Investing Activities

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Investing Activities

Debt securities

We invest in a variety of debt securities. We classify these investments into various sectors using industry conventions; however, our classifications may differ from similarly titled classifications of other companies.

Fair Value and Cost of Securities:	December 31, 2011
($ in millions)			Gross		Gross				OTTI
	Amortized		Unrealized		Unrealized		Fair		Recognized
	Cost		Gains(1)		Losses(1)		Value		in AOCI(2)
U.S. government and agency	$	163,132	$	12,653	$	(457)	$	175,328	$	--
State and political subdivision		77,323		5,518		(444)		82,397		--
Foreign government		30,473		1,825		(421)		31,877		--
Corporate		1,169,209		83,310		(44,142)		1,208,377		(1,505)
Commercial mortgage-backed (“CMBS”)		281,616		12,283		(3,944)		289,955		(5,131)
Residential mortgage-backed (“RMBS”)		562,186		14,106		(22,773)		553,519		(20,396)
CDO/CLO		77,456		1,240		(10,680)		68,016		(6,220)
Other asset-backed		135,435		2,333		(845)		136,923		--
Available-for-sale debt securities	$	2,496,830	$	133,268	$	(83,706)	$	2,546,392	$	(33,252)

———————

⁽¹⁾ Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our balance sheet as a component of AOCI. The table above 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).

⁽²⁾ Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment.

Fair Value and Cost of Securities:	December 31, 2010
($ in millions)			Gross		Gross				OTTI
	Amortized		Unrealized		Unrealized		Fair		Recognized
	Cost		Gains(1)		Losses(1)		Value		in AOCI(2)
U.S. government and agency	$	96,137	$	2,483	$	(337)	$	98,283	$	--
State and political subdivision		33,092		216		(799)		32,509		--
Foreign government		14,683		1,463		(60)		16,086		--
Corporate		692,780		39,804		(38,807)		693,777		(1,512)
CMBS		172,850		5,673		(4,568)		173,955		(4,519)
RMBS		350,729		4,429		(21,553)		333,605		(15,263)
CDO/CLO		72,603		1,940		(11,359)		63,184		(6,279)
Other asset-backed		108,632		1,320		(953)		108,999		--
Available-for-sale debt securities	$	1,541,506	$	57,328	$	(78,436)	$	1,520,398	$	(27,573)

———————

⁽¹⁾ Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our balance sheet as a component of AOCI. The table above 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).

⁽²⁾ 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	As of December 31, 2011
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	$	--	$	--	$	3,485	$	(457)	$	3,485	$	(457)
State and political subdivision		15,419		(28)		913		(416)		16,332		(444)
Foreign government		7,231		(421)		--		--		7,231		(421)
Corporate		113,623		(3,707)		74,192		(40,435)		187,815		(44,142)
CMBS		59,478		(1,240)		6,924		(2,704)		66,402		(3,944)
RMBS		74,575		(2,809)		106,890		(19,964)		181,465		(22,773)
CDO/CLO		3,735		(110)		40,638		(10,570)		44,373		(10,680)
Other asset-backed		22,944		(190)		15,194		(655)		38,138		(845)
Total temporarily impaired securities	$	297,005	$	(8,505)	$	248,236	$	(75,201)	$	545,241	$	(83,706)
Below investment grade	$	26,187	$	(1,515)	$	76,237	$	(49,711)	$	102,424	$	(51,226)
Below investment grade after offsets   for deferred policy acquisition cost   adjustment and taxes			$	(595)			$	(4,714)			$	(5,309)
Number of securities				193				180				373

Unrealized losses on below-investment-grade debt securities with a fair value of less than 80% of amortized cost totaled $44,536 thousand at December 31, 2011, of which $40,125 thousand was below 80% of amortized cost for more than 12 months.

These securities were considered to be temporarily impaired at December 31, 2011 because each of these securities had performed, and are expected to perform, in accordance with original contractual terms. In addition, management does not have the intention to sell nor does it expect to be required to sell these securities prior to their recovery.

Aging of Temporarily Impaired	As of December 31, 2010
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 are expected to perform, in accordance with original contractual terms. In addition, management does not have the intention to sell nor does it expect to be required to sell these securities prior to their recovery.

Maturities of Debt Securities:	December 31, 2011				December 31, 2010
($ in thousands)	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	111,027	$	111,279	$	89,543	$	89,992
Due after one year through five years		268,596		284,081		216,902		228,887
Due after five years through ten years		572,731		604,800		261,559		280,563
Due after ten years		487,783		497,819		268,688		241,213
CMBS/RMBS/ABS/CDO/CLO		1,056,693		1,048,413		704,814		679,743
Total	$	2,496,830	$	2,546,392	$	1,541,506	$	1,520,398

The maturities of debt securities, as of December 31, 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

Management exercised significant judgment with respect to certain securities in determining whether impairments are temporary or other than temporary. 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 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. For securities for which no OTTI was ultimately indicated at December 31, 2011, management does not have the intention to sell nor does it expect to be required to sell these securities prior to their recovery.

Fixed income OTTIs recorded in 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 $2,804 thousand in 2011, $10,799 thousand in 2010 and $22,914 thousand in 2009. There were no limited partnership and other investment OTTIs in 2011 and 2010, respectively, and $1,093 thousand in 2009 were recognized.

In addition to 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 $6,507 thousand in 2011, $8,994 thousand in 2010 and $25,691 thousand in 2009.

The following table presents a roll-forward of pre-tax credit losses recognized in earnings related to debt securities for which a portion of the OTTI was recognized in OCI.

Credit Losses Recognized in Earnings on Debt Securities for	As of December 31,
which a Portion of the OTTI Loss was Recognized in OCI:	2011		2010
($ in thousands)
Balance, beginning of year	$	(17,335)	$	(12,442)
Add: Credit losses on securities not previously impaired(1)		(961)		(2,193)
Add: Credit losses on securities previously impaired(1)		(1,526)		(7,344)
Less: Credit losses on securities impaired due to intent to sell		--		--
Less: Credit losses on securities sold		1,208		2,475
Less: Credit losses upon adoption of ASC 815		--		2,169
Less: Increases in cash flows expected on previously impaired securities		--		--
Balance, end of year	$	(18,614)	$	(17,335)

———————

⁽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.

Limited partnerships and other investments

Limited partnerships and other investments are made up of private equity investments of $4,620 thousand in 2011 and $3,226 thousand in 2010 and common stock of $345 thousand in 2011 and $316 thousand in 2010.

Net investment income

Sources of Net Investment Income:	Years Ended December 31,
($ in thousands)	2011		2010		2009
Debt securities	$	96,816	$	69,219	$	74,237
Policy loans		3,114		3,012		2,587
Limited partnerships and other investments		323		1,633		2,051
Fair value option investments		178		1,028		176
Other income		1,263		157		112
Cash and cash equivalents		5		34		21
Total investment income		101,699		75,083		79,184
Less: Investment expenses		1,410		1,356		417
Net investment income	$	100,289	$	73,727	$	78,767

Statutory deposits

Pursuant to certain statutory requirements, as of December 31, 2011 and 2010, we had on deposit securities with a fair value of $7,636 thousand and $7,131 thousand, respectively, in insurance department special deposit accounts. We are not permitted to remove the securities from these accounts without approval of the regulatory authority.

Net realized investment gains (losses)

Sources and Types of Net Realized Investment Gains (Losses):	Years Ended December 31,
($ in thousands)	2011		2010		2009
Total other-than-temporary debt impairments	$	(9,311)	$	(19,793)	$	(48,605)
Portion of loss recognized in OCI		6,507		8,994		25,691
Net debt impairments recognized in earnings	$	(2,804)	$	(10,799)	$	(22,914)
Debt security impairments:
U.S. government and agency	$	--	$	--	$	--
State and political subdivision		--		--		--
Foreign government		--		--		--
Corporate		(413)		(756)		(7,059)
CMBS		(398)		(1,560)		(637)
RMBS		(1,628)		(4,713)		(9,560)
CDO/CLO		(306)		(3,648)		(4,600)
Other asset-backed		(59)		(122)		(1,058)
Net debt security impairments		(2,804)		(10,799)		(22,914)
Limited partnerships and other investment impairments		--		--		(1,093)
Impairment losses		(2,804)		(10,799)		(24,007)
Debt security transaction gains(1)		2,411		3,334		9,043
Debt security transaction losses(1)		(766)		(4,120)		(13,247)
Limited partnerships and other investment gains		--		265		--
Limited partnerships and other investment losses		--		--		(1,128)
Net transaction gains (losses)		1,645		(521)		(5,332)
Derivative instruments		12,576		(23,426)		(70,446)
Embedded derivatives(2)		(32,322)		17,190		90,607
Net realized investment gains (losses), excluding impairment losses		(18,101)		(6,757)		14,829
Net realized investment losses, including impairment losses	$	(20,905)	$	(17,556)	$	(9,178)

———————

⁽¹⁾ Proceeds from the sale of available-for-sale debt securities were $325,796 thousand, $359,084 thousand and $417,265 thousand for the years ended December 31, 2011, 2010 and 2009, respectively.

⁽²⁾ Includes the change in fair value of embedded derivatives associated with variable annuity GMWB, GMAB, GPAF and COMBO riders. See Note 7 to these financial statements for additional disclosures.

Unrealized investment gains (losses)

Sources of Changes in Net Unrealized Investment Gains (Losses):	Years Ended December 31,
($ in thousands)	2011		2010		2009
Debt securities	$	70,670	$	92,080	$	198,748
Other investments		(120)		(201)		2,116
Net unrealized investment gains	$	70,550	$	91,879	$	200,864
Net unrealized investment gains	$	70,550	$	91,879	$	200,864
Applicable deferred policy acquisition cost		41,865		98,432		149,998
Applicable deferred income tax		10,039		(13,894)		17,803
Offsets to net unrealized investment gains (losses)		51,904		84,538		167,801
Net unrealized investment gains included in OCI	$	18,646	$	7,341	$	33,063

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 limited partnerships and other investments on our 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 $4,620 thousand and $3,226 thousand as of December 31, 2011 and 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 December 31, 2011, we were not exposed to any credit concentration risk of a single issuer greater than 10% of stockholders’ 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 December 31, 2011, we held derivative assets, net of liabilities, with a fair value of $90,765 thousand. Derivative credit exposure was diversified with eight different counterparties. We also had debt securities of these issuers with a fair value of $17,806 thousand. Our maximum amount of loss due to credit risk with these issuers was $108,571 thousand. See Note 8 to these financial statements for more information regarding derivatives.