Reinsurance

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Reinsurance

We use reinsurance agreements to limit potential losses, reduce exposure to larger risks and provide additional capacity for growth.

We remain liable to the extent that reinsuring companies may not be able to meet their obligations under reinsurance agreements in effect. Failure of the reinsurers to honor their obligations could result in losses to us. Since we bear the risk of nonpayment, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. As of December 31, 2011, we had ceded reserves of $50,273 thousand and a reinsurance receivable balance of $1,660 thousand with Scottish Re. Based on our review of its financial statements, reputation in the reinsurance marketplace and other relevant information, we believe that we have no material exposure to uncollectible life reinsurance. As such, no allowance has been established.

The following table lists our top five reinsurance relationships as defined by reinsurance recoverable balance and ceded statutory reserves and the A.M. Best rating of each reinsurer.

	December 31, 2011
Principal Life Reinsurers:			Reinsurer’s
($ in thousands)	Recoverable		A.M. Best
	Balances		Rating
RGA Reinsurance Company	$	156,673	A+
Swiss Reinsurance Group(1)	$	152,155	A+
AEGON USA(2)	$	121,227	A+
Scottish Re (US) Inc(3)	$	50,273	NR
Munich American Reassurance Co	$	45,200	A+

———————

⁽¹⁾ Swiss Reinsurance Group includes Swiss Re Life & Health America and Reassure America Life Insurance Co.

⁽²⁾ Transamerica Life Insurance Co is a subsidiary of AEGON.

⁽³⁾ Due to the financial distress of Scottish Re and the withdrawal of its ratings in June, 2009, we are continuing to monitor its financial situation and assess the recoverability of the reinsurance recoverable on a quarterly basis.

We cede risk to other insurers under various agreements that cover individual life insurance policies. The amount of risk ceded depends on our evaluation of the specific risk and applicable retention limits. For business sold prior to December 31, 2010, our retention limit on any one life is $10 million for single life and joint first-to-die policies and $12 million for joint last-to-die policies. Beginning January 1, 2011, our retention limit on new business is $5 million for single life and joint first-to-die policies and $6 million for second-to-die policies. We also assume reinsurance from other insurers.

Direct Business and Reinsurance:	Years Ended December 31,
($ in thousands)	2011		2010		2009
Direct premiums	$	77,138	$	82,799	$	95,823
Premiums ceded to reinsurers(1)		(74,827)		(79,044)		(84,403)
Premiums	$	2,311	$	3,755	$	11,420
Direct policy benefits incurred	$	159,619	$	217,429	$	197,776
Policy benefits assumed from reinsureds		3,810		3,815		3,590
Policy benefits ceded to reinsurers		(90,131)		(148,275)		(78,977)
Premiums paid to reinsurers(2)		78,812		63,248		68,753
Policy benefits(3)	$	152,110	$	136,217	$	191,142
Direct life insurance in-force	$	68,205,090	$	73,616,813	$	81,106,817
Life insurance in-force assumed from reinsureds		66,060		71,594		80,402
Life insurance in-force ceded to reinsurers		(52,320,762)		(56,248,915)		(61,854,539)
Life insurance in-force	$	15,950,388	$	17,439,492	$	19,332,680
Percentage of amount assumed to net insurance in-force		0.4%		0.4%		0.4%

———————

⁽¹⁾ Amount above represents premiums ceded to reinsurers related to traditional life and term insurance policies.

⁽²⁾ For universal life and variable universal life contracts, premiums paid to reinsurers are reflected within policy benefits.

⁽³⁾ The policy benefit amounts above exclude changes in reserves, interest credited to policyholders and withdrawals, which total $93,509 thousand, $77,149 thousand and $58,315 thousand, net of reinsurance, for the years ended December 31, 2011, 2010 and 2009, respectively.

Our reinsurance program cedes various types of risks to other reinsurers primarily under yearly renewable term and coinsurance agreements. Yearly renewable term and coinsurance arrangements result in passing all or a portion of the risk to the reinsurer. Under coinsurance agreements on our traditional and term insurance policies, the reinsurer receives a proportionate amount of the premiums less an allowance for commissions and expenses and is liable for a corresponding proportionate amount of all benefit payments. Under our yearly renewable term agreements, the ceded premium represents a charge for the death benefit coverage.

We cede the majority of mortality risk on most new issues of term insurance. Effective October 1, 2009, we coinsured all the benefit risks, net of existing reinsurance, on the previously unreinsured portion of our term life business in force.

Irrevocable letters of credit aggregating $27,973 thousand at December 31, 2011 have been arranged with commercial banks in our favor to collateralize the ceded reserves.