Investing Activities

6 Months Ended

Jun. 30, 2011

Investing Activities

Debt securities

Fair Value and Cost of General Account Securities:	June  30, 2011				December  31, 2010
($ in thousands)	Fair Value		Cost		Fair Value		Cost
U.S. government and agency	$	116,954	$	113,973	$	98,283	$	96,137
State and political subdivision		33,743		33,055		32,509		33,092
Foreign government		26,793		24,864		16,086		14,683
Corporate		924,268		904,982		693,777		692,780
CMBS		237,024		233,049		173,955		172,850
RMBS		429,348		442,548		333,605		350,729
CDO/CLO		58,779		66,240		63,184		72,603
Other asset-backed		145,364		144,254		108,999		108,632
Available-for-sale debt securities	$	1,972,273	$	1,962,965	$	1,520,398	$	1,541,506

Unrealized Gains (Losses) from General Account Securities:	June  30, 2011				December  31, 2010
($ in thousands)	Gains		Losses		Gains		Losses
U.S. government and agency	$	3,255	$	(274)	$	2,483	$	(337)
State and political subdivision		1,053		(365)		216		(799)
Foreign government		1,936		(7)		1,463		(60)
Corporate		50,824		(31,538)		39,804		(38,807)
CMBS		7,258		(3,283)		5,673		(4,568)
RMBS		6,146		(19,346)		4,429		(21,553)
CDO/CLO		1,060		(8,521)		1,940		(11,359)
Other asset-backed		1,794		(684)		1,320		(953)
Debt securities gains (losses)	$	73,326	$	(64,018)	$	57,328	$	(78,436)
Debt securities net gains (losses)	$	9,308					$	(21,108)

Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in the balance sheet as a component of AOCI. The table below presents the special category of AOCI for debt securities that are other-than-temporarily impaired when the impairment loss has been split between the credit loss component (in earnings) and the non-credit component (separate category of AOCI).

Fixed Maturity Non-Credit OTTI Losses in AOCI, by Security Type:	June  30,		Dec  31,
($ in thousands)	2011(1)		2010(1)
U.S. government and agency	$	--	$	--
State and political subdivision		--		--
Foreign government		--		--
Corporate		(1,504)		(1,512)
CMBS		(4,519)		(4,519)
RMBS		(16,021)		(15,263)
CDO/CLO		(5,432)		(6,279)
Other asset-backed		--		--
Total fixed maturity non-credit OTTI losses in AOCI	$	(27,476)	$	(27,573)

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⁽¹⁾ Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment.

Aging of Temporarily Impaired	June  30, 2011
General Account Debt Securities:	Less than 12 months				Greater than 12 months				Total
($ in thousands)	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Debt securities
U.S. government and agency	$	--	$	--	$	3,668	$	(274)	$	3,668	$	(274)
State and political subdivision		992		(9)		972		(356)		1,964		(365)
Foreign government		1,975		(7)		--		--		1,975		(7)
Corporate		104,776		(2,066)		87,417		(29,472)		192,193		(31,538)
CMBS		42,843		(603)		7,160		(2,680)		50,003		(3,283)
RMBS		101,438		(2,952)		85,162		(16,394)		186,600		(19,346)
CDO/CLO		1,306		--		43,228		(8,521)		44,534		(8,521)
Other asset-backed		28,384		(302)		7,402		(382)		35,786		(684)
Total temporarily impaired securities	$	281,714	$	(5,939)	$	235,009	$	(58,079)	$	516,723	$	(64,018)
Below investment grade	$	14,470	$	(377)	$	89,410	$	(39,279)	$	103,880	$	(39,656)
Below investment grade after offsets   for deferred policy acquisition cost   adjustment and taxes			$	(211)			$	(3,430)			$	(3,641)
Number of securities				173				152				325

Unrealized losses on below investment grade debt securities with a fair value of less than 80% of amortized cost totaled $32,902 thousand at June 30, 2011, of which $31,271 thousand was below 80% of amortized cost for more than 12 months.

These securities were considered to be temporarily impaired at June 30, 2011 because each of these securities had performed, and was expected to perform, in accordance with its original contractual terms. In addition, management does not have the intention to sell nor does it expect to be required to sell these securities before recovery.

Aging of Temporarily Impaired	As of December 31, 2010
General Account Debt Securities:	Less than 12 months				Greater than 12 months				Total
($ in thousands)	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Debt Securities
U.S. government and agency	$	592	$	(8)	$	3,613	$	(329)	$	4,205	$	(337)
State and political subdivision		20,184		(381)		910		(418)		21,094		(799)
Foreign government		968		(60)		--		--		968		(60)
Corporate		38,680		(1,833)		89,756		(36,974)		128,436		(38,807)
CMBS		22,577		(401)		12,851		(4,167)		35,428		(4,568)
RMBS		61,907		(2,296)		96,254		(19,257)		158,161		(21,553)
CDO/CLO		88		--		43,920		(11,359)		44,008		(11,359)
Other asset-backed		35,346		(355)		7,456		(598)		42,802		(953)
Total temporarily impaired securities	$	180,342	$	(5,334)	$	254,760	$	(73,102)	$	435,102	$	(78,436)
Below investment grade	$	3,946	$	(276)	$	88,564	$	(43,094)	$	92,510	$	(43,370)
Below investment grade after offsets   for deferred policy acquisition cost   adjustment and taxes			$	(35)			$	(3,310)			$	(3,345)
Number of securities				142				174				316

Unrealized losses on below investment grade debt securities with a fair value of less than 80% of amortized cost totaled $37,304 thousand at December 31, 2010, of which $36,499 thousand was below 80% of amortized cost for more than 12 months.

These securities were considered to be temporarily impaired at December 31, 2010 because each of these securities had performed, and was expected to perform, in accordance with its original contractual terms. In addition, management does not have the intention to sell nor does it expect to be required to sell these securities before recovery.

Maturities of General Account Debt Securities:	As of June 30, 2011
($ in thousands)	Fair		Amortized
	Value		Cost
Due in one year or less	$	81,718	$	81,271
Due after one year through five years		232,318		217,539
Due after five years through ten years		411,187		386,907
Due after ten years		376,535		391,157
CMBS/RMBS/ABS/CDO/CLO		870,515		886,091
Total	$	1,972,273	$	1,962,965

The maturities of general account debt securities, as of June 30, 2011, are summarized in the table above by contractual maturity. Actual maturities will differ from contractual maturities as certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties, and we have the right to put or sell certain obligations back to the issuers.

Other-than-temporary impairments

A credit-related loss impairment for structured securities is determined by calculating the present value of the expected credit losses on a given security’s coupon and principal cash flows until maturity. All other fixed income securities are written down to fair value. The impairment amount is separated into the amount related to credit losses, which is recorded as a charge to net realized investment losses included in our earnings, and the amount related to all other factors, which is recognized in OCI. The non-credit related loss component is equal to the difference between the fair value of a security and its carrying value subsequent to impairment.

Management exercised significant judgment with respect to certain securities in determining whether impairments are temporary or other than temporary. At June 30, 2011, this included securities with $18,507 thousand of gross unrealized losses of 50% or more for which no other-than-temporary impairment (“OTTI”) was ultimately indicated. In reaching its conclusions, management used a number of issuer-specific quantitative indicators and qualitative judgments to assess the probability of receiving a given security’s contractual cash flows. This included the issue’s implied yield to maturity, cumulative default rate based on rating, comparisons of issue-specific spreads to industry or sector spreads, specific trading activity in the issue, and other market data such as recent debt tenders and upcoming refinancing requirements. Management also reviewed fundamentals such as issuer credit and liquidity metrics, business outlook and industry conditions. Management does not have the intention to sell nor does it expect to be required to sell these securities prior to their recovery. Management maintains a watch list of securities that is reviewed for impairments. Each security on the watch list was evaluated, analyzed and discussed, with the positive and negative factors weighed in the ultimate determination of whether or not the security was other-than-temporarily impaired.

Debt Securities

Fixed income OTTIs recorded in the first half of 2011 were primarily concentrated in structured securities and corporate bonds. These impairments were driven primarily by increased collateral default rates and rating downgrades. In our judgment, these credit events or other adverse conditions of the issuers have caused, or will most likely lead to, a deficiency in the contractual cash flows related to the investment. Therefore, based upon these credit events, we have determined that OTTIs exist. Total debt impairments recognized through earnings related to such credit-related circumstances were $436 thousand in the second quarter of 2011 and $2,973 thousand in the second quarter of 2010 and $930 thousand in the first half of 2011 and $6,541 thousand in the first half of 2010.

In addition to these credit-related impairments recognized through earnings, we impaired securities to fair value through other comprehensive loss for any impairments related to non-credit related factors. These types of impairments were driven primarily by market or sector credit spread widening or by a lack of liquidity in the securities.

The amount of impairments recognized as an adjustment to other comprehensive loss due to these factors was $346 thousand in the second quarter of 2011 and $1,116 thousand in the second quarter of 2010 and $732 thousand in the first half of 2011 and $3,199 thousand in the first half of 2010.

In periods subsequent to the recognition of an OTTI, the impaired security is accounted for as if it had been purchased on the measurement date of impairment at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. We will continue to estimate the present value of future expected cash flows and if significantly greater than the new cost basis, we will accrete the difference as investment income on a prospective basis.

The following table rolls forward the amount of credit losses recognized in earnings on debt securities held at the beginning of the period, for which a portion of the OTTI was recognized in OCI.

Credit Losses Recognized in Earnings on Debt Securities for	Three Months Ended				Six Months Ended
which a Portion of the OTTI Loss was Recognized in OCI:	June  30,				June  30,
($ in thousands)	2011		2010		2011		2010
Balance, beginning of period	$	(16,871)	$	(16,010)	$	(17,335)	$	(12,442)
Add: Credit losses on securities not previously impaired(1)		(277)		(1,401)		(527)		(1,647)
Add: Credit losses on securities previously impaired(1)		(100)		(1,572)		(344)		(4,894)
Less: Credit losses on securities impaired due to intent to sell		--		--		958		--
Less: Credit losses on securities sold		--		--		--		--
Less: Increases in cash flows expected on previously     impaired securities		--		--		--		--
Balance, end of period	$	(17,248)	$	(18,983)	$	(17,248)	$	(18,983)

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⁽¹⁾ Additional credit losses on securities for which a portion of the OTTI loss was recognized in AOCI are included within net OTTI losses recognized in earnings on the statements of income and comprehensive income.

Venture capital partnerships

The following table presents investments in limited partnerships interests. We make contributions to partnerships under existing or new funding commitments.

Investment Activity in Venture Capital Partnerships:	Three Months Ended				Six Months Ended
($ in thousands)	June  30,				June  30,
	2011		2010		2011		2010
Contributions	$	291	$	420	$	538	$	556
Equity in earnings (loss) of partnerships		(42)		166		54		166
Distributions		(3)		--		(3)		(91)
Change in venture capital partnerships		246		586		589		631
Venture capital partnership investments, beginning of period		3,569		1,482		3,226		1,437
Venture capital partnership investments, end of period	$	3,815	$	2,068	$	3,815	$	2,068

Net investment income

Sources of Net Investment Income:	Three Months Ended				Six Months Ended
($ in thousands)	June  30,				June  30,
	2011		2010		2011		2010
Debt securities	$	23,390	$	16,891	$	43,832	$	33,984
Policy loans		773		780		1,493		1,503
Venture capital		(42)		166		54		166
Other investments		430		921		534		1,060
Fair value option investments		146		19		420		104
Other income		--		8		--		16
Cash and cash equivalents		1		1		5		13
Total investment income		24,698		18,786		46,338		36,846
Less: Investment expenses		467		334		709		682
Net investment income	$	24,231	$	18,452	$	45,629	$	36,164

Net realized investment gains (losses)

Sources and Types of	Three Months Ended				Six Months Ended
Net Realized Investment Gains (Losses):	June  30,				June  30,
($ in thousands)	2011		2010		2011		2010
Total other-than temporary debt impairment losses	$	(782)	$	(4,089)	$	(1,662)	$	(9,740)
Portion of loss recognized in OCI		346		1,116		732		3,199
Net debt impairments recognized in earnings	$	(436)	$	(2,973)	$	(930)	$	(6,541)
Debt security impairments:
U.S. government and agency	$	--	$	--	$	--	$	--
State and political subdivision		--		--		--		--
Foreign government		--		--		--		--
Corporate		--		(210)		(250)		(210)
CMBS		--		(300)		--		(870)
RMBS		(377)		(1,929)		(621)		(3,413)
CDO/CLO		--		(534)		--		(2,048)
Other asset-backed		(59)		--		(59)		--
Net debt security impairments		(436)		(2,973)		(930)		(6,541)
Other investments impairments		--		--		--		--
Impairment losses		(436)		(2,973)		(930)		(6,541)
Debt security transaction gains		1,596		917		2,227		1,154
Debt security transaction losses		(260)		(108)		(585)		(1,732)
Other investments transaction gains (losses)		--		(104)		--		161
Net transaction gains (losses)		1,336		705		1,642		(417)
Realized gains (losses) on derivative assets and liabilities		(3,089)		2,968		(7,363)		8,652
Net realized investment gains (losses),   excluding impairment losses		(1,753)		3,673		(5,721)		8,235
Net realized investment gains (losses),   including impairment losses	$	(2,189)	$	700	$	(6,651)	$	1,694

Unrealized investment gains (losses)

Sources of Changes in	Three Months Ended				Six Months Ended
Net Unrealized Investment Gains (Losses):	June  30,				June  30,
($ in thousands)	2011		2010		2011		2010
Debt securities	$	16,845	$	25,641	$	30,416	$	61,813
Equity securities		127		--		260		--
Other investments		36		(182)		10		93
Net unrealized investment gains	$	17,008	$	25,459	$	30,686	$	61,906
Net unrealized investment gains	$	17,008	$	25,459	$	30,686	$	61,906
Applicable deferred policy acquisition cost		13,390		15,696		18,660		73,783
Applicable deferred income tax expense (benefit)		(6,784)		(2,884)		(1,441)		(14,757)
Offsets to net unrealized investment losses		6,606		12,812		17,219		59,026
Net unrealized investment gains included in OCI	$	10,402	$	12,647	$	13,467	$	2,880

Non-consolidated variable interest entities

Entities which do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as VIEs. We perform ongoing assessments of our investments in VIEs to determine whether we have a controlling financial interest in the VIE and therefore would be considered to be the primary beneficiary. An entity would be considered a primary beneficiary and be required to consolidate a VIE when the entity has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses, or right to receive benefits, that could potentially be significant to the VIE. We reassess our VIE determination with respect to an entity on an ongoing basis.

We are involved with various entities that are deemed to be VIEs primarily as a passive investor in private equity limited partnerships and through direct investments, in which we are not related to the general partner. These investments are accounted for under the equity method of accounting and are included in the venture capital category of the balance sheet. The carrying value of assets and liabilities, as well as the maximum exposure to loss, relating to significant VIEs for which we are not the primary beneficiary was $3,815 thousand and $3,226 thousand as of June 30, 2011 and December 31, 2010, respectively. The asset value of our investments in VIEs for which we are not the primary beneficiary is based upon sponsor values and financial statements of the individual entities. Our maximum exposure to loss related to these non-consolidated VIEs is limited to the amount of our investment.

Issuer and counterparty credit exposure

Credit exposure related to issuers and derivatives counterparties is inherent in investments and derivative contracts with positive fair value or asset balances. We manage credit risk through the analysis of the underlying obligors, issuers and transaction structures. We review our debt security portfolio regularly to monitor the performance of obligors and assess the stability of their credit ratings. We also manage credit risk through industry and issuer diversification and asset allocation. Maximum exposure to an issuer or derivative counterparty is defined by quality ratings, with higher quality issuers having larger exposure limits. As of June 30, 2011, we were not exposed to any credit concentration risk of a single issuer greater than 10% of stockholder’s equity other than U.S. government and government agencies backed by the faith and credit of the U.S. government. We have an overall limit on below investment grade rated issuer exposure. To further mitigate the risk of loss on derivatives, we only enter into contracts in which the counterparty is a financial institution with a rating of A or higher.

As of June 30, 2011, we held derivative assets, net of liabilities, with a fair value of $64,468 thousand. Derivative credit exposure was diversified with seven different counterparties. We also had debt securities of these issuers with a carrying value of $14,600 thousand. Our maximum amount of loss due to credit risk with these issuers was $79,068 thousand. See Note 6 to these financial statements for more information regarding derivatives.