Symetra Financial 10Q 2014 Q3 Quarterly report

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 September 30, 2014



¨	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 October 31, 2014, the Registrant had 115,913,082 common voting shares outstanding, with a par value of $0.01 per share.

TABLE OF CONTENTS




		Page
	PART I – FINANCIAL INFORMATION

Item 1:	Condensed Financial Statements:
	Consolidated Balance Sheets	5
	Consolidated Statements of Income	6
	Consolidated Statements of Comprehensive Income (Loss)	7
	Consolidated Statements of Changes in Stockholders’ Equity	8
	Consolidated Statements of Cash Flows	9
	Condensed Notes to Consolidated Financial Statements	10
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	69
Item 4:	Controls and Procedures	69

	PART II – OTHER INFORMATION

Item 1:	Legal Proceedings	71
Item 1A:	Risk Factors	71
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 6:	Exhibits	72

Signatures		73

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, and statements about management’s intentions regarding those strategies; and


•	initiatives such as our previously announced stock repurchase program that are intended or expected to have various impacts upon 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 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:


•	the 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;


•	the effects of significant increases in corporate refinance activity, including bond prepayments;


•	the performance of our investment portfolio;


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


•	our ability to successfully execute on our strategies;


•	the accuracy and adequacy of our recorded reserves, including the actuarial and other assumptions upon which those reserves are established, adjusted and maintained;


•	the 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;


•	the 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 amortization of 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;


•	retention of our key personnel and distribution partners;


•	the availability and cost of capital and financing;


•	the adequacy and collectibility of reinsurance that we have purchased, as well as the continued availability and cost of reinsurance coverage;


•	the 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;


•	the ability of our 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 our ability to prevent or timely detect and remediate any unauthorized access to or disclosure of our customer information and other sensitive business data;


•	the initiation of regulatory investigations or litigation against us and the results of any regulatory proceedings;


•	the effects of changes in national monetary and fiscal policy;


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


•	the effects of redomestication on our principal insurance company subsidiary and whether redomestication will result in the intended benefits; 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, 2013.

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.

PART I – Financial Information

Item 1. Condensed Financial Statements

CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)



	As of September 30, 2014			As of December 31, 2013
	(Unaudited)
ASSETS
Investments:
Available-for-sale securities:
Fixed maturities, at fair value (amortized cost: $23,702.3 and $22,261.3, respectively)	$	25,316.6		$	23,337.7
Marketable equity securities, at fair value (cost: $115.9 and $129.0, respectively)	122.7			134.3
Trading securities:
Marketable equity securities, at fair value (cost: $386.9 and $403.0, respectively)	467.9			474.4
Mortgage loans, net	3,921.0			3,541.0
Policy loans	61.0			63.3
Investments in limited partnerships (includes $63.3 and $31.2 measured at fair value, respectively)	307.9			296.3
Other invested assets (includes $72.2 and $47.8 measured at fair value, respectively)	76.9			54.1
Total investments	30,274.0			27,901.1
Cash and cash equivalents	109.2			76.0
Accrued investment income	309.2			298.0
Reinsurance recoverables	324.4			310.8
Deferred policy acquisition costs	364.9			322.5
Receivables and other assets	300.7			242.7
Separate account assets	952.1			978.4
Total assets	$	32,634.5		$	30,129.5
LIABILITIES AND STOCKHOLDERS’ EQUITY
Funds held under deposit contracts	$	26,150.2		$	24,642.9
Future policy benefits	408.2			397.9
Policy and contract claims	156.6			159.9
Other policyholders’ funds	121.3			128.1
Notes payable	697.0			449.5
Deferred income tax liabilities, net	362.3			201.9
Other liabilities	411.5			229.0
Separate account liabilities	952.1			978.4
Total liabilities	29,259.2			27,187.6
Commitments and contingencies (Note 12)
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued	—			—
Common stock, $0.01 par value; 750,000,000 shares authorized; 124,966,385 issued and 115,913,082 outstanding as of September 30, 2014; 124,683,023 issued and 117,730,757 outstanding as of December 31, 2013	1.2			1.2
Additional paid-in capital	1,469.9			1,464.6
Treasury stock, at cost; 9,053,303 and 6,952,266 shares as of September 30, 2014 and December 31, 2013, respectively	(134.6		)	(93.4		)
Retained earnings	1,127.7			975.9
Accumulated other comprehensive income, net of taxes	911.1			593.6
Total stockholders’ equity	3,375.3			2,941.9
Total liabilities and stockholders’ equity	$	32,634.5		$	30,129.5

See accompanying notes.

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except share and per share data)

(Unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues:
Premiums	$	159.6		$	156.0		$	468.1		$	470.4
Net investment income	318.5			326.4			961.9			968.7
Policy fees, contract charges, and other	45.7			48.3			140.4			146.7
Net realized gains (losses):
Total other-than-temporary impairment losses on securities	(1.6		)	(6.6		)	(4.1		)	(17.0		)
Less: portion recognized in other comprehensive income (loss)	—			0.4			—			1.6
Net impairment losses recognized in earnings	(1.6		)	(6.2		)	(4.1		)	(15.4		)
Other net realized gains (losses)	(13.2		)	1.6			35.3			26.0
Net realized gains (losses)	(14.8		)	(4.6		)	31.2			10.6
Total revenues	509.0			526.1			1,601.6			1,596.4
Benefits and expenses:
Policyholder benefits and claims	113.9			118.5			325.2			353.2
Interest credited	237.2			235.3			707.7			696.3
Other underwriting and operating expenses	92.8			90.6			273.3			274.3
Interest expense	10.2			8.3			26.7			24.7
Amortization of deferred policy acquisition costs	17.6			20.2			54.1			56.3
Total benefits and expenses	471.7			472.9			1,387.0			1,404.8
Income from operations before income taxes	37.3			53.2			214.6			191.6
Provision (benefit) for income taxes:
Current	10.8			11.3			38.3			46.6
Deferred	(9.5		)	(3.4		)	(10.5		)	(11.3		)
Total provision for income taxes	1.3			7.9			27.8			35.3
Net income	$	36.0		$	45.3		$	186.8		$	156.3
Net income per common share:
Basic	$	0.31		$	0.38		$	1.60		$	1.21
Diluted	$	0.31		$	0.38		$	1.60		$	1.21
Weighted-average number of common shares outstanding:
Basic	115,904,205			117,801,744			116,436,077			129,574,014
Diluted	115,906,535			117,803,885			116,439,608			129,578,606
Cash dividends declared per common share	$	0.10		$	0.09		$	0.30		$	0.25

See accompanying notes.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Net income	$	36.0		$	45.3		$	186.8		$	156.3
Other comprehensive income (loss), net of taxes and reclassification adjustments:
Changes in unrealized gains (losses) on available-for-sale securities (net of taxes of $(67.1), $(26.0), $179.2 and $(392.0))	(124.3		)	(48.2		)	332.9			(727.9		)
Other-than-temporary impairments on fixed maturities not related to credit losses (net of taxes of $0.0, $(0.1), $0.0 and $(0.5))	—			(0.3		)	—			(1.1		)
Impact of net unrealized (gains) losses on deferred policy acquisition costs and deferred sales inducements (net of taxes of $15.8, $1.2, $(13.0) and $48.4)	29.4			2.1			(24.1		)	89.8
Impact of cash flow hedges (net of taxes of $8.3, $(9.3), $4.7 and $(7.0))	15.4			(17.2		)	8.7			(13.0		)
Other comprehensive income (loss)	(79.5		)	(63.6		)	317.5			(652.2		)
Total comprehensive income (loss)	$	(43.5	)	$	(18.3	)	$	504.3		$	(495.9	)

See accompanying notes.

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, 2013	$	1.2	$	1,459.3	$	—		$	798.4		$	1,371.2		$	3,630.1
Net income	—		—		—			156.3			—			156.3
Other comprehensive income (loss)	—		—		—			—			(652.2		)	(652.2		)
Stock-based compensation	—		4.6		—			—			—			4.6
Shares repurchased	—		—		(93.4		)	—			—			(93.4		)
Dividends declared	—		—		—			(32.6		)	—			(32.6		)
Balances as of September 30, 2013	$	1.2	$	1,463.9	$	(93.4	)	$	922.1		$	719.0		$	3,012.8
Balances as of January 1, 2014	$	1.2	$	1,464.6	$	(93.4	)	$	975.9		$	593.6		$	2,941.9
Net income	—		—		—			186.8			—			186.8
Other comprehensive income (loss)	—		—		—			—			317.5			317.5
Stock-based compensation	—		5.3		—			—			—			5.3
Shares repurchased	—		—		(41.2		)	—			—			(41.2		)
Dividends declared	—		—		—			(35.0		)	—			(35.0		)
Balances as of September 30, 2014	$	1.2	$	1,469.9	$	(134.6	)	$	1,127.7		$	911.1		$	3,375.3

See accompanying notes.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	For the Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities
Net income	$	186.8		$	156.3
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses	(31.2		)	(10.6		)
Accretion and amortization of invested assets, net	71.0			52.9
Accrued interest on fixed maturities	(8.9		)	(10.8		)
Amortization and depreciation	18.7			21.8
Deferred income tax provision (benefit)	(10.5		)	(11.3		)
Interest credited on deposit contracts	707.7			696.3
Mortality and expense charges and administrative fees	(101.1		)	(90.9		)
Changes in:
Accrued investment income	(11.2		)	(17.0		)
Deferred policy acquisition costs, net	(70.1		)	(22.2		)
Future policy benefits	10.3			4.0
Policy and contract claims	(3.3		)	3.2
Current income taxes	(36.9		)	39.5
Other assets and liabilities	3.4			0.5
Other, net	(10.9		)	(5.2		)
Total adjustments	527.0			650.2
Net cash provided by (used in) operating activities	713.8			806.5
Cash flows from investing activities
Purchases of:
Fixed maturities and marketable equity securities	(4,296.5		)	(3,582.1		)
Other invested assets and investments in limited partnerships	(100.0		)	(47.3		)
Issuances of mortgage loans	(582.1		)	(473.6		)
Maturities, calls, paydowns, and other repayments	1,201.5			1,417.8
Sales of:
Fixed maturities and marketable equity securities	1,776.3			1,359.5
Other invested assets and investments in limited partnerships	41.7			16.4
Repayments of mortgage loans	203.1			188.3
Other, net	23.8			7.1
Net cash provided by (used in) investing activities	(1,732.2		)	(1,113.9		)
Cash flows from financing activities
Policyholder account balances:
Deposits	2,360.9			1,746.0
Withdrawals	(1,470.8		)	(1,287.6		)
Net proceeds from issuance of debt	246.0			—
Cash dividends paid on common stock	(35.0		)	(32.6		)
Common stock repurchased	(41.2		)	(93.4		)
Other, net	(8.3		)	(34.7		)
Net cash provided by (used in) financing activities	1,051.6			297.7
Net increase (decrease) in cash and cash equivalents	33.2			(9.7		)
Cash and cash equivalents at beginning of period	76.0			130.8
Cash and cash equivalents at end of period	$	109.2		$	121.1
Supplemental disclosures of cash flow information
Non-cash transactions during the period:
Fixed maturities exchanges	$	87.3		$	232.0
Investments in limited partnerships and capital obligations incurred	5.9			22.7

See accompanying notes.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

1. Description of Business

Symetra Financial Corporation is a Delaware corporation that, through its subsidiaries, offers products and services that serve the retirement, employee 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 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.” 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).

2. Summary of Significant Accounting Policies

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 for it to conform to the current period presentation.

The provision 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% to income 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, 2013. Financial results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the twelve months ended December 31, 2014.

Accounting Pronouncements Not Yet Adopted

Accounting Standards Update (ASU) 2014-01, Accounting for Investments in Qualified Affordable Housing Projects

In January 2014, the FASB issued ASU 2014-01, Investments (Topic 323) – Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing (AFH) Projects. This ASU provides companies with the option to elect the proportional method of amortization for AFH 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 is effective for annual and interim periods beginning on or after December 15, 2014, with retrospective application required if the proportional amortization method is elected. The standard does not apply to other types of tax credit investments.

The Company will adopt the standard as of the first quarter of 2015, but does not intend to elect the proportional method of amortization for its AFH investments. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

3. Earnings Per Share

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

Participating securities are those for which the instrument holders are entitled to receive any dividends declared on the common stock concurrently with the holders of outstanding shares of common stock, on a one-to-one basis. These securities include restricted stock issued to the Company’s employees, as well as the Company’s warrants, which were previously exercisable for 18,975,744 common shares and were net-share settled on June 20, 2013. Participating securities are included in

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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 nine months ended September 30, 2014 and 2013, stock options exercisable for 2,650,000 shares of common stock 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 September 30,				For the Nine Months Ended September 30,
	2014		2013		2014		2013
Numerator:
Net income	$	36.0	$	45.3	$	186.8	$	156.3
Denominator:
Weighted-average common shares outstanding – basic	115,904,205		117,801,744		116,436,077		129,574,014
Add: dilutive effect of certain equity instruments	2,330		2,141		3,531		4,592
Weighted-average common shares outstanding – diluted	115,906,535		117,803,885		116,439,608		129,578,606
Net income per common share:
Basic	$	0.31	$	0.38	$	1.60	$	1.21
Diluted	$	0.31	$	0.38	$	1.60	$	1.21

4. Investments

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



	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		OTTI in AOCI
As of September 30, 2014
Fixed maturities:
U.S. government and agencies	$	446.8	$	6.1	$	(2.6	)	$	450.3	$	—
State and political subdivisions	751.9		36.0		(1.5		)	786.4		—
Corporate securities	17,656.4		1,418.6		(79.5		)	18,995.5		(13.9		)
Residential mortgage-backed securities	2,735.1		138.2		(15.5		)	2,857.8		(5.6		)
Commercial mortgage-backed securities	1,329.5		76.4		(4.2		)	1,401.7		—
Other debt obligations	782.6		42.7		(0.4		)	824.9		(0.1		)
Total fixed maturities	23,702.3		1,718.0		(103.7		)	25,316.6		(19.6		)
Marketable equity securities, available-for-sale	115.9		7.9		(1.1		)	122.7		—
Total	$	23,818.2	$	1,725.9	$	(104.8	)	$	25,439.3	$	(19.6	)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)



	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		OTTI in AOCI
As of December 31, 2013
Fixed maturities:
U.S. government and agencies	$	348.5	$	2.1	$	(6.2	)	$	344.4	$	—
State and political subdivisions	748.2		17.6		(14.3		)	751.5		—
Corporate securities	16,470.9		1,083.8		(202.3		)	17,352.4		(14.9		)
Residential mortgage-backed securities	2,678.3		115.1		(37.4		)	2,756.0		(6.8		)
Commercial mortgage-backed securities	1,436.0		94.7		(12.3		)	1,518.4		—
Other debt obligations	579.4		39.3		(3.7		)	615.0		—
Total fixed maturities	22,261.3		1,352.6		(276.2		)	23,337.7		(21.7		)
Marketable equity securities, available-for-sale	129.0		5.9		(0.6		)	134.3		—
Total	$	22,390.3	$	1,358.5	$	(276.8	)	$	23,472.0	$	(21.7	)

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 September 30, 2014
Fixed maturities:
U.S. government and agencies	$	33.9	$	(0.1	)	5		$	64.1	$	(2.5	)	3
State and political subdivisions	21.8		(0.2		)	6		44.3		(1.3		)	15
Corporate securities	1,614.5		(22.1		)	214		1,314.1		(57.4		)	96
Residential mortgage-backed securities	216.9		(1.3		)	28		347.7		(14.2		)	57
Commercial mortgage-backed securities	66.8		(0.2		)	5		138.2		(4.0		)	13
Other debt obligations	55.2		(0.2		)	7		31.0		(0.2		)	3
Total fixed maturities	2,009.1		(24.1		)	265		1,939.4		(79.6		)	187
Marketable equity securities, available-for-sale	14.5		(1.1		)	15		—		—			—
Total	$	2,023.6	$	(25.2	)	$	280	$	1,939.4	$	(79.6	)	$	187

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except share and per share 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, 2013
Fixed maturities:
U.S. government and agencies	$	102.7	$	(6.2	)	9		$	—	$	—		—
State and political subdivisions	278.7		(13.9		)	44		5.4		(0.4		)	3
Corporate securities	3,621.5		(150.7		)	258		263.5		(51.6		)	42
Residential mortgage-backed securities	680.0		(33.0		)	95		52.4		(4.4		)	22
Commercial mortgage-backed securities	261.9		(11.4		)	17		14.2		(0.9		)	9
Other debt obligations	152.0		(3.6		)	15		0.6		(0.1		)	3
Total fixed maturities	5,096.8		(218.8		)	438		336.1		(57.4		)	79
Marketable equity securities, available-for-sale	39.7		(0.6		)	21		—		—			—
Total	$	5,136.5	$	(219.4	)	$	459	$	336.1	$	(57.4	)	$	79

Based on National Association of Insurance Commissioners (NAIC) ratings as of September 30, 2014 and December 31, 2013, the Company held below-investment-grade fixed maturities with fair values of $1,228.4 and $1,267.5, respectively, and amortized costs of $1,184.2 and $1,229.7, respectively. These holdings amounted to 4.8% and 5.5% of the Company’s investments in fixed maturities at fair value as of September 30, 2014 and December 31, 2013, respectively.

The following table summarizes the amortized cost and fair value of fixed maturities as of September 30, 2014, 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	$	809.0	$	824.8
Over one year through five years	5,657.3		6,126.7
Over five years through ten years	8,622.7		8,918.2
Over ten years	3,882.0		4,484.2
Residential mortgage-backed securities	2,735.1		2,857.8
Commercial mortgage-backed securities	1,329.5		1,401.7
Other asset-backed securities	666.7		703.2
Total fixed maturities	$	23,702.3	$	25,316.6

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Fixed maturities	$	278.8		$	283.4		$	837.8		$	840.5
Marketable equity securities, available-for-sale	1.0			0.6			3.6			2.3
Marketable equity securities, trading	2.9			3.3			9.3			9.6
Mortgage loans	54.5			48.7			156.1			140.7
Policy loans	0.9			0.8			2.6			2.7
Investments in limited partnerships	(12.6		)	(4.2		)	(25.9		)	(9.7		)
Other	1.1			1.5			3.3			5.7
Total investment income	326.6			334.1			986.8			991.8
Investment expenses	(8.1		)	(7.7		)	(24.9		)	(23.1		)
Net investment income	$	318.5		$	326.4		$	961.9		$	968.7

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Fixed maturities:
Gross gains on sales	$	1.5		$	2.4		$	21.0		$	8.0
Gross losses on sales	(3.3		)	(7.4		)	(5.7		)	(17.4		)
Net impairment losses recognized in earnings	(1.6		)	(6.2		)	(4.1		)	(15.4		)
Other (1)	1.4			0.5			(1.0		)	(3.9		)
Total fixed maturities	(2.0		)	(10.7		)	10.2			(28.7		)
Marketable equity securities, trading (2)	(12.0		)	12.0			29.3			43.3
Other (3)	2.1			(7.0		)	(5.6		)	(5.7		)
Deferred policy acquisition costs and deferred sales inducement adjustment	(2.9		)	1.1			(2.7		)	1.7
Net realized gains (losses)	$	(14.8	)	$	(4.6	)	$	31.2		$	10.6
____________________


(1)	This includes net gains (losses) on calls and redemptions, and changes in the fair value of the Company’s convertible securities held as of period end totaling $(1.3) and $1.2 for the three months ended September 30, 2014 and 2013, respectively, and $0.3 and $(0.8) for the nine months ended September 30, 2014 and 2013, respectively.


(2)	This includes net gains (losses) on changes in the fair value of trading securities held as of period end totaling $(16.3) and $6.6 for the three months ended September 30, 2014 and 2013, respectively, and $19.4 and $17.8 for the nine months ended September 30, 2014 and 2013, respectively.


(3)	This includes net gains (losses) on derivatives not designated for hedge accounting, including an embedded derivative related to the Company's fixed indexed annuity (FIA) product and other instruments.

Other-Than-Temporary Impairments

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:


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


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


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


•	Any downgrades of the security by a rating agency;


•	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 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). In order to determine the amount of the 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.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Determination of Credit-Related OTTI on Corporate Securities

To determine the recovery value for a corporate security, the Company performs an analysis 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;


•	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 ratios and loan-to-value ratios on the underlying collateral;


•	Average cumulative 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.

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 any credit-related OTTI:



	As of September 30, 2014					As of December 31, 2013
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fixed maturities
Underwater by 20% or more:
Less than 6 consecutive months	$	3.5	$	(1.8	)	$	33.3	$	(12.3	)
6 consecutive months or more	4.9		(1.9		)	26.7		(18.4		)
Total underwater by 20% or more	8.4		(3.7		)	60.0		(30.7		)
All other underwater fixed maturities	3,940.1		(100.0		)	5,372.9		(245.5		)
Total underwater fixed maturities	$	3,948.5	$	(103.7	)	$	5,432.9	$	(276.2	)

As of September 30, 2014, there were $0.4 of gross unrealized losses related to available-for-sale marketable equity securities with a total fair value of $0.9 that were underwater by 20% or more. There were no such securities underwater by 20% or more as of December 31, 2013.

The Company reviewed its available-for-sale fixed maturities with unrealized losses as of September 30, 2014 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 fixed maturities, 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.

As of September 30, 2014 and December 31, 2013, the Company has evaluated the near-term prospects of its available-for-sale equity securities with unrealized losses in relation to the severity and duration of the impairment. Based on that evaluation, the Company concluded that it had the ability and intent to hold these investments until a recovery of fair value.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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 (loss) (OCI) were as follows:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Balance, beginning of period	$	22.2		$	33.4		$	23.1		$	36.2
Increases recognized in the current period:
For which an OTTI was not previously recognized	0.1			2.7			0.1			3.0
For which an OTTI was previously recognized	0.2			1.3			1.5			2.1
Decreases attributable to:
Securities sold or paid down during the period	(0.7		)	(12.7		)	(2.7		)	(16.6		)
Previously recognized credit losses on securities impaired during the period due to a change in intent to sell (1)	—			—			(0.2		)	—
Balance, end of period	$	21.8		$	24.7		$	21.8		$	24.7
____________________


(1)	Represents circumstances where the Company determined in the period that it intended to sell the security prior to recovery of its amortized cost.

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 generally diversified by geographic region, loan size and scheduled maturity. As of September 30, 2014, 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 29.2%, 10.5% and 8.3% 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 its carrying value.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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



	As of September 30, 2014					As of December 31, 2013
	Carrying Value			% of Total		Carrying Value			% of Total
Lower risk	$	2,394.2		61.0	%	$	2,195.1		61.9	%
Medium risk	909.4			23.2		843.5			23.8
Higher risk	620.3			15.8		506.3			14.3
Credit quality indicator total	3,923.9			100.0	%	3,544.9			100.0	%
Loans specifically evaluated for impairment (1)	2.0					2.0
Other (2)	(4.9		)			(5.9		)
Total	$	3,921.0				$	3,541.0
________________


(1)	As of September 30, 2014 and December 31, 2013, reserve amounts of $0.2 and $0.2, respectively were held for loans specifically evaluated for impairment.


(2)	Includes the allowance for loan losses and deferred fees and costs.

In developing its portfolio reserve for incurred but not specifically identified losses, the Company evaluates loans by risk category and considers its past loan experience, commercial real estate market conditions, and third-party data for expected losses on loans with similar LTV ratios and DSCRs. Each loan’s LTV ratio and DSCR is updated annually, primarily during the third quarter. In developing its provision for specifically identified loans, a market valuation on the collateral is performed to determine if a reserve is necessary.

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



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2014		2013		2014		2013
Allowance at beginning of period	$	8.1	$	8.1	$	8.1	$	7.9
Provision for specific loans	—		—		—		0.2
Provision for loans not specifically identified	—		—		—		—
Charge-offs	—		—		—		—
Allowance at end of period	$	8.1	$	8.1	$	8.1	$	8.1

Non-performing loans, defined generally as those in default, close to being in default or more than 90 days past due, are placed on non-accrual status. As of September 30, 2014, one loan with an outstanding balance of $1.5 was considered non-performing and as of December 31, 2013, no loans were considered non-performing.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

6. Derivative Instruments

The following table sets forth the fair value of the Company’s derivative instruments. 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 September 30, 2014						As of December 31, 2013
	Notional Amount		Fair Value				Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities		Notional Amount		Assets		Liabilities
Derivatives designated as hedges:
Cash flow hedges:
Interest rate swaps	$	128.7	$	4.3	$	0.2	$	97.1	$	4.6	$	—
Foreign currency swaps	582.2		5.5		20.4		440.4		—		28.4
Total derivatives designated as hedges	$	710.9	$	9.8	$	20.6	$	537.5	$	4.6	$	28.4
Derivatives not designated as hedges:
Equity index options	$	1,788.4	$	57.7	$	0.5	$	1,060.9	$	38.8	$	1.6
Foreign currency forwards	7.9		0.1		—		49.3		0.3		0.4
Embedded derivatives	—		—		183.5		—		—		92.1
Other derivatives	101.4		0.3		—		66.0		0.3		—
Total derivatives not designated as hedges	1,897.7		58.1		184.0		1,176.2		39.4		94.1
Total derivatives	$	2,608.6	$	67.9	$	204.6	$	1,713.7	$	44.0	$	122.5

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 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 does not offset recognized collateral amounts posted 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.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

The following tables present the potential effect of netting arrangements by counterparty on the Company’s consolidated balance sheets:



	As of September 30, 2014
			Gross Amount of Collateral (Received) Posted
	Fair Value Presented in the Balance Sheets		Financial Instruments		Cash Collateral			Net Amount
Counterparty:
Assets:
A	$	7.0	$	—	$	(4.0	)	$	3.0
B	18.0		—		(3.6		)	14.4
C	14.8		—		(15.3		)	(0.5		)
D	10.7		—		(12.8		)	(2.1		)
F	14.4		—		(13.9		)	0.5
Other	3.0		—		—			3.0
Total derivative assets	$	67.9	$	—	$	(49.6	)	$	18.3



	As of September 30, 2014
			Gross Amount of Collateral Received (Posted)
	Fair Value Presented in the Balance Sheets		Financial Instruments			Cash Collateral			Net Amount
Counterparty:
Liabilities:
A	$	3.3	$	—		$	—		$	3.3
B	13.1		—			(0.8		)	12.3
E	4.0		(2.3		)	—			1.7
Other	0.7		—			—			0.7
Total derivative liabilities (1)	$	21.1	$	(2.3	)	$	(0.8	)	$	18.0
_______________________


(1)	Excludes $183.5 of embedded derivatives which have no counterparty.



	As of December 31, 2013
			Gross Amount of Collateral (Received) Posted
	Fair Value Presented in the Balance Sheets		Financial Instruments		Cash Collateral			Net Amount
Counterparty:
Assets:
A	$	4.4	$	—	$	(0.2	)	$	4.2
B	11.0		—		(3.0		)	8.0
C	17.7		—		(17.4		)	0.3
D	9.1		—		(6.9		)	2.2
Other	1.8		—		—			1.8
Total derivative assets	$	44.0	$	—	$	(27.5	)	$	16.5

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)



	As of December 31, 2013
			Gross Amount of Collateral Received (Posted)
	Fair Value Presented in the Balance Sheets		Financial Instruments			Cash Collateral			Net Amount
Counterparty:
Liabilities:
A	$	5.3	$	—		$	—		$	5.3
B	16.9		—			(0.2		)	16.7
E	5.1		(2.8		)	—			2.3
Other	3.1		—			—			3.1
Total derivative liabilities (1)	$	30.4	$	(2.8	)	$	(0.2	)	$	27.4
_______________________


(1)	Excludes $92.1 of embedded derivatives which have no counterparty.

Derivatives Designated as Hedges

The following table presents the amount of gain (loss) recognized in OCI on derivatives that qualify as cash flow hedges:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014		2013
Interest rate swaps	$	(0.5	)	$	0.7		$	1.5	$	(2.3	)
Foreign currency swaps	25.8			(27.2		)	14.0		(15.7		)
Total	$	25.3		$	(26.5	)	$	15.5	$	(18.0	)

See Note 10 for amounts reclassified out of AOCI into net income for the three and nine months ended September 30, 2014 and 2013. The Company expects to reclassify net gains of $4.1 from AOCI into net income in the next 12 months, which includes both discontinued hedges and periodic settlements of active hedges. Actual amounts may vary from this estimate as a result of market conditions.

As of September 30, 2014, the maximum term over which the Company is hedging its exposure to the variability in future cash flows is approximately fifteen years. The Company recorded no ineffectiveness for these instruments for the three and nine months ended September 30, 2014 and 2013.

Derivatives Not Designated as Hedges

The following table shows the effect of derivatives not designated as hedges on the consolidated statements of income, which is recorded in net realized gains (losses):



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2014		2013			2014			2013
Equity index options	$	2.5	$	3.3		$	17.6		$	7.4
Foreign currency forwards	0.4		—			0.3			1.3
Embedded derivatives	2.4		(6.9		)	(16.4		)	(9.4		)
Other derivatives	1.5		—			1.8			(0.4		)
Total	$	6.8	$	(3.6	)	$	3.3		$	(1.1	)

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

7. Fair Value of Financial Instruments

The Company determines the fair value of its financial instruments based on the fair value hierarchy, which favors the use of observable inputs over the use of unobservable inputs when measuring fair value. The Company has categorized its financial instruments into the three-level hierarchy, which gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The level to which a fair value measurement falls is assigned based on the lowest-level input that is significant to the measurement. The fair value measurements for the Company’s financial instruments are categorized as follows:


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

•

Level 2 — Quoted prices for similar instruments in active markets and model-derived valuations whose inputs are observable. This category includes those financial instruments that are valued using industry-standard pricing methodologies or models. All significant inputs are observable or derived from observable information in the marketplace. Financial instruments in this category primarily include corporate fixed maturities and mortgage-backed securities.

•

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

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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



	As of September 30, 2014
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Measured at fair value on a recurring basis:
Financial assets:
Fixed maturities, available-for-sale:
U.S. government and agencies	$	450.3	$	450.3	$	—	$	450.3	$	—
State and political subdivisions	786.4		786.4		—		786.4		—
Corporate securities	18,995.5		18,995.5		—		18,872.5		123.0
Residential mortgage-backed securities	2,857.8		2,857.8		—		2,857.8		—
Commercial mortgage-backed securities	1,401.7		1,401.7		—		1,397.1		4.6
Other debt obligations	824.9		824.9		—		736.1		88.8
Total fixed maturities, available-for-sale	25,316.6		25,316.6		—		25,100.2		216.4
Marketable equity securities, available-for-sale	122.7		122.7		64.3		58.4		—
Marketable equity securities, trading	467.9		467.9		467.6		—		0.3
Investments in limited partnerships, alternative investments	63.3		63.3		—		—		63.3
Other invested assets:
Equity index options	57.7		57.7		—		55.6		2.1
Other	14.5		14.5		0.6		10.3		3.6
Total other invested assets	72.2		72.2		0.6		65.9		5.7
Total investments carried at fair value	26,042.7		26,042.7		532.5		25,224.5		285.7
Separate account assets	952.1		952.1		952.1		—		—
Total assets at fair value	$	26,994.8	$	26,994.8	$	1,484.6	$	25,224.5	$	285.7
Financial liabilities:
Embedded derivatives	$	183.5	$	183.5	$	—	$	—	$	183.5
Foreign currency swaps	20.4		20.4		—		20.4		—
Total liabilities at fair value	$	203.9	$	203.9	$	—	$	20.4	$	183.5

Subject to fair value disclosure requirements:
Financial assets:
Mortgage loans	$	3,921.0	$	4,162.5	$	—	$	—	$	4,162.5
Investments in limited partnerships, tax credit investments	244.6		220.3		—		220.3		—
Cash and cash equivalents	109.2		109.2		109.2		—		—
Financial liabilities:
Funds held under deposit contracts (1):
Deferred annuities	$	13,327.3	$	13,441.1	$	—	$	—	$	13,441.1
Income annuities	6,527.2		8,058.3		—		—		8,058.3
Notes payable:
Capital Efficient Notes (CENts)	149.9		157.5		—		157.5		—
Senior notes	547.1		581.3		—		581.3		—
_______________________


(1)	The carrying value of this balance excludes $6,295.7 of liabilities related to insurance contracts and embedded derivatives.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)



	As of December 31, 2013
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Measured at fair value on a recurring basis:
Financial assets:
Fixed maturities, available-for-sale:
U.S. government and agencies	$	344.4	$	344.4	$	—	$	327.0	$	17.4
State and political subdivisions	751.5		751.5		—		751.5		—
Corporate securities	17,352.4		17,352.4		—		17,324.4		28.0
Residential mortgage-backed securities	2,756.0		2,756.0		—		2,755.8		0.2
Commercial mortgage-backed securities	1,518.4		1,518.4		—		1,512.6		5.8
Other debt obligations	615.0		615.0		—		486.2		128.8
Total fixed maturities, available-for-sale	23,337.7		23,337.7		—		23,157.5		180.2
Marketable equity securities, available-for-sale	134.3		134.3		77.4		56.9		—
Marketable equity securities, trading	474.4		474.4		474.1		—		0.3
Investments in limited partnerships, alternative investments	31.2		31.2		—		—		31.2
Other invested assets	47.8		47.8		0.6		5.2		42.0
Total investments carried at fair value	24,025.4		24,025.4		552.1		23,219.6		253.7
Separate account assets	978.4		978.4		978.4		—		—
Total assets at fair value	$	25,003.8	$	25,003.8	$	1,530.5	$	23,219.6	$	253.7
Financial liabilities:
Embedded derivatives	92.1		92.1		—		—		92.1
Total liabilities at fair value	$	92.1	$	92.1	$	—	$	—	$	92.1

Subject to fair value disclosure requirements:
Financial assets:
Mortgage loans	$	3,541.0	$	3,664.6	$	—	$	—	$	3,664.6
Investments in limited partnerships, tax credit investments	265.1		237.9		—		237.9		—
Cash and cash equivalents	76.0		76.0		76.0		—		—
Financial liabilities:
Funds held under deposit contracts (1):
Deferred annuities	$	12,017.0	$	11,884.2	$	—	$	—	$	11,884.2
Income annuities	6,514.3		7,548.0		—		—		7,548.0
Notes payable:
Capital Efficient Notes (CENts)	149.9		156.2		—		156.2		—
Senior notes	299.6		319.3		—		319.3		—
_________________


(1)	The carrying value of this balance excludes $6,111.6 of liabilities related to insurance contracts and embedded derivatives.

Financial Instruments Measured at Fair Value on a Recurring Basis

Fixed Maturities

The vast majority of the Company’s fixed maturities have been classified as Level 2 measurements. To make this assessment, the Company determines whether the market for a security is active and if significant pricing inputs are observable. The Company predominantly utilizes third-party independent pricing services to assist management in determining the fair value of its fixed maturity securities. As of September 30, 2014 and December 31, 2013, respectively, pricing services provided prices for 95.9% and 96.6% of the Company’s fixed maturities.

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

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

periodic due diligence procedures, including quarterly deep-dive analyses, monthly price fluctuation analyses, and corroboration of prices by obtaining secondary pricing quotes for selected securities. Based upon its analyses, the Company generally does not adjust prices obtained from the pricing services.

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

As of September 30, 2014, the Company had $854.1 or 3.4%, of its fixed maturities invested in private placement securities. The use of significant observable inputs in determining the fair value of the Company’s investments in private placement securities resulted in the classification of $824.5, or 96.5%, as Level 2 measurements as of September 30, 2014. As of December 31, 2013, the Company had $653.7, or 2.8%, of its fixed maturities invested in private placement securities, of which $635.6, or 97.2%, were classified as Level 2 measurements.

Corporate Securities

As of September 30, 2014 and December 31, 2013, the fair value of the Company’s corporate securities classified as Level 2 measurements was $18,872.5 and $17,324.4, respectively. The following table presents additional information about the composition of the Level 2 corporate securities:



	As of September 30, 2014						As of December 31, 2013
	Amount			% of Total		# of Securities	Amount			% of Total		# of Securities
Significant security sectors:
Industrial	$	3,372.7		17.9	%	221	$	3,237.3		18.7	%	223
Consumer staples	2,829.3			15.0		164	2,681.6			15.5		159
Consumer discretionary	2,340.8			12.4		195	2,184.7			12.6		184
Utilities	2,160.9			11.5		157	1,897.9			11.0		146
Financial	2,052.2			10.9		168	1,819.2			10.5		158

Weighted-average coupon rate	5.35		%				5.60		%
Weighted-average remaining years to contractual maturity	9.1						9.6

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

As of September 30, 2014 and December 31, 2013, $724.0, or 3.8%, and $523.5, or 3.0%, respectively, of Level 2 corporate securities were privately placed. These securities were valued using a matrix pricing approach. The significant inputs to the measurement are the base credit spread, treasury yield and expected future cash flows of the security, which are all observable inputs. The base spread is determined based on trades of similar publicly-traded securities, and the expected future cash flows are based on the contractual terms of the security. The valuation approach also incorporates an illiquidity spread, determined based on premiums demanded by investors for privately placed securities. The illiquidity spread is an unobservable input, which ranges from 0 to 30 basis points and is based on the credit quality of the security. The illiquidity spread does not significantly impact the resulting valuation and thus management does not believe it prohibits Level 2 classification.

Residential Mortgage-backed Securities

As of September 30, 2014 and December 31, 2013, the fair value of the Company’s residential mortgage-backed securities (RMBS) classified as Level 2 measurements was $2,857.8 and $2,755.8, respectively. These securities were primarily fixed-rate, with a weighted-average coupon rate of 4.22% and 4.39% as of September 30, 2014 and December 31, 2013, respectively.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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

Agency securities comprised 88.5% and 89.2% of the Company’s Level 2 RMBS as of September 30, 2014 and December 31, 2013, respectively. The following table presents additional information about the composition of the Level 2 non-agency RMBS securities:



	As of September 30, 2014				As of December 31, 2013
	Fair Value		% of Total		Fair Value		% of Total
Highest rating agency rating:
AAA	$	124.9	38.0	%	$	42.5	14.3	%
AA through BBB	57.8		17.6		88.0		29.5
BB & below	146.0		44.4		167.8		56.2
Total non-agency RMBS	$	328.7	100.0	%	$	298.3	100.0	%
Non-agency RMBS with super senior subordination	$	210.7	64.1	%	$	178.3	59.8	%

As of September 30, 2014 and December 31, 2013, the Company’s non-agency Level 2 RMBS had a weighted-average credit enhancement of 8.3% and 8.8%, respectively. As of September 30, 2014 and December 31, 2013, $75.5 and $110.3, or 23.0% and 37.0%, respectively, of the Company’s non-agency Level 2 RMBS had an origination or vintage year of 2004 and prior. The underlying collateral in years prior to 2005 is considered higher quality as underwriting standards were more stringent.

Commercial Mortgage-backed Securities

As of September 30, 2014 and December 31, 2013, the fair value of the Company’s commercial mortgage-backed securities (CMBS) classified as Level 2 measurements was $1,397.1 and $1,512.6, respectively. The weighted-average coupon rate on these securities was 4.73% and 4.82% as of September 30, 2014 and December 31, 2013, respectively.

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

The Company’s Level 2 CMBS securities were primarily non-agency securities, which comprised 86.4% and 83.3% of Level 2 CMBS as of September 30, 2014 and December 31, 2013, respectively. The non-agency Level 2 CMBS had an estimated weighted-average credit enhancement of 32.4% and 31.4% as of September 30, 2014 and December 31, 2013, respectively, and 97.8% and 98.7% were in the most senior tranche as of September 30, 2014 and December 31, 2013, respectively.

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

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)



	As of September 30, 2014		As of December 31, 2013
	% of Total		% of Total
Significant underlying collateral locations:
New York	23.3	%	21.8	%
California	11.2		11.7
Florida	7.7		7.5
Texas	7.1		7.3
Significant underlying collateral property types:
Office buildings	32.7	%	32.6	%
Retail shopping centers	30.5		31.5

Marketable Equity Securities

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

Investments in Limited Partnerships

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

Equity Index Options

Equity index options consist primarily of Standard & Poor’s 500 Index^® (“S&P 500”) options. As of September 30, 2014, the fair value of these index options was determined using option pricing models. Significant inputs include index implied volatilities, index dividend yields, index prices, a risk-free rate, option term and option strike price. As these inputs are observable, the equity index options are classified as Level 2.

Separate Accounts

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

Embedded Derivatives

Embedded derivatives relate to the Company’s fixed indexed annuity (FIA) product, which credits interest to the policyholder’s account balance based on increases in equity or commodity indexes. The fair value of the embedded derivative reflects the excess of the projected benefits based on the indexed fund value over the projected benefits based on the guaranteed fund value. The excess benefits are projected using best estimates for surrenders, mortality and indexed fund interest, and discounted at a risk-free rate plus a spread for nonperformance risk. Because the estimates utilize significant unobservable inputs, the Company classifies the embedded derivative as a Level 3 measurement.

Foreign Currency Swaps

Foreign currency swaps are valued using an income approach. These swaps are priced utilizing a discounted cash flow model. The significant inputs include the projected cash flows, currency spot rates, swap yield curve and cross currency basis curve. These are considered observable inputs, and as such are classified as Level 2 measurements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Other Financial Instruments Subject to Fair Value Disclosure Requirements

Cash and cash equivalents consist of demand bank deposits and short-term highly liquid investments with original maturities of three months or less at the time of purchase. Cash equivalents, which are reported at cost and approximate fair value, were $20.2 and $37.8 as of September 30, 2014 and December 31, 2013, respectively. These are classified as Level 1 measurements.

The fair value of the Company’s mortgage loans are measured by discounting the projected future cash flows using the current rate at which the loans would be made to borrowers with similar credit ratings and for the same maturities. Because these estimates utilize significant unobservable inputs, mortgage loans are classified as a Level 3 measurement.

The fair value of the Company’s investments in limited partnerships associated with tax credit investments are estimated based on the discounted cash flows over the remaining life of the tax credits, using the original internal rate of return for each investment. As these inputs are considered observable, investments in limited partnerships are classified as a Level 2 measurement.

The fair values of funds held under deposit contracts related to investment-type contracts are estimated based on the present value of the discounted cash flows. Cash flows were projected using best estimates for lapses, mortality and expenses, and discounted at a risk-free rate plus a nonperformance risk spread. Because these estimates utilize significant unobservable inputs, the Company classifies funds held under deposit contracts as a Level 3 measurement.

The fair value of the Company’s notes payable is determined by an independent pricing service utilizing evaluated pricing models, consistent with how fair value was determined for the majority of its corporate securities. The use of observable inputs resulted in the classification of notes payable as a Level 2 measurement.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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

The following tables present additional information about financial instruments measured at fair value on a recurring basis and for which the Company has utilized significant unobservable inputs (Level 3) to determine fair value for the three and nine months ended September 30, 2014:



														Unrealized Gains (Losses) Included in:
	Balance as of July 1, 2014		Purchases and Issues(1)		Sales and Settlements(1)			Transfers In and/or (Out) of Level 3(2)			Other(3)			Net Income(4)			Other Comprehensive Income (Loss)			Realized Gains (Losses)(4)			Balance as of September 30, 2014
Financial Assets:
Fixed maturities, available-for-sale:
Corporate securities	$	157.3	$	46.0	$	—		$	(89.1	)	$	3.8		$	—		$	5.0		$	—		$	123.0
Residential mortgage-backed securities	50.5		—		(0.1		)	(50.3		)	(0.1		)	—			—			—			—
Commercial mortgage-backed securities	4.8		—		—			—			(0.2		)	—			—			—			4.6
Other debt obligations	63.8		—		—			25.8			(0.3		)	—			(0.5		)	—			88.8
Total fixed maturities, available-for-sale	276.4		46.0		(0.1		)	(113.6		)	3.2			—			4.5			—			216.4
Marketable equity securities, trading	0.3		—		—			—			—			—			—			—			0.3
Investments in limited partnerships	42.0		25.8		—			—			—			(4.3		)	—			(0.2		)	63.3
Other invested assets:
Equity index options	2.6		0.7		—			—			(0.1		)	(0.9		)	—			(0.2		)	2.1
Other	3.5		0.3		—			—			(0.1		)	0.1			—			(0.2		)	3.6
Total other invested assets	6.1		1.0		—			—			(0.2		)	(0.8		)	—			(0.4		)	5.7
Total Level 3 assets	$	324.8	$	72.8	$	(0.1	)	$	(113.6	)	$	3.0		$	(5.1	)	$	4.5		$	(0.6	)	$	285.7
Financial Liabilities:
Embedded derivatives	157.9		28.2		(0.3		)	—			—			(2.3		)	—			—			183.5
Total Level 3 liabilities	$	157.9	$	28.2	$	(0.3	)	$	—		$	—		$	(2.3	)	$	—		$	—		$	183.5

														Unrealized Gains (Losses) Included in:
	Balance as of January 1, 2014		Purchases and Issues(1)		Sales and Settlements(1)			Transfers In and/or (Out) of Level 3(2)			Other(3)			Net Income(4)			Other Comprehensive Income (Loss)			Realized Gains (Losses)(4)			Balance as of September 30, 2014
Financial Assets:
Fixed maturities, available-for-sale:
U.S. government and agencies	$	17.4	$	—	$	—		$	(17.4	)	$	—		$	—		$	—		$	—		$	—
Corporate securities	28.0		46.0		—			39.0			0.6			—			9.4			—			123.0
Residential mortgage-backed securities	0.2		—		(0.1		)	—			(0.2		)	—			0.1			—			—
Commercial mortgage-backed securities	5.8		—		—			—			(1.2		)	—			—			—			4.6
Other debt obligations	128.8		—		—			(39.3		)	(2.1		)	—			1.4			—			88.8
Total fixed maturities, available-for-sale	180.2		46.0		(0.1		)	(17.7		)	(2.9		)	—			10.9			—			216.4
Marketable equity securities, trading	0.3		—		—			—			—			—			—			—			0.3
Investments in limited partnerships	31.2		37.7		—			—			(0.9		)	(4.7		)	—			—			63.3
Other invested assets:
Equity index options	38.8		1.0		—			(36.7		)	(0.4		)	(0.5		)	—			(0.1		)	2.1
Other	3.2		1.4		—			—			(1.0		)	0.3			—			(0.3		)	3.6
Total other invested assets	42.0		2.4		—			(36.7		)	(1.4		)	(0.2		)	—			(0.4		)	5.7
Total Level 3 assets	$	253.7	$	86.1	$	(0.1	)	$	(54.4	)	$	(5.2	)	$	(4.9	)	$	10.9		$	(0.4	)	$	285.7
Financial Liabilities:
Embedded derivatives	$	92.1	$	75.5	$	(0.5	)	$	—		$	—		$	16.4		$	—		$	—		$	183.5
Total Level 3 liabilities	$	92.1	$	75.5	$	(0.5	)	$	—		$	—		$	16.4		$	—		$	—		$	183.5
_______________


(1)	Issues and settlements are related to the Company’s embedded derivative liabilities.

(2)

Transfers into and/or out of Level 3 are reported at the value as of the beginning of the period in which the transfer occurs. Gross transfers into Level 3 were $25.8 and $66.4 for the three and nine months ended September 30, 2014. Gross transfers out of Level 3 were $139.4 and $120.8 for the three and nine months ended September 30, 2014, of which $139.4 and $84.1, respectively, related to fixed maturities for which observable inputs became available. Additionally, transfers out included a change in valuation methodology for equity index options during the first quarter of 2014 to a method that uses significant observable inputs. Such securities are now classified as Level 2.


(3)	Other is comprised of transactions such as pay downs, calls, amortization and redemptions.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)


(4)	Realized and unrealized gains and losses for investments in limited partnerships are included in net investment income. All other realized and unrealized gains and losses recognized in net income are included in net realized gains (losses). Amounts shown for financial liabilities are (gains) losses in net income.



														Unrealized Gains (Losses) Included in:
	Balance as of July 1, 2013		Purchases and Issues(1)		Sales and Settlements(1)			Transfers In and/or (Out) of Level 3(2)			Other(3)			Net Income(4)		Other Comprehensive Income (Loss)			Realized Gains (Losses)(4)			Balance as of September 30, 2013
Financial Assets:
Fixed maturities, available-for-sale:
Corporate securities	$	27.5	$	69.0	$	—		$	4.0		$	(0.2	)	$	—	$	(2.2	)	$	—		$	98.1
Residential mortgage-backed securities	26.0		—		—			(25.8		)	(0.1		)	—		0.1			—			0.2
Commercial mortgage-backed securities	6.5		24.7		—			—			(0.3		)	—		0.4			—			31.3
Other debt obligations	73.8		—		—			—			0.2			—		(1.3		)	—			72.7
Total fixed maturities, available-for-sale	133.8		93.7		—			(21.8		)	(0.4		)	—		(3.0		)	—			202.3
Marketable equity securities, available-for-sale	6.2		—		—			(6.2		)	—			—		—			—			—
Marketable equity securities, trading	0.3		—		—			—			—			—		—			—			0.3
Investments in limited partnerships	34.7		0.8		—			—			(0.4		)	4.5		—			(3.7		)	35.9
Other invested assets	18.9		7.2		—			—			(1.4		)	3.8		—			(0.1		)	28.4
Total Level 3 assets	$	193.9	$	101.7	$	—		$	(28.0	)	$	(2.2	)	$	8.3	$	(3.0	)	$	(3.8	)	$	266.9
Financial Liabilities:
Embedded derivatives	34.1		18.2		(0.1		)	—			(0.3		)	7.2		—			—			59.1
Total Level 3 liabilities	$	34.1	$	18.2	$	(0.1	)	$	—		$	(0.3	)	$	7.2	$	—		$	—		$	59.1

														Unrealized Gains (Losses) Included in:
	Balance as of January 1, 2013		Purchases and Issues(1)		Sales and Settlements(1)			Transfers In and/or (Out) of Level 3(2)			Other(3)			Net Income(4)		Other Comprehensive Income			Realized Gains (Losses)(4)			Balance as of September 30, 2013
Financial Assets:
Fixed maturities, available-for-sale:
Corporate securities	$	38.9	$	69.0	$	—		$	6.2		$	(13.5	)	$	—	$	(2.4	)	$	(0.1	)	$	98.1
Residential mortgage-backed securities	—		—		—			0.2			(0.1		)	—		0.1			—			0.2
Commercial mortgage-backed securities	18.8		24.7		—			—			(12.1		)	—		(0.1		)	—			31.3
Other debt obligations	73.0		5.5		—			—			0.1			—		(5.9		)	—			72.7
Total fixed maturities, available-for-sale	130.7		99.2		—			6.4			(25.6		)	—		(8.3		)	(0.1		)	202.3
Marketable equity securities, available-for-sale	5.0		—		—			(5.0		)	—			—		—			—			—
Marketable equity securities, trading	0.2		—		—			—			—			0.1		—			—			0.3
Investments in limited partnerships	28.6		6.6		—			—			(4.3		)	7.7		—			(2.7		)	35.9
Other invested assets	7.8		16.4		—			—			(3.9		)	7.2		—			0.9			28.4
Total Level 3 assets	$	172.3	$	122.2	$	—		$	1.4		$	(33.8	)	$	15.0	$	(8.3	)	$	(1.9	)	$	266.9
Financial Liabilities:
Embedded derivatives	14.1		35.7		(0.1		)	—			—			9.4		—			—			59.1
Total Level 3 liabilities	$	14.1	$	35.7	$	(0.1	)	$	—		$	—		$	9.4	$	—		$	—		$	59.1
_______________


(1)	Issues and settlements are related to the Company’s embedded derivative liabilities.


(2)	Transfers into and/or out of Level 3 are reported at the value as of the beginning of the period in which the transfer occurs. Gross transfers into Level 3 were $6.4 and $6.9 for the three and nine months ended September 30, 2013. Gross transfers out of Level 3 were $34.4 and $5.5 for the three and nine months ended September 30, 2013.


(3)	Other is comprised of transactions such as pay downs, calls, amortization and redemptions.


(4)	Realized and unrealized gains and losses for investments in limited partnerships are included in net investment income. All other realized and unrealized gains and losses recognized in net income are included in net realized gains (losses). Amounts shown for financial liabilities are (gains) losses in net income.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Unamortized balance at beginning of period	$	464.2		$	373.1		$	419.9		$	367.9
Deferral of acquisition costs	43.5			36.4			124.2			77.4
Adjustments for realized (gains) losses	(3.0		)	0.8			(2.9		)	1.1
Amortization — excluding unlocking	(16.3		)	(14.9		)	(47.7		)	(46.0		)
Amortization — impact of assumption and experience unlocking	(1.3		)	(5.3		)	(6.4		)	(10.3		)
Unamortized balance at end of period	487.1			390.1			487.1			390.1
Accumulated effect of net unrealized gains	(122.2		)	(118.4		)	(122.2		)	(118.4		)
Balance at end of period	$	364.9		$	271.7		$	364.9		$	271.7

The following table provides a reconciliation of the beginning and ending balance for DSI, which is included in receivables and other assets in the consolidated balance sheets. DSI amortization is included in interest credited in the consolidated statements of income.



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Unamortized balance at beginning of period	$	146.5		$	155.1		$	154.8		$	153.4
Capitalizations	7.2			12.1			24.4			37.6
Adjustments for realized (gains) losses	0.2			0.3			0.3			0.6
Amortization — excluding unlocking	(10.0		)	(10.1		)	(31.1		)	(30.5		)
Amortization — impact of assumption and experience unlocking	0.1			(3.4		)	(4.4		)	(7.1		)
Unamortized balance at end of period	144.0			154.0			144.0			154.0
Accumulated effect of net unrealized gains	(85.4		)	(84.1		)	(85.4		)	(84.1		)
Balance at end of period	$	58.6		$	69.9		$	58.6		$	69.9

9. Notes Payable and Credit Facility

Senior Notes Due 2024

On August 4, 2014, the Company issued $250.0 of 4.25% senior notes due on July 15, 2024, which were issued at a discount yielding $249.0. Interest on the notes is payable semi-annually, commencing on January 15, 2015, and the effective interest rate of the notes is 4.44%. The notes are general unsecured obligations of the Company and rank equally in right of payment with all existing and future senior indebtedness of the Company, including its senior notes due 2016 and revolving credit facility. The notes are senior in right of payment to the Company's capital efficient notes (CENts).

The notes are redeemable, in whole or in part, at the option of the Company on at least 30 but not more than 60 days prior notice, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes or (ii) the present value of the remaining scheduled payments on the redemption date, discounted to the date of redemption using the yield to maturity of a comparable treasury issue plus 30 basis points; plus, in each case, any accrued and unpaid interest.

Revolving Credit Facility

On August 28, 2014, the Company entered into a $400.0 senior unsecured revolving credit facility with a syndicate of lending institutions. The facility also provides access to up to $100.0 of financing, subject to the availability of additional commitments from lenders. The facility is set to mature on August 28, 2019 and is available to provide support for working capital, capital expenditures, and other general corporate purposes.

Borrowings under the facility will bear interest at a variable annual rate based on adjusted LIBOR or the alternate base rate plus, in each case, an applicable margin. Under the terms of the facility, the Company's debt-to-capitalization ratio, excluding AOCI, may not exceed 35%, and each of the Company's material insurance company subsidiaries must maintain a risk-based capital ratio of at least 225%, as well as other customary affirmative covenants. The Company is required to pay facility fees ranging from 0.1% to 0.3%, depending on the Company's rating with Moody's or S&P, on the daily amount of the

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

commitment. The Company had no outstanding borrowings under the facility and was in compliance with all covenants as of September 30, 2014.

Effective August 28, 2014, concurrently with entry into the unsecured revolving credit agreement referenced above, the Company terminated its prior $300.0 credit agreement, dated December 14, 2011, which was set to mature on December 14, 2015. At termination, the Company had no borrowings outstanding under the credit agreement and was in compliance with all covenants.

10. Stockholders' Equity

The following tables summarize the components of AOCI and the adjustments to OCI for amounts reclassified from AOCI into net income for the three and nine months ended September 30, 2014:



	Net Unrealized Gains (losses) on Available-for- sale Securities			OTTI on Fixed Maturities not related to Credit Losses (2)			Adjustment for DAC and DSI			Net Gains (losses) on Cash Flow Hedges			Accumulated Other Comprehensive Income
Balance as of July 1, 2014	$	1,194.0		$	(13.2	)	$	(166.6	)	$	(23.6	)	$	990.6
Other comprehensive income (loss) before reclassifications, net of taxes (1)	(130.2		)	—			27.5			16.4			(86.3		)
Reclassifications recorded in:
Net investment income:
Interest rate swaps	—			—			—			(0.6		)	(0.6		)
Foreign currency swaps	—			—			—			(1.0		)	(1.0		)
Net realized investment (gains) losses	8.2			0.5			2.9			—			11.6
Total provision (benefit) for income taxes	(2.7		)	(0.1		)	(1.0		)	0.6			(3.2		)
Total reclassifications from AOCI, net of taxes	5.5			0.4			1.9			(1.0		)	6.8
Other comprehensive income (loss) after reclassifications	(124.7		)	0.4			29.4			15.4			(79.5		)
Balance as of September 30, 2014	$	1,069.3		$	(12.8	)	$	(137.2	)	$	(8.2	)	$	911.1



	Net Unrealized Gains (losses) on Available-for- sale Securities			OTTI on Fixed Maturities not related to Credit Losses (2)			Adjustment for DAC and DSI			Net Gains (losses) on Cash Flow Hedges			Accumulated Other Comprehensive Income
Balance as of January 1, 2014	$	737.8		$	(14.2	)	$	(113.1	)	$	(16.9	)	$	593.6
Other comprehensive income (loss) before reclassifications, net of taxes (1)	338.3			—			(25.9		)	10.1			322.5
Reclassifications recorded in:
Net investment income:
Interest rate swaps	—			—			—			(1.7		)	(1.7		)
Foreign currency swaps	—			—			—			(0.4		)	(0.4		)
Net realized (gains) losses	(10.5		)	2.1			2.7			—			(5.7		)
Total provision (benefit) for income taxes	3.7			(0.7		)	(0.9		)	0.7			2.8
Total reclassifications from AOCI, net of taxes	(6.8		)	1.4			1.8			(1.4		)	(5.0		)
Other comprehensive income (loss) after reclassifications	331.5			1.4			(24.1		)	8.7			317.5
Balance as of September 30, 2014	$	1,069.3		$	(12.8	)	$	(137.2	)	$	(8.2	)	$	911.1
___________________


(1)	Other comprehensive income (loss) before reclassifications is net of taxes of $(69.9), $0.0, $14.8, $8.9 and $(46.2), respectively, for the three months ended September 30, 2014, and net of taxes of $182.2, $0.0, $(13.9), $5.4 and $173.7, respectively, for the nine months ended September 30, 2014.


(2)	Reclassification adjustments of OTTI on fixed maturities not related to credit losses are included in changes in unrealized gains and losses on available-for-sale securities within the consolidated statements of comprehensive income (loss).

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

The following tables summarize the components of AOCI and the adjustments to OCI for amounts reclassified from AOCI into net income for the three and nine months ended September 30, 2013:



	Net Unrealized Gains (losses) on Available-for- sale Securities			OTTI on Fixed Maturities not related to Credit Losses (2)			Adjustment for DAC and DSI			Net Gains (losses) on Cash Flow Hedges			Accumulated Other Comprehensive Income
Balance as of July 1, 2013	$	926.7		$	(16.6	)	$	(133.7	)	$	6.2		$	782.6
Other comprehensive income (loss) before reclassifications, net of taxes(1)	(60.3		)	(0.3		)	2.8			(17.1		)	(74.9		)
Reclassifications recorded in:
Net investment income:
Interest rate swaps	—			—			—			(0.6		)	(0.6		)
Foreign currency swaps	—			—			—			0.5			0.5
Net realized investment (gains) losses	12.2			6.4			(1.1		)	—			17.5
Total provision (benefit) for income taxes	(4.3		)	(2.2		)	0.4			—			(6.1		)
Total reclassifications from AOCI, net of taxes	7.9			4.2			(0.7		)	(0.1		)	11.3
Other comprehensive income (loss) after reclassifications	(52.4		)	3.9			2.1			(17.2		)	(63.6		)
Balance as of September 30, 2013	$	874.3		$	(12.7	)	$	(131.6	)	$	(11.0	)	$	719.0



	Net Unrealized Gains (losses) on Available-for- sale Securities			OTTI on Fixed Maturities not related to Credit Losses (2)			Adjustment for DAC and DSI			Net Gains (losses) on Cash Flow Hedges			Accumulated Other Comprehensive Income
Balance as of January 1, 2013	$	1,610.2		$	(19.6	)	$	(221.4	)	$	2.0		$	1,371.2
Other comprehensive income (loss) before reclassifications, net of taxes (1)	(754.4		)	(1.1		)	90.9			(11.6		)	(676.2		)
Reclassifications recorded in:
Net investment income:
Interest rate swaps	—			—			—			(1.7		)	(1.7		)
Foreign currency swaps	—			—			—			(0.4		)	(0.4		)
Net realized (gains) losses	28.5			12.2			(1.7		)	—			39.0
Total provision (benefit) for income taxes	(10.0		)	(4.2		)	0.6			0.7			(12.9		)
Total reclassifications from AOCI, net of taxes	18.5			8.0			(1.1		)	(1.4		)	24.0
Other comprehensive income (loss) after reclassifications	(735.9		)	6.9			89.8			(13.0		)	(652.2		)
Balance as of September 30, 2013	$	874.3		$	(12.7	)	$	(131.6	)	$	(11.0	)	$	719.0
___________________


(1)	Other comprehensive income (loss) before reclassifications is net of taxes of $(32.5), $(0.1), $1.6, $(9.3) and $(40.3), respectively, for the three months ended September 30, 2013, and net of taxes of $(406.2), $(0.5), $49.0, $(6.3) and $(364.0), respectively, for the nine months ended September 30, 2013.


(2)	Reclassification adjustments of OTTI on fixed maturities not related to credit losses are included in changes in unrealized gains and losses on available-for-sale securities within the consolidated statements of comprehensive income (loss).

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Common Stock Outstanding

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



	Common Shares
Balance as of January 1, 2013	119,087,677
Common stock issued (1)	5,300,569
Restricted stock issued, net	254,579
Employee stock purchase plan shares issued	133,122
Common stock repurchased (2)	(7,045,190	)
Balance as of December 31, 2013	117,730,757

Balance as of January 1, 2014	117,730,757
Common stock issued	1,790
Restricted stock issued, net	197,829
Employee stock purchase plan shares issued	87,344
Common stock repurchased (2)	(2,104,638	)
Balance as of September 30, 2014	115,913,082
_____________________


(1)	Includes 5,297,758 shares of common stock issued from the settlement of warrants.


(2)	Represents shares of common stock repurchased pursuant to the Company’s stock repurchase program that began in 2013, which are held in treasury, as well as shares repurchased and subsequently retired to satisfy employee income tax withholding pursuant to the Company’s Equity Plan.

11. Stock-Based Compensation

The following table summarizes the Company’s restricted stock activity for the nine months ended September 30, 2014:



	Number of Shares		Weighted- Average Fair Value
Outstanding as of January 1, 2014	650,197		$	11.53
Shares granted	212,202		20.33
Shares vested	(13,048	)	10.85
Shares forfeited	(14,373	)	13.69
Outstanding as of September 30, 2014	834,978		$	13.74

12. Commitments and Contingencies

Litigation

Because of the nature of its business, the Company is subject to legal actions filed or threatened in the ordinary course of its business operations. The Company does not expect that any such litigation, pending or threatened, as of September 30, 2014, will have a material adverse effect on its consolidated financial condition, future operating results or liquidity.

Other Commitments and Contingencies

The Company has a service agreement with a third-party service provider to outsource the majority of its information technology infrastructure. On March 3, 2014, the Company extended its initial term of the service agreement to expire on July 31, 2015. On September 16, 2014, the Company elected to extend its service agreement for a second 12-month renewal period, which expires July 31, 2016. The material terms of the agreement remained unchanged.

As of September 30, 2014, the Company had no other material changes to its commitments or contingencies since December 31, 2013.

13. Segment Information

The Company offers a broad range of products and services that include retirement, group health and employee benefits and life insurance products. These operations are managed separately as three divisions, consisting of four business segments

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

based on product groupings, and a fifth reportable segment consisting primarily of unallocated corporate items and surplus investment income. The five segments are Benefits, Deferred Annuities, Income Annuities, Individual Life and Other.

The following tables present selected financial information by segment and reconcile segment pre-tax adjusted operating income (loss) to amounts reported in the consolidated statements of income.



	For the Three Months Ended September 30, 2014
	Benefits		Deferred Annuities			Income Annuities			Individual Life			Other			Total
Operating revenues:
Premiums	$	150.9	$	—		$	—		$	8.7		$	—		$	159.6
Net investment income	5.4		152.0			93.4			69.6			(1.9		)	318.5
Policy fees, contract charges, and other	3.7		5.6			0.4			35.6			0.4			45.7
Certain realized gains (losses)	—		(0.1		)	—			—			—			(0.1		)
Total operating revenues	160.0		157.5			93.8			113.9			(1.5		)	523.7
Benefits and expenses:
Policyholder benefits and claims	94.7		—			—			19.2			—			113.9
Interest credited	—		87.6			85.3			64.6			(0.3		)	237.2
Other underwriting and operating expenses	44.6		23.6			5.1			18.8			0.7			92.8
Interest expense	—		—			—			—			10.2			10.2
Amortization of DAC	0.1		15.6			1.3			0.6			—			17.6
Total benefits and expenses	139.4		126.8			91.7			103.2			10.6			471.7
Segment pre-tax adjusted operating income (loss)	$	20.6	$	30.7		$	2.1		$	10.7		$	(12.1	)	$	52.0
Operating revenues	$	160.0	$	157.5		$	93.8		$	113.9		$	(1.5	)	$	523.7
Add: Excluded realized gains (losses)	—		(1.9		)	(8.8		)	(0.1		)	(3.9		)	(14.7		)
Total revenues	160.0		155.6			85.0			113.8			(5.4		)	509.0
Total benefits and expenses	139.4		126.8			91.7			103.2			10.6			471.7
Income (loss) from operations before income taxes	$	20.6	$	28.8		$	(6.7	)	$	10.6		$	(16.0	)	$	37.3



	For the Three Months Ended September 30, 2013
	Benefits		Deferred Annuities			Income Annuities		Individual Life			Other			Total
Operating revenues:
Premiums	$	147.4	$	—		$	—	$	8.6		$	—		$	156.0
Net investment income	5.2		145.0			98.4		72.6			5.2			326.4
Policy fees, contract charges, and other	3.5		5.8			0.2		34.1			4.7			48.3
Certain realized gains (losses)	—		0.8			—		—			—			0.8
Total operating revenues	156.1		151.6			98.6		115.3			9.9			531.5
Benefits and expenses:
Policyholder benefits and claims	99.2		0.2			—		19.1			—			118.5
Interest credited	—		86.6			85.7		63.4			(0.4		)	235.3
Other underwriting and operating expenses	41.7		23.3			4.9		15.4			5.3			90.6
Interest expense	—		—			—		—			8.3			8.3
Amortization of DAC	—		17.7			0.9		1.6			—			20.2
Total benefits and expenses	140.9		127.8			91.5		99.5			13.2			472.9
Segment pre-tax adjusted operating income (loss)	$	15.2	$	23.8		$	7.1	$	15.8		$	(3.3	)	$	58.6
Operating revenues	$	156.1	$	151.6		$	98.6	$	115.3		$	9.9		$	531.5
Add: Excluded realized gains (losses)	—		(9.7		)	9.8		(3.0		)	(2.5		)	(5.4		)
Total revenues	156.1		141.9			108.4		112.3			7.4			526.1
Total benefits and expenses	140.9		127.8			91.5		99.5			13.2			472.9
Income (loss) from operations before income taxes	$	15.2	$	14.1		$	16.9	$	12.8		$	(5.8	)	$	53.2

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)



	For the Nine Months Ended September 30, 2014
	Benefits		Deferred Annuities			Income Annuities		Individual Life		Other			Total
Operating revenues:
Premiums	$	442.2	$	—		$	—	$	25.9	$	—		$	468.1
Net investment income	15.6		447.9			286.2		210.6		1.6			961.9
Policy fees, contract charges, and other	11.9		17.4			0.8		108.9		1.4			140.4
Certain realized gains (losses)	—		—			—		—		—			—
Total operating revenues	469.7		465.3			287.0		345.4		3.0			1,570.4
Benefits and expenses:
Policyholder benefits and claims	269.2		0.2			—		55.8		—			325.2
Interest credited	—		262.0			253.2		193.7		(1.2		)	707.7
Other underwriting and operating expenses	131.8		67.6			15.4		56.2		2.3			273.3
Interest expense	—		—			—		—		26.7			26.7
Amortization of DAC	0.4		47.2			3.4		3.1		—			54.1
Total benefits and expenses	401.4		377.0			272.0		308.8		27.8			1,387.0
Segment pre-tax adjusted operating income (loss)	$	68.3	$	88.3		$	15.0	$	36.6	$	(24.8	)	$	183.4
Operating revenues	$	469.7	$	465.3		$	287.0	$	345.4	$	3.0		$	1,570.4
Add: Excluded realized gains (losses)	—		(3.1		)	37.1		2.9		(5.7		)	31.2
Total revenues	469.7		462.2			324.1		348.3		(2.7		)	1,601.6
Total benefits and expenses	401.4		377.0			272.0		308.8		27.8			1,387.0
Income (loss) from operations before income taxes	$	68.3	$	85.2		$	52.1	$	39.5	$	(30.5	)	$	214.6
As of September 30, 2014:
Total assets	$	164.7	$	15,547.0		$	7,479.5	$	6,716.9	$	2,726.4		$	32,634.5



	For the Nine Months Ended September 30, 2013
	Benefits		Deferred Annuities			Income Annuities		Individual Life			Other			Total
Operating revenues:
Premiums	$	444.0	$	—		$	—	$	26.4		$	—		$	470.4
Net investment income	15.5		424.4			299.0		211.5			18.3			968.7
Policy fees, contract charges, and other	10.4		16.9			2.3		101.1			16.0			146.7
Certain realized gains (losses)	—		2.3			—		—			—			2.3
Total operating revenues	469.9		443.6			301.3		339.0			34.3			1,588.1
Benefits and expenses:
Policyholder benefits and claims	299.1		0.4			—		53.7			—			353.2
Interest credited	—		250.3			256.9		190.4			(1.3		)	696.3
Other underwriting and operating expenses	125.8		64.6			15.7		47.9			20.3			274.3
Interest expense	—		—			—		—			24.7			24.7
Amortization of DAC	—		48.0			2.8		5.5			—			56.3
Total benefits and expenses	424.9		363.3			275.4		297.5			43.7			1,404.8
Segment pre-tax adjusted operating income (loss)	$	45.0	$	80.3		$	25.9	$	41.5		$	(9.4	)	$	183.3
Operating revenues	$	469.9	$	443.6		$	301.3	$	339.0		$	34.3		$	1,588.1
Add: Excluded realized gains (losses)	—		(8.0		)	23.4		(7.0		)	(0.1		)	8.3
Total revenues	469.9		435.6			324.7		332.0			34.2			1,596.4
Total benefits and expenses	424.9		363.3			275.4		297.5			43.7			1,404.8
Income (loss) from operations before income taxes	$	45.0	$	72.3		$	49.3	$	34.5		$	(9.5	)	$	191.6
As of September 30, 2013:
Total assets	$	160.5	$	13,533.2		$	7,278.7	$	6,482.6		$	2,329.6		$	29,784.6

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

14. Subsequent Event

On October 24, 2014, the Company declared a special dividend of $1.30 per common share, or approximately $150.7 in total, to shareholders of record on November 7, 2014. The dividend will be paid on or about November 21, 2014.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion contains forward-looking statements that involve risk and uncertainties. Our actual results may differ materially from those discussed in or implied by any of the forward-looking statements as a result of various factors, including but not limited to those listed above under “Forward-Looking Statements” and the factors described in Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 25, 2014 (“2013 10-K”). You should read the following discussion in conjunction with Item 1 – “Condensed Financial Statements” included in this Form 10-Q and our 2013 10-K, as well as our current reports on Form 8-K and other publicly available information. Our fiscal year ends on December 31 of each calendar year.

Management considers certain non-GAAP financial measures to be useful to investors in evaluating our financial performance and condition. These measures have been reconciled to their most comparable GAAP financial measures. For a definition and further discussion of these non-GAAP measures, see Item 7 – “Management’s Discussion and Analysis of Financial Condition – Use of non-GAAP Financial Measures” in our 2013 10-K.

All amounts, except share and per share data, are in millions unless otherwise stated.

Overview

We are a financial services company in the life insurance industry providing employee benefits, annuities and life insurance products and services through a national network of benefits consultants, financial institutions, broker-dealers, and independent agents and advisers. Our operations date back to 1957, and while we have been expanding our distribution partnerships, many of our current relationships have been in place for decades.

Our Operations

We manage our business through three divisions composed of four business segments:

Benefits Division


•	Benefits. We offer medical stop-loss, limited benefit medical and group life and disability income (DI) insurance products and services to employers, unions, and public agencies.

Retirement Division


•	Deferred Annuities. We offer fixed deferred annuities, including fixed indexed annuities (FIA), and variable deferred annuities to consumers who want to accumulate tax-deferred assets for retirement.


•	Income Annuities. We offer single premium immediate annuities (SPIAs) to customers seeking a reliable source of retirement income or protection against outliving their assets during retirement. We also service our block of structured settlement policies and offer funding services options to existing structured settlement clients.

Individual Life Division


•	Individual Life. We offer individual life insurance products, such as term and universal life insurance. We also offer institutional products, including bank-owned life insurance (BOLI) and variable corporate-owned life insurance (COLI).

In addition, we have a fifth segment, referred to as the Other segment, which includes our operations that are not directly related to the operating segments. This includes small, non-insurance businesses that are managed outside our divisions; investment income related to unallocated surplus, certain alternative investments and tax credit investments; unallocated corporate expenses; interest expense on debt; and inter-segment elimination entries.

See Note 13 to the accompanying unaudited interim condensed consolidated financial statements for the financial results of our segments. Our segments and operations are further described in Item 1 – Business of our 2013 10-K.

Executive Summary

Net income for the nine months ended September 30, 2014 increased to $186.8, from $156.3 in the same period in 2013, the result of flat pretax adjusted operating income, higher net realized gains and a lower effective tax rate. For further discussion of earnings drivers for the period, refer to — "Results of Operations".

Significant business developments during the third quarter include the following:


•	Benefits Division: Our loss ratio remained at 62.7% for the third quarter of 2014, which was unchanged from the second quarter of 2014. Our loss ratio for the nine months ended September 30, 2014 was 60.9%, and we expect the full-year loss ratio to be below our target range of 64 – 66%.


•	Retirement Division: Higher FIA account values continued to deliver significantly higher earnings contributions compared to the prior year. FIA account values grew to $2.91 billion from $1.32 billion in the prior year, driven by strong sales. Total account values in our Deferred Annuities segment grew to $14.79 billion.


•	Individual Life Division: Sales of individual life products increased to $8.3 for the three months ended September 30, 2014, compared to $3.9 for the same period in 2013. Expanded distribution relationships in the Brokerage General Agency (BGA) market have resulted in stronger sales, primarily of our universal life products.

Additionally, other recent developments include the following


•	Senior notes: On August 4, 2014, the Company issued $250.0 of 4.25% senior notes due on July 15, 2024. Interest on the notes is payable semi-annually, commencing on January 15, 2015.

•

Revolving credit facility: The Company entered into a five-year, $400.0 senior unsecured revolving credit agreement, with access to an additional $100.0 of financing through an expansion feature for a total available credit facility of $500.0. The credit agreement matures August 28, 2019. Effective August 28, 2014, concurrently with entry into the new credit agreement, the Company terminated its prior four-year credit agreement, dated December 14, 2011.


•	Special dividend: On October 27, 2014, the Company announced that a portion of the proceeds from the senior notes would be utilized to pay a special cash dividend of $1.30 per common share, for an estimated total payout of $150.7.

Business Strategy

We remain focused on increasing adjusted operating income and cash flows and improving our operating ROAE over time. Our strategies are outlined in our 2013 10-K, in Item 1 — “Business – Our strategies” and Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business strategy.”

Recent developments in the strategies we have outlined include the following:


•	Benefits Division: We are executing our strategy to place all of our employee benefits products on the private exchanges of our preferred distribution partners. We expect to have our limited benefit medical product available on many of these exchanges by the end of 2014.


•	Retirement Division: We continue to focus on distribution and product expansion. In October 2014, we launched a death benefit rider for our FIA product that we believe will differentiate our product in the marketplace.

•

Individual Life Division: We expanded our product line-up with the launch of a universal life product with survivorship benefits in late second quarter 2014. Additionally, we intend to have a financing solution in place by the end of this year to more effectively manage reserves and capital related to our universal life products with secondary guarantees. This financing solution will include certain business written in recent years, and we are monitoring regulatory developments impacting business written in 2015 and beyond that may affect the benefit from future financing solutions.

Our success may be affected by the factors discussed in Item 1A — “Risk Factors” in our 2013 10-K and other factors as discussed herein.

Economic and Industry Trends

Our results and ability to execute on our strategies are influenced by a range of economic and other factors, which are described in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business strategy” in our 2013 10-K. We continually monitor changes in these factors that affect our business, and there have been no significant changes to the trends discussed in our 2013 10-K.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported and disclosed in the unaudited interim condensed consolidated financial statements. In applying the Company’s accounting policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company’s businesses and operations. For all of these policies, we caution that future events rarely develop exactly as forecasted, and our best estimates may require adjustment.

The following accounting policies are those we consider to be particularly critical to understanding our condensed financial statements because their application places the most significant demands on our ability to judge the effect of inherently uncertain matters on our financial results:


•	The valuation of investments at fair value;


•	The evaluation of other-than-temporary impairments (OTTI) of investments;


•	The balance, recoverability and amortization of deferred policy acquisition costs (DAC) and deferred sales inducements (DSI); and


•	The liabilities for future policy benefits and policy and contract claims.

There have been no material changes to the critical accounting estimates listed above, which are described in Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and Note 2 of the notes to the audited consolidated financial statements included in our 2013 10-K.

New Accounting Standards

For a discussion of not yet adopted accounting pronouncements, see Note 2 to the accompanying unaudited interim condensed consolidated financial statements.

Sources of Revenues and Expenses

Our primary sources of revenues from our insurance operations are premiums, net investment income and policy fees and contract charges. We also generate net realized gains (losses), primarily on sales or impairment of our investments, and changes in fair value on our equity trading portfolio and derivative financial instruments. Our primary sources of expenses from our insurance operations are policyholder benefits and claims, interest credited to policyholder reserves and account balances, DAC amortization and general business and operating expenses, net of DAC deferrals.

Business segments with significant invested assets maintain their own portfolios of invested assets, which are managed in accordance with specific guidelines. The net investment income and realized gains (losses) are reported in the segment in which they occur. We also allocate surplus net investment income to each segment using a risk-based capital formula. The unallocated portion of net investment income is reported in the Other segment. Investment expenses, which are recorded as a reduction of investment income, are allocated to each segment based on its portfolio of invested assets. We allocate shared service operating expenses to each segment using multiple factors, including employee headcount and time study results.

For a full description of each source of revenue and expense, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Sources of Revenues and Expenses” in our 2013 10-K.

Use of non-GAAP Financial Measures

Certain tables and related disclosures in this report include non-GAAP financial measures. We believe these measures provide useful information to investors in evaluating our financial performance or condition. The non-GAAP financial measures discussed below are not substitutes for their most directly comparable GAAP measures. The adjustments made to derive these non-GAAP measures are important to understanding our overall results of operations and financial position and, if evaluated without proper context, these non-GAAP measures possess material limitations.

For a full description of each non-GAAP measure, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Use of non-GAAP Financial Measures” in our 2013 10-K.

The following table presents a reconciliation of each of these non-GAAP financial measures to their most directly comparable GAAP financial measures:



	As of September 30, 2014		As of December 31, 2013
Total stockholders’ equity	$	3,375.3	$	2,941.9
Less: accumulated other comprehensive income (AOCI)	911.1		593.6
Adjusted book value*	2,464.2		2,348.3
Book value per common share(1)	$	29.12	$	24.99
Adjusted book value per common share (2)*	$	21.26	$	19.95



	For the Twelve Months Ended
	September 30, 2014			December 31, 2013
Return on stockholders’ equity, or ROE	7.9		%	6.8		%
Net income (3)	$	251.2		$	220.7
Average stockholders’ equity (4)	3,190.8			3,245.8
Operating return on average equity, or ROAE*	9.1		%	8.8		%
Adjusted operating income (5)*	$	216.5		$	200.9
Average adjusted book value (6)*	2,387.1			2,293.9
_________________


*	Represents a non-GAAP measure.


(1)	Book value per common share is calculated as stockholders’ equity divided by common shares outstanding totaling 115,913,082 and 117,730,757 as of September 30, 2014 and December 31, 2013, respectively.


(2)	Adjusted book value per common share is calculated as adjusted book value divided by common shares outstanding totaling 115,913,082 and 117,730,757 as of September 30, 2014 and December 31, 2013, respectively.


(3)	Net income for the most recent twelve months is used in the calculation of ROE. For the twelve months ended September 30, 2014, this consisted of quarterly net income of $36.0, $71.5, $79.3 and $64.4.


(4)	Ending stockholders' equity balances for the most recent five quarters are used in the calculation of ROE. As of September 30, 2014, stockholders' equity for the most recent five quarters was $3,375.3, $3,428.6, $3,195.3, $2,941.9 and $3,012.8. As of December 31, 2013, stockholders' equity for the most recent five quarters was $2,941.9, $3,012.8, $3,040.1, $3,604.2, and $3,630.1.

(5)

Adjusted operating income for the most recent twelve months is used in the calculation of operating ROAE. For the twelve months ended September 30, 2014, this consisted of quarterly adjusted operating income of $45.5, $55.3, $65.7 and $50.0. Adjusted operating income consists of net income, excluding after-tax net realized gains (losses) that are not reflective of the performance of the Company's insurance operations. For the twelve months ended September 30, 2014, the net quarterly reconciling amounts to arrive at net income were $(9.5), $16.2, $13.6 and $14.4. For the twelve months ended December 31, 2013, adjusted operating income was $200.9, with a reconciling amount of $19.8 to arrive at net income.

(6)

Ending adjusted book values for the most recent five quarters are used in the calculation of operating ROAE. Adjusted book value consists of stockholders’ equity, less AOCI. As of September 30, 2014, adjusted book value for the most recent five quarters was $2,464.2, $2,438.0, $2,391.0, $2,348.3 and $2,293.8. AOCI, for the most recent five quarters was $911.1, $990.6, $804.3, $593.6 and $719.0. As of December 31, 2013, adjusted book value of the most recent five quarters was $2,348.3, $2,293.8, $2,257.5, $2,311.1 and $2,258.9. AOCI, for the most recent five quarters was $593.6, $719.0, $782.6, $1,293.1 and $1,371.2.

Results of Operations

The following discussion should be read in conjunction with our unaudited interim condensed consolidated financial statements and the related condensed notes.

Total Company

Set forth below is a summary of our consolidated financial results. The variances noted in the total company and segment tables should be interpreted as increases or (decreases), respectively.



	For the Three Months Ended September 30,						Variance (%)		For the Nine Months Ended September 30,				Variance (%)
	2014			2013			2014 vs. 2013		2014		2013		2014 vs. 2013
Revenues:
Premiums	$	159.6		$	156.0		2.3	%	$	468.1	$	470.4	(0.5	)%
Net investment income	318.5			326.4			(2.4	)	961.9		968.7		(0.7	)
Policy fees, contract charges, and other	45.7			48.3			(5.4	)	140.4		146.7		(4.3	)
Net realized gains (losses)	(14.8		)	(4.6		)	*		31.2		10.6		*
Total revenues	509.0			526.1			(3.3	)	1,601.6		1,596.4		0.3
Benefits and expenses:
Policyholder benefits and claims	113.9			118.5			(3.9	)	325.2		353.2		(7.9	)
Interest credited	237.2			235.3			0.8		707.7		696.3		1.6
Other underwriting and operating expenses	92.8			90.6			2.4		273.3		274.3		(0.4	)
Interest expense	10.2			8.3			22.9		26.7		24.7		8.1
Amortization of deferred policy acquisition costs	17.6			20.2			(12.9	)	54.1		56.3		(3.9	)
Total benefits and expenses	471.7			472.9			(0.3	)	1,387.0		1,404.8		(1.3	)
Income from operations before income taxes	37.3			53.2			(29.9	)	214.6		191.6		12.0
Total provision for income taxes	1.3			7.9			(83.5	)	27.8		35.3		(21.2	)
Net income	$	36.0		$	45.3		(20.5	)%	$	186.8	$	156.3	19.5	%
Net income per common share – diluted (1):	$	0.31		$	0.38		(18.4	)%	$	1.60	$	1.21	32.2	%
Weighted-average common shares outstanding – diluted	115,906,535			117,803,885			(1.6	)	116,439,608		129,578,606		(10.1	)
Non-GAAP Financial Measures:
Adjusted operating income	$	45.5		$	48.8		(6.8	)%	$	166.5	$	150.9	10.3	%
Adjusted operating income per common share – diluted	$	0.39		$	0.41		(4.9	)%	$	1.43	$	1.16	23.3	%

Net income	$	36.0		$	45.3		(20.5	)	$	186.8	$	156.3	19.5
Less: Excluded realized gains (losses) (net of taxes of $(5.2), $(1.9), $10.9 and $2.9)	(9.5		)	(3.5		)	*		20.3		5.4		*
Adjusted operating income	$	45.5		$	48.8		(6.8	)%	$	166.5	$	150.9	10.3	%
__________________

* Represents percentage variances that are not meaningful or are explained through the discussion of other variances.


(1)	Historically, our outstanding warrants exercisable for 18,975,744 common shares were included weighted-average common shares outstanding. The warrants were net-share settled on June 20, 2013, resulting in the issuance of 5,297,758 common shares.

The following table sets forth additional detail of our other underwriting and operating expenses:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Salaries, incentive compensation, and other employee costs	$	50.0		$	42.2		$	142.4		$	125.3
Rent and occupancy costs	4.6			3.8			14.1			10.4
Professional services and software licensing	14.5			12.6			44.2			37.7
Other	7.4			11.1			21.7			33.9
Total operating expenses	76.5			69.7			222.4			207.3
Commissions and premium-based taxes and fees	59.8			57.3			175.1			144.4
DAC deferrals	(43.5		)	(36.4		)	(124.2		)	(77.4		)
Other underwriting and operating expenses	$	92.8		$	90.6		$	273.3		$	274.3

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

Summary of Results

Net income decreased $9.3 primarily as a result of a $10.2 increase in net realized losses and a decrease in pre-tax adjusted operating income. This was partially offset by a lower provision for income taxes as a result of a lower effective tax rate. Most net realized gains (losses) are excluded from pre-tax adjusted operating income. Refer to – “Investments” for further discussion of realized gains (losses).

Compared to third quarter 2013 results, third quarter 2014 pre-tax adjusted operating income from our Benefits and Deferred Annuities segments improved significantly, and declined in our Income Annuities, Individual Life, and Other Segments. Segment results, discussed further below, include net prepayment-related income of $5.1, which consisted of $7.1 of net investment income from investment prepayments (primarily bond make-whole payments in our Deferred Annuities segment), less $2.0 of related DAC and DSI amortization. For the three months ended September 30, 2013, prepayment-related income, net of related amortization, contributed $13.2 to pre-tax adjusted operating income.

Additionally, we perform our annual unlocking during the third quarter, which includes a comprehensive review of actuarial assumptions used for estimates of future gross profits underlying the amortization of deferred acquisition costs, deferred sales inducement assets and certain reserves related mainly to life insurance products. Among other factors, these actuarial assumptions include future investment yields, interest spreads, mortality, expenses, and lapses. Changes to these future assumptions result in adjustments that increase or decrease assets and liabilities amortized based on estimated gross profits. Annual unlocking charges were modest and totaled $1.1 in third quarter 2014, compared with $2.3 of unlocking charges in third quarter 2013.

Our other underwriting and operating expenses increased $2.2. This increase reflects expenses to support growth in our business, including information technology initiatives. These increases more than offset expense savings of $5.4 related to a broker-dealer subsidiary sold in the fourth quarter of 2013.

The provision for income taxes decreased $6.6 from the three months ended September 30, 2013. The effective tax rate declined to 3.5% for the three months ended September 30, 2014 from 14.8% for the same period in 2013. This was primarily due to increased benefits from tax credit investments on lower pre-tax income.

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

Summary of Results

Net income increased $30.5 primarily as a result of a $20.6 increase in net realized gains and a lower effective tax rate. Pre-tax adjusted operating income remained flat. Most net realized gains (losses) are excluded from pre-tax adjusted operating income. Refer to – “Investments” for further discussion of realized gains (losses).

Compared to 2013, pre-tax adjusted operating income from our Benefits and Deferred Annuities segments improved for the nine months ended September 30, 2014, and declined in our Income Annuities, Individual Life and Other segments. Segment results, discussed further below, include net prepayment-related income of $14.7, which consisted of $26.3 of net investment income from investment prepayments, less $11.6 of related DAC and DSI amortization. For the nine months ended September 30, 2013, prepayment-related income, net of related amortization, contributed $30.8 to pre-tax adjusted operating income.

Our other underwriting and operating expenses decreased $1.0. This decline reflects expense savings of $18.3 related to a broker-dealer subsidiary sold in the fourth quarter of 2013. Offsetting this decline is an increase in expenses to support business growth, a $4.3 charge primarily for prior years' state sales and use tax expense, increases in rent and occupancy costs, and expenses associated with our national brand campaign.

The provision for income taxes decreased $7.5 from the nine months ended September 30, 2013 as a result of a lower effective tax rate on higher income from operations. The effective tax rate declined to 13.0% for the nine months ended September 30, 2014 from 18.4% for the same period in 2013, due primarily to increased benefits from our tax credit investments.

Segment Operating Results

The following table sets forth pre-tax adjusted operating income, by segment:



	For the Three Months Ended September 30,						Variance (%)		For the Nine Months Ended September 30,						Variance (%)
	2014			2013			2014 vs. 2013		2014			2013			2014 vs. 2013
Segment pre-tax adjusted operating income (loss):
Benefits	$	20.6		$	15.2		35.5	%	$	68.3		$	45.0		51.8	%
Deferred Annuities	30.7			23.8			29.0		88.3			80.3			10.0
Income Annuities	2.1			7.1			(70.4	)	15.0			25.9			(42.1	)
Individual Life	10.7			15.8			(32.3	)	36.6			41.5			(11.8	)
Other	(12.1		)	(3.3		)	*		(24.8		)	(9.4		)	*
Pre-tax adjusted operating income(1)	$	52.0		$	58.6		(11.3	)%	$	183.4		$	183.3		0.1	%
Add: Excluded realized gains (losses)	(14.7		)	(5.4		)	*		31.2			8.3			*
Income from operations before incomes taxes	$	37.3		$	53.2		(29.9	)%	$	214.6		$	191.6		12.0	%
________________


*	Represents percentage variances that are not meaningful or are explained through the discussion of other variances.


(1)	Represents a non-GAAP measure.

The results of operations and selected operating metrics for our three divisions composed of five segments (Benefits, Deferred Annuities, Income Annuities, Individual Life and Other) for the three and nine months ended September 30, 2014 and 2013 are set forth in the following sections.

Benefits

The following table sets forth the results of operations relating to our Benefits segment:



	For the Three Months Ended September 30,				Variance (%)		For the Nine Months Ended September 30,				Variance (%)
	2014		2013		2014 vs. 2013		2014		2013		2014 vs. 2013
Operating revenues:
Premiums	$	150.9	$	147.4	2.4	%	$	442.2	$	444.0	(0.4	)%
Net investment income	5.4		5.2		3.8		15.6		15.5		0.6
Policy fees, contract charges, and other	3.7		3.5		5.7		11.9		10.4		14.4
Total operating revenues	160.0		156.1		2.5		469.7		469.9		—
Benefits and expenses:
Policyholder benefits and claims	94.7		99.2		(4.5	)	269.2		299.1		(10.0	)
Other underwriting and operating expenses	44.6		41.7		7.0		131.8		125.8		4.8
Amortization of deferred policy acquisition costs	0.1		—		*		0.4		—		*
Total benefits and expenses	139.4		140.9		(1.1	)	401.4		424.9		(5.5	)
Segment pre-tax adjusted operating income	$	20.6	$	15.2	35.5	%	$	68.3	$	45.0	51.8	%
________________


*	Represents percentage variances that are not meaningful or are explained through the discussion of other variances.

The following table sets forth selected operating metrics relating to our Benefits segment:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Loss ratio (1)	62.7		%	67.3		%	60.9		%	67.4		%
Expense ratio (2)	29.4			28.1			29.7			28.2
Combined ratio (3)	92.1			95.4			90.6			95.6
Medical stop-loss – loss ratio (4)	63.6			67.2			60.1			67.5
Total sales (5)	$	34.8		$	19.0		$	132.8		$	106.8
_________________


(1)	Loss ratio represents policyholder benefits and claims incurred divided by premiums earned.


(2)	Expense ratio is equal to other underwriting and operating expenses of the segment's insurance operations divided by premiums earned.


(3)	Combined ratio is equal to the sum of the loss ratio and the expense ratio.


(4)	Medical stop-loss — loss ratio represents medical stop-loss policyholder benefits and claims incurred divided by medical stop-loss premiums earned.


(5)	Total sales represents annualized first-year premiums net of first year policy lapses.

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

Summary of Results

Segment pre-tax adjusted operating income increased $5.4, driven primarily by an improved loss ratio for medical stop-loss, which was partially offset by higher operating expenses. The loss ratio improved to 62.7% for the three months ended September 30, 2014, compared to 67.3% for the same period in 2013.

In addition to the drivers discussed above, we consider the following information useful in understanding our results.

Operating Revenues

Premiums increased $3.5 due to growth in our group life and DI business. This was partially offset by decreases in our medical stop-loss line due to policy lapses outpacing premiums from sales and renewals in 2014.

Benefits and Expenses

Policyholder benefits and claims decreased $4.5, primarily due to lower claims frequency in medical stop-loss, particularly on business written in 2013. This decrease was partially offset by higher group life and DI claims primarily due to growth in this line of business.

Other underwriting and operating expenses increased $2.9, primarily due to increased employee-related expenses and commissions driven by growth in our business.

Sales

Sales for the three months ended September 30, 2014 totaled $34.8, up from sales of $19.0 for the same period in 2013, driven by growth in our medical stop-loss and group life and DI lines of business.

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

Summary of Results

Segment pre-tax adjusted operating income increased $23.3, primarily driven by a lower loss ratio. The loss ratio improved to 60.9% for the nine months ended September 30, 2014, compared to 67.4% for the same period in 2013.

In addition to the driver discussed above, we consider the following information useful in understanding our results.

Operating Revenues

Premiums were essentially flat, as a $16.8 decrease in medical stop-loss premiums was effectively offset by $16.0 increase in group life and DI premiums. For our medical stop-loss business in 2014, policy lapses have outpaced premiums from sales and renewals.

Benefits and Expenses

Policyholder benefits and claims decreased $29.9 primarily due to lower claims frequency in medical stop-loss. During 2013, we experienced higher than expected claims frequency related to business written in January 2013 and established reserves for estimated incurred but not reported claims based on this experience. In 2014, the related claims have been lower than expected and reserves for this block were released. This favorable claims development has resulted in a lower loss ratio and reduced our benefits expense. This decrease was partially offset by higher group life and DI claims primarily due to growth in this line of business.

Other underwriting and operating expenses increased $6.0, primarily driven by increased employee-related expenses and commissions due to growth in our group life & DI business.

Sales

Sales for the nine months ended September 30, 2014 totaled $132.8, compared to sales of $106.8 for the same period in 2013. Sales increased across business lines in 2014, with most of the growth driven by higher sales of medical stop-loss and limited benefit medical.

Deferred Annuities

The following table sets forth the results of operations relating to our Deferred Annuities segment:



	For the Three Months Ended September 30,					Variance (%)		For the Nine Months Ended September 30,				Variance (%)
	2014			2013		2014 vs. 2013		2014		2013		2014 vs. 2013
Operating revenues:
Net investment income	$	152.0		$	145.0	4.8	%	$	447.9	$	424.4	5.5	%
Policy fees, contract charges, and other	5.6			5.8		(3.4	)	17.4		16.9		3.0
Certain realized gains (losses)	(0.1		)	0.8		*		—		2.3		(100.0	)
Total operating revenues	157.5			151.6		3.9		465.3		443.6		4.9
Benefits and expenses:
Policyholder benefits and claims	—			0.2		(100.0	)	0.2		0.4		(50.0	)
Interest credited	87.6			86.6		1.2		262.0		250.3		4.7
Other underwriting and operating expenses	23.6			23.3		1.3		67.6		64.6		4.6
Amortization of deferred policy acquisition costs	15.6			17.7		(11.9	)	47.2		48.0		(1.7	)
Total benefits and expenses	126.8			127.8		(0.8	)	377.0		363.3		3.8
Segment pre-tax adjusted operating income	$	30.7		$	23.8	29.0	%	$	88.3	$	80.3	10.0	%

The following table sets forth selected operating metrics relating to our Deferred Annuities segment:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Fixed account values, excluding FIA – General account	$	11,074.0		$	10,790.0		$	11,074.0		$	10,790.0
Interest spread (1)	1.91		%	2.05		%	1.91		%	2.08		%
Base earned yield	4.43			4.60			4.47			4.65
Base credited yield	2.70			2.88			2.73			2.87
Base interest spread (2)	1.73		%	1.72		%	1.74		%	1.78		%
Fixed account values, FIA – General account	$	2,907.2		$	1,321.8		$	2,907.2		$	1,321.8
FIA interest spread (3)	1.21		%	*			1.22		%	*
FIA base earned yield (4)	3.39		%	*			3.34		%	*
FIA base credited rate (4)	2.14		%	*			2.10		%	*
FIA base interest spread (4)	1.25		%	*			1.24		%	*
Variable account values – Separate account	$	805.3		$	792.3		$	805.3		$	792.3
Total sales (5)	759.3			747.1			2,037.1			1,510.6
_________________


(1)	Interest spread excludes FIA and is the difference between the net investment yield and the credited rate to policyholders. The net investment yield is the approximate yield on invested assets. The credited rate is the approximate rate credited on policyholder fixed account values. Interest credited is subject to contractual terms, including minimum guarantees.

(2)

Base interest spread excludes FIA and is the interest spread adjusted to exclude items that can vary significantly from period to period due to a number of factors and, therefore, may contribute to results that are not indicative of the underlying trends. This is primarily the impact of asset prepayments, such as bond make-whole premiums net of related deferred sales inducement amortization, and the MBS prepayment speed adjustment.


(3)	FIA interest spread is the difference between the net investment yield and the credited rate to policyholders. The net investment yield is the approximate yield on invested assets, excluding derivative assets. The credited rate represents amounts recorded in interest credited related to FIA contracts.

(4)

FIA base interest spread is the FIA interest spread adjusted to exclude items that can vary significantly from period to period due to a number of factors and, therefore, may contribute to results that are not indicative of the underlying trends. This is primarily the impact of asset prepayments, such as bond make-whole premiums and the MBS prepayment speed adjustment, and the impact of reserve adjustments on interest credited.


(5)	Total sales represent deposits for new policies net of first year policy lapses and/or surrenders.


*	Not meaningful.

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

Summary of Results

Segment pre-tax adjusted operating income was $30.7 for the three months ended September 30, 2014, an increase of $6.9 from the same period in 2013. Higher FIA account values contributed $9.1 to interest margin, compared with $2.6 in the same period in 2013. Annual unlocking adjustments increased earnings by $0.2 in the third quarter of 2014, compared with a $3.5 reduction in earnings in the third quarter of 2013. These increases were partially offset by a reduction in income from prepayment-related activity.

In addition to the drivers discussed above, we consider the following information useful in understanding our results.

Operating Revenues

Net investment income increased $7.0, driven by an increase in invested assets due to higher account values. This increase was partially offset by lower yields on invested assets and lower investment income from prepayment-related activity. Prepayment income was $5.5 in the third quarter of 2014, compared with $12.6 in the third quarter of 2013.

The decline in investment yields was driven by earned rates on recent purchases of fixed maturities and originations of commercial mortgage loans, which were below our overall portfolio yields. Also contributing to the decline in yields was the reinvestment of proceeds from prepayments at lower yields.

Benefits and Expenses

Interest credited increased $1.0, which was due to growth in account values, mostly offset by a favorable impact from annual DSI unlocking and lower DSI amortization related to prepayment income compared to 2013.

Amortization of deferred policy acquisition costs decreased $2.1 primarily due to a smaller annual unlocking charge in 2014 as compared with 20l3.

Sales

Deferred Annuities’ sales increased to $759.3 for the three months ended September 30, 2014 compared to $747.1 for the same period in 2013. Higher sales of our FIA and traditional fixed annuities products were driven by ongoing expansion of our products on bank and broker-dealer distribution platforms.

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

Summary of Results

Segment pre-tax adjusted operating income increased $8.0, primarily driven by higher FIA account values. This was partially offset by lower income from prepayment-related activity. Prepayment-related income was $7.6, net of related amortization, compared to $18.1 in the same period in 2013.

In addition to the drivers discussed above, we consider the following information useful in understanding our results.

Operating Revenues

Net investment income increased $23.5, driven by an increase in invested assets due to higher account values. This increase was partially offset by lower yields on invested assets and lower investment income from prepayment-related activity. The decline in yields was driven by earned rates on recent purchases of fixed maturities and originations of commercial

mortgage loans, which were below our overall portfolio yields. Also contributing to the decline in yields was the reinvestment of proceeds from prepayments at lower yields.

Benefits and Expenses

The $11.7 increase in interest credited was driven by higher FIA interest, primarily from growth in account value.

Other underwriting and operating expenses increased $3.0 primarily due to higher employee-related expenses to support business growth and a charge primarily for prior years' state sales and use tax expense, as well as increases in rent and occupancy costs and expenses associated with our national brand campaign.

Sales

Deferred Annuities’ sales increased to $2,037.1 for the nine months ended September 30, 2014 compared to $1,510.6 for the same period in 2013, with significant increases in sales of FIA and traditional fixed annuity products. While interest rates remained at historically low levels, sales benefited from an improved interest rate environment in the first half of the year compared to 2013, and ongoing expansion of our FIA and traditional fixed annuity products on bank and broker-dealer distribution platforms.

Income Annuities

The following table sets forth the results of operations relating to our Income Annuities segment:



	For the Three Months Ended September 30,				Variance (%)		For the Nine Months Ended September 30,				Variance (%)
	2014		2013		2014 vs. 2013		2014		2013		2014 vs. 2013
Operating revenues:
Net investment income	$	93.4	$	98.4	(5.1	)%	$	286.2	$	299.0	(4.3	)%
Policy fees, contract charges, and other	0.4		0.2		100.0		0.8		2.3		(65.2	)
Total operating revenues	93.8		98.6		(4.9	)	287.0		301.3		(4.7	)
Benefits and expenses:
Interest credited	85.3		85.7		(0.5	)	253.2		256.9		(1.4	)
Other underwriting and operating expenses	5.1		4.9		4.1		15.4		15.7		(1.9	)
Amortization of deferred policy acquisition costs	1.3		0.9		44.4		3.4		2.8		21.4
Total benefits and expenses	91.7		91.5		0.2		272.0		275.4		(1.2	)
Segment pre-tax adjusted operating income	$	2.1	$	7.1	(70.4	)%	$	15.0	$	25.9	(42.1	)%

The following table sets forth selected operating metrics relating to our Income Annuities segment:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Reserves(1)	$	6,494.8		$	6,484.6		$	6,494.8		$	6,484.6
Interest spread (2)	0.46		%	0.61		%	0.48		%	0.62		%
Base earned yield	5.89			6.02			5.89			6.03
Base credited yield	5.36			5.49			5.43			5.51
Base interest spread(3)	0.53		%	0.53		%	0.46		%	0.52		%
Mortality gains (losses) (4)	$	0.2		$	1.1		$	6.3		$	6.6
Total sales (5)	62.3			38.9			238.8			125.1
_________________


(1)	Reserves represent the present value of future income annuity benefits and assumed expenses, discounted by the assumed interest rate. This metric represents the amount of our in-force book of business.


(2)	Interest spread is the difference between the net investment yield and the credited rate to policyholders. The net investment yield is the approximate yield on invested assets, excluding equities, in the general account attributed to the segment. The credited rate is the approximate rate credited on policyholder reserves.


(3)	Base interest spread is the interest spread adjusted to exclude items that can vary significantly from period to period due to a number of factors and, therefore, may contribute to yields that are not indicative of the underlying trends. This is primarily the impact of asset prepayments, such as bond make-whole premiums and the MBS prepayment speed adjustment.


(4)	Mortality gains (losses) represent the difference between actual and expected reserves released on our life contingent annuities.


(5)	Total sales represent deposits for new policies net of first year policy lapses and/or surrenders.

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

Summary of Results

Segment pre-tax adjusted operating income decreased $5.0, primarily the result of a lower investment margin and a reduction in mortality gains. Mortality gains were $0.2 for the three months ended September 30, 2014, compared to gains of $1.1 for the same period in 2013.

In addition to the drivers discussed above, we consider the following information useful in understanding our results.

Operating Revenues

Net investment income decreased $5.0, primarily due to a $1.9 mark-to-market loss on alternative investments purchased in the quarter and an overall decline in investment yields. The decline in yields was driven by earned rates on recent fixed maturity purchases and commercial mortgage loan originations, which were below overall portfolio yields. Proceeds from prepayments of higher yielding assets were also reinvested at lower yields.

Benefits and Expenses

Interest credited decreased $0.4 as a result of lower crediting rates, partially offset by less favorable mortality gains. Mortality experience is volatile and can fluctuate significantly from period to period.

Sales

Sales increased to $62.3 in 2014, compared to $38.9 in 2013. The increase was primarily the result of more competitive pricing of our SPIA products and the continued success of our sales strategies to help customers maximize retirement income. However, competition among carriers in this market remains strong, and sales in the third quarter of 2014 decreased sequentially from the second quarter.

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

Summary of Results

Segment pre-tax adjusted operating income decreased $10.9, primarily the result of a lower interest margin from lower investment yields and lower income from prepayment-related activity.

In addition to the drivers discussed above, we consider the following information useful in understanding our results.

Operating Revenues

Net investment income decreased $12.8, primarily due to lower investment yields. Additionally, we recorded a $1.9 mark-to-market loss on alternative investments, and we had lower prepayment-related income, which contributed earnings of $3.1 for the nine months ended September 30, 2014 compared to $4.9 in 2013. The decline in yields was driven by earned rates on recent fixed maturity purchases and commercial mortgage loan originations, which were below overall portfolio yields. Proceeds from prepayments of higher yielding assets were also reinvested at lower yields.

Benefits and Expenses

Interest credited decreased $3.7, primarily driven by lower crediting rates.

Sales

Sales increased $113.7 due to sales of SPIAs, which increased to $238.8 in 2014 compared to $117.6 in 2013. The increase was primarily the result of the improved interest rate environment compared to the nine months ended September 30, 2013, and the continued success of our sales strategies to help customers maximize retirement income.

Individual Life

The following table sets forth the results of operations relating to our Individual Life segment:



	For the Three Months Ended September 30,				Variance (%)		For the Nine Months Ended September 30,				Variance (%)
	2014		2013		2014 vs. 2013		2014		2013		2014 vs. 2013
Operating revenues:
Premiums	$	8.7	$	8.6	1.2	%	$	25.9	$	26.4	(1.9	)%
Net investment income	69.6		72.6		(4.1	)	210.6		211.5		(0.4	)
Policy fees, contract charges, and other	35.6		34.1		4.4		108.9		101.1		7.7
Total operating revenues	113.9		115.3		(1.2	)	345.4		339.0		1.9
Benefits and expenses:
Policyholder benefits and claims	19.2		19.1		0.5		55.8		53.7		3.9
Interest credited	64.6		63.4		1.9		193.7		190.4		1.7
Other underwriting and operating expenses	18.8		15.4		22.1		56.2		47.9		17.3
Amortization of deferred policy acquisition costs	0.6		1.6		(62.5	)	3.1		5.5		(43.6	)
Total benefits and expenses	103.2		99.5		3.7		308.8		297.5		3.8
Segment pre-tax adjusted operating income	$	10.7	$	15.8	(32.3	)%	$	36.6	$	41.5	(11.8	)%

The following table sets forth selected operating metrics relating to our Individual Life segment:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Individual insurance:
Individual claims (1)	$	14.3		$	14.0		$	41.7		$	43.4
UL account value (2)	753.4			717.6			753.4			717.6
UL interest spread (3)	1.36		%	2.44		%	1.40		%	2.11		%
UL base interest spread (4)	1.17			1.41			1.23			1.43
Sales (5)	$	8.3		$	3.9		$	25.3		$	9.2
Institutional Markets:
BOLI account value (2)	$	4,868.1		$	4,764.8		$	4,868.1		$	4,764.8
BOLI ROA(6)	0.96		%	0.78		%	1.01		%	0.84		%
BOLI base ROA (7)	0.92			0.64			0.87			0.77
COLI sales (8)	$	—		$	10.2		$	—		$	37.0
_________________


(1)	Individual claims represents incurred claims, net of reinsurance, on our term and universal life policies.


(2)	UL account value and BOLI account value represent our liabilities to our policyholders.

(3)

UL interest spread excludes SPL and is the difference between the net investment yield and the credited rate to policyholders. The net investment yield is the approximate yield on invested assets in the general account attributed to UL policies. The credited rate is the approximate rate credited on UL policyholder account values. Interest credited is subject to contractual terms, including minimum guarantees.

(4)

UL base interest spread excludes SPL and is UL interest spread adjusted to exclude items that can vary significantly from period to period due to a number of factors and, therefore, may contribute to results that are not indicative of underlying trends. This is primarily the impact of asset prepayments, such as bond make-whole premiums net of related bonus interest amortization, the MBS prepayment speed adjustment and reserve adjustments.


(5)	Individual sales represents annualized first year premiums for recurring premium products and 10% of new single premium deposits, net of first year policy lapses and/or surrenders.

(6)

BOLI ROA is a measure of the gross margin on our BOLI book of business. This metric is calculated as the difference between our BOLI revenue earnings rate and our BOLI policy benefits rate. The revenue earnings rate is calculated as revenues divided by average invested assets. The policy benefits rate is calculated as total policy benefits divided by average account value. The policy benefits used in this metric do not include expenses.


(7)	BOLI base ROA is BOLI ROA adjusted to exclude items that can vary significantly from period to period due to a number of factors and, therefore, may contribute to yields that are not indicative of the underlying trends. This is primarily the impact of asset prepayments, such as bond make-whole premiums, the MBS prepayment speed adjustment.


(8)	Represents deposits for new policies.

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

Summary of Results

Segment pre-tax adjusted operating income decreased $5.1, driven by an increase in operating expenses, lower prepayment-related income, and an unfavorable impact from annual unlocking. This was partially offset by a higher BOLI base ROA, driven by lower institutional claims.

In addition to the drivers discussed above, we consider the following information useful in understanding our results.

Operating Revenues

Net investment income decreased $3.0 primarily due to lower prepayment-related income, which contributed earnings of $0.9 in the third quarter of 2014 compared to $3.6 in the third quarter of 2013. Excluding prepayments, net investment income declined slightly primarily due to lower overall yields, partially offset by higher average invested assets.

Benefits and Expenses

Benefit-related expenses (policyholder benefits and claims, and interest credited) increased $1.3, driven by a $3.1 increase related to higher reserves from growth in our Classic UL block of business and a favorable impact from annual unlocking in 2013, as well as an increase in interest credited on higher UL and BOLI account values. These increases were primarily offset by a decrease of $3.2 in claims on our BOLI business.

Other underwriting and operating expenses increased $3.4, which includes an increase in expenses to acquire new business and service growth in this line of business. Non-deferrable commissions and premium taxes also increased due to higher sales of our Classic UL product.

Sales

Sales of individual life products increased to $8.3 for the three months ended September 30, 2014, compared to $3.9 for the same period in 2013. An expanded BGA distribution network contributed to higher sales of our Classic UL product.

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

Summary of Results

Segment pre-tax adjusted operating income decreased $4.9, primarily driven by higher operating expenses as well as an unfavorable impact from annual unlocking. Partially offsetting these items were increased earnings contributions from growth in our UL account value, and a higher BOLI base ROA, driven by lower claims.

In addition to the drivers discussed above, we consider the following information useful in understanding our results.

Operating Revenues

Net investment income remained flat primarily due to higher average invested assets offset by lower overall yields.

Policy fees, contract charges, and other increased $7.8 primarily due to increased COI charges and policy fees related to our UL and BOLI businesses.

Benefits and Expenses

Benefit-related expenses (policyholder benefits and claims, and interest credited) increased $5.4, driven by a $6.0 increase related to higher reserves from strong sales of our Classic UL product and a favorable impact from annual unlocking in 2013, as well as a $3.3 increase in interest credited primarily on larger BOLI account values. These increases were partially offset by a decrease of $4.0 from lower individual and BOLI claims.

Other underwriting and operating expenses increased $8.3, which includes $1.3 of expense primarily related to prior years' sales and use tax, as well as an increase in rent and occupancy costs, an increase in expenses to acquire new business and service growth in this line of business, and an increase related to consulting expenses on technology initiatives.

Sales

Sales of individual life products increased to $25.3 for the nine months ended September 30, 2014, compared to $9.2 for the same period in 2013. An expanded BGA distribution network contributed to higher sales of our Classic UL product.

Other

The following table sets forth the results of operations relating to our Other segment:



	For the Three Months Ended September 30,						Variance (%)		For the Nine Months Ended September 30,						Variance (%)
	2014			2013			2014 vs. 2013		2014			2013			2014 vs. 2013
Operating revenues:
Net investment income	$	(1.9	)	$	5.2		*		$	1.6		$	18.3		(91.3	)%
Policy fees, contract charges, and other	0.4			4.7			(91.5	)%	1.4			16.0			(91.3	)%
Total operating revenues	(1.5		)	9.9			*		3.0			34.3			(91.3	)
Benefits and expenses:
Interest credited	(0.3		)	(0.4		)	(25.0	)	(1.2		)	(1.3		)	(7.7	)
Other underwriting and operating expenses	0.7			5.3			(86.8	)	2.3			20.3			(88.7	)
Interest expense	10.2			8.3			22.9		26.7			24.7			8.1
Total benefits and expenses	10.6			13.2			(19.7	)	27.8			43.7			(36.4	)
Segment pre-tax adjusted operating loss	$	(12.1	)	$	(3.3	)	*		$	(24.8	)	$	(9.4	)	*
_________________


*	Represents percentage variances that are not meaningful or are explained through the discussion of other variances.

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

Summary of Results

Our Other segment reported pre-tax adjusted operating losses of $12.1 for the three months ended September 30, 2014 compared with losses of $3.3 for the same period in 2013. This decline was primarily driven by a $7.1 decrease in net investment income from lower returns on our alternative investments, which are marked to market each quarter. We recorded losses of $2.5 for the three months ended September 30, 2014 compared with gains of $0.8 for the same period in 2013. Higher amortization of our tax credit investments also contributed to the decline in net investment income. These tax credit investments reduce net investment income, but provide tax benefits that reduce our provision for income taxes and decrease our effective tax rate. See "Investments – Investments in Limited Partnerships – Tax Credit Investments" for further information.

The decrease in other underwriting and operating expenses was primarily due to third quarter 2013 commissions and other operating expenses associated with our broker-dealer subsidiary that was sold in the fourth quarter 2013, which was offset by a related decline in fee revenue.

Interest expense increased following the issuance of $250.0 senior notes in the third quarter 2014.

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

Summary of Results

Our Other segment reported pre-tax adjusted operating losses of $24.8 for the nine months ended September 30, 2014 compared with losses of $9.4 for the same period in 2013. This was driven by a reduction in net investment income, primarily due to lower returns on our alternative investments, which are marked to market each quarter. We recorded losses of $2.8 for the nine months ended September 30, 2014 compared with gains of $4.9 for the same period in 2013. Higher amortization of our tax credit investments also contributed to the decline in net investment income.

The decrease in other underwriting and operating expenses was primarily due to 2013 commissions and other operating expenses associated with our broker-dealer subsidiary that was sold in the fourth quarter 2013, which was offset by a related decline in fee revenue, as well as expenses related to the exploration of acquisition opportunities incurred in the second quarter of 2013.

Investments

Our investment portfolio is intended to support the expected cash flows of our liabilities and produce stable returns over the long term. The composition of our portfolio reflects our asset management philosophy of protecting principal and receiving appropriate reward for risk. Our investment portfolio mix as of September 30, 2014 consisted in large part of high quality fixed maturities and commercial mortgage loans we originated, as well as a smaller allocation of high yield fixed maturities, marketable equity securities, investments in limited partnerships (primarily tax credit investments and alternative investments which include private equity and hedge funds) and other investments. Our equity investments primarily consist of common stock and mainly support asset and liability matching strategies for certain long-duration insurance products in our Income Annuities segment. We believe that prudent levels of equity investments offer enhanced long-term, after-tax total returns.

The following table presents the composition of our investment portfolio:



	As of September 30, 2014				As of December 31, 2013
	Amount		% of Total		Amount		% of Total
Types of Investments
Fixed maturities, available-for-sale:
Public	$	24,462.5	80.8	%	$	22,684.0	81.3	%
Private	854.1		2.8		653.7		2.3
Marketable equity securities, available-for-sale	122.7		0.4		134.3		0.5
Marketable equity securities, trading	467.9		1.5		474.4		1.7
Mortgage loans, net	3,921.0		13.0		3,541.0		12.7
Policy loans	61.0		0.2		63.3		0.2
Investments in limited partnerships (1):
Alternative investments	63.3		0.2		31.2		0.1
Tax credit investments	244.6		0.8		265.1		1.0
Other invested assets (2)	76.9		0.3		54.1		0.2
Total	$	30,274.0	100.0	%	$	27,901.1	100.0	%
____________________


(1)	Alternative investments are carried at fair value, and our tax credit investments are carried at amortized cost.


(2)	Primarily includes derivative instruments.

Invested assets increased $2,372.9 during the nine months ended September 30, 2014 primarily due to a net increase in unrealized gains on our fixed maturities and portfolio growth generated by sales in the Retirement Division. As of September 30, 2014 and December 31, 2013, we had net unrealized gains of $1.61 billion and $1.08 billion, respectively, on our fixed maturity portfolio. This increase in unrealized gains was driven by a decrease in benchmark 10-year U.S. Treasury rates from 3.04% as of December 31, 2013 to 2.52% as of September 30, 2014.

Investment Returns

Net Investment Income

Return on invested assets is an important element of our financial results. The following table sets forth the income yield and net investment income, excluding realized gains (losses), for each major investment category:



	For the Three Months Ended September 30, 2014					For the Three Months Ended September 30, 2013
	Yield (1)		Amount			Yield (1)		Amount
Types of Investments
Fixed maturities, available-for-sale	4.78	%	$	278.8		5.24	%	$	283.4
Marketable equity securities, available-for-sale	3.35		1.0			4.37		0.6
Marketable equity securities, trading	2.94		2.9			2.84		3.3
Mortgage loans, net	5.68		54.5			5.84		48.7
Policy loans	5.63		0.9			5.63		0.8
Investments in limited partnerships:
Alternative investments	*		(4.5		)	*		0.8
Tax credit investments (2)	*		(8.1		)	*		(5.0		)
Other income producing assets (3)	1.41		1.1			2.14		1.5
Gross investment income before investment expenses	4.59		326.6			5.11		334.1
Investment expenses	(0.11	)	(8.1		)	(0.12	)	(7.7		)
Net investment income	4.48	%	$	318.5		4.99	%	$	326.4
____________________


*	Represents yield that is not meaningful.


(1)	Yields are determined based on monthly averages calculated using beginning and end-of-period balances. Yields for fixed maturities are based on amortized cost. Yields for equity securities, including investments in limited partnerships, are based on cost. Yields for all other asset types are based on carrying values.


(2)	The negative impact from the tax credit investments is offset by U.S. federal income tax benefits. The total impact to net income was $6.0 and $6.4 for the three months ended September 30, 2014 and 2013, respectively.


(3)	Other income producing assets includes other invested assets and cash and cash equivalents.

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

For the three months ended September 30, 2014, net investment income was down $7.9 compared to the same period in 2013. Average invested assets increased, while yields on our investment portfolio decreased to 4.48% for the three months ended September 30, 2014 from 4.99% for the three months ended September 30, 2013.

Yields continued to be negatively impacted by the low interest rate environment. Excluding the impact of prepayments, which are discussed below, yields on our investment portfolio decreased to 4.38% for the three months ended September 30, 2014 from 4.71% for the three months ended September 30, 2013. This reduction is a result of earned rates on new purchases, which are significantly below overall portfolio yields. We have experienced significant growth in account value from strong sales and reinvestment of proceeds from prepayment activity. The interest rates on new investment purchases associated with these cash flows are putting downward pressure on our overall portfolio yield.

We also continued to see elevated levels of prepayment activity and related income, though this impact was lower in the third quarter of 2014 when compared to the same period in 2013. Prepayment-related activities generated income of $7.1, or 10bps of yield, in the three months ended September 30, 2014, compared to $18.6, or 28bps of yield, in the same period in 2013. Prepayment-related income includes make-whole payments and consent fees on early calls or tenders of fixed maturities, prepayment speed adjustments on structured securities, and prepayment fees on our commercial mortgage loans. Prepayment activity usually stems from higher-yielding investments, resulting in cash inflows which are then typically reinvested into lower-yielding new assets, placing downward pressure on our future investment income and interest spreads.

In an attempt to mitigate the impact of the low interest rate environment, we continued to focus on our underwriting of commercial mortgage loans, which generally provide higher yields than fixed maturities. We also strategically increased our investment in high-quality foreign corporate securities beginning in late 2012, with a focus on investment grade securities.

We focus on originating loans at an attractive spread to comparable U.S. Treasuries. For the three months ended September 30, 2014, we originated loans at a spread over U.S. Treasuries of approximately 240bps, compared with an

approximate 290bps spread over U.S. Treasuries for the year ended December 31, 2013. Spreads to U.S. Treasuries continue to tighten, primarily due to increased competition for loans that meet our size, duration and underwriting standards. Additionally, U.S. Treasury rates were low throughout 2013 and into 2014, which has led to a decline in our overall mortgage loan portfolio yield as we continue to grow this asset class.

The following table sets forth the income yield and net investment income, excluding realized gains (losses), for each major investment category:



	For the Nine Months Ended September 30, 2014					For the Nine Months Ended September 30, 2013
	Yield (1)		Amount			Yield (1)		Amount
Types of Investments
Fixed maturities, available-for-sale	4.87	%	$	837.8		5.25	%	$	840.5
Marketable equity securities, available-for-sale	4.04		3.6			5.70		2.3
Marketable equity securities, trading	3.22		9.3			2.78		9.6
Mortgage loans, net	5.62		156.1			5.79		140.7
Policy loans	5.58		2.6			5.66		2.7
Investments in limited partnerships:
Alternative investments	*		(4.8		)	*		5.0
Tax credit investments (2)	*		(21.1		)	*		(14.7		)
Other income producing assets (3)	1.71		3.3			2.65		5.7
Gross investment income before investment expenses	4.72		986.8			5.13		991.8
Investment expenses	(0.12	)	(24.9		)	(0.12	)	(23.1		)
Net investment income	4.60	%	$	961.9		5.01	%	$	968.7
____________________


*	Represents yield that is not meaningful.


(1)	Yields are determined based on monthly averages calculated using beginning and end-of-period balances. Yields for fixed maturities are based on amortized cost. Yields for equity securities, including investments in limited partnerships, are based on cost. Yields for all other asset types are based on carrying values.


(2)	The negative impact from the tax credit investments is offset by U.S. federal income tax benefits. The total impact to net income was $21.0 and $18.1 for the nine months ended September 30, 2014 and 2013, respectively.


(3)	Other income producing assets includes other invested assets and cash and cash equivalents.

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

For the nine months ended September 30, 2014, net investment income was down $6.8 compared to the same period in 2013. Average invested assets increased, while yields on our investment portfolio decreased to 4.60% for the nine months ended September 30, 2014 from 5.01% for the nine months ended September 30, 2013.

Yields continued to be negatively impacted by the low interest rate environment. Excluding the impact of prepayments, which are discussed below, yields on our investment portfolio decreased to 4.47% for the nine months ended September 30, 2014 from 4.77% for the nine months ended September 30, 2013. This reduction is a result of earned rates on new purchases, which are significantly below overall portfolio yields. We have experienced significant growth in account value from strong sales and reinvestment of proceeds from prepayment activity. The interest rates on new investment purchases associated with these cash flows are putting downward pressure on our overall portfolio yield.

We also continued to see elevated levels of prepayment activity and related income, though this impact was lower in the first nine months of 2014 when compared to the same period in 2013. Prepayment-related activities generated income of $26.3, or 13bps of yield, in the nine months ended September 30, 2014, compared to $44.9, or 24bps of yield, in the same period in 2013. Prepayment-related income includes make-whole payments and consent fees on early calls or tenders of fixed maturities, prepayment speed adjustments on structured securities, and prepayment fees on our commercial mortgage loans. Prepayment activity usually stems from higher-yielding investments, resulting in cash inflows which are then typically reinvested into lower-yielding new assets, placing downward pressure on our future investment income and interest spreads.

In an attempt to mitigate the impact of the low interest rate environment, we continued to focus on our underwriting of commercial mortgage loans, which generally provide higher yields than fixed maturities. For the nine months ended September 30, 2014, we originated loans at a spread over U.S. Treasuries of approximately 240bps, compared with an approximate 290bps spread over U.S. Treasuries for the year ended December 31, 2013. We also strategically increased our investment in high-quality foreign corporate securities beginning in late 2012, with a focus on investment grade securities.

Net Realized Gains (Losses)

The following table sets forth the detail of our net realized gains (losses) before taxes:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Gross realized gains on sales of fixed maturities	$	1.5		$	2.4		$	21.0		$	8.0
Gross realized losses on sales of fixed maturities	(3.2		)	(7.4		)	(5.7		)	(17.4		)
Impairments:
Total credit-related	(0.3		)	(4.0		)	(1.6		)	(5.1		)
Intent to sell	(1.3		)	(2.2		)	(2.5		)	(10.3		)
Total impairments	(1.6		)	(6.2		)	(4.1		)	(15.4		)
Net gains (losses) on trading securities	(12.0		)	12.0			29.4			43.3
Net realized gains (losses) related to FIA:
Certain realized gains (losses) (1)	(0.1		)	0.9			—			2.0
Fair value changes — embedded derivative and related options (2)	4.9			(4.2		)	1.2			(4.0		)
Other net gains (losses) (3):
Other gross gains	15.4			5.2			31.1			12.4
Other gross losses	(19.7		)	(7.3		)	(41.7		)	(18.3		)
Net realized gains (losses)	$	(14.8	)	$	(4.6	)	$	31.2		$	10.6
____________________


(1)	Represents the changes in fair value of index options purchased to economically hedge our block of FIA business sold during the late 1990s ("old block"), which has an account value of $35.6 as of September 30, 2014. This change in fair value is included in pre-tax adjusted operating income.


(2)	Represents the changes in fair value of embedded derivative liabilities associated with our FIA products launched and sold starting in 2011 and beyond, netted with changes in fair value of index options purchased to economically hedge this business.


(3)	This primarily consists of changes in fair value of convertible bonds, gains (losses) on calls and redemptions, impairments of tax credit investments, the impact of net realized gains (losses) on DAC and DSI and changes in fair value of derivatives not related to FIA.

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

For the three months ended September 30, 2014, our portfolio produced net realized losses of $14.8, as compared to losses of $4.6 for the same period in 2013. The decrease was primarily due to net losses on our equity trading securities, which are discussed further in “– Return on Equity Investments,” compared to net gains during the third quarter of 2013. The loss was partially offset by net realized gains related to fair value changes in our embedded derivative and related options compared to losses for the same period in 2013 and decreased impairments for the three months ended September 30, 2014.

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

For the nine months ended September 30, 2014, our portfolio produced net realized gains of $31.2, as compared to gains of $10.6 for the same period in 2013. The increase was primarily due to decreased impairments and net realized gains related to sales of fixed maturities for the nine months ended September 30, 2014 compared to net realized losses for the same period in 2013. These were partially offset by decreased gains on trading securities for the nine months ended September 30, 2014 compared to the same period in 2013.

Impairments

We regularly monitor our investments for indicators of impairment. When evaluating a security for possible impairment, we consider several factors, which are described in more detail in Note 4 to the accompanying consolidated financial statements.

Impairments for the three and nine months ended September 30, 2014 decreased from the same periods in 2013 by $4.6 and $11.3, respectively. These decreases were driven by reductions in write-downs of securities we intend to sell. For those issuers for which we recorded a credit-related impairment during the nine months ended September 30, 2014, we had remaining holdings with an amortized cost of $2.9 and fair value of $3.0 as of September 30, 2014. We believe the amortized cost of these securities is recoverable, based on our estimated recovery values.

As of September 30, 2014 and December 31, 2013, 35.6% and 36.8%, respectively, of the gross unrealized losses on our investment portfolio, after the recognition of OTTI, related to securities due after ten years and our mortgage backed securities, which we consider to be longer duration assets. The fair value of these securities fluctuates more significantly with changes in interest rates and credit spreads, and we believe they will recover over time. Refer to Note 4 to the accompanying consolidated financial statements for a table summarizing the amortized cost and fair value of fixed maturities by contractual years to maturity as of September 30, 2014.

Fixed Maturity Securities

Fixed maturities represented approximately 84% of invested assets as of both September 30, 2014 and December 31, 2013. The majority of our fixed maturities are invested in highly marketable or publicly traded securities. We invest in a small percentage of privately placed fixed maturities to enhance the overall value of the portfolio and obtain higher yields than can ordinarily be obtained with comparable public market securities. As of September 30, 2014 and December 31, 2013, privately placed fixed maturities represented 3.4% and 2.8%, respectively, of our total fixed maturity portfolio at fair value.

Fixed Maturity Securities Credit Quality

The Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC) evaluates the investments of insurers for regulatory reporting purposes and assigns fixed maturities to one of the six categories called “NAIC Designations.” NAIC designations of “1” or “2” include fixed maturities considered investment grade, which generally include securities rated BBB- or higher by Standard & Poor’s (S&P). NAIC designations of “3” through “6” are referred to as below investment grade, which generally include securities rated BB+ or lower by S&P. In recent years, the SVO adopted a modeling approach to determine the NAIC designation for non-agency residential and commercial mortgage-backed securities. As a result, the NAIC designation for such securities may not correspond to the S&P designations described.

The following table presents our fixed maturities by NAIC designation and S&P equivalent credit ratings, as well as the percentage of total fixed maturities, based upon fair value that each designation comprises:



	As of September 30, 2014						As of December 31, 2013
	Amortized Cost		Fair Value		% of Total Fair Value		Amortized Cost		Fair Value		% of Total Fair Value
NAIC: S&P Equivalent:
1 AAA, AA, A	$	13,579.5	$	14,561.2	57.6	%	$	12,723.7	$	13,403.1	57.4	%
2 BBB	8,938.6		9,527.0		37.6		8,307.9		8,667.1		37.1
Total investment grade	22,518.1		24,088.2		95.2		21,031.6		22,070.2		94.5
3 BB	599.2		626.4		2.5		639.1		666.6		2.9
4 B	498.6		517.2		2.0		496.3		515.8		2.2
5 CCC & lower	80.2		79.9		0.3		76.8		78.3		0.4
6 In or near default	6.2		4.9		—		17.5		6.8		—
Total below investment grade	1,184.2		1,228.4		4.8		1,229.7		1,267.5		5.5
Total	$	23,702.3	$	25,316.6	100.0	%	$	22,261.3	$	23,337.7	100.0	%

Below investment grade securities comprised 4.8% and 5.5% of our fixed maturities portfolio as of September 30, 2014 and December 31, 2013, respectively. As of September 30, 2014, our NAIC 5 and 6 designated securities had gross unrealized losses of $5.7. Our analysis of these securities, including management’s estimates of future cash flows, where appropriate, supports the recoverability of amortized cost.

Fixed Maturity Securities and Unrealized Gains and Losses by Security Sector

The following tables set forth the fair value of our fixed maturities by sector, as well as the associated gross unrealized gains and losses and the percentage of total fixed maturities that each sector comprises as of the dates indicated:



	As of September 30, 2014
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		% of Total Fair Value		OTTI in AOCI
Security Sector
Corporate securities:
Consumer discretionary	$	2,219.8	$	128.3	$	(7.4	)	$	2,340.7	9.2	%	$	—
Consumer staples	2,628.7		211.9		(11.4		)	2,829.2		11.2		—
Energy	1,258.7		104.5		(5.7		)	1,357.5		5.4		—
Financial	1,920.4		154.4		(12.6		)	2,062.2		8.1		—
Health care	1,915.3		127.5		(13.8		)	2,029.0		8.0		(1.8		)
Industrial	3,128.2		288.9		(9.3		)	3,407.8		13.5		—
Information technology	493.1		30.7		(2.3		)	521.5		2.1		—
Materials	1,362.6		95.5		(9.6		)	1,448.5		5.7		(11.2		)
Telecommunication services	749.9		66.8		(0.6		)	816.1		3.2		(0.8		)
Utilities	1,979.7		210.1		(6.8		)	2,183.0		8.6		(0.1		)
Total corporate securities	17,656.4		1,418.6		(79.5		)	18,995.5		75.0		(13.9		)
U.S. government and agencies	446.8		6.1		(2.6		)	450.3		1.8		—
State and political subdivisions	751.9		36.0		(1.5		)	786.4		3.1		—
Residential mortgage-backed securities:
Agency	2,418.7		125.6		(15.2		)	2,529.1		10.0		—
Non-agency:
Prime	256.4		8.9		(0.3		)	265.0		1.0		(5.2		)
Alt-A	60.0		3.7		—			63.7		0.3		(0.4		)
Total residential mortgage-backed securities	2,735.1		138.2		(15.5		)	2,857.8		11.3		(5.6		)
Commercial mortgage-backed securities:
Agency	186.3		8.5		(0.3		)	194.5		0.8		—
Non-agency	1,143.2		67.9		(3.9		)	1,207.2		4.8		—
Total commercial mortgage-backed securities	1,329.5		76.4		(4.2		)	1,401.7		5.6		—
Other debt obligations	782.6		42.7		(0.4		)	824.9		3.2		(0.1		)
Total	$	23,702.3	$	1,718.0	$	(103.7	)	$	25,316.6	100.0	%	$	(19.6	)



	As of December 31, 2013
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		% of Total Fair Value		OTTI in AOCI
Security Sector
Corporate securities:
Consumer discretionary	$	2,110.0	$	98.7	$	(24.0	)	$	2,184.7	9.4	%	$	—
Consumer staples	2,532.0		175.5		(26.0		)	2,681.5		11.5		—
Energy	1,150.1		88.6		(6.4		)	1,232.3		5.3		—
Financial	1,738.3		110.0		(29.1		)	1,819.2		7.8		—
Health care	1,634.0		102.0		(28.2		)	1,707.8		7.3		(1.9		)
Industrial	3,040.5		224.7		(28.0		)	3,237.2		13.9		(0.9		)
Information technology	343.4		28.0		(3.9		)	367.5		1.6		—
Materials	1,332.8		84.4		(19.2		)	1,398.0		6.0		(11.2		)
Telecommunication services	772.0		41.5		(7.0		)	806.5		3.5		(0.8		)
Utilities	1,817.8		130.4		(30.5		)	1,917.7		8.2		(0.1		)
Total corporate securities	16,470.9		1,083.8		(202.3		)	17,352.4		74.5		(14.9		)
U.S. government and agencies	348.5		2.1		(6.2		)	344.4		1.5		—
State and political subdivisions	748.2		17.6		(14.3		)	751.5		3.2		—
Residential mortgage-backed securities:
Agency	2,388.8		104.9		(36.3		)	2,457.4		10.5		—
Non-agency:
Prime	222.2		6.9		(1.0		)	228.1		1.0		(6.2		)
Alt-A	67.3		3.3		(0.1		)	70.5		0.3		(0.6		)
Total residential mortgage-backed securities	2,678.3		115.1		(37.4		)	2,756.0		11.8		(6.8		)
Commercial mortgage-backed securities:
Agency	247.7		10.5		(0.4		)	257.8		1.1		—
Non-agency	1,188.3		84.2		(11.9		)	1,260.6		5.4		—
Total commercial mortgage-backed securities	1,436.0		94.7		(12.3		)	1,518.4		6.5		—
Other debt obligations	579.4		39.3		(3.7		)	615.0		2.5		—
Total	$	22,261.3	$	1,352.6	$	(276.2	)	$	23,337.7	100.0	%	$	(21.7	)

Our fixed maturities holdings are diversified by industry and issuer. As of September 30, 2014 and December 31, 2013, the fair value of our ten largest issuers of corporate securities holdings was $1,431.6 and $1,373.5, or 7.5% and 7.9% of total corporate securities, respectively. The fair value of our largest exposure to a single issuer of corporate securities was $150.5, or 0.8% of total corporate securities, as of September 30, 2014. All of the securities related to this issuer have an NAIC rating of 2. As of December 31, 2013, the fair value of our largest exposure to a single issuer of corporate securities was $152.1, or 0.9% of total corporate securities, all of which had an NAIC rating of 2.

As of September 30, 2014, there were net unrealized gains of $1,614.3 in our portfolio, compared to net unrealized gains of $1,076.4 as of December 31, 2013. The increase in gross unrealized gains was primarily due to falling interest rates since December 31, 2013. The benchmark 10-year U.S. Treasury rate decreased from 3.04% as of December 31, 2013 to 2.52% as of September 30, 2014. However, if interest rates begin to rise, we would expect to experience decreases in our net unrealized gains.

As of September 30, 2014 and December 31, 2013, the fair value of our state and political subdivision securities included $35.6 and $34.2 of municipal general obligation bonds and $750.8 and $717.3 of municipal revenue bonds, respectively. We have municipal holdings of $5.6 and $5.4 in Illinois as of September 30, 2014 and December 31, 2013, respectively, and no exposure to municipal holdings in Michigan or Puerto Rico.

As of September 30, 2014, our investments in U.S. government and agency securities increased by $105.9, to $450.3 from $344.4 as of December 31, 2013. These securities are generally purchased as part of our cash management and asset-liability matching strategies to obtain higher yields and match liability durations from incoming cash flows until investments with adequate spreads are found. Our holdings of these securities will fluctuate from quarter to quarter based on sales volume

and timing of cash deployment. In addition, these holdings may fluctuate to support collateral needs for our derivatives program.

Exposure to Foreign Fixed Maturities

As of September 30, 2014 and December 31, 2013, we held $665.3 and $530.6, respectively, of fixed maturities denominated in a foreign currency and reported in U.S. dollars based on period-end exchange rates. As part of our strategy to improve portfolio yields, we invest in high-quality foreign corporate securities with a focus on investment grade securities. We utilize foreign currency swaps and forwards to hedge our exposure to foreign currency.

The following tables summarize our exposure to European fixed maturity holdings separated between sovereign debt, financial industry and other corporate debt exposures. The country designation is based on the issuer’s country of incorporation. The majority of these holdings are denominated in U.S. dollars.



	As of September 30, 2014
	Sovereign Debt		Financial Industry		Other Corporate		Total Fair Value		% of Exposure		Amortized Cost
European Countries:
United Kingdom	$	—	$	99.9	$	727.1	$	827.0	36.0	%	$	791.7
Netherlands	—		5.0		600.1		605.1		26.4		576.3
Luxembourg	—		17.8		290.3		308.1		13.5		298.8
France	—		20.2		244.5		264.7		11.5		253.8
Switzerland	—		110.7		—		110.7		4.8		103.2
Other	0.5		—		179.2		179.7		7.8		171.2
Total	$	0.5	$	253.6	$	2,041.2	$	2,295.3	100.0	%	$	2,195.0



	As of December 31, 2013
	Sovereign Debt		Financial Industry		Other Corporate		Total Fair Value		% of Exposure		Amortized Cost
European Countries:
United Kingdom	$	—	$	97.4	$	706.7	$	804.1	38.2	%	$	783.2
Netherlands	—		—		608.7		608.7		28.9		593.0
France	—		18.5		213.6		232.1		11.0		231.8
Luxembourg	—		—		229.7		229.7		10.9		226.9
Switzerland	—		94.8		—		94.8		4.5		99.4
Other	0.6		—		134.4		135.0		6.5		136.6
Total	$	0.6	$	210.7	$	1,893.1	$	2,104.4	100.0	%	$	2,070.9

As of September 30, 2014 and December 31, 2013, the fair value of our exposure to European fixed maturities was 9.1% and 9.0% of our total fixed maturities portfolio, respectively. The fair value of our total exposure to Ireland, Italy, Portugal, and Spain was $77.1 and $37.6 as of September 30, 2014 and December 31, 2013, respectively. We have no exposure to any issuers in Greece, Russia or Ukraine.

The fair value of our ten largest European security holdings by issuer was $913.9, or 3.6% of the fixed maturities portfolio as of September 30, 2014, and $973.9, or 4.2%, as of December 31, 2013. All of the issuers of our ten largest European security holdings had an S&P rating at or above BBB and a Moody's rating at or above Baa3. The fair value of our largest single European issuer exposure was $121.7, or 0.5%, and $150.6, or 0.6%, of the portfolio as of September 30, 2014 and December 31, 2013, respectively, and had an S&P rating of BBB+ and a Moody's rating of Baa1.

Mortgage-Backed Securities

Our fixed maturities portfolio included $4.26 billion of residential and commercial mortgage-backed securities at fair value as of September 30, 2014. As of September 30, 2014, 63.9% of our mortgage-backed securities were agency securities. Additionally, 27.2% of our mortgage-backed securities are AAA-rated non-agency securities in the most senior tranche of the structure type.

The residential and commercial real estate markets were significantly impacted by the financial crisis and recession, but have since shown signs of improvement. The recovery in these markets has been supported by improved market fundamentals,

including increased real estate prices and rent growth, reduced vacancy rates, lower delinquencies, and improved access to refinancing. Non-agency mortgage-backed securities issued in the 2006 through 2008 vintage years were generally the most affected by the financial crisis and recession, due to weaker underwriting standards and an issuance date closest to the market peak in real estate prices. As of September 30, 2014, our non-agency mortgage-backed securities with vintage years 2006 through 2008, which are primarily non-agency commercial mortgage-backed securities, had an amortized cost of $510.6 and a fair value of $558.0.

Our mortgage-backed securities may have prepayment options. Accounting standards require us to make estimates regarding prepayments when recognizing interest income on these securities. Prepayments that vary from our estimates in amount or timing cause fluctuations in our yields due to an acceleration or deceleration of unamortized premium or discount associated with the securities in our portfolio. These adjustments, which relate primarily to residential mortgage-backed securities, are recorded in net investment income in our results of operations and can create volatility between periods.

Residential Mortgage-Backed Securities (RMBS)

We classify our investments in RMBS as agency, prime, Alt-A, and subprime. Agency RMBS are guaranteed or otherwise supported by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. Prime RMBS have underlying loans to customers with good quality credit profiles, and subprime RMBS have underlying loans to customers with a greater risk of default. Alt-A RMBS have overall credit quality between prime and subprime, based on a review of their underlying mortgage loans and factors such as credit scores and financial ratios. The Company had no exposure to subprime loans as of September 30, 2014 or December 31, 2013.

As of September 30, 2014, our Alt-A portfolio was collateralized with 95.7% fixed rate mortgages and 4.3% hybrid adjustable rate mortgages (ARMs) with no exposure to option ARMs. Generally, fixed rate mortgages have had better credit performance than ARMs, with lower delinquencies and defaults on the underlying collateral.

The following table sets forth the total fair value, and amortized cost of our non-agency RMBS by year of origination (vintage) and credit quality, based on the highest rating by Moody’s, S&P, or Fitch. There were two securities with a total amortized cost and fair value of $12.2 and $12.3, respectively, that were rated below investment grade by either Moody’s, S&P or Fitch, while at least one other agency rated the securities as investment grade.



	As of September 30, 2014
	Highest Rating Agency Rating
	AAA		AA		A		BBB		BB and Below		Total		Total as of December 31, 2013
Vintage:
2009-2014	$	123.6	$	—	$	—	$	—	$	—	$	123.6	$	41.5
2006-2008	—		—		—		—		60.8		60.8		70.7
2005 and prior	0.1		14.3		21.5		18.9		77.2		132.0		177.3
Total amortized cost	$	123.7	$	14.3	$	21.5	$	18.9	$	138.0	$	316.4	$	289.5
Net unrealized gains (losses)	1.2		1.2		0.7		1.2		8.0		12.3		9.1
Total fair value	$	124.9	$	15.5	$	22.2	$	20.1	$	146.0	$	328.7	$	298.6

As of September 30, 2014 and December 31, 2013, 64.1% and 59.8%, respectively, of the fair value of our non-agency RMBS had super senior subordination. The super senior class has priority over all principal and interest cash flows and will not experience any loss of principal until lower levels are written down to zero. Therefore, the majority of our RMBS investments have less exposure to defaults and delinquencies in the underlying collateral than if we held the more subordinated classes.

The following table provides additional information on our RMBS prepayment exposure, by type and vintage:



	As of September 30, 2014
	Amortized Cost		Unrealized Gains/ (Losses)		Fair Value		Gross Discount		Gross Premium			Average Mortgage Loan Rate
Agency:
CMO:
2009-2014	$	1,303.5	$	45.0	$	1,348.5	$	39.5	$	(13.6	)	4.1	%
2006-2008	2.0		0.2		2.2		0.2		—			5.7
2005 and prior	378.1		47.2		425.3		11.1		(2.6		)	6.2
Total Agency CMO	$	1,683.6	$	92.4	$	1,776.0	$	50.8	$	(16.2	)	4.6	%
Passthrough:
2009-2014	$	674.9	$	11.5	$	686.4	$	1.4	$	(23.8	)	4.9	%
2006-2008	27.6		2.8		30.4		0.1		(0.5		)	6.3
2005 and prior	32.6		3.7		36.3		0.6		(0.2		)	5.7
Total Agency Passthrough	735.1		18.0		753.1		2.1		(24.5		)	5.0
Total Agency RMBS	$	2,418.7	$	110.4	$	2,529.1	$	52.9	$	(40.7	)	4.7	%
Non-Agency:
2009-2014	$	123.6	$	1.3	$	124.9	$	2.2	$	(0.7	)	4.2	%
2006-2008	60.8		4.7		65.5		9.1		(0.2		)	5.4
2005 and prior	132.0		6.3		138.3		5.1		(0.1		)	5.6
Total Non-Agency RMBS	316.4		12.3		328.7		16.4		(1.0		)	5.0
Total RMBS	$	2,735.1	$	122.7	$	2,857.8	$	69.3	$	(41.7	)	4.7	%

As of September 30, 2014, our RMBS had gross unamortized discount and premium of $69.3 and $41.7, respectively. Changes in prepayment speeds, which are based on prepayment activity of the underlying mortgages, may create volatility in our net investment income because they accelerate or decelerate our amortization of the unamortized premiums and discounts. The impact to net investment income is dependent on whether the securities are at a discount or premium and whether the prepayment speeds increase or decrease.

There are various U.S. government initiatives through the Making Home Affordable program that may result in higher than expected prepayments on our RMBS portfolio, such as the Home Affordable Refinance Program that was extended to 2015. We continually monitor the underlying collateral in our RMBS to manage our prepayment exposure.

Commercial Mortgage-Backed Securities (CMBS)

The following table sets forth the total fair value, and amortized cost of our non-agency CMBS by credit quality and vintage. There were 10 securities with a fair value of $269.3 and an amortized cost of $247.4 that were rated AAA by either S&P, Moody’s or Fitch, that were given a lower rating by at least one other agency. None of these securities were rated below investment grade by any of the three agencies.



	As of September 30, 2014
	Highest Rating Agency Rating
	AAA		AA		A		BBB		BB and Below			Total		Total as of December 31, 2013
Vintage:
2009-2014	$	477.2	$	—	$	—	$	12.5	$	—		$	489.7	$	445.7
2006-2008	480.4		18.3		—		—		11.9			510.6		545.1
2005 and prior	142.5		0.4		—		—		—			142.9		197.5
Total amortized cost	$	1,100.1	$	18.7	$	—	$	12.5	$	11.9		$	1,143.2	$	1,188.3
Net unrealized gains (losses)	62.7		1.6		—		—		(0.3		)	64.0		72.3
Total fair value	$	1,162.8	$	20.3	$	—	$	12.5	$	11.6		$	1,207.2	$	1,260.6

As of September 30, 2014, our CMBS portfolio was highly concentrated in the most senior tranches, with 99.8% of our AAA-rated securities in the most senior tranche, based on amortized cost. The senior class has priority over the mezzanine and junior classes to all principal and interest cash flows and will not experience any loss of principal until both the entire mezzanine and junior tranches are written down to zero. As of September 30, 2014, our CMBS had a total gross unamortized discount and premium of $12.4 and $13.0, respectively.

The weighted-average credit enhancement of our CMBS, adjusted to remove defeased loans, was 34.6% as of September 30, 2014. We believe this additional credit enhancement is significant, especially in the event of a deep real estate downturn during which losses would be expected to increase substantially.

Return on Equity Investments

Our equity investments consist primarily of publicly traded common stock. We believe that these investments are suitable for funding certain long duration liabilities in our Income Annuities segment and, on a limited basis, in our surplus portfolio. The majority of these securities are included in trading marketable equity securities on our consolidated balance sheets and are recorded at fair value, with changes in fair value recorded in net realized gains (losses).

The following table compares the total gross return on our common stock to the S&P 500. The gross return includes both the impact of changes in fair value and dividend income.



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2014		2013		2014		2013
Common stock	(1.4	)%	5.7	%	4.5	%	16.8	%
S&P 500 Total Return Index	1.1		5.2		8.3		19.8

Mortgage Loans

Our mortgage loan department originates commercial mortgages and manages our existing commercial mortgage loan portfolio. We specialize in originating loans of $1.0 to $5.0, which are secured by first-mortgage liens on income-producing commercial real estate. All loans are underwritten consistently to our standards based on loan-to-value (LTV) ratios and debt service coverage ratios (DSCR). LTV ratios and DSCRs are based on income and detailed market, property and borrower analyses using our long-term experience in commercial mortgage lending. A large majority of our loans have personal guarantees and all loans are inspected and evaluated annually. We diversify our mortgage loans by geographic region, loan size and scheduled maturity.

The following table presents selected information about the composition of our mortgage loan portfolio:



	As of September 30, 2014			As of December 31, 2013
Average loan balance	$	2.5		$	2.5
Largest loan balance	15.5			15.8
Weighted average LTV ratio	54.1		%	54.7		%
Weighted average DSCR	1.80			1.81

As of September 30, 2014 and December 31, 2013, 72.6% and 71.6%, respectively, of our mortgage loans had an outstanding balance under $5.0.

We continue to increase our investments in mortgage loans, as this strategy has resulted in increased net investment yields when compared to fixed maturity investments. We believe a disciplined increase in commercial mortgage loan investments will help maintain the overall quality of our investment portfolio and obtain appropriate yields to match our policyholder liabilities. We originated $260.8 and $582.1 of mortgage loans during the three and nine months ended September 30, 2014, and expect originations in the fourth quarter of 2014 to outpace those during the third quarter.

We believe we have maintained our disciplined underwriting approach as we have increased our mortgage loan portfolio. The following table presents information about our mortgage loan originations:



	For the Nine Months Ended September 30, 2014		For the Year Ended December 31, 2013
Weighted average LTV ratio of loans originated	53.1	%	53.3	%
Maximum LTV ratio of loans originated	73.8		74.0
Weighted average DSCR of loans originated	1.82		1.79
Minimum DSCR of loans originated	1.01		0.97
Approximate weighted average spread over U.S. Treasuries of loans originated	2.41		2.90

The following sections provide more information on the composition of our mortgage loan portfolio. On our consolidated balance sheets, mortgage loans are reported net of an allowance for losses, deferred loan origination costs, and unearned mortgage loan fees; however, the following tables exclude these items.

Credit Quality

We use the LTV ratio and DSCR as our primary metrics to assess mortgage loan quality. These factors are also considered in the evaluation of our allowance for mortgage loan losses. For more information and further discussion of the allowance for mortgage loan losses, see Note 5 to our unaudited interim condensed consolidated financial statements. As of September 30, 2014, one loan, with an outstanding principal balance of $1.5, was considered nonperforming.

The LTV ratio compares the outstanding principal of the loan to the estimated fair value of the underlying property collateralizing the loan. In the year of funding, LTV ratios are calculated using independent appraisals performed by Member of the Appraisal Institute (MAI) designated appraisers. Subsequent to the year of funding, LTV ratios are updated annually using internal valuations based on property income and estimated market capitalization rates. Property income estimates are typically updated during the third quarter of each year. Market capitalization rates are updated during the first quarter based on geographic region, property type and economic climate. LTV ratios greater than 100% indicate that the loan amount is greater than the collateral value. A smaller LTV ratio generally indicates a higher quality loan.

The following table sets forth the LTV ratios for our mortgage loan portfolio:



	As of September 30, 2014				As of December 31, 2013
	Carrying Value		% of Total		Carrying Value		% of Total
Loan-to-Value Ratio:
< or = 50%	$	1,442.3	36.7	%	$	1,228.2	34.6	%
51% - 60%	1,223.9		31.2		1,120.5		31.6
61% - 70%	922.2		23.5		890.5		25.1
71% - 75%	187.1		4.8		91.9		2.6
76% - 80%	57.8		1.5		82.0		2.3
81% - 100%	84.6		2.1		107.5		3.0
> 100%	8.0		0.2		26.3		0.8
Total	$	3,925.9	100.0	%	$	3,546.9	100.0	%

The following table sets forth the carrying value and weighted-average LTV ratios for our mortgage loan portfolio by year of origination:



	As of September 30, 2014						As of December 31, 2013
	Carrying Value		% of Total Value		Weighted Average LTV		Carrying Value		% of Total Value		Weighted Average LTV
Origination Year:
2014	$	613.3	15.6	%	53.1	%
2013	711.1		18.1		57.2		$	728.7	20.6	%	53.3	%
2012	770.4		19.6		55.4		795.5		22.4		57.5
2011	835.6		21.3		56.3		881.2		24.9		57.9
2010	443.8		11.3		49.8		499.0		14.1		50.8
2009 and prior	551.7		14.1		49.4		642.5		18.0		51.5
Total	$	3,925.9	100.0	%	54.1	%	$	3,546.9	100.0	%	54.7	%

The DSCR compares the amount of rental income a property is generating to the amount of the mortgage payments due on the property. DSCRs are calculated using the most current annual operating history for the collateral, which are typically updated during the third quarter. The following table sets forth the DSCRs for our mortgage loan portfolio:



	As of September 30, 2014				As of December 31, 2013
	Carrying Value		% of Total		Carrying Value		% of Total
Debt Service Coverage Ratio:
> or = 1.60	$	2,254.6	57.4	%	$	2,072.4	58.4	%
1.40 - 1.59	808.1		20.6		675.6		19.0
1.20 - 1.39	499.5		12.7		471.5		13.3
1.00 - 1.19	255.5		6.5		212.1		6.0
0.85 - 0.99	30.8		0.8		56.5		1.6
< 0.85	77.4		2.0		58.8		1.7
Total	$	3,925.9	100.0	%	$	3,546.9	100.0	%

As of September 30, 2014, loans with an aggregate carrying value of $108.2 had a DSCR of less than 1.00. The average outstanding principal balance of these loans was $1.6 with a weighted average LTV of 72.5%.

Composition of Mortgage Loans

The following table sets forth our investments in mortgage loans by state:



	As of September 30, 2014				As of December 31, 2013
	Carrying Value		% of Total		Carrying Value		% of Total
State:
California	$	1,145.1	29.2	%	$	1,042.1	29.4	%
Texas	412.9		10.5		411.8		11.6
Washington	327.7		8.3		319.4		9.0
Ohio	162.5		4.1		123.0		3.5
Illinois	156.5		4.0		153.9		4.3
Florida	155.2		4.0		132.3		3.7
Nevada	127.5		3.2		98.7		2.8
Oregon	126.0		3.2		116.2		3.3
Other	1,312.5		33.5		1,149.5		32.4
Total	$	3,925.9	100.0	%	$	3,546.9	100.0	%

The following table sets forth our investments in mortgage loans by property type:



	As of September 30, 2014				As of December 31, 2013
	Carrying Value		% of Total		Carrying Value		% of Total
Property Type:
Shopping centers and retail	$	1,953.1	49.7	%	$	1,758.6	49.6	%
Office buildings	902.9		23.0		836.5		23.6
Industrial	653.4		16.6		610.3		17.2
Multi-family	209.8		5.3		172.4		4.9
Other	206.7		5.4		169.1		4.7
Total	$	3,925.9	100.0	%	$	3,546.9	100.0	%

Maturity Date of Mortgage Loans

The following table sets forth our investments in mortgage loans by contractual maturity date:



	As of September 30, 2014
	Carrying Value		% of Total
Years to Maturity:
Due in one year or less	$	20.2	0.5	%
Due after one year through five years	414.9		10.6
Due after five years through ten years	1,611.7		41.1
Due after ten years	1,879.1		47.8
Total	$	3,925.9	100.0	%

Prior to their contractual maturity, some of our mortgage loans have one or more specified rate resetting windows during which the loan typically can be prepaid without a fee. During these windows, we expect that a portion of these loans will either be reset or refinanced at market terms, given the current interest rate environment. These loan features are considered in our asset-liability management, and we align our expected mortgage loan cash inflows and duration with the amount and timing of liability cash outflows. Additionally, our loan terms usually allow borrowers to prepay their mortgage loan prior to the stated maturity or outside specified rate resetting windows. Prepayments are driven by factors specific to the activities of our borrowers as well as the interest rate environment. However, the majority of our mortgage loans contain yield maintenance prepayment provisions that we believe mitigate such prepayments.

Investments in Limited Partnerships — Tax Credit Investments

We invest in limited partnership interests related to tax credit investments. Although these investments decrease our net investment income on a pre-tax basis, they provide us with significant tax benefits, which decrease our effective tax rate. As of September 30, 2014 and December 31, 2013, our tax credit investments had a carrying value of $244.6 and $265.1, respectively.

The following table sets forth the impact of these investments on net income:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Amortization related to tax credit investments, net of taxes	$	(5.2	)	$	(3.3	)	$	(13.7	)	$	(9.6	)
Realized losses related to tax credit investments, net of taxes	(3.0		)	(2.1		)	(7.3		)	(3.1		)
Tax credits	14.2			11.8			42.0			30.8
Impact to net income	$	6.0		$	6.4		$	21.0		$	18.1

The following table provides the future estimated impact to net income:



	Impact to Net
	Income
Remainder of 2014	$	9.1
2015	25.7
2016	17.8
2017	12.4
2018 and beyond	10.7
Estimated impact to net income	$	75.7

The majority of our investments in limited partnerships relate to affordable housing. The tax credits from these partnerships are generally delivered in the first 10 years of the investment, with the largest portions provided in the middle years. We amortize these investments over the period during which partnership losses are expected to be recognized. The amortization schedule for each investment is updated periodically as new information related to the amount and timing of losses is received. Other tax credit investments generally provide tax benefits during the first year of the investment.

Liquidity and Capital Resources

Symetra conducts its operations through its operating subsidiaries, and our liquidity requirements primarily have been and will continue to be met by funds from such subsidiaries. Dividends from its subsidiaries are Symetra’s principal source of cash to pay dividends to stockholders, fund the stock repurchase program and meet its obligations, including payments of principal and interest on notes payable.

We actively manage our liquidity in light of changing market, economic and business conditions, and we believe that our liquidity levels are more than adequate to cover our exposures, as evidenced by the following:


•	As of September 30, 2014 we had $25.20 billion of liquid assets, which includes cash, cash equivalents, short-term investments, publicly traded fixed maturities and equity securities.


•	We continued to generate strong cash flows from operations, which were $713.8 for the nine months ended September 30, 2014, compared to $806.5 for the nine months ended September 30, 2013.


•	We had higher net flows related to policyholder account balances, which were $890.1 for the nine months ended September 30, 2014 compared to $458.4 for the same period in 2013, primarily due to higher deposits from strong sales in 2014 in our Deferred Annuities segment.


•	While certain policy lapses and surrenders occur in the normal course of business, the current interest rate environment generally has resulted in lower than expected lapses of our fixed annuities, as policyholders have limited alternatives to seek a higher return on their funds. As interest rates rise, we may experience an increase in lapses.


•	As of September 30, 2014, we had the ability to borrow, on an unsecured basis, a principal amount of $400.0 under a revolving line of credit arrangement with an expansion feature providing access to up to $100.0 for a total maximum principal amount of $500.0.


•	As of September 30, 2014 our primary life insurance subsidiary, Symetra Life Insurance Company, had an estimated risk-based capital ratio of approximately 453%. This provides adequate capital levels for growth of our business.

On August 4, 2014, the Company issued $250.0 of 4.25% senior notes due on July 15, 2024. On August 28, 2014, the Company also entered into a five-year, $400.0 senior unsecured revolving credit facility, with access to an additional $100.0 of financing through an expansion feature. Concurrently with entry into the new credit agreement the Company terminated its prior four-year credit agreement, dated December 14, 2011. For more information on these agreements, see Note 9 to the accompanying unaudited interim condensed consolidated financial statements.

Historically, we have paid quarterly cash dividends to holders of our common stock. During the three months ended September 30, 2014, we declared and paid a cash dividend of $0.10 per common share. Also, subsequent to quarter end, we declared a special dividend of $1.30 per common share, to be funded with the proceeds from issuance of the senior notes in August. We intend to continue to pay quarterly cash dividends to our stockholders, and the declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors. See “— Dividends” below for further discussion.

In February 2013, we began a stock repurchase program, authorized for up to 10,000,000 shares of Symetra’s outstanding common stock. In May 2013, the authorization was increased to 16,000,000 shares. As of September 30, 2014, we had repurchased a total of 9,053,303 shares for $134.6 since the program began. Symetra has funded and plans to continue to fund this program mainly through dividends from its subsidiaries. Refer to Part II. Item 2 – “Unregistered Sales of Equity Securities and Use of Proceeds” for current period activity and additional information about the repurchase program.

Liquidity Requirements and Sources of Liquidity

The liquidity requirements of Symetra’s insurance company subsidiaries principally relate to the liabilities associated with their insurance and investment products, operating costs and expenses, the payment of dividends to the holding company, and the payment of income taxes. Liabilities associated with insurance and investment products include the payment of benefits, as well as cash payments made in connection with policy and contract surrenders and withdrawals, and policy loans. Historically, Symetra’s insurance company subsidiaries have used cash flows from operations, cash flows from invested assets and sales of investment securities to fund their liquidity requirements.

In managing the liquidity of our insurance operations, we consider the risk that policyholder and contract holder withdrawals of funds occur earlier than assumed when selecting assets to support these contractual obligations. We use surrender charges and other contract provisions to mitigate the extent, timing and profitability impact of such withdrawals. The following table sets forth liquidity characteristics of our general account policyholder liabilities, composed of annuity reserves, deposit liabilities and policy and contract claim liabilities, net of reinsurance recoverables:



	As of September 30, 2014				As of December 31, 2013
	Amount		% of Total		Amount		% of Total
Illiquid: cannot be surrendered
Structured settlements & other single premium immediate annuities (1)	$	6,527.2	24.7	%	$	6,514.3	26.1	%
Somewhat Liquid: can be surrendered with adjustments or charges of 3% or more
Deferred Annuities:
Surrender charges of 5% or higher	5,822.5		22.0		5,473.4		21.9
Surrender charges of 3 to 5%	1,443.2		5.4		2,080.4		8.3
MVA and surrender charges of 5% or higher (2)	2,622.7		9.9		1,514.7		6.1
5 year payout provision or MVA (3)	286.9		1.1		300.4		1.2
BOLI (4)	4,965.9		18.8		4,892.8		19.6
Universal life	315.4		1.2		293.1		1.2
Total somewhat liquid	15,456.6		58.4	%	14,554.8		58.3	%
Liquid: can be surrendered with no adjustment or charges of less than 3%
Deferred Annuities:
No surrender charges (5)	3,052.1		11.5		2,801.2		11.2
Surrender charges less than 3%	658.1		2.5		321.4		1.3
Universal life	456.3		1.7		450.4		1.8
Total liquid	4,166.5		15.7	%	3,573.0		14.3	%
Other
Other (net of reinsurance) (6)	319.4		1.2		327.1		1.3
Total (7)	$	26,469.7	100.0	%	$	24,969.2	100.0	%
___________________

The liabilities presented above have been aggregated based on contractual surrender charge schedules without adjustment for free partial withdrawals and guaranteed return of premium provisions, if applicable. The following footnotes may also be useful in evaluating the withdrawal characteristics of our liabilities:

(1)

The benefits are specified in the contracts as fixed amounts, primarily to be paid over the next several decades. Certain single premium immediate annuity contracts contain a liquidity feature that permits contract owners to make partial withdrawals once every 36 months within the life expectancy period. The withdrawals are based on prevailing market rates which limits our exposure to liquidity and interest rate risk.


(2)	The market value adjustment (MVA) adjusts the value of the contract at surrender based on current interest rates, subject to a guaranteed minimum account value specified in the contract.


(3)	The MVA adjusts the value of the contract at surrender based on current interest rates, subject to a guaranteed minimum account value specified in the contract. In a liquidity crisis situation, we could invoke the five-year payout provision so that the contract value with interest is paid out ratably over five years.


(4)	The biggest deterrent to surrender is the taxation on the gain within these contracts, which includes a 10% non-deductible penalty tax. Banks can exchange certain of these contracts with other carriers, tax-free. However, a significant portion of this business does not qualify for this tax-free treatment due to the employment status of the original covered employees and charges may be applicable.


(5)	Given the current interest rate environment, we do not expect significant changes in the persistency of this business.

(6)

Other represents the sum of the following: (a) our term life insurance policyholder liabilities, net of reinsurance recoverables. There is no surrender value related to these contracts; (b) incurred but not reported claim liabilities mainly related to our medical stop-loss business. The precise timing and amount of payment is unknown; and (c) reported claim liabilities for BOLI, term life insurance, medical stop-loss and group life policies.


(7)	Represents the sum of funds held under deposit contracts, future policy benefits and policy and contract claims in the consolidated balance sheets, excluding other policyholder related liabilities and reinsurance recoverables of $245.3 and $231.5 as of September 30, 2014 and December 31, 2013, respectively.

Liquid Assets

Symetra’s insurance company subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance policies and structured settlement annuities, are matched with investments having similar estimated lives such as long-term fixed maturities, mortgage loans and marketable equity securities. Shorter-term liabilities are matched with fixed maturities that have short- and medium-terms. In addition, our insurance company subsidiaries hold sufficient levels of highly liquid, high quality assets to fund anticipated operating expenses, surrenders and withdrawals.

We define liquid assets to include cash, cash equivalents, short-term investments, publicly traded fixed maturities and public equity securities. As of September 30, 2014 and December 31, 2013, our insurance subsidiaries had liquid assets of $24.70 billion and $23.17 billion, respectively, and Symetra had liquid assets of $450.6 and $162.6, respectively. The portion of total company liquid assets comprised of cash and cash equivalents and short-term investments was $110.2 and $76.6 as of September 30, 2014 and December 31, 2013, respectively.

We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in evaluating the adequacy of our insurance operations’ liquidity under a variety of stress scenarios. We believe that the liquidity profile of our assets is sufficient to satisfy our liquidity requirements, including under foreseeable stress scenarios.

Considering the size and liquidity profile of our investment portfolio, we believe that we have appropriately mitigated the risk of policyholder behavior varying from our projections. Our asset/liability management process takes into account the expected cash flows on investments and expected policyholder payments as well as the specific nature and risk profile of the liabilities.

Dividends

We declared and paid a quarterly dividend of $0.10 per common share during each of the first three quarters of 2014 for a total payout of $35.0. Additionally, on October 24, 2014, we declared a special dividend of $1.30 per common share for a total expected payout of approximately $150.7.

Cash Flows

The following table sets forth a summary of our consolidated cash flows for the dates indicated:



	For the Nine Months Ended September 30,
	2014			2013
Net cash flows provided by (used in) operating activities	$	713.8		$	806.5
Net cash flows provided by (used in) investing activities	(1,732.2		)	(1,113.9		)
Net cash flows provided by (used in) financing activities	1,051.6			297.7

Operating Activities

Cash flows from our operating activities are primarily driven by the amount and timing of cash received from income on our investments, including dividends and interest, and premiums on our group insurance and term life insurance products, as well as the amount and timing of cash disbursed for our payment of policyholder benefits and claims, underwriting and operating expenses and income taxes. The following discussion highlights key drivers in the level of cash flows generated from our operating activities:

Net cash provided by operating activities for the nine months ended September 30, 2014 decreased $92.7 over the same period in 2013. This decrease was primarily the result of timing differences in the settlement of federal income tax liabilities

and increased policy acquisition related expenses associated with strong sales, partially offset by a decrease in medical stop-loss paid claims.

Investing Activities

Cash flows from our investing activities are primarily driven by the amount and timing of cash received from maturities and calls of fixed maturity securities, sales of investments and maturities of mortgage loans, as well as the amount and timing of cash disbursed for purchases of investments and funding of mortgage loan originations. Generally, the amount and timing of our purchases of investments correlate to sales of annuity and life insurance policies, which are classified as cash inflows from financing activities. The amount and timing of cash inflows from investments generally correlate to amounts needed to fund policyholder obligations. The following discussion highlights key drivers in the level of cash flows used in our investing activities:

Net cash used in investing activities for the nine months ended September 30, 2014 increased $618.3 over the same period in 2013. This increase was primarily due to an increase in purchases of fixed maturities and issuances of mortgage loans, both as a result of strong annuity sales, as well as a reduction in proceeds from investment prepayments. These were partially offset by increased proceeds from sales of fixed maturities.

Financing Activities

Cash flows from our financing activities are primarily driven by the amount and timing of cash received from deposits into certain life insurance and annuity policies and proceeds from the issuance of debt, as well as the amount and timing of cash disbursed to fund withdrawals from certain life insurance and annuity policies, dividend distributions to our common stockholders, and stock repurchase activity. The following discussion highlights key drivers in the level of cash flows from our financing activities:

Net cash provided by financing activities for the nine months ended September 30, 2014 was $1,051.6, in comparison to cash provided by financing activities of $297.7 during the same period in 2013. This change was driven by higher net policyholder deposits mainly from higher sales of deferred annuities and net proceeds from the issuance of debt in the third quarter of 2014.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of change in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, or equity or commodity prices. To varying degrees, the investment management activities supporting all of our products and services generate market risks. There have been no material changes in the nature of our market risk exposures from December 31, 2013, a description of which may be found in Part II, Item 7A – “Quantitative and Qualitative Disclosures about Market Risk” in our 2013 10-K. See Item 1A – “Risk Factors” of Part I in our 2013 10-K for a discussion of how changes to our operations or economic conditions may materially adversely affect our business and results of operations.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We carried out an evaluation required by the Securities Exchange Act of 1934 (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a—15(e) of the 1934 Act, as of September 30, 2014. Based on this evaluation our principal executive officer and principal financial officer concluded that, as of September 30, 2014, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Limitations on Controls

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all errors or fraud. Any control system, no matter how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute

assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – Other Information

Item 1. Legal Proceedings

We are regularly a party to litigation, arbitration proceedings and governmental examinations in the ordinary course of our business. While we cannot predict the outcome of any pending or future litigation or examination, we do not believe that any pending matter, individually or in the aggregate, will have a material adverse effect on our business. Disclosure concerning material legal proceedings can be found in Note 12 to the accompanying unaudited interim condensed consolidated financial statements under the caption “Litigation,” which is incorporated here by this reference.

Item 1A. Risk Factors

In addition to the other information set forth in this report, consideration should be given to the factors discussed in Part I, Item 1A — “Risk Factors” in our 2013 10-K. If any of those factors were to occur, they could materially adversely affect our business, financial condition or future results and could cause actual results to differ materially from those expressed in forward-looking statements in this report. There have been no material changes to the risk factors set forth in our 2013 10-K as of September 30, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of equity securities by the issuer and affiliated purchasers

Purchases of common stock made by or on behalf of the Company during the quarter ended September 30, 2014 are set forth in whole shares below:



	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as part of Publicly Announced Program	Maximum Number of Shares that May Yet be Purchased Under the Publicly Announced Program
Period:
July 1, 2014 — July 31, 2014	—	$	—	—	6,946,697
August 1, 2014 — August 31, 2014	—	—		—	6,946,697
September 1, 2014 — September 30, 2014	—	—		—	6,946,697
Total	—	$	—	—	6,946,697
________________


(1)	Represents shares of common stock repurchased pursuant to the Company’s stock repurchase program as well as shares repurchased to satisfy employee income tax withholding pursuant to the Company’s Equity Plan.

On February 1, 2013, the board of directors authorized the repurchase of up to 10,000,000 shares of Symetra’s outstanding common stock. On May 21, 2013, the board of directors authorized the Company to repurchase an additional 6,000,000 shares, for a total authorization of 16,000,000 shares of outstanding common stock. Under the stock repurchase program, purchases may be made from time to time in the open market, in accelerated stock buyback arrangements, in privately negotiated transactions or otherwise. The program may be modified, extended or terminated by the board of directors at any time.

During the nine months ended September 30, 2014, the Company purchased 2,101,037 shares for $41.2 million. The timing and amount of any stock repurchases will be determined by management based upon market conditions, regulatory considerations and other factors. Numerous factors could affect the timing and amount of any future repurchases under the stock repurchase program, including capital levels, our share price, potential opportunities for growth and acquisitions or other priorities for capital use.

Item 6. Exhibits



			Incorporate By Reference
Exhibit Number		Exhibit Title	Filed Herewith	Form	Form Exhibit Number	File Number	Filing Date
1.1		Underwriting Agreement, dated as of July 30, 2014, between Symetra Financial Corporation (the “Company”) and J.P. Morgan Securities LLC and Wells Fargo Securities, LLC, as representatives of the several underwriters listed therein.		8-K	1.1	001-33808	August 4, 2014
4.1		Indenture, dated as of August 4, 2014, between Symetra Financial Corporation (the “Company”) and U.S. Bank National Association, as Trustee.		8-K	4.1	001-33808	August 4, 2014
4.2		First Supplemental Indenture, dated as of August 4, 2014, between the Company and U.S. Bank National Association, as Trustee.		8-K	4.2	001-33808	August 4, 2014
4.3		Form of 4.25% Senior Note due 2024 (included in Exhibit 4.2).		8-K	4.3	001-33808	August 4, 2014
10.1		Amendment No. 7 dated as of September 19, 2014 to the Master Services Agreement dated August 1, 2009 among Symetra Life Insurance Company and Xerox Business Services, LLC (formerly Affiliated Computer Services, Inc.) †	X
10.2		Credit Agreement among Symetra Financial Corporation, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, dated as of August 28, 2014		8-K	10.01	001-33808	August 28, 2014
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	X
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	X
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
101		The following materials from Symetra Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statement of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statement of Cash Flows and (vi) the Condensed Notes to the Consolidated Financial Statements.
_________

†	Confidential treatment has been requested for portions of this exhibit.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




	SYMETRA FINANCIAL CORPORATION

Date: November 7, 2014	By:	/s/ Thomas M. Marra
		Name: Thomas M. Marra
		Title: President and Chief Executive Officer

Date: November 7, 2014	By:	/s/ Margaret A. Meister
		Name: Margaret A. Meister
		Title: Executive Vice President and Chief Financial Officer

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Symetra Financial (SYA) 10-Q2014 Q3 Quarterly report

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