UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		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 þ No o

     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 o No o

     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 o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a 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 o No þ

     As of May 6, 2011, the Registrant had 118,538,606 common voting shares outstanding, with a par value of $0.01 per share.

 

 

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets			5
Consolidated Statements of Income			6
Consolidated Statements of Changes in Stockholders’ Equity			7
Consolidated Statements of Cash Flows			8
Condensed Notes to Consolidated Financial Statements			9
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3: Quantitative and Qualitative Disclosures about Market Risk			54
Item 4: Controls and Procedures			54
PART II — OTHER INFORMATION
Item 1: Legal Proceedings			55
Item 1A: Risk Factors			55
Item 6: Exhibits			55
Signatures			56
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

          Unless the context otherwise requires, references in this quarterly report on Form 10-Q to “we,” “our,” “us” and “the Company” are to Symetra Financial Corporation together with its subsidiaries. References to “Symetra” refer to Symetra Financial Corporation on a stand-alone, non-consolidated basis.

Forward-Looking Statements

          This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements, which constitute 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 “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 include, among others, statements with respect to Symetra Financial Corporation’s:

	•		estimates or projections of revenues, net income, net income per share, adjusted operating income, adjusted operating income per share, market share or other financial forecasts;
	•		trends in operations, financial performance and financial condition;
	•		financial and operating targets or plans; and
	•		business and growth strategy.

          These statements are based on certain assumptions and analyses made by Symetra in light of its 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 Symetra’s expectations and predictions is subject to a number of risks, uncertainties and contingencies that could cause actual results to differ materially from expectations, including, among others:

	•		general economic, market or business conditions, including further economic downturns or other adverse conditions in the global and domestic capital and credit markets;
	•		the availability of capital and financing;
	•		potential investment losses;
	•		the effects of fluctuations in interest rates and a prolonged low interest rate environment;
	•		recorded reserves for future policy benefits and claims subsequently proving to be inadequate or inaccurate;
	•		deviations from assumptions used in setting prices for insurance and annuity products;
	•		continued viability of certain products under various economic and other conditions;
	•		market pricing and competitive trends related to insurance products and services;
	•		changes in amortization of deferred policy acquisition costs or deferred sales inducements;
	•		financial strength or credit ratings downgrades;
	•		the continued availability and cost of reinsurance coverage;
	•		changes in laws or regulations, or their interpretation, including those that could increase Symetra’s business costs and required capital levels;
	•		the ability of subsidiaries to pay dividends to Symetra;
	•		the ability of the new executive leadership team to successfully implement business strategies;
	•		the effects of implementation of the Patient Protection and Affordable Care Act (“PPACA”);
	•		the effects of implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd Frank Act”); and

•

the risks that are described in Part II, Item 1A — “Risk Factors” in this report; and Part I, Item 1A — “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010.

          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 Symetra will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, Symetra or its business or operations. Symetra assumes 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.		Financial Statements

CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)

		As of				As of
		March 31, 2011				December 31, 2010
		(Unaudited)
ASSETS
Investments:
Available-for-sale securities:
Fixed maturities, at fair value (amortized cost: $20,911.1 and $20,416.5, respectively)		$	21,785.4			$	21,281.8
Marketable equity securities, at fair value (cost: $52.8 and $52.8, respectively)			46.4				45.1
Trading securities:
Marketable equity securities, at fair value (cost: $192.2 and $168.0, respectively)			224.7				189.3
Mortgage loans, net			1,862.0				1,713.0
Policy loans			70.4				71.5
Investments in limited partnerships (includes $34.9 and $36.5 measured at fair value, respectively)			198.8				186.9
Other invested assets			12.8				12.6
Total investments			24,200.5				23,500.2
Cash and cash equivalents			307.9				274.6
Accrued investment income			267.3				257.6
Accounts receivable and other receivables			63.6				65.6
Reinsurance recoverables			283.9				280.8
Deferred policy acquisition costs			262.5				250.0
Goodwill			28.9				28.4
Other assets			106.2				98.0
Separate account assets			901.5				881.7
Total assets		$	26,422.3			$	25,636.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
Funds held under deposit contracts		$	21,553.4			$	20,953.3
Future policy benefits			399.3				398.4
Policy and contract claims			108.2				116.6
Unearned premiums			12.5				12.2
Other policyholders’ funds			112.9				111.0
Notes payable			449.1				449.0
Deferred income tax liabilities, net			110.2				99.0
Other liabilities			344.2				235.1
Separate account liabilities			901.5				881.7
Total liabilities			23,991.3				23,256.3
Commitments and contingencies (Note 10)
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued			—				—
Common stock, $0.01 par value; 750,000,000 shares authorized; 118,535,188 issued and outstanding as of March 31, 2011; 118,216,470 issued and 118,215,701 outstanding as of December 31, 2010			1.2				1.2
Additional paid-in capital			1,451.1				1,450.2
Retained earnings			544.7				496.7
Accumulated other comprehensive income, net of taxes			434.0				432.5
Total stockholders’ equity			2,431.0				2,380.6
Total liabilities and stockholders’ equity		$	26,422.3			$	25,636.9

See accompanying notes.

CONSOLIDATED STATEMENTS OF INCOME

		For the Three Months Ended
		March 31,
		2011				2010
Revenues:
Premiums		$	120.9			$	119.0
Net investment income			310.0				286.9
Policy fees, contract charges, and other			44.7				40.5
Net realized investment gains:
Total other-than-temporary impairment losses on securities			(0.9	)			(17.9	)
Less: portion of losses recognized in other comprehensive income			—				8.2
Net impairment losses recognized in earnings			(0.9	)			(9.7	)
Other net realized investment gains			16.5				16.5
Total net realized investment gains			15.6				6.8
Total revenues			491.2				453.2
Benefits and expenses:
Policyholder benefits and claims			92.3				86.2
Interest credited			228.3				218.5
Other underwriting and operating expenses			66.0				59.6
Interest expense			8.0				8.0
Amortization of deferred policy acquisition costs			20.1				15.4
Total benefits and expenses			414.7				387.7
Income from operations before income taxes			76.5				65.5
Provision for income taxes:
Current			11.2				9.9
Deferred			10.4				9.3
Total provision for income taxes			21.6				19.2
Net income		$	54.9			$	46.3
Net income per common share:
Basic		$	0.40			$	0.35
Diluted		$	0.40			$	0.35
Weighted-average number of common shares outstanding:
Basic			137.292				131.018
Diluted			137.300				131.038
Cash dividends declared per common share		$	0.05			$	—

See accompanying notes.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

														Accumulated
						Additional								Other				Total
		Common				Paid-in				Retained				Comprehensive				Stockholders’
		Stock				Capital				Earnings				Income (Loss)				Equity
Balances as of January 1, 2010		$	0.9			$	1,165.7			$	316.4			$	(49.7	)		$	1,433.3
Common stock issued (net of issuance costs of $20.4)			0.3				282.4				—				—				282.7
Comprehensive income, net of taxes:
Net income			—				—				46.3				—				46.3
Other comprehensive income (net of taxes: $112.7)			—				—				—				209.2				209.2
Total comprehensive income, net of taxes																			255.5
Stock-based compensation			—				0.2				—				—				0.2
Balances as of March 31, 2010		$	1.2			$	1,448.3			$	362.7			$	159.5			$	1,971.7
Balances as of January 1, 2011		$	1.2			$	1,450.2			$	496.7			$	432.5			$	2,380.6
Comprehensive income, net of taxes:
Net income			—				—				54.9				—				54.9
Other comprehensive income (net of taxes: $0.8)			—				—				—				1.5				1.5
Total comprehensive income, net of taxes																			56.4
Stock-based compensation			—				0.9				—				—				0.9
Dividends declared			—				—				(6.9	)			—				(6.9	)
Balances as of March 31, 2011		$	1.2			$	1,451.1			$	544.7			$	434.0			$	2,431.0

See accompanying notes.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Three Months Ended
		March 31,
		2011				2010
Cash flows from operating activities
Net income		$	54.9			$	46.3
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains			(15.6	)			(6.8	)
Accretion and amortization of invested assets, net			9.8				8.8
Accrued interest on bonds			(7.8	)			(11.5	)
Amortization and depreciation			6.0				4.2
Deferred income tax provision			10.4				9.3
Interest credited on deposit contracts			228.3				218.5
Mortality and expense charges and administrative fees			(26.7	)			(25.4	)
Changes in:
Accrued investment income			(9.7	)			(10.3	)
Deferred policy acquisition costs, net			(16.2	)			(14.1	)
Other receivables			(2.0	)			0.2
Future policy benefits			0.9				0.9
Policy and contract claims			(8.4	)			(5.0	)
Current income taxes			4.0				0.6
Other assets and liabilities			(14.7	)			(6.3	)
Other, net			1.0				0.2
Total adjustments			159.3				163.3
Net cash provided by operating activities			214.2				209.6
Cash flows from investing activities
Purchases of:
Fixed maturities and marketable equity securities			(1,089.7	)			(1,024.8	)
Other invested assets and investments in limited partnerships			(5.4	)			(8.9	)
Issuances of mortgage loans			(183.5	)			(45.8	)
Issuances of policy loans			(3.1	)			(4.7	)
Maturities, calls, paydowns, and other			559.4				387.5
Sales of:
Fixed maturities and marketable equity securities			125.0				176.4
Other invested assets and investments in limited partnerships			4.1				4.9
Repayments of mortgage loans			32.9				18.8
Repayments of policy loans			3.9				4.8
Net increase (decrease) in short-term investments			0.2				(51.9	)
Other, net			(2.1	)			(0.4	)
Net cash used in investing activities			(558.3	)			(544.1	)
Cash flows from financing activities
Policyholder account balances:
Deposits			722.8				495.3
Withdrawals			(332.4	)			(295.2	)
Proceeds from issuance of common stock			—				282.7
Cash dividends paid on common stock			(6.9	)			—
Other, net			(6.1	)			(16.8	)
Net cash provided by financing activities			377.4				466.0
Net increase in cash and cash equivalents			33.3				131.5
Cash and cash equivalents at beginning of period			274.6				257.8
Cash and cash equivalents at end of period		$	307.9			$	389.3
Supplemental disclosures of cash flow information
Non-cash transactions during the period:
Investments in limited partnerships and capital obligations incurred		$	13.4			$	18.6
Bond exchanges			18.8				6.0

See accompanying notes.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

          Symetra Financial Corporation is a Delaware corporation that, through its subsidiaries, offers group and individual insurance products and retirement products, including annuities, marketed through benefits consultants, financial institutions and independent agents and advisors in all states and the District of Columbia. The Company’s principal products include medical stop-loss insurance, fixed and variable deferred annuities, single premium immediate annuities and individual life insurance.

2. Summary of Significant Accounting Policies

     Basis of Presentation and Use of Estimates

          The interim 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), for interim reporting. 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 consolidated financial statements and accompanying notes. These interim consolidated financial statements are unaudited but in management’s opinion include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation.

          The accompanying interim financial statements include, on a consolidated basis, the accounts of Symetra Financial Corporation and its subsidiaries, which are collectively referred to as “Symetra Financial” or “the Company”. All significant intercompany transactions and balances have been eliminated.

          These interim 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, 2010, filed with the SEC. The consolidated balance sheet as of December 31, 2010 was derived from audited consolidated financial statements as of that date, but certain information and footnotes required by GAAP for complete financial statements have been excluded. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the twelve months ended December 31, 2011.

          During the first quarter of 2010, the Company revised its estimate for bonus interest reserves on one of its universal life products. This bonus interest is not earned by the contract holder if the policy’s credited rate is equal to the guaranteed minimum. Due to the negative impact the low interest rate environment has had on investment yields, the credited interest rate was adjusted downward to the guaranteed minimum rate over the past 12 months, beginning in first quarter 2010. As a result, for the three months ended March 31, 2010, income from operations before income taxes was $7.4 higher than it would have been without this adjustment. The impact on net income for the same period was $4.8, or $0.03 per share of common stock.

     Adoption of New Accounting Pronouncements

     ASU 2010-06, Improving Disclosures about Fair Value Measurement

          In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurement. The guidance in this ASU requires additional disclosures about an entity’s fair value measurements, including information about inputs to Level 2 measurements, gross transfers into and out of Levels 1 and 2, and information about activity for Level 3 measurements on a gross basis. It also clarifies the level of disaggregation required for existing fair value disclosures. The Company adopted this guidance on January 1, 2010, except for the provisions regarding activity for Level 3 measurements presented on a gross basis, which was adopted on January 1, 2011, as provided for in the guidance. See Note 6 for the Company’s disclosures related to fair value measurements.

ASU 2010-15, How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments

          In April 2010, the FASB issued ASU 2010-15, Financial Services — Insurance (Topic 944) — How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments. This guidance clarifies that an insurer should only consider its ownership interests held within its general account when determining if it holds a controlling interest, thus excluding

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

interests held in a separate account from the analysis. It does not change the guidance for consolidating investments when the general account holds a controlling interest. The Company adopted this guidance on January 1, 2011, which did not change the Company’s current practice of excluding ownership interests held in its separate account from its consolidation analysis.

     Accounting Pronouncements Not Yet Adopted

     ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

          In October 2010, the FASB issued ASU 2010-26, Financial Services — Insurance (Topic 944) — Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This guidance limits the amount of deferrable acquisition costs to those incremental costs directly related to the successful acquisition of an insurance contract and clarifies which costs are included in that definition. The guidance is effective for fiscal years beginning after December 15, 2011. Retrospective application, as well as early adoption, are permitted, but not required. The Company expects to retrospectively adopt this guidance on January 1, 2012, and is currently evaluating the impact of adoption on its financial statements.

     ASU 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring

          In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) — A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. This guidance aims to eliminate diversity in practice by clarifying the criteria for whether a troubled debt restructuring has occurred when a creditor modifies a financing receivable for a borrower. The guidance is effective for the interim or annual periods beginning after June 15, 2011. Application is required to be retrospective to the beginning of the fiscal year in which the guidance is adopted. Upon adoption of ASU 2011-02, additional disclosures required by the guidance in ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses must be provided if a loan modification is determined to be a troubled debt restructuring. The Company will adopt this guidance on July 1, 2011, and expects to apply the guidance retrospectively to the January 1, 2011 at that time. The Company does not expect this guidance will have a material impact on its 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 earnings available to each share of common stock outstanding during the reporting period, adjusted for potential issuance of dilutive common stock.

          The Company’s outstanding warrants and certain restricted stock granted to employees are included in weighted-average common shares outstanding for the purposes of computing basic and diluted earnings per share, using the two-class method. These are considered participating or potential common stock securities because the terms of the agreements entitle the holders to receive any dividends declared concurrently with the holders of outstanding shares of common stock, on a one-to-one basis. Non-participating restricted stock is included in diluted earnings per share based on the application of the treasury stock method.

          For the three months ended March 31, 2011, 2.950 stock options were excluded from the computation of diluted earnings per share, based on the application of the treasury stock method, because they were antidilutive. There were no stock options outstanding as of March 31, 2010.

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

          The following table presents information relating to the Company’s calculations of basic and diluted earnings per share:

		For the Three Months Ended
		March 31,
		2011				2010
Numerator:
Net income, as reported		$	54.9			$	46.3
Denominator:
Weighted-average common shares outstanding — basic			137.292				131.018
Add: dilutive effect of restricted stock			0.008				0.020
Weighted-average common shares outstanding — diluted			137.300				131.038
Net income per common share:
Basic		$	0.40			$	0.35
Diluted		$	0.40			$	0.35

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 transferred to, or recorded in, AOCI for securities that also had a credit-related impairment.

		Cost or				Gross				Gross
		Amortized				Unrealized				Unrealized				Fair				OTTI in
As of March 31, 2011		Cost				Gains				Losses				Value				AOCI
Fixed maturities:
U.S. government and agencies		$	154.8			$	2.8			$	(0.9	)		$	156.7			$	(0.1	)
State and political subdivisions			471.2				5.3				(13.7	)			462.8				(0.2	)
Corporate securities			14,344.6				820.7				(168.4	)			14,996.9				(18.9	)
Residential mortgage-backed securities			3,711.1				140.1				(35.9	)			3,815.3				(39.2	)
Commercial mortgage-backed securities			1,706.6				108.1				(11.8	)			1,802.9				(3.2	)
Other debt obligations			522.8				34.9				(6.9	)			550.8				(4.4	)
Total fixed maturities			20,911.1				1,111.9				(237.6	)			21,785.4				(66.0	)
Marketable equity securities, available-for-sale			52.8				0.3				(6.7	)			46.4				—
Total		$	20,963.9			$	1,112.2			$	(244.3	)		$	21,831.8			$	(66.0	)

		Cost or				Gross				Gross
		Amortized				Unrealized				Unrealized				Fair				OTTI in
As of December 31, 2010		Cost				Gains				Losses				Value				AOCI
Fixed maturities:
U.S. government and agencies		$	30.3			$	2.8			$	—			$	33.1			$	(0.1	)
State and political subdivisions			462.9				5.3				(15.4	)			452.8				(0.2	)
Corporate securities			13,891.7				855.3				(205.6	)			14,541.4				(26.2	)
Residential mortgage-backed securities			3,707.2				148.9				(54.5	)			3,801.6				(40.0	)
Commercial mortgage-backed securities			1,782.2				115.2				(10.1	)			1,887.3				(3.3	)
Other debt obligations			542.2				35.8				(12.4	)			565.6				(6.4	)
Total fixed maturities			20,416.5				1,163.3				(298.0	)			21,281.8				(76.2	)
Marketable equity securities, available-for-sale			52.8				0.1				(7.8	)			45.1				—
Total		$	20,469.3			$	1,163.4			$	(305.8	)		$	21,326.9			$	(76.2	)

          The following tables summarize gross unrealized losses and fair values of the Company’s available-for-sale investments. For fixed maturities, gross unrealized losses include the portion of OTTI recorded in AOCI. The tables are aggregated by investment

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

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
						Gross												Gross
		Fair				Unrealized				# of				Fair				Unrealized				# of
As of March 31, 2011		Value				Losses				Securities				Value				Losses				Securities
Fixed maturities:
U.S. government and agencies		$	124.1			$	(0.9	)			4			$	—			$	—				—
State and political subdivisions			141.2				(3.2	)			20				126.7				(10.5	)			21
Corporate securities			2,483.2				(79.5	)			227				844.3				(88.9	)			93
Residential mortgage-backed securities			659.2				(21.9	)			50				199.0				(14.0	)			28
Commercial mortgage-backed securities			167.7				(4.5	)			24				61.2				(7.3	)			17
Other debt obligations			37.3				(0.7	)			7				81.6				(6.2	)			8
Total fixed maturities		$	3,612.7			$	(110.7	)			332			$	1,312.8			$	(126.9	)			167
Marketable equity securities, available-for-sale			19.2				(1.2	)			1				25.6				(5.5	)			2
Total		$	3,631.9			$	(111.9	)			333			$	1,338.4			$	(132.4	)			169

		Less Than 12 Months												12 Months or More
						Gross												Gross
		Fair				Unrealized				# of				Fair				Unrealized				# of
As of December 31, 2010		Value				Losses				Securities				Value				Losses				Securities
Fixed maturities:
State and political subdivisions		$	139.1			$	(3.3	)			19			$	146.9			$	(12.1	)			24
Corporate securities			2,191.5				(92.2	)			203				897.7				(113.4	)			105
Residential mortgage-backed securities			525.8				(18.6	)			37				273.1				(35.9	)			42
Commercial mortgage-backed securities			160.5				(2.9	)			26				63.2				(7.2	)			17
Other debt obligations			41.4				(0.8	)			7				94.9				(11.6	)			10
Total fixed maturities		$	3,058.3			$	(117.8	)			292			$	1,475.8			$	(180.2	)			198
Marketable equity securities, available-for-sale			19.9				(0.7	)			2				24.1				(7.1	)			3
Total		$	3,078.2			$	(118.5	)			294			$	1,499.9			$	(187.3	)			201

          Based on National Association of Insurance Commissioners (NAIC) ratings, as of March 31, 2011 and December 31, 2010, the Company held below-investment-grade fixed maturities with fair values of $1,337.5 and $1,257.5, respectively, and amortized costs of $1,371.4 and $1,321.2, respectively. These holdings amounted to 6.1% and 5.9% of the Company’s investments in fixed maturities at fair value as of March 31, 2011 and December 31, 2010, respectively.

          The following table summarizes the amortized cost and fair value of fixed maturities as of March 31, 2011, by contractual years to maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.

		Amortized				Fair
		Cost				Value
One year or less		$	492.6			$	502.3
Over one year through five years			3,310.4				3,510.5
Over five years through ten years			6,290.3				6,622.4
Over ten years			4,919.7				5,030.0
Residential mortgage-backed securities			3,711.1				3,815.3
Commercial mortgage-backed securities			1,706.6				1,802.9
Other asset-backed securities			480.4				502.0
Total fixed maturities		$	20,911.1			$	21,785.4

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

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

		For the Three Months Ended
		March 31,
		2011				2010
Fixed maturities		$	286.7			$	271.0
Marketable equity securities, available-for-sale			0.6				0.6
Marketable equity securities, trading			0.9				0.7
Mortgage loans			27.9				18.8
Policy loans			1.0				1.1
Investments in limited partnerships			(2.6	)			(1.2	)
Other			1.3				1.1
Total investment income			315.8				292.1
Investment expenses			(5.8	)			(5.2	)
Net investment income		$	310.0			$	286.9

          The following table summarizes the Company’s net realized investment gains:

		For the Three Months Ended
		March 31,
		2011				2010
Fixed maturities:
Gross gains on sales		$	2.7			$	10.4
Gross losses on sales			(6.1	)			(1.1	)
Other-than-temporary impairments			(0.9	)			(9.7	)
Other(1)			8.2				2.3
Total fixed maturities			3.9				1.9
Marketable equity securities, trading(2)			12.2				7.6
Other invested assets			0.5				(1.4	)
Deferred policy acquisition costs adjustment			(1.0	)			(1.3	)
Net realized investment gains		$	15.6			$	6.8

     Other-Than-Temporary Impairments

          The Company’s review of 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 securities for which the cost or amortized cost exceeds fair value by less than 20% do not 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;

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

	•		Any reduction or elimination of dividends or non-payment of scheduled interest payments;
	•		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 and the Company’s liquidity needs.

          For fixed maturities, if the Company determines that the present value of the cash flows expected to be collected is less than the amortized cost of the security (i.e., a credit loss exists), the Company concludes that an OTTI has occurred. In order to determine the amount of the credit loss, the Company calculates the recovery value by discounting the current expectations of future cash flows it expects to recover. The discount rate is the effective interest rate implicit in the underlying fixed maturity. The effective interest rate is the original effective yield for corporate securities, or current effective yield for mortgage-backed securities.

     Determination of OTTI on Corporate Securities

          To determine the recovery value, credit loss or intent to sell for a corporate security, the Company performs an analysis related to the underlying issuer 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, compared to the price at which the market is trading;
	•		Earnings multiples for an issuer’s industry or sector of the industry, divided by the outstanding debt to determine an expected recovery value of the security in the case of a liquidation;
	•		Expectations regarding defaults and recovery rates;
	•		Changes to the rating of the security by a rating agency; and
	•		Additional market information.

     Determination of OTTI on Structured Securities

          To determine the recovery value, credit loss or intent to sell for a structured security, including residential mortgage-, commercial mortgage- and other asset-backed securities, the Company performs an analysis related to the underlying issuer including, but not limited to, the following:

	•		Discounted cash flow analysis based on the future cash flows the Company expects to recover;
	•		Level of creditworthiness;
	•		Delinquency ratios and loan-to-value ratios;
	•		Average cumulative collateral loss, vintage year and level of subordination;
	•		Susceptibility to fair value fluctuations due to changes in the interest rate environment;
	•		Susceptibility to variability of prepayments; and
	•		Susceptibility to reinvestment risk.

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

          The following table presents the severity and duration of the gross unrealized losses on the Company’s underwater available-for-sale securities, after the recognition of OTTI:

		As of March 31, 2011								As of December 31, 2010
						Gross								Gross
		Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses
Fixed maturities
Underwater by 20% or more:
Less than 6 consecutive months		$	25.4			$	(7.7	)		$	69.1			$	(23.7	)
6 consecutive months or more			29.6				(12.5	)			93.9				(36.2	)
Total underwater by 20% or more			55.0				(20.2	)			163.0				(59.9	)
All other underwater fixed maturities			4,870.5				(217.4	)			4,371.1				(238.1	)
Total underwater fixed maturities		$	4,925.5			$	(237.6	)		$	4,534.1			$	(298.0	)
Marketable equity securities, available-for-sale
Underwater by 20% or more:
Less than 6 consecutive months		$	—			$	—			$	—			$	—
6 consecutive months or more			1.7				(4.4	)			1.7				(4.4	)
Total underwater by 20% or more			1.7				(4.4	)			1.7				(4.4	)
All other underwater marketable equity securities, available-for-sale			43.1				(2.3	)			42.3				(3.4	)
Total underwater marketable equity securities, available-for-sale		$	44.8			$	(6.7	)		$	44.0			$	(7.8	)

          The Company reviewed its available-for-sale investments with unrealized losses as of March 31, 2011 in accordance with its impairment policy and determined, after the recognition of other-than-temporary impairments, 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 fixed maturities before recovery of amortized cost. This conclusion is supported by the Company’s spread analysis, cash flow modeling and expected continuation of contractually required principal and interest payments.

          As of March 31, 2011 and December 31, 2010, the Company did not intend to sell its underwater available-for-sale marketable equity securities, primarily consisting of non-redeemable preferred stocks, and based on its analysis of its underwater available-for-sale marketable equity securities, including an evaluation of the near term prospects of the issuers, it had the intent and ability to hold them until recovery. Therefore, the Company concluded that the declines in fair value of these securities were temporary.

          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 were as follows:

		For the Three Months Ended
		March 31,
		2011				2010
Balance, beginning of period		$	68.0			$	69.6
Increases recognized in the current period:
For which an OTTI was not previously recognized			0.4				6.0
For which an OTTI was previously recognized			—				1.5
Decreases attributable to:
Securities sold or paid down during the period			(16.2	)			(7.6	)
Balance, end of period		$	52.2			$	69.5

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. All loans are underwritten consistently using standards 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 receivable,

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

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 loans are inspected and evaluated annually. The Company’s mortgage loan portfolio is diversified by geographic region, loan size and scheduled maturities. As of March 31, 2011, 32.3% of our commercial mortgage loans were located in California, 15.0% were located in Washington and 9.9% were located in Texas. Individual loans generally do not exceed $15.0.

     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 incurred but not specifically identified losses and, as needed, specific reserves for non-performing loans. The allowance for losses on mortgage loans is evaluated as of 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 — All 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.

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

		As of March 31, 2011								As of December 31, 2010
		Carrying Value				% of Total				Carrying Value				% of Total
Lower Risk		$	1,020.4				54.6	%		$	917.5				53.3	%
Medium Risk			380.8				20.4				430.4				25.0
Higher Risk			468.6				25.0				372.3				21.7
Credit quality indicator total			1,869.8				100.0	%			1,720.2				100.0	%
Other (1)			(7.8	)							(7.2	)
Total		$	1,862.0							$	1,713.0

          In developing its portfolio reserve for incurred but not specifically identified losses the Company evaluates loans by risk category as well as its past loan experience, commercial real estate market conditions, and third party data for expected losses on loans with similar LTV ratios and DSCRs. For existing loans, the Company’s LTV ratios and DSCRs are updated each year between June 1 and September 30.

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

		For the Three Months Ended
		March 31,
		2011				2010
Allowance at beginning of period		$	7.1			$	8.2
Provision for loans not specifically identified			—				0.1
Allowance at end of period		$	7.1			$	8.3

          Specific reserves are established for non-performing loans, which are those loans that are more than 90 days past due on payment or for which the Company considers it probable that amounts due according to the terms of the loan agreement will not be collected. As of March 31, 2011, no loans were considered non-performing or were specifically evaluated and identified as impaired. As of March 31, 2010, the $8.3 reserve included a $2.2 specific reserve associated with one non-performing loan.

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

6. Fair Value of Financial Instruments

          The Company determines the fair value of its financial instruments based on the fair value hierarchy, which requires an entity to maximize its use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, 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 within which a fair value measurement falls is determined based on the lowest-level input that is significant to the fair value measurement. The Company’s financial assets recorded at fair value on the consolidated balance sheets are categorized as follows:

	•		Level 1 — Unadjusted quoted prices in active markets for identical instruments. This level primarily consists of exchange-traded marketable equity securities and actively traded mutual fund investments.
	•		Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. This level includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. All significant inputs are observable, derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the market place. Financial instruments in this category primarily include certain corporate fixed maturities, government or agency securities and certain mortgage-backed securities.
	•		Level 3 — Instruments whose significant value drivers are unobservable. This comprises 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 category may also utilize non-binding broker quotes. This category primarily consists of certain less liquid fixed maturities, including certain corporate private placement securities, and investments in private equity funds.

          The following tables present the financial assets accounted for at fair value on a recurring basis, classified by the valuation hierarchy described above. The Company has no financial liabilities accounted for at fair value on a recurring basis.

		As of March 31, 2011
																		Level 3
Types of Investments		Fair Value				Level 1				Level 2				Level 3				Percent
Fixed maturities, available-for-sale:
U.S. government and agencies		$	156.7			$	—			$	156.7			$	—				—
State and political subdivisions			462.8				—				462.8				—				—
Corporate securities			14,996.9				—				14,227.5				769.4				3.3	%
Residential mortgage-backed securities			3,815.3				—				3,815.3				—				—
Commercial mortgage-backed securities			1,802.9				—				1,785.2				17.7				0.1
Other debt obligations			550.8				—				400.4				150.4				0.7
Total fixed maturities, available-for-sale			21,785.4				—				20,847.9				937.5				4.1
Marketable equity securities, available-for-sale			46.4				44.6				—				1.8				—
Marketable equity securities, trading			224.7				224.0				—				0.7				—
Investments in limited partnerships(1)			34.9				—				—				34.9				0.2
Other invested assets			6.7				2.3				—				4.4				—
Total investments carried at fair value			22,098.1				270.9				20,847.9				979.3				4.3
Separate account assets			901.5				901.5				—				—				—
Total		$	22,999.6			$	1,172.4			$	20,847.9			$	979.3				4.3	%

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

		As of December 31, 2010
																		Level 3
Types of Investments		Fair Value				Level 1				Level 2				Level 3				Percent
Fixed maturities, available-for-sale:
U.S. government and agencies		$	33.1			$	—			$	33.1			$	—				—
State and political subdivisions			452.8				—				452.8				—				—
Corporate securities			14,541.4				—				13,786.8				754.6				3.3	%
Residential mortgage-backed securities			3,801.6				—				3,801.6				—				—
Commercial mortgage-backed securities			1,887.3				—				1,868.2				19.1				0.1
Other debt obligations			565.6				—				412.4				153.2				0.7
Total fixed maturities, available-for-sale			21,281.8				—				20,354.9				926.9				4.1
Marketable equity securities, available-for-sale			45.1				43.3				—				1.8				—
Marketable equity securities, trading			189.3				188.7				—				0.6				—
Investments in limited partnerships(1)			36.5				—				—				36.5				0.2
Other invested assets			6.4				2.6				—				3.8				—
Total investments carried at fair value			21,559.1				234.6				20,354.9				969.6				4.3
Separate account assets			881.7				881.7				—				—				—
Total		$	22,440.8			$	1,116.3			$	20,354.9			$	969.6				4.3	%