Investments | 7 . INVESTMENT S Fixed Maturity Securities The following tables set forth amortized costs , gross unrealized gains and losses and fair values of the Company’s fixed maturity securities: June 30, 2015 Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In millions) Corporate bonds $ 6,986.8 $ 299.6 $ (62.3) $ 7,224.1 U.S. government and agency bonds 207.8 30.4 (0.1) 238.1 U.S. state and political subdivision bonds 134.6 8.7 (0.4) 142.9 Foreign government bonds 80.0 6.2 --- 86.2 Mortgage/asset-backed bonds 243.6 3.7 (1.7) 245.6 Total fixed maturity securities $ 7,652.8 $ 348.6 $ (64.5) $ 7,936.9 December 31, 2014 Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In millions) Corporate bonds $ 6,740.6 $ 366.5 $ (37.0) $ 7,070.1 U.S. government and agency bonds 223.2 35.6 (0.2) 258.6 U.S. state and political subdivision bonds 125.8 10.4 (0.1) 136.1 Foreign government bonds 58.4 6.5 --- 64.9 Mortgage/asset-backed bonds 242.0 4.1 (2.1) 244.0 Total fixed maturity securities $ 7,390.0 $ 423.1 $ (39.4) $ 7,773.7 The following table sets forth the amortized costs and fair values of the Company’s fixed maturity securities by contractual maturity : June 30, 2015 December 31, 2014 Amortized Fair Amortized Fair Cost Value Cost Value (In millions) Due in one year or less $ 619.3 $ 627.8 $ 649.0 $ 658.0 Due after one year through five years 2,912.0 3,049.6 3,060.8 3,215.4 Due after five years through ten years 3,042.2 3,083.9 2,847.9 2,916.7 Due after ten years 1,079.3 1,175.6 832.3 983.6 Total fixed maturity securities $ 7,652.8 $ 7,936.9 $ 7,390.0 $ 7,773.7 Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Callable bonds, excluding bonds with make-whole provisions and bonds with provisions that allow the borrower to prepay near maturity, represented 3.8 %, or $303.5 million, of the Company’s fixed maturity securities portfolio at June 30, 2015 . At June 30, 2015 , the Company did not have any direct exposure to sub-prime or Alt-A mortgages in its fixed maturity securities portfolio . Gross Unrealized Losses The following tables set forth the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position: June 30, 2015 Total Less than 12 months 12 or more months Number Amount Number Amount Number Amount (Dollars in millions) Unrealized losses: Corporate bonds 1,192 $ 62.3 1,064 $ 50.9 128 $ 11.4 U.S. government and agency bonds 3 0.1 --- --- 3 0.1 U.S. state and political subdivision bonds 9 0.4 9 0.4 --- --- Mortgage/asset-backed bonds 32 1.7 26 1.4 6 0.3 Total 1,236 $ 64.5 1,099 $ 52.7 137 $ 11.8 Fair market value of securities with unrealized losses: Corporate bonds 1,192 $ 2,232.9 1,064 $ 2,020.8 128 $ 212.1 U.S. government and agency bonds 3 2.4 --- --- 3 2.4 U.S. state and political subdivision bonds 9 21.2 9 21.2 --- --- Mortgage/asset-backed bonds 32 103.0 26 88.3 6 14.7 Total 1,236 $ 2,359.5 1,099 $ 2,130.3 137 $ 229.2 December 31, 2014 Total Less than 12 months 12 or more months Number Amount Number Amount Number Amount (Dollars in millions) Unrealized losses: Corporate bonds 956 $ 37.0 653 $ 19.9 303 $ 17.1 U.S. government and agency bonds 5 0.2 --- --- 5 0.2 U.S. state and political subdivision bonds 4 0.1 --- --- 4 0.1 Mortgage/asset-backed bonds 39 2.1 30 1.4 9 0.7 Total 1,004 $ 39.4 683 $ 21.3 321 $ 18.1 Fair market value of securities with unrealized losses: Corporate bonds 956 $ 1,646.0 653 $ 1,074.9 303 $ 571.1 U.S. government and agency bonds 5 6.4 --- --- 5 6.4 U.S. state and political subdivision bonds 4 6.9 --- --- 4 6.9 Mortgage/asset-backed bonds 39 117.2 30 87.3 9 29.9 Total 1,004 $ 1,776.5 683 $ 1,162.2 321 $ 614.3 The unrealized losses on the fixed maturity securities set forth above were partly due to increases in market interest rates subsequent to their purchase by the Company and have also been affected by overall economic factors. The Company expects the fair value of these fixed maturity securities to recover as the fixed maturity securities approach their maturity dates or sooner if market yields for such fixed maturity securities decline . The Company does not believe that any of the fixed maturity secu rities are impaired due to credit quality or due to any company or industry specific event. Based on management’s evaluation of the securities and the Company’s intent to hold th e securities , and as it is unlikely that the Company will be required to sell the securities, none of the unrealized losses summarized in this table are considered other-than-temporary. Commercial Mortgage Loans The Company underwrites mortgage loans on commercial pr operty throughout the United States. In addition to real estate collateral, the Company requires either partial or full recourse on most loans. At June 30, 2015 , the Company d id not have any direct exposure to sub-prime or Alt-A mortgages in its commerci al mortgage loan portfolio. The following table sets forth the commercial mortgage loan portfolio by property type, by geographic region within the U.S. and by U.S. state: June 30, 2015 December 31, 2014 Amount Percent Amount Percent (Dollars in millions) Property type: Retail $ 2,727.1 49.5 % $ 2,627.1 49.4 % Office 1,050.2 19.0 1,013.4 19.1 Industrial 1,032.7 18.7 1,001.5 18.8 Commercial 222.8 4.0 213.6 4.0 Hotel/motel 181.3 3.3 165.7 3.1 Apartment and other 300.6 5.5 299.8 5.6 Total commercial mortgage loans, net $ 5,514.7 100.0 % $ 5,321.1 100.0 % Geographic region*: Pacific $ 1,984.6 36.0 % $ 1,914.6 36.0 % South Atlantic 1,111.5 20.2 1,065.5 20.0 West South Central 719.8 13.1 676.9 12.7 Mountain 633.2 11.5 606.5 11.4 East North Central 476.6 8.6 466.0 8.8 Middle Atlantic 227.2 4.1 215.3 4.0 East South Central 189.2 3.4 188.7 3.6 West North Central 130.7 2.4 140.1 2.6 New England 41.9 0.7 47.5 0.9 Total commercial mortgage loans, net $ 5,514.7 100.0 % $ 5,321.1 100.0 % U.S. state: California $ 1,465.8 26.6 % $ 1,434.2 27.0 % Texas 670.3 12.2 623.4 11.7 Florida 334.7 6.1 309.4 5.8 Georgia 307.7 5.6 306.6 5.8 Other states 2,736.2 49.5 2,647.5 49.7 Total commercial mortgage loans, net $ 5,514.7 100.0 % $ 5,321.1 100.0 % * Geographic regions obtained from the American Council of Life Insurers Mortgage Loan Portfolio Profile. Due to the concentration of commercial mortgage loans in California, the Company could be exposed to potential losses as a result of an economic downturn in California as well as certain catastrophes, such as earthquakes and fires, which may affect the region. The carrying value of commercial mortgage loans represents the outstanding principal balance less a loan loss allowance for probable uncolle ctible amounts. The commercial mortgage loan loss allowance is estimated based on evaluating known and inherent risks in the loan portfolio and consists of a general and a specific loan loss allowance. Impairment Evaluation The Company monitors its commer cial mortgage loan portfolio for potential impairment by evaluating the portfolio and individual loans. Key factors that are monitored include : Loan loss experience. Delinquency history. Debt coverage ratio. Loan-to- value ratio. Refinancing and restructuri ng history. Request for payment forbearance history. If the analysis above indicates a loan might be impaired, it is further analyzed through the consideration of the following additional factors: Delinquency status. Foreclosure status. Restructuring status. Borrower history. If it is determined a loan is impaired, a specific loan loss allowance is recorded. General Loan Loss Allowance The general loan loss allowance is based on the Company’s analysis of factors including changes in the size and compo sition of the loan portfolio, debt coverage ratios, loan-to- value ratios, actual loan loss experience and individual loan analysis. Specific Loan Loss Allowance An impaired commercial mortgage loan is a loan where the Company does not expect to receive contractual principal and interest in accordance with the terms of the original loan agreement. A specific allowance for losses is recorded when a loan is considered to be impaired and it is probable that all amounts due will not be collected based on the terms of the original note . The Company also holds specific loan loss allowances on certain performing commercial mortgage loans that it continues to monitor and evaluate. Impaired commercial mortgage loans without specific allowances for losses are those for which the Company has determined that it remains probable that all amounts due will be collected although the timing or nature may be outside the original contractual terms. In addition, for impaired commercial mortgage loans, the Company evaluates th e cost to dispose of the underlying collateral, any significant out of pocket expenses the loan may incur and other quantitative information management has concerning the loan. Negotiated reductions of principal are generally written off against the allowa nce, and recoveries, if any, are credited to the allowance. The following table sets forth changes in the commercial mortgage loan loss allowance: Three Months Ended Six Months Ended June 30, June 30, 2015 2014 2015 2014 (In millions) Commercial mortgage loan loss allowance: Beginning balance $ 38.9 $ 43.5 $ 40.0 $ 43.6 Provision change (gain) loss (1.9) 0.5 (2.2) 2.2 (Charge-offs) recoveries, net (1.5) 0.4 (2.3) (1.4) Ending balance $ 35.5 $ 44.4 $ 35.5 $ 44.4 Specific loan loss allowance $ 21.8 $ 28.0 $ 21.8 $ 28.0 General loan loss allowance 13.7 16.4 13.7 16.4 Total commercial mortgage loan loss allowance $ 35.5 $ 44.4 $ 35.5 $ 44.4 Changes in the commercial mortgage loan loss allowance can result from the number of commercial mortgage loans with a specific loan loss allowance and general loan loss allowance and the composition factors of the commercial mortgage loan portfolio. Changes in the provision and charge-offs can result from losses related to foreclosures, accepted deeds in lieu of foreclosure on commercial mortgage loans and other related charges associated with commercial mortgage loans in the commercial mortgage loan portfolio. The following table sets forth the recorded investment in commercial mortgage loans: June 30, December 31, 2015 2014 (In millions) Commercial mortgage loans collectively evaluated for impairment $ 5,451.7 $ 5,255.2 Commercial mortgage loans individually evaluated for impairment 98.5 105.9 Commercial mortgage loan loss allowance (35.5) (40.0) Total commercial mortgage loans, net $ 5,514.7 $ 5,321.1 The Company assesses the credit quality of its commercial mortgage loan portfolio quarterly by reviewing the performance of its portfolio , which includes evaluating its performing and nonperforming commercial mortgage loans. Nonperforming commercial mortgage loans include all commercial mortgage loans that are 60 days or more past due and commercial mortgage loans that are not 60 days past d ue but are not substantially performing to other original contractual terms. The following tables set forth performing and nonperforming commercial mortgage loans by property type: June 30, 2015 Hotel/ Apartment Retail Office Industrial Commercial Motel and Other Total (In millions) Performing commercial mortgage loans $ 2,726.4 $ 1,050.2 $ 1,032.0 $ 222.4 $ 181.3 $ 300.6 $ 5,512.9 Nonperforming commercial mortgage loans 0.7 --- 0.7 0.4 --- --- 1.8 Total commercial mortgage loans $ 2,727.1 $ 1,050.2 $ 1,032.7 $ 222.8 $ 181.3 $ 300.6 $ 5,514.7 December 31, 2014 Hotel/ Apartment Retail Office Industrial Commercial Motel and Other Total (In millions) Performing commercial mortgage loans $ 2,622.4 $ 1,012.7 $ 1,001.4 $ 213.6 $ 165.7 $ 299.1 $ 5,314.9 Nonperforming commercial mortgage loans 4.7 0.7 0.1 --- --- 0.7 6.2 Total commercial mortgage loans $ 2,627.1 $ 1,013.4 $ 1,001.5 $ 213.6 $ 165.7 $ 299.8 $ 5,321.1 The following tables set forth impaired commercial mortgage loans identified in management’s specific review of probable loan losses and the related allowance: June 30, 2015 Unpaid Amount on Recorded Principal Related Nonaccrual Investment Balance Allowance Status (In millions) Impaired commercial mortgage loans: Without specific loan loss allowance: Retail $ 26.7 $ 26.7 $ --- $ 0.3 Industrial 1.0 1.0 --- --- Commercial 0.5 0.5 --- --- Office 0.1 0.1 --- --- Hotel/motel Total impaired commercial mortgage loans without specific loan loss allowance 28.3 28.3 --- 0.3 With specific loan loss allowance: Retail 49.9 49.9 11.8 0.7 Commercial 8.4 8.4 6.8 0.5 Office 7.6 7.6 1.7 --- Industrial 4.3 4.3 1.5 0.3 Total impaired commercial mortgage loans with specific loan loss allowance 70.2 70.2 21.8 1.5 Total impaired commercial mortgage loans $ 98.5 $ 98.5 $ 21.8 $ 1.8 December 31, 2014 Unpaid Amount on Recorded Principal Related Nonaccrual Investment Balance Allowance Status (In millions) Impaired commercial mortgage loans: Without specific loan loss allowance: Retail $ 25.0 $ 25.0 $ --- $ 10.5 Office 1.6 1.6 --- --- Commercial 2.3 2.3 --- 0.5 Apartment and other 2.8 2.8 --- --- Total impaired commercial mortgage loans without specific loan loss allowance 31.7 31.7 --- 11.0 With specific loan loss allowance: Retail 52.2 52.2 12.3 7.7 Office 8.6 8.6 2.9 --- Industrial 4.6 4.6 1.6 0.1 Commercial 8.5 8.5 7.0 0.6 Apartment and other 0.3 0.3 --- --- Total impaired commercial mortgage loans with specific loan loss allowance 74.2 74.2 23.8 8.4 Total impaired commercial mortgage loans $ 105.9 $ 105.9 $ 23.8 $ 19.4 Changes in the carrying value of impaired commercial mortgage loans can result from a change in the number of commercial mortgage loans with a specific loan loss allowance. As of June 30, 2015 and December 31, 2014 , the Company did not have any commercial mortgage loans greater than 90 days delinquent that were accruing interest. A modification is considered to be a troubled debt restructuring when the debtor is experiencing financial difficulties and the restructured terms constitute a concessi on. Granting payment forbearance is not a modification of the loan if the payment forbearance is considered to be an insignificant timing difference associated with the borrowing. The Company evaluates all restructured commercial mortgage loans for indicat ions of troubled debt restructurings and the potential losses related to these restructurings. If a loan is considered a troubled debt restructuring, the Company impairs the loan and records a specific allowance for estimated losses. In some cases, the rec orded investment in the loan may increase post-restructuring. The Company assessed all restructurings that occurred during the period to determine if they were troubled debt restructurings. The Company did not identify any troubled debt restructurings that were not already considered impaired. The following table s set forth information related to the troubled debt restructuring s of financing receivables : Three Months Ended June 30, 2015 Six Months Ended June 30, 2015 Pre- Post- Pre- Post- Restructuring Restructuring Restructuring Restructuring Number Recorded Recorded Number Recorded Recorded of Loans Investment Investment of Loans Investment Investment (Dollars in millions) Troubled debt restructurings: Retail --- $ --- $ --- 3 $ 1.5 $ 1.5 Office --- --- --- 2 1.1 1.2 Total troubled debt restructurings --- $ --- $ --- 5 $ 2.6 $ 2.7 Three Months Ended June 30, 2014 Six Months Ended June 30, 2014 Pre- Post- Pre- Post- Restructuring Restructuring Restructuring Restructuring Number Recorded Recorded Number Recorded Recorded of Loans Investment Investment of Loans Investment Investment (Dollars in millions) Troubled debt restructurings: Retail 1 $ 0.8 $ 0.7 1 $ 0.8 $ 0.7 Industrial --- --- --- 2 1.7 1.9 Commercial 1 2.7 2.7 1 2.7 2.7 Total troubled debt restructurings 2 $ 3.5 $ 3.4 4 $ 5.2 $ 5.3 There were no troubled debt restructurings identified in the previous 12 months that subsequently defaulted during the first six months of 2015 . The following table sets forth the average recorded investment in impaired commercial mortgage loans before specific loan loss allowances: Three Months Ended Six Months Ended June 30, June 30, 2015 2014 2015 2014 (In millions) Average recorded investment $ 98.4 $ 104.6 $ 100.9 $ 107.8 Interest Income The Company records interest income in net investment income and continues to recognize interest income on delinquent commercial mortgage loans until the loans are more than 90 days delinquent. Interest income and accrued interest receivable are reversed when a loan is more than 90 days delinquent. For loans that are less than 90 days delinquent, management may reverse interest income and the accrued interest receivable if there is a question on the collectability of the interest. Interest income on loans in the 90- day delinquent category is recognized in the period the cash is collected. The Company resumes the recognition of interest income when the loan becomes less than 90 da ys delinquent and management determines it is probable that the loan will remain performing. The amount of interest income recognized on impaired commercial mortgage loans was $ 1.1 million and $ 0.9 million for the second quarters of 2015 and 2014 , respective ly, and was $ 2.2 million for the first six months of 2015 and 2014 . The cash received by the Company in payment of interest on impaired commercial mortgage loans was $ 1.0 million for both second quarters of 2015 and 2014 , and was $ 2.1 million and $ 1.8 million for the first six months of 2015 and 2014 , respectively. The following table s set forth the aging of commercial mortgage loans by property type: June 30, 2015 Total Greater Than Allowance Commercial 30 Days 60 Days 90 Days Total Related Current, Mortgage Past Due Past Due Past Due Past Due to Past Due Net Loans (In millions) Commercial mortgage loans: Retail $ 0.4 $ --- $ 2.4 $ 2.8 $ (1.8) $ 2,726.1 $ 2,727.1 Office 0.5 --- --- 0.5 --- 1,049.7 1,050.2 Industrial 0.5 0.6 0.5 1.6 (0.4) 1,031.5 1,032.7 Commercial --- --- 5.2 5.2 (4.7) 222.3 222.8 Hotel/motel --- --- --- --- --- 181.3 181.3 Apartment and other --- --- --- --- --- 300.6 300.6 Total commercial mortgage loans $ 1.4 $ 0.6 $ 8.1 $ 10.1 $ (6.9) $ 5,511.5 $ 5,514.7 December 31, 2014 Total Greater Than Allowance Commercial 30 Days 60 Days 90 Days Total Related Current, Mortgage Past Due Past Due Past Due Past Due to Past Due Net Loans (In millions) Commercial mortgage loans: Retail $ 0.2 $ 2.0 $ 4.8 $ 7.0 $ (2.1) $ 2,622.2 $ 2,627.1 Office 1.9 --- 0.8 2.7 --- 1,010.7 1,013.4 Industrial 0.5 --- 0.3 0.8 (0.2) 1,000.9 1,001.5 Commercial --- --- --- --- --- 213.6 213.6 Hotel/motel --- --- --- --- --- 165.7 165.7 Apartment and other 0.2 0.7 --- 0.9 --- 298.9 299.8 Total commercial mortgage loans $ 2.8 $ 2.7 $ 5.9 $ 11.4 $ (2.3) $ 5,312.0 $ 5,321.1 The Company closely monitors all past due commercial mortgage loans. Additional attention is given to those loans at least 60 days past due. Commercial mortgage loans that have been granted payment forbearanc e are not considered to be past due. At June 30, 2015 , there were no commercial mortgage loans that were granted payment forbearance and $5.2 million at December 31, 2014 . Commercial mortgage loans that were at least 60 days past due totaled $8.7 million and $8.6 million at June 30, 2015 and De cember 31, 2014 , respectively. Commercial mortgage loans that were at least 60 days past due were 0.16 % of the commercial mortgage loan portfolio at both June 30, 2015 and December 31, 2014 . Net Investment Income The following table sets forth net investment income summarized by investment type: Three Months Ended Six Months Ended June 30, June 30, 2015 2014 2015 2014 (In millions) Fixed maturity securities $ 76.5 $ 72.8 $ 152.0 $ 147.6 Commercial mortgage loans 85.1 84.7 164.7 167.0 Real estate 1.0 0.2 1.5 0.2 S&P 500 Index options 0.2 2.4 1.6 4.4 Other 0.4 2.1 0.3 4.4 Gross investment income 163.2 162.2 320.1 323.6 Investment expenses (4.6) (6.4) (8.8) (13.4) Tax-advantaged investments 0.7 (1.0) 1.3 (1.5) Net investment income $ 159.3 $ 154.8 $ 312.6 $ 308.7 Tax-advantaged investments that do not qualify as affordable housing investments are accounted for under the equity method of accounting as a component of net investment income. For tax-advantaged investments with state premium tax credits, the state premium tax credits and the related investment losses are recorded as a component of net investment income. See “Note 1—Organization, Principles of Consolidation and Basis of Presentation.” Realized Gross Capital Gains and Losses The following table sets forth gross capital gains and losses by investment type: Three Months Ended Six Months Ended June 30, June 30, 2015 2014 2015 2014 (In millions) Gains: Fixed maturity securities $ 3.1 $ 1.5 $ 4.4 $ 3.4 Commercial mortgage loans 2.0 0.6 2.4 1.0 Real estate --- 0.4 --- 1.1 Gross capital gains 5.1 2.5 6.8 5.5 Losses: Fixed maturity securities (2.2) (0.6) (3.0) (1.1) Provision for commercial mortgage loan losses --- (0.5) --- (2.2) Real estate (0.8) (0.8) (1.3) (1.7) Other (1) (2.6) (0.1) (11.6) (1.1) Gross capital losses (5.6) (2.0) (15.9) (6.1) Net capital (losses) gains $ (0.5) $ 0.5 $ (9.1) $ (0.6) (1) In the first quarter of 2015, the Company recorded a $5.6 million impairment related to the expected sale of the assets of the Company’s private client wealth management business. Securities Deposited as Collateral Securities deposited for the benefit of policyholders in various states, in accordance with state regulations, amounted to $7.1 million at June 30, 2015 and $7.2 million at December 31, 2014 . In the second quarter of 2015, the Federal Home Loan Bank (“FHLB”) of Seattle completed its merger with the FHLB of Des Moines. The merger does not have a material effect on our business, financial position, results of operations, cash flows, existing funding agreements with the FHLB, and is n ot anticipated to impact the Company’s utilization of the FHLB program or its products in the future . Standard issues collateralized funding agreements and invests the cash received from advances to support various spread-based businesses and enhance its a sset-liability management. Membership also provides an additional funding source and access to financial services that can be used as an alternative source of liquidity. At June 30, 2015 , Standard owned $22.1 million of FHLB of Des Moines common stock rela ted to its membership and activity in the FHLB of Des Moines. At June 30, 2015, Standard had $ 303.4 million outstanding under funding agreements with the FHLB of Des Moines and pledged $ 365.0 million of commercial mortgage loans as collateral for its outstanding advances. At December 31, 2014 , Standard had $139.0 million outstanding under funding agreements with the FHLB of Seattle and pledged $174.4 million of commercial mortgage loans as col lateral for its outstanding advances. |