2 Investments
The following table presents the composition of our investment portfolio by major security type, consistent with our internal classification of how we manage, monitor, and measure the portfolio:
($ in millions) | Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Net Realized Gains (Losses)1 |
Fair Value | % of Total Fair Value |
|||||
---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2009 |
|||||||||||
Fixed maturities: | |||||||||||
U.S. government obligations | $ | 4,939.6 | $ | 6.4 | $ | (128.5) | $ | — | $ | 4,817.5 | 32.8% |
State and local government obligations | 1,974.2 | 55.1 | (5.3) | — | 2,024.0 | 13.8 | |||||
Corporate debt securities | 1,244.9 | 43.4 | (6.9) | — | 1,281.4 | 8.7 | |||||
Residential mortgage-backed securities | 592.0 | 4.3 | (79.9) | — | 516.4 | 3.5 | |||||
Commercial mortgage-backed securities | 1,572.0 | 37.0 | (18.9) | — | 1,590.1 | 10.8 | |||||
Other asset-backed securities | 721.9 | 6.1 | (1.8) | — | 726.2 | 4.9 | |||||
Redeemable preferred stocks | 671.3 | 20.7 | (85.3) | — | 606.7 | 4.1 | |||||
Other debt obligations | 1.1 | — | — | — | 1.1 | — | |||||
Total fixed maturities | 11,717.0 | 173.0 | (326.6) | — | 11,563.4 | 78.6 | |||||
Equity securities: | |||||||||||
Nonredeemable preferred stocks | 665.4 | 597.6 | — | (7.2) | 1,255.8 | 8.5 | |||||
Common equities | 598.4 | 220.1 | (2.3) | — | 816.2 | 5.6 | |||||
Short-term investments – other | 1,078.0 | — | — | — | 1,078.0 | 7.3 | |||||
Total portfolio2,3 | $ | 14,058.8 | $ | 990.7 | $ | (328.9) | $ | (7.2) | $ | 14,713.4 | 100.0% |
($ in millions) | Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Net Realized Gains (Losses)1 |
Fair Value | % of Total Fair Value |
|||||
December 31, 2008 |
|||||||||||
Fixed maturities: | |||||||||||
U.S. government obligations | $ | 3,565.7 | $ | 129.0 | $ | (1.1) | $ | — | $ | 3,693.6 | 28.5% |
State and local government obligations | 3,041.4 | 53.1 | (90.1) | — | 3,004.4 | 23.1 | |||||
Foreign government obligations | 16.2 | .2 | — | — | 16.4 | .1 | |||||
Corporate debt securities | 692.1 | 1.6 | (54.4) | — | 639.3 | 4.9 | |||||
Residential mortgage-backed securities | 758.7 | 1.4 | (137.1) | — | 623.0 | 4.8 | |||||
Commercial mortgage-backed securities | 1,692.7 | 1.0 | (243.7) | — | 1,450.0 | 11.2 | |||||
Other asset-backed securities | 139.2 | — | (10.1) | — | 129.1 | 1.0 | |||||
Redeemable preferred stocks | 387.2 | 8.7 | (8.0) | — | 387.9 | 3.0 | |||||
Other debt obligations | 2.1 | .9 | — | — | 3.0 | — | |||||
Total fixed maturities | 10,295.3 | 195.9 | (544.5) | — | 9,946.7 | 76.6 | |||||
Equity securities: | |||||||||||
Nonredeemable preferred stocks | 1,131.3 | 73.5 | (17.3) | (37.5) | 1,150.0 | 8.9 | |||||
Common equities | 553.6 | 203.5 | (29.3) | — | 727.8 | 5.6 | |||||
Short-term investments – other | 1,153.6 | — | — | — | 1,153.6 | 8.9 | |||||
Total portfolio2,3 | $ | 13,133.8 | $ | 472.9 | $ | (591.1) | $ | (37.5) | $ | 12,978.1 | 100.0% |
1) Represents net holding period gains (losses) on certain hybrid securities (discussed below).
2) At December 31, 2009 and 2008, we had $7.7 million and $254.2 million, respectively, of net unsettled security transactions offset in other liabilities.
3) Includes $2.2 billion and $1.0 billion at December 31, 2009 and 2008, respectively, of securities in the portfolio of a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.
Our fixed-maturity securities include debt securities and redeemable preferred stocks. At December 31, 2009 and 2008, the nonredeemable preferred stock portfolio included $66.3 million and $53.0 million, respectively, of hybrid securities (i.e., perpetual preferred stocks that have call features with fixed-rate coupons, whereby the change in value of the call feature is a component of the overall change in value of the preferred stock). Common equities include common stocks and other risk investments (e.g., private equity investments). Our other short-term investments include Eurodollar deposits, commercial paper, and other investments which are expected to mature within one year. At December 31, 2009, our other short-term investments also included $0.9 million in treasury bills issued by the Australian government.
At December 31, 2009, bonds and certificates of deposit in the principal amount of $131.9 million were on deposit to meet state insurance regulatory and/or rating agency requirements. We did not have any securities of any one issuer, excluding U.S. government obligations with an aggregate cost or fair value exceeding 10% of total shareholders’ equity at December 31, 2009 or 2008. At December 31, 2009, we had fixed-maturity securities with a fair value of $1.1 million that were non-income producing during the preceding 12 months.
Fixed Maturities The composition of fixed maturities by maturity at December 31, 2009 was:
(millions) | Cost | Fair Value |
||
---|---|---|---|---|
Less than one year | $ | 1,231.1 | $ | 1,220.9 |
One to five years | 7,419.7 | 7,443.0 | ||
Five to ten years | 3,013.1 | 2,857.2 | ||
Ten years or greater | 53.0 | 42.2 | ||
Total1 | $ | 11,716.9 | $ | 11,563.3 |
1) Excludes $0.1 million of gains on the open interest rate swap position.
Asset-backed securities are classified in the maturity distribution table based upon their projected cash flows. All other securities which do not have a single maturity date are reported at expected average maturity. Contractual maturities may differ from expected maturities because the issuers of the securities may have the right to call or prepay obligations.
Net Investment Income The components of net investment income for the years ended December 31, were:
(millions) | 2009 | 2008 | 2007 | |||
---|---|---|---|---|---|---|
Fixed maturities: | ||||||
U.S. government obligations | $ | 79.6 | $ | 54.1 | $ | 115.0 |
State and local government obligations | 91.9 | 126.5 | 135.9 | |||
Corporate debt securities | 48.2 | 53.4 | 52.7 | |||
Residential mortgage-backed securities | 33.4 | 47.1 | 40.3 | |||
Commercial mortgage-backed securities | 90.7 | 102.1 | 94.8 | |||
Other asset-backed securities | 9.7 | 6.9 | 6.7 | |||
Redeemable preferred stocks | 47.5 | 47.0 | 32.0 | |||
Other debt obligations | .3 | 1.3 | 1.2 | |||
Total fixed maturities | 401.3 | 438.4 | 478.6 | |||
Equity securities: | ||||||
Nonredeemable preferred stocks | 89.7 | 144.5 | 126.9 | |||
Common equities | 13.3 | 38.9 | 46.2 | |||
Short-term investments: | ||||||
Auction-rate municipal obligations | — | 1.4 | 2.6 | |||
Auction-rate preferred stocks | — | — | .8 | |||
Other short-term investments | 2.7 | 14.5 | 25.7 | |||
Investment income | 507.0 | 637.7 | 680.8 | |||
Investment expenses | (11.1) | (8.8) | (12.4) | |||
Net investment income | $ | 495.9 | $ | 628.9 | $ | 668.4 |
Net Realized Gains (Losses) The components of net realized gains (losses) for the years ended December 31, were:
(millions) | 2009 | 2008 | 2007 | |||
---|---|---|---|---|---|---|
Gross realized gains on security sales |
||||||
Fixed maturities: | ||||||
U.S. government obligations | $ | 103.1 | $ | 243.2 | $ | 100.2 |
State and local government obligations | 35.2 | 17.3 | 3.1 | |||
Corporate and other debt securities | 20.5 | 5.5 | 7.1 | |||
Commercial mortgage-backed securities | .8 | — | — | |||
Redeemable preferred stocks | — | — | 2.9 | |||
Total fixed maturities | 159.6 | 266.0 | 113.3 | |||
Equity securities: | ||||||
Nonredeemable preferred stocks | 32.6 | 11.6 | 2.1 | |||
Common equities | 148.5 | 320.7 | 55.4 | |||
Short-term investments – other | — | — | .1 | |||
Subtotal gross realized gains on security sales | 340.7 | 598.3 | 170.9 | |||
Gross realized losses on security sales |
||||||
Fixed maturities: | ||||||
U.S. government obligations | (2.1) | (.7) | (14.2) | |||
State and local government obligations | (7.6) | — | (.8) | |||
Corporate and other debt securities | (.5) | (13.1) | (4.0) | |||
Residential mortgage-backed securities | (3.2) | — | (1.0) | |||
Commercial mortgage-backed securities | (9.9) | (1.4) | (.3) | |||
Other asset-backed securities | (.7) | (.4) | — | |||
Redeemable preferred stocks | — | (1.8) | (1.4) | |||
Total fixed maturities | (24.0) | (17.4) | (21.7) | |||
Equity securities: | ||||||
Nonredeemable preferred stocks | (57.3) | (541.8) | (2.2) | |||
Common equities | (40.0) | (179.3) | (33.4) | |||
Subtotal gross realized losses on security sales | (121.3) | (738.5) | (57.3) | |||
Net realized gains (losses) on security sales |
||||||
Fixed maturities: | ||||||
U.S. government obligations | 101.0 | 242.5 | 86.0 | |||
State and local government obligations | 27.6 | 17.3 | 2.3 | |||
Corporate and other debt securities | 20.0 | (7.6) | 3.1 | |||
Residential mortgage-backed securities | (3.2) | — | (1.0) | |||
Commercial mortgage-backed securities | (9.1) | (1.4) | (.3) | |||
Other asset-backed securities | (.7) | (.4) | — | |||
Redeemable preferred stocks | — | (1.8) | 1.5 | |||
Total fixed maturities | 135.6 | 248.6 | 91.6 | |||
Equity securities: | ||||||
Nonredeemable preferred stocks | (24.7) | (530.2) | (.1) | |||
Common equities | 108.5 | 141.4 | 22.0 | |||
Short-term investments – other | — | — | .1 | |||
Subtotal net realized gains (losses) on security sales | 219.4 | (140.2) | 113.6 | |||
Other-than-temporary impairment losses |
||||||
Fixed maturities: | ||||||
Corporate and other debt securities | — | (69.0) | — | |||
Residential mortgage-backed securities | (32.0) | (38.2) | (1.7) | |||
Commercial mortgage-backed securities | (.9) | (.6) | (.2) | |||
Redeemable preferred stocks | (6.1) | (301.0) | — | |||
Total fixed maturities | (39.0) | (408.8) | (1.9) | |||
Equity securities: | ||||||
Nonredeemable preferred stocks | (158.8) | (941.3) | (17.4) | |||
Common equities | (10.3) | (43.0) | (.3) | |||
Subtotal other-than-temporary impairment losses | (208.1) | (1,393.1) | (19.6) | |||
Net holding period gains (losses) |
||||||
Hybrid preferred stocks | 14.5 | (73.6) | (7.4) | |||
Derivative instruments | 1.3 | 161.8 | 19.7 | |||
Subtotal net holding period gains (losses) | 15.8 | 88.2 | 12.3 | |||
Total net realized gains (losses) on securities | $ | 27.1 | $ | (1,445.1) | $ | 106.3 |
Gross realized gains and losses were the result of traditional investment sales transactions in our fixed-income portfolio, affected by movements in credit spreads and interest rates, sales of our common stocks to reduce our risk exposure, rebalancing of our equity-indexed portfolio, tax management, and holding period valuation changes on hybrids and derivatives. In addition, in 2007, gains and losses also reflected the sale of securities to fund our $1.4 billion extraordinary dividend payment in September 2007. Also included are write-downs for securities determined to be other-than-temporarily impaired in our fixed-maturity and/or equity portfolios. These write-downs were the result of fundamental matters related to either specific issues or issuers and/or the significant decline in the credit and mortgage-related markets.
Other-than-Temporary Impairment (OTTI) During 2009, we adopted the new accounting standards related to OTTI that provide guidance in determining whether impairments in debt securities are other-than-temporary and require additional disclosures relating to OTTI and unrealized losses on investments; the new standards did not change the impairment model for equity securities.
The new guidance required that, during the initial period of adoption, we record a cumulative effect of change in accounting principle to reclassify the non-credit component of a previously recognized OTTI from retained earnings to other comprehensive income. Based on our review of OTTI losses on securities held at March 31, 2009, we reclassified $189.6 million (or $291.8 million on a pretax basis) from retained earnings to accumulated other comprehensive income (loss) during the second quarter 2009.
The following table shows our OTTI losses separated between those related to a credit loss and the portion that was a non-credit related impairment for the period since the adoption of the new guidance (second quarter 2009):
(millions) | Total OTTI | Credit Related and Other OTTI (Income Statement) |
Non-Credit Related OTTI (Balance Sheet)1 |
|||
---|---|---|---|---|---|---|
Fixed maturities: | ||||||
Residential mortgage-backed: | ||||||
Bifurcated | $ | 56.6 | $ | 16.9 | $ | 39.7 |
Non-bifurcated2 | 14.2 | 14.2 | — | |||
Total residential mortgage-backed | 70.8 | 31.1 | 39.7 | |||
Commercial mortgage-backed - bifurcated | 1.3 | .9 | .4 | |||
Other asset-backed - non-bifurcated2 | .2 | .2 | — | |||
Total fixed maturities | 72.3 | 32.2 | 40.1 | |||
Nonredeemable preferred stocks | 6.9 | 6.9 | NA | |||
Common equities | 1.7 | 1.7 | NA | |||
Total | $ | 80.9 | $ | 40.8 | $ | 40.1 |
NA = Not Applicable
1) Reflects the non-credit related OTTI recorded as a component of accumulated other comprehensive income at the time the credit impairment was determined. The valuation on these positions improved by $16.0 million subsequent to the write-downs, resulting in a remaining balance of $24.1 million in accumulated other comprehensive income at December 31, 2009.
2) Represents securities where our total OTTI losses were credit related; no unrealized losses are recorded as a component of accumulated other comprehensive income.
The following table provides a rollforward of the amounts related to credit losses recognized in earnings for which a portion of the OTTI loss was recognized in accumulated other comprehensive income at the time the credit impairment was determined and recognized:
(millions) | Commercial Mortgage- Backed |
Corporate Debt |
Residential Mortgage- Backed |
Total | ||||
---|---|---|---|---|---|---|---|---|
Beginning balance at April 1, 2009 | $ | — | $ | 6.5 | $ | 24.2 | $ | 30.7 |
Credit losses for which an OTTI was previously recognized | — | — | 1.4 | 1.4 | ||||
Credit losses for which an OTTI was not previously recognized | .9 | — | 15.5 | 16.4 | ||||
Ending balance at December 31, 2009 | $ | .9 | $ | 6.5 | $ | 41.1 | $ | 48.5 |
Since it was determined that it is more likely than not that we will not be required to sell the securities prior to the recovery (which could be maturity) of their respective cost bases, in order to measure the amount of credit losses on the securities that were determined to be other-than-temporarily impaired during the year, we considered a number of factors and inputs related to the individual securities. The methodology and significant inputs used to measure the amount of credit losses in our asset-backed portfolio included: current performance indicators on the underlying assets (i.e., delinquency rates, foreclosure rates, and default rates), credit support (via current levels of subordination), and historical credit ratings. Updated cash flow expectations were also generated by our portfolio managers based upon these performance indicators. In order to determine the amount of credit loss, if any, the net present value of the cash flows expected (i.e., expected recovery value) was calculated using the current implied yield for each security, and was compared to its current amortized value. In the event that the net present value was below the amortized value, a credit loss was deemed to exist, and the security was written-down.
Gross Unrealized Losses As of December 31, 2009, we had $326.6 million of gross unrealized losses in our fixed-income portfolio (i.e., fixed-maturity securities, nonredeemable preferred stocks, and short-term investments) and $2.3 million in our common equities. We currently do not intend to sell the fixed-income securities and determined that it is more likely than not that we will not be required to sell these securities for the period of time necessary to recover their cost bases. In addition, we may retain the common stocks to maintain correlation to the Russell 1000 Index, as long as the portfolio and index correlation remain similar. If our strategy was to change and these securities were determined to be other-than-temporarily impaired, we would recognize a write-down in accordance with our stated policy.
The following tables show the composition of gross unrealized losses by major security type by the length of time that individual securities have been in a continuous unrealized loss position:
(millions) | Total Fair Value |
Total Unrealized Losses |
Less than 12 Months | 12 Months or Greater | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||
December 31, 2009 |
||||||||||||
Fixed maturities: | ||||||||||||
U.S. government obligations | $ | 4,595.3 | $ | (128.5) | $ | 2,408.1 | $ | (6.4) | $ | 2,187.2 | $ | (122.1) |
State and local government obligations | 448.6 | (5.3) | 41.3 | (.2) | 407.3 | (5.1) | ||||||
Corporate debt securities | 344.2 | (6.9) | 264.6 | (1.8) | 79.6 | (5.1) | ||||||
Residential mortgage-backed securities | 367.4 | (79.9) | 27.9 | (2.5) | 339.5 | (77.4) | ||||||
Commercial mortgage-backed securities | 386.1 | (18.9) | 32.6 | (.9) | 353.5 | (18.0) | ||||||
Other asset-backed securities | 81.6 | (1.8) | 71.6 | (.3) | 10.0 | (1.5) | ||||||
Redeemable preferred stocks | 507.5 | (85.3) | — | — | 507.5 | (85.3) | ||||||
Total fixed maturities | 6,730.7 | (326.6) | 2,846.1 | (12.1) | 3,884.6 | (314.5) | ||||||
Equity securities - common equities | 30.7 | (2.3) | 20.9 | (1.7) | 9.8 | (.6) | ||||||
Total portfolio | $ | 6,761.4 | $ | (328.9) | $ | 2,867.0 | $ | (13.8) | $ | 3,894.4 | $ | (315.1) |
(millions) | Total Fair Value |
Total Unrealized Losses |
Less than 12 Months | 12 Months or Greater | ||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||
December 31, 2008 |
||||||||||||
Fixed maturities: | ||||||||||||
U.S. government obligations | $ | 232.5 | $ | (1.1) | $ | 232.5 | $ | (1.1) | $ | — | $ | — |
State and local government obligations | 1,100.6 | (90.1) | 274.8 | (17.9) | 825.8 | (72.2) | ||||||
Corporate debt securities | 493.1 | (54.4) | 278.3 | (27.4) | 214.8 | (27.0) | ||||||
Residential mortgage-backed securities | 592.8 | (137.1) | 219.1 | (41.4) | 373.7 | (95.7) | ||||||
Commercial mortgage-backed securities | 1,422.1 | (243.7) | 842.9 | (116.7) | 579.2 | (127.0) | ||||||
Other asset-backed securities | 128.8 | (10.1) | 117.7 | (7.4) | 11.1 | (2.7) | ||||||
Redeemable preferred stocks | 60.6 | (8.0) | 60.6 | (8.0) | — | — | ||||||
Total fixed maturities | 4,030.5 | (544.5) | 2,025.9 | (219.9) | 2,004.6 | (324.6) | ||||||
Equity securities: | ||||||||||||
Nonredeemable preferred stocks | 437.6 | (17.3) | 305.4 | (13.2) | 132.2 | (4.1) | ||||||
Common equities | 123.2 | (29.3) | 110.5 | (26.5) | 12.7 | (2.8) | ||||||
Total equity securities | 560.8 | (46.6) | 415.9 | (39.7) | 144.9 | (6.9) | ||||||
Total portfolio | $ | 4,591.3 | $ | (591.1) | $ | 2,441.8 | $ | (259.6) | $ | 2,149.5 | $ | (331.5) |
The $85.3 million gross unrealized losses in our redeemable preferred stock portfolio reflects the effect of our $266.7 million reclassification, on a pretax basis, of prior other-than-temporary impairment losses under the accounting guidance for impairments that was adopted during 2009, partially offset by the subsequent recovery in value recorded during the remainder of 2009.
Included in gross unrealized losses at December 31, 2009, was $24.1 million related to securities for which a portion of the OTTI loss was recorded in earnings as a credit loss. The fair value and gross unrealized losses for these securities were comprised of the following:
(millions) | Total Fair Value |
Total Unrealized Losses |
Less than 12 Months | 12 Months or Greater | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||
Fixed maturities: | ||||||||||||
Residential mortgage-backed securities | $ | 77.4 | $ | (23.6) | $ | 15.6 | $ | (1.9) | $ | 61.8 | $ | (21.7) |
Commercial mortgage-backed securities | 1.8 | (.5) | .5 | (.2) | 1.3 | (.3) | ||||||
Total fixed maturities | $ | 79.2 | $ | (24.1) | $ | 16.1 | $ | (2.1) | $ | 63.1 | $ | (22.0) |
Trading Securities At December 31, 2009 and 2008, we did not hold any trading securities and we did not have any net realized gains (losses) on trading securities for the years ended December 31, 2009, 2008, and 2007.
Derivative Instruments We have invested in the following derivative exposures at various times: interest rate swaps, asset-backed credit default swaps, U.S. corporate debt credit default swaps, and cash flow hedges. In addition, during 2009, we invested in equity options as an economic, forecasted forward sale.
For all derivative positions discussed below, realized holding period gains and losses are netted with any upfront cash that may be exchanged under the contract to determine if the net position should be classified either as an asset or liability. To be reported as a component of the available-for-sale portfolio, the inception-to-date realized gain on the derivative position at period end would have to exceed any upfront cash received (net derivative asset). On the other hand, a net derivative liability would include any inception-to-date realized loss plus the amount of upfront cash received (or netted, if upfront cash was paid) and would be reported as a component of other liabilities. These net derivative assets/liabilities are not separately disclosed on the balance sheet due to their immaterial effect on our financial condition, cash flows, and results of operations.
The following table shows the status of our derivative instruments at December 31, 2009 and 2008, and for the years ended December 31, 2009, 2008, and 2007; amounts are on a pretax basis:
Balance Sheet | Income Statement | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Notional Value1 | Fair Value | Net Realized Gains (Losses) on Securities |
|||||||||||||
(millions) | December 31, | December 31, | Years ended December 31, | ||||||||||||
Derivatives designated as: | 2009 | 2008 | 2007 | Purpose | Classification | 2009 | 2008 | 2009 | 2008 | 2007 | |||||
Hedging instruments |
|||||||||||||||
Foreign currency cash flow hedge2 |
$ — | $ 8 | $ — | Forecasted transaction |
Accumulated other comprehensive income | $ | — | $ | .2 | $ | — | $ | — | $ | — |
Non-hedging instruments |
|||||||||||||||
Assets: | |||||||||||||||
Interest rate swaps3 |
713 | 1,800 | 1,325 | Manage
portfolio duration |
Investments – fixed maturities |
.1 | 96.3 | .1 | 104.3 | 53.1 | |||||
Liabilities: | |||||||||||||||
Corporate credit default swaps | 25 | 25 | — | Manage credit risk | Other liabilities | (.8) | (.5) | (.6) | (.7) | — | |||||
Asset-backed credit default swaps | — | — | 140 | General portfolio investing |
NA | — | — | — | — | (45.9) | |||||
Closed: | |||||||||||||||
Interest rate swaps |
4,186 | 1,550 | — | Manage portfolio duration |
— | — | — | 10.4 | 57.1 | — | |||||
Corporate credit default swaps | 7 | 545 | 250 | Manage credit risk | — | — | — | (.4) | 20.8 | 10.0 | |||||
Asset-backed credit default swaps | — | 140 | 50 | General portfolio investing |
— | — | — | — | (19.7) | 2.5 | |||||
Equity options4 (177,190 contracts) |
NA | NA | NA | Manage price risk |
— | — | — | (9.1) | — | — | |||||
Foreign currency trade2 |
8 | — | — | Manage currency risk |
— | — | — | .9 | — | — | |||||
Total | NA | NA | NA | $ | (.7) | $ | 96.0 | $ | 1.3 | $ | 161.8 | $ | 19.7 |
1) The amounts represent the value held at year-end for open positions and the maximum amount held during the year for closed positions.
2) During the fourth quarter 2009, we reclassified our cash flow hedge and closed the position; see Cash Flow Hedges below for further discussion.
3) The $713 million notional value swap was entered into as a short position (i.e., receive variable and pay fixed coupon) while the swaps held at December 31, 2008 and 2007 were long positions (i.e., receive fixed and pay variable coupon).
4) Each contract is equivalent to 100 shares of common stock of the issuer; we had no option activity in 2008 or 2007.
NA = Not Applicable
CASH FLOW HEDGES In the fourth quarter 2009, we recognized a realized gain of $0.9 million reflecting the previously deferred gain on our foreign currency cash flow hedge.
During the second quarter 2007, we entered into a forecasted debt issuance hedge against a possible rise in interest rates in anticipation of issuing $1 billion of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the “Debentures”). The hedge was designated as, and qualified for, cash flow hedge accounting treatment. Upon issuance of the Debentures, the hedge was closed, and we recognized a pretax gain of $34.4 million, which is recorded as part of accumulated other comprehensive income. The $34.4 million gain is deferred and is being recognized as an adjustment to interest expense over the 10-year fixed interest rate term of the Debentures. During 2009, 2008, and 2007, we recognized $2.8 million, $2.6 million, and $1.3 million, respectively, as an adjustment to interest expense.
INTEREST RATE SWAPS During the years ended December 31, 2009, 2008, and 2007, we invested in interest rate swap positions primarily to manage the fixed-income portfolio duration. As of December 31, 2009, no cash collateral was delivered or received on our open interest rate swap position. As of December 31, 2008 and 2007, we had received $79.6 million and $44.4 million, respectively, in cash collateral from the counterparties on our then open interest rate swap positions, which amounts were invested in short-term securities.
CORPORATE CREDIT DEFAULT SWAPS During the years ended December 31, 2009 and 2008, we held a position, which was opened during the third quarter 2008, on one corporate issuer within the financial services sector where we bought credit default protection in the form of a credit default swap for a 5-year time horizon. We hold this protection to reduce our exposure to potential additional valuation declines on our preferred stock due to credit impairment of the issuer. As of December 31, 2009, we delivered $0.6 million in cash collateral to the counterparty on our open corporate credit default swap position. Additionally, during the third quarter 2009, we closed a position where we bought credit default protection in the form of credit default swaps for a 2-year time horizon on one corporate issuer within the industrial sector. We paid $0.6 million in upfront cash when we entered the 2-year exposure position, which was offset against our then open exposure. During the fourth quarter 2008, we closed positions where we bought credit default protection in the form of credit default swaps for 3-year and 5-year time horizons on debt issuances of nine different corporate issuers within the financial services sector that we opened during the third quarter 2008. We originally purchased the protection to reduce our overall financial sector exposure given the heightened risk in the financial markets at the time and our exposure to financial firms. No cash collateral was delivered or received on these positions during the year ended December 31, 2008.
During the year ended December 31, 2007, we opened and closed positions where we bought credit default protection in the form of credit default swaps on a corporate non-investment-grade index, and we closed positions where we bought credit default swaps on an investment-grade index. No cash collateral was delivered or received on these positions during the year ended December 31, 2007.
EQUITY OPTIONS During the year ended December 31, 2009, we opened and closed positions where we simultaneously sold and purchased a substantially equivalent amount of call and put options, respectively, on Citigroup common stock, which related to our preferred stock holding. The purpose of this transaction was to effect a forward sale of a portion of the common stock we expected to receive from Citigroup resulting from the conversion of our preferred stock holding into common stock pursuant to Citigroup’s exchange that occurred during the third quarter 2009. This was achieved through matching the strike price and term of the option contracts and was meant to offset the downside price risk of the common stock during the time period pending the exchange. All of the common stock we received from the preferred stock conversion was sold by the end of the third quarter. As of December 31, 2009, we did not have any unsettled collateral deliveries related to this position. We had no equity option positions during the years ended December 31, 2008 and 2007.
ASSET-BACKED CREDIT DEFAULT SWAPS We held no asset-backed credit default swap positions during the year ended December 31, 2009. During the fourth quarter 2008, we closed a position for which we sold credit protection in the form of a credit default swap comprised of a basket of 20 asset-backed bonds supported by sub-prime mortgage loans. We covered the credit default swap’s notional exposure by acquiring U.S. Treasury Notes of equal maturity and principal amount and reducing our overall exposure with any upfront cash received. As of December 31, 2009 and 2008, we did not have any collateral deliveries related to this position outstanding. As of December 31, 2007, we delivered $44.8 million ($34.1 million of U.S. Treasury Notes and $10.7 million of cash) in collateral to the counterparties on the asset-backed credit default swap position.