 
(14.7
)
 
(2.4
)
Net impairment losses recognized in earnings
(2.6
)
 
(1.4
)
 
(10.6
)
 
(2.5
)
Other (1)
(2.4
)
 
(1.2
)
 
(2.5
)
 
(2.4
)
Total fixed maturities
(11.7
)
 
7.6

 
(19.9
)
 
12.2

Marketable equity securities, trading (2)
(12.4
)
 
21.6

 
(4.2
)
 
41.3

Investments in limited partnerships (3)
(8.9
)
 
(3.1
)
 
(12.6
)
 
(6.7
)
Other (4)
7.3

 
0.4

 
1.6

 
(1.0
)
Deferred policy acquisition costs and deferred sales inducement adjustment
(2.9
)
 
(1.2
)
 
0.3

 
0.2

Net realized gains (losses)
$
(28.6
)
 
$
25.3

 
$
(34.8
)
 
$
46.0

____________________
 
 
 
 
 
 
 
 
(1)
This includes net gains (losses) on calls and redemptions, and changes in the fair value of the Company's convertible securities.
(2)
This includes net gains (losses) on changes in the fair value of trading securities held as of period end totaling $(13.3) and $18.8 for the three months ended June 30, 2015 and 2014, respectively, and $(13.2) and $31.4 for the six months ended June 30, 2015 and 2014, respectively.
(3)
This reflects impairments related to tax credit investments and, for the three and six months ended June 30, 2015, includes a $(3.9) impairment of an alternative investment.
(4)
This includes net gains (losses) on derivatives not designated for hedge accounting and other instruments, including an embedded derivative related to the Company's fixed indexed annuity (FIA) product.
Other-Than-Temporary Impairments (OTTI)
The Company's review of available-for-sale investment securities for OTTI includes both quantitative and qualitative criteria. Quantitative criteria include the length of time and amount that each security is in an unrealized loss position (i.e., is underwater) and, for fixed maturities, whether expected future cash flows indicate that a credit loss exists.
While all securities are monitored for impairment, the Company's experience indicates that, under normal market conditions, securities for which the cost or amortized cost exceeds fair value by less than 20% do not typically represent a significant risk of impairment and, often, fair values recover over time as the factors that caused the declines improve. If the estimated fair value has declined and remained below cost or amortized cost by 20% or more for at least six months, the Company further analyzes the decrease in fair value to determine whether it is an other-than-temporary decline. To make this determination for each security, the Company considers, among other factors:

15

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except share, per share and percentage data, unless otherwise stated)
(Unaudited)

Extent and duration of the decline in fair value below cost or amortized cost;
Financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations, earnings potential or compliance with terms and covenants of the security;
Changes in the financial condition of the security's underlying collateral;
Any downgrades of the security by a rating agency;
Nonpayment of scheduled interest, or the reduction or elimination of dividends;
Other indications that a credit loss has occurred; and
For fixed maturities, the Company's intent to sell or whether it is more likely than not the Company will be required to sell the fixed maturity prior to recovery of its amortized cost, considering any regulatory developments, prepayment or call notifications and the Company's liquidity needs.
For fixed maturities, the Company concludes that an OTTI has occurred if a security is underwater and there is an intent or requirement to sell the security or if the present value of expected cash flows is less than the amortized cost of the security (i.e., a credit loss exists). Where a credit loss exists, the Company isolates the portion of the total unrealized loss related to the credit loss, which is recognized in realized gains (losses) on the consolidated statements of income, and the remainder of the unrealized loss is recorded as a non-credit OTTI through other comprehensive income. If there is an intent or requirement to sell the security, the entire unrealized loss is recognized in realized gains (losses).
To determine the amount of a credit loss, the Company calculates the recovery value by discounting its estimate of future cash flows from the security. The discount rate is the original effective yield for corporate securities or current effective yield for mortgage-backed and other structured securities.
Determination of Credit-Related OTTI on Corporate Securities
To determine the recovery value for a corporate security, the Company performs an analysis including, but not limited to, the following:
Expected cash flows of the issuer;
Fundamentals of the industry in which the issuer operates;
Fundamentals of the issuer to determine what the Company would recover if the issuer were to file for bankruptcy or restructure its debt outside of bankruptcy;
Expectations regarding defaults and recovery rates;
Changes to the rating of the security by a rating agency;
Third-party guarantees; and
Additional available market information.
Determination of Credit-Related OTTI on Structured Securities
To determine the recovery value for a structured security, including residential mortgage-, commercial mortgage- and other asset-backed securities, the Company performs an analysis including, but not limited to, the following:
Expected cash flows from the security;
Creditworthiness;
Delinquency, debt-service coverage, and loan-to-value ratios on the underlying collateral;
Underlying collateral values, vintage year and level of subordination;
Geographic concentrations; and
Susceptibility to prepayment and anti-selection due to changes in the interest rate environment.

16

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except share, per share and percentage data, unless otherwise stated)
(Unaudited)

The following table presents the severity and duration of the gross unrealized losses on the Company's underwater available-for-sale fixed maturities, after the recognition of OTTI:
 
As of June 30, 2015
 
As of December 31, 2014
 
Fair
Value
 
Gross
Unrealized
Losses
 
# of Securities
 
Fair
Value
 
Gross
Unrealized
Losses
 
# of Securities
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
Underwater by 20% or more:
 
 
 
 
 
 
 
 
 
 
 
Less than 6 consecutive months
$
39.3

 
$
(10.4
)
 
14

 
$
38.5

 
$
(17.3
)
 
33

6 consecutive months or more
13.5

 
(9.3
)
 
9

 
4.5

 
(2.8
)
 
8

Total underwater by 20% or more
52.8

 
(19.7
)
 
23

 
43.0

 
(20.1
)
 
41

All other underwater fixed maturities
5,568.4

 
(151.4
)
 
540

 
3,168.5

 
(78.1
)
 
373

Total underwater fixed maturities
$
5,621.2

 
$
(171.1
)
 
563

 
$
3,211.5

 
$
(98.2
)
 
414

The Company reviewed its available-for-sale fixed maturities with unrealized losses as of June 30, 2015 in accordance with its impairment policy and determined, after the recognition of OTTI, that the remaining declines in fair value were temporary. The Company did not intend to sell its underwater securities, and it was not more likely than not that the Company will be required to sell the securities before recovery of cost or amortized cost, which may be maturity. This conclusion is supported by the Company's spread analyses, cash flow modeling and expected continuation of contractually required principal and interest payments.
Changes in the amount of credit-related OTTI recognized in net income where the portion related to other factors was recognized in other comprehensive income (OCI) were as follows:
 
For the Three Months Ended 
 June 30,
 
For the Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Balance, beginning of period
$
16.9

 
$
21.8

 
$
20.1

 
$
23.1

Increases recognized in the current period:
 
 
 
 
 
 
 
For which an OTTI was not previously recognized
0.4

 

 
0.9

 

For which an OTTI was previously recognized
1.0

 
1.3

 
1.7

 
1.3

Decreases attributable to:
 
 
 
 
 
 
 
Securities sold or paid down during the period
(0.6
)
 
(0.7
)
 
(5.0
)
 
(2.0
)
Previously recognized credit losses on securities impaired during the period due to a change in intent to sell (1)

 
(0.2
)
 

 
(0.2
)
Balance, end of period
$
17.7

 
$
22.2

 
$
17.7

 
$
22.2

____________________
 
 
 
 
 
 
 
(1)
Represents circumstances where the Company determined in the period that it intended to sell the security prior to recovery of its amortized cost.
Investments in Limited Partnerships — Affordable Housing Project Investments
The Company invests in limited partnerships that are established to fund low-income housing and other qualifying purposes, where the primary return on investment is in the form of income tax credits. These are collectively referred to as "tax credit investments," and the majority of the Company's investments in such partnerships relate to affordable housing project investments. As of June 30, 2015 and December 31, 2014, the Company's tax credit investments had carrying values of $223.1 and $238.4, respectively, of which $210.9 and $228.7 related to affordable housing project investments, respectively.
The Company's tax credit investments are primarily accounted for under the equity method and recorded at amortized cost. These investments are amortized based on the expected performance of the underlying partnership, with amortization recorded as a reduction to net investment income. When the carrying value of an investment exceeds the total amount of remaining tax benefits, the Company records an impairment loss, which is included in other net realized gains (losses). Although these investments decrease income on a pre-tax basis, the partnerships provide tax benefits that decrease the Company's income tax expense.

17

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except share, per share and percentage data, unless otherwise stated)
(Unaudited)

The following table sets forth the impact of affordable housing project investments on net income. These amounts do not include the impacts of the Company's holdings in other types of tax credit investments.
 
For the Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Amortization
$
(7.4
)
 
$
(5.9
)
 
$
(13.9
)
 
$
(12.1
)
Realized losses
(2.5
)
 
(1.5
)
 
(4.6
)
 
(2.2
)
Tax benefit from amortization and realized losses
3.5

 
2.6

 
6.5

 
5.0

Tax credits
11.3

 
11.9

 
22.6

 
23.7

Impact to net income
$
4.9

 
$
7.1

 
$
10.6

 
$
14.4

5. Mortgage Loans
The Company originates and manages a portfolio of mortgage loans which are secured by first-mortgage liens on income-producing commercial real estate, primarily in the retail, industrial and office building sectors. Loans are underwritten based on loan-to-value (LTV) ratios and debt-service coverage ratios (DSCR), as well as detailed market, property and borrower analyses. The Company's mortgage loan portfolio is considered a single portfolio segment and class of financing receivables, which is consistent with how the Company assesses and monitors the risk and performance of the portfolio. A large majority of these loans have personal guarantees, and all mortgaged properties are inspected annually.
The Company's mortgage loan portfolio is diversified by geographic region, loan size and scheduled maturity. As of June 30, 2015, the three states with the largest concentrations of the Company's commercial mortgage loans were California, primarily the Los Angeles area, Texas and Washington. Loans in these states comprised 29.0%, 10.9% and 8.0% of the total portfolio, respectively.
Allowance for Mortgage Loans
The allowance for losses on mortgage loans provides for the risk of credit loss inherent in the lending process. The allowance includes a portfolio reserve for probable losses incurred but not specifically identified and, as needed, specific reserves for impaired loans. The allowance for losses on mortgage loans is evaluated at each reporting period and adjustments are recorded when appropriate. To assist in its evaluation of the allowance for loan losses, the Company utilizes the following credit quality indicators to categorize its loans as lower, medium or higher risk:
Lower Risk Loans – Loans with an LTV ratio of less than 65%, and a DSCR of greater than 1.50.
Medium Risk Loans – Loans that have an LTV ratio of less than 65% but a DSCR below 1.50, or loans with an LTV ratio between 65% and 80% and a DSCR of greater than 1.50.
Higher Risk Loans – Loans with an LTV ratio greater than 80%, or loans which have an LTV ratio between 65% and 80% and a DSCR of less than 1.50.
Loans are specifically evaluated for impairment if the Company considers it probable that amounts due according to the terms of the loan agreement will not be collected, or the loan is modified in a troubled debt restructuring. The Company establishes specific reserves for these loans when the fair value is less than the carrying value.

18

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except share, per share and percentage data, unless otherwise stated)
(Unaudited)

The following table sets forth the Company's mortgage loans by risk category:
 
As of June 30, 2015
 
As of December 31, 2014
 
Carrying
Value
 
% of Total
 
Carrying
Value
 
% of Total
Lower risk
$
2,766.3

 
62.4
%
 
$
2,567.0

 
62.1
%
Medium risk
1,131.0

 
25.5

 
994.2

 
24.1

Higher risk
536.1

 
12.1

 
571.3

 
13.8

Credit quality indicator total
4,433.4

 
100.0
%
 
4,132.5

 
100.0
%
Loans specifically evaluated for impairment (1)
2.0

 
 
 
2.0

 
 
Other (2)
(4.3
)
 
 
 
(4.4
)
 
 
Total
$
4,431.1

 
 
 
$
4,130.1

 
 
________________
 
 
 
 
 
 
 
  
(1)
As of June 30, 2015 and December 31, 2014, reserve amounts of $0.2 were held for loans specifically evaluated for impairment.
(2)
Includes the allowance for loan losses and deferred fees and costs.
In developing the portfolio reserve for incurred but not specifically identified losses, the Company evaluates loans by risk category and considers past loan experience, commercial real estate market conditions, and third-party data for expected losses on loans with similar LTV ratios and DSCRs. Each loan's LTV ratio and DSCR is updated annually, primarily during the third quarter. In developing its provision for specifically identified loans, a market valuation on the collateral is performed to determine if a reserve is necessary.
As of June 30, 2015 and December 31, 2014, the balance of the Company's allowance for mortgage loan losses was $8.1. For the three and six months ended June 30, 2015 and 2014, no additional provisions or charge-offs were recorded.
Non-performing loans, defined generally as those in default, close to being in default or more than 90 days past due, are placed on non-accrual status. As of June 30, 2015, there were no loans considered non-performing. As of December 31, 2014, one loan with an outstanding balance of $1.5 was considered non-performing.
6. Derivative Instruments
The following table sets forth the fair value of the Company's derivative instruments, including embedded derivatives that primarily relate to the Company's FIA products. In the consolidated balance sheets, derivative contracts in an asset position are included in other invested assets, derivative contracts in a liability position are included in other liabilities, and embedded derivative liabilities are included in funds held under deposit contracts.
 
As of June 30, 2015
 
As of December 31, 2014
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
 
 
Assets
 
Liabilities
 
 
Assets
 
Liabilities
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
158.5

 
$
5.0

 
$

 
$
158.5

 
$
5.4

 
$

Foreign currency swaps
679.8

 
21.3

 
10.2

 
638.6

 
14.9

 
10.2

Total derivatives designated as hedges
$
838.3

 
$
26.3

 
$
10.2

 
$
797.1

 
$
20.3

 
$
10.2

Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
Equity index options
$
2,790.3

 
$
69.6

 
$

 
$
2,055.9

 
$
71.0

 
$
0.1

Foreign currency forwards
7.8

 

 
0.1

 
18.3

 
0.1

 

Embedded derivatives

 

 
296.3

 

 

 
230.1

Other derivatives
93.7

 
0.2

 
0.3

 
25.3

 
0.2

 
0.4

Total derivatives not designated as hedges
2,891.8

 
69.8

 
296.7

 
2,099.5

 
71.3

 
230.6

Total derivatives
$
3,730.1

 
$
96.1

 
$
306.9

 
$
2,896.6

 
$
91.6

 
$
240.8

Collateral Arrangements and Offsetting of Financial Instruments
The Company's derivative contracts are typically governed by an International Swaps and Derivatives Association (ISDA) Master Agreement, except for foreign currency forwards which do not require an ISDA. For each ISDA, the Company and the counterparty have also entered into a credit support annex (CSA) to reduce the risk of counterparty default in derivative

19

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except share, per share and percentage data, unless otherwise stated)
(Unaudited)

transactions by requiring the posting of cash collateral or other financial assets. The CSA requires either party to post collateral when net exposures from all derivative contracts between the parties exceed pre-determined contractual thresholds, which vary by counterparty. The amount of net exposure is the difference between the derivative contract's fair value and the fair value of the collateral held for such agreements with each counterparty. Collateral amounts required to be posted or received are determined daily based on the net exposure with each counterparty under a master netting agreement. The Company is also required to post initial and variation margin on certain centrally cleared instruments and, as a result, may have collateral posted related to derivatives in an asset position. The Company does not offset recognized collateral amounts pledged or received against the fair value amounts recognized for derivative contracts.
In the consolidated balance sheets, the Company recognizes cash collateral received in cash and cash equivalents, and the obligation to return cash collateral in other liabilities. Non-cash collateral received is not recognized in the consolidated balance sheets. In the event of default, the counterparty relinquishes claim to the assets pledged as collateral, and the Company recognizes the collateral as its own asset recorded at fair value, or, in the case of cash collateral, derecognizes its obligation to return collateral.
 
The following tables present the potential effect of netting arrangements by counterparty on the Company's consolidated balance sheets:
 
As of June 30, 2015
 
 
 
Gross Amount of Collateral (Received) Posted
 
 
 
Fair Value Presented in the
Balance Sheets
 
Financial
Instruments
 
Cash Collateral
 
Net Amount
Counterparty:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
A
$
12.0

 
$

 
$
(12.0
)
 
$

B (1)
19.6

 
4.0

 
(16.3
)
 
7.3

C
11.7

 

 
(11.7
)
 

D
9.6

 

 
(9.6
)
 

F
26.8

 

 
(26.8
)
 

Other
16.4

 

 
(13.9
)
 
2.5

Total derivative assets
$
96.1

 
$
4.0

 
$
(90.3
)
 
$
9.8

_______________________
 
 
 
 
 
 
 
(1) Amounts include financial instrument collateral of $4.0 posted by the Company to comply with regulatory requirements on certain centrally cleared instruments.
 
As of June 30, 2015
 
 
 
Gross Amount of Collateral Received (Posted)
 
 
 
Fair Value Presented in the
Balance Sheets
 
Financial
Instruments
 
Cash Collateral
 
Net Amount
Counterparty:
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
A
$
0.9

 
$

 
$

 
$
0.9

B
5.3

 

 
(0.1
)
 
5.2

C
1.0

 

 

 
1.0

E
2.1

 

 

 
2.1

Other
1.3

 

 

 
1.3

Total derivative liabilities (1)
$
10.6

 
$

 
$
(0.1
)
 
$
10.5

_______________________
 
 
 
 
 
 
 
(1)
Excludes embedded derivatives of $296.3 which have no counterparty.

20

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except share, per share and percentage data, unless otherwise stated)
(Unaudited)


 
As of December 31, 2014
 
 
 
Gross Amount of Collateral (Received) Posted
 
 
 
Fair Value Presented in the
Balance Sheets
 
Financial
Instruments
 
Cash Collateral
 
Net Amount
Counterparty:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
A
$
12.0

 
$

 
$
(12.0
)
 
$

B (1)
20.2

 
1.9

 
(13.9
)
 
8.2

C
12.0

 

 
(12.0
)
 

D
14.9

 

 
(14.9
)
 

F
24.0

 

 
(24.0
)
 

Other
8.5

 

 
(6.7
)
 
1.8

Total derivative assets
$
91.6

 
$
1.9

 
$
(83.5
)
 
$
10.0

_______________________
 
 
 
 
 
 
 
(1) Amounts include financial instrument collateral of $1.9 posted by the Company to comply with regulatory requirements on certain centrally cleared instruments.

 
As of December 31, 2014
 
 
 
Gross Amount of Collateral Received (Posted)
 
 
 
Fair Value Presented in the
Balance Sheets
 
Financial
Instruments
 
Cash Collateral
 
Net Amount
Counterparty:
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
A
$
1.2

 
$

 
$

 
$
1.2

B
6.7

 

 
(0.1
)
 
6.6

E
2.4

 

 

 
2.4

Other
0.4