Basis of Presentation and Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies

2. Basis of Presentation and Significant Accounting Policies

We have prepared these unaudited financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which differ materially from the accounting practices prescribed by various insurance regulatory authorities. Certain prior period amounts have been reclassified to conform to the current period presentation.

These financials include all adjustments (consisting primarily of accruals) considered necessary for the fair statement of the balance sheet, statements of comprehensive income, and statements of cash flows for the interim periods. Certain financial information that is not required for interim reporting has been omitted. The interim financial statements should be read in conjunction with the financial statements included in our 2011 Annual Report on Form 10-K. Financial results for the three months ended March 31, 2012 are not necessarily indicative of full year results.

Adjustments Related to Prior Years

Net income of $2,895 thousand was recognized during the three months ended March 31, 2012. This reflects approximately $3,700 thousand associated with the correction of errors related to 2011, which decreased net income recognized in 2012. We have assessed the impact of these errors on all prior periods and previously issued annual and quarterly financial statements and have determined that the errors were not material.

Use of estimates

In preparing these financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions are made in the determination of estimated gross profits (“EGPs”) used in the valuation and amortization of assets and liabilities associated with universal life and annuity contracts; policyholder liabilities and accruals; valuation of investments in debt securities; limited partnerships and other investments; valuation of deferred tax assets; and accruals for contingent liabilities. We are also subject to estimates made by our ultimate parent company related to discount rates and other assumptions for our pension and other post-employment benefits expense; and accruals for contingent liabilities. Actual results could differ from these estimates.

Adoption of new accounting standards

Amendments to the Presentation of Comprehensive Income

In June 2011, the Financial Accounting Standards Board (the “FASB”) issued amended guidance to ASC 220, Comprehensive Income, with respect to the presentation of comprehensive income as part of the effort to establish common requirements in accordance with GAAP and International Financial Reporting Standards (“IFRS”). This amended guidance requires entities to present all non-owner changes in stockholder’s equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not affect which components of comprehensive income are recognized in net income or comprehensive income, or when an item of other comprehensive income must be classified to net income. The disclosures in Note 9 reflect the retrospective adoption of this guidance in the first quarter of 2012. Other than additional disclosures, adoption of this guidance did not have a material effect on our financial statements.

Amendments to Fair Value Measurement and Disclosure Requirements

In May 2011, the FASB issued amended guidance to ASC 820, Fair Value Measurement, with respect to measuring fair value and related disclosures as part of the effort to establish common requirements in accordance with GAAP and IFRS. The amended guidance clarifies that the concept of highest and best use should only be used in the valuation of non-financial assets, specifies how to apply fair value measurements to instruments classified in stockholder’s equity and requires that premiums or discounts be applied consistent with what market participants would use absent Level 1 inputs. The amendment also explicitly requires additional disclosures related to the valuation of assets categorized as Level 3 within the fair value hierarchy. Additional disclosures include quantitative information about unobservable inputs, the sensitivity of fair value measurement to changes in unobservable outputs and information on the valuation process used. The disclosures in Note 7 reflect the prospective adoption of this guidance in the first quarter of 2012. Other than additional disclosures, adoption of this guidance did not have a material effect on our financial statements.

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued amended guidance to ASC 944, Financial Services – Insurance, to address the diversity in practice for accounting for costs associated with acquiring or renewing insurance contracts. The amendment clarifies the definition of acquisition costs (i.e., costs which qualify for deferral) to incremental direct costs that result directly from, and are essential to, a contract and would not have been incurred by the insurance entity had the contract transaction not occurred. Therefore, only costs related to successful efforts of acquiring a new, or renewal, contract should be deferred. This guidance was retrospectively adopted on January 1, 2012. The cumulative effect of retrospective adoption reduced deferred policy acquisition costs and beginning stockholders’ equity as of January 1, 2012 by $52,505 thousand and $41,388 thousand, respectively, primarily related to lower deferrals associated with expenses not directly related to new policy sales.

The tables below show selected financial data as adjusted for the retrospective adoption noted above. Adoption of the standard did not affect the previously reported totals for net cash flows provided by (used for) operating, investing or financing activities.

Summarized Selected Annual Financial Data:	Year Ended December 31,
($ in thousands)	2011		2010		2009		2008
Deferred policy acquisition costs, as previously reported	$	576,557	$	594,126	$	837,567	$	1,065,128
Impact of adoption		(52,505)		(75,262)		(123,592)		(154,991)
Deferred policy acquisition costs, as revised	$	524,052	$	518,864	$	713,975	$	910,137
Deferred tax liability, as reported	$	(6,762)	$	(13,371)	$	(26,678)	$	(33,291)
Impact of adoption		22,286		30,659		48,000		59,441
Deferred tax asset, as revised	$	15,524	$	17,288	$	21,322	$	26,150
Policy liabilities and accruals, as reported	$	1,343,909	$	1,283,034	$	1,363,818	$	1,386,611
Impact of adoption		11,169		12,336		13,550		14,839
Policy liabilities and accruals, as revised	$	1,355,078	$	1,295,370	$	1,377,368	$	1,401,450
Total equity, as previously reported	$	645,764	$	610,155	$	613,964	$	532,441
Impact of adoption		(41,388)		(56,939)		(89,142)		(110,389)
Total equity, as revised	$	604,376	$	553,216	$	524,822	$	422,052

Summarized Selected Quarterly Financial Data:	Quarter Ended
($ in thousands)	Dec 31,		Sept 30,		June 30,		Mar 31,
	2011
Policy benefits, as previously reported	$	59,339	$	61,832	$	73,879	$	50,569
Impact of adoption		(292)		(292)		(292)		(291)
Policy benefits, as revised	$	59,047	$	61,540	$	73,587	$	50,278
Policy acquisition cost amortization, as reported	$	25,401	$	39,815	$	28,896	$	39,052
Impact of adoption		(4,673)		(4,586)		(4,672)		(6,769)
Policy acquisition cost amortization, as revised	$	20,728	$	35,229	$	24,224	$	32,283
Operating expenses, as previously reported	$	34,329	$	19,406	$	18,061	$	18,381
Impact of adoption		312		315		314		315
Operating expenses, as revised	$	34,641	$	19,721	$	18,375	$	18,696
Income (loss) before income taxes, as previously reported	$	(4,222)	$	(2,273)	$	3,119	$	10,927
Impact of adoption		4,653		4,563		4,650		6,745
Income before income taxes, as revised	$	431	$	2,290	$	7,769	$	17,672
Income tax expense (benefit), as previously reported	$	(296)	$	(13,780)	$	4,377	$	287
Impact of adoption		1,628		1,597		1,828		2,161
Income tax expense (benefit), as revised	$	1,332	$	(12,183)	$	6,205	$	2,448
Net income (loss), as previously reported	$	(3,926)	$	11,507	$	(1,258)	$	10,640
Impact of adoption		3,025		2,966		2,822		4,584
Net income (loss), as revised	$	(901)	$	14,473	$	1,564	$	15,224

Summarized Selected Annual Financial Data:	Year Ended December 31,
($ in thousands)	2011		2010		2009		2008
Policy benefits, as previously reported	$	245,619	$	213,366	$	249,457	$	218,415
Impact of adoption		(1,167)		(1,214)		(1,289)		(478)
Policy benefits, as revised	$	244,452	$	212,152	$	248,168	$	217,937
Policy acquisition cost amortization, as reported	$	133,164	$	192,504	$	139,243	$	262,132
Impact of adoption		(20,700)		(28,090)		(30,243)		(57,636)
Policy acquisition cost amortization, as revised	$	112,464	$	164,414	$	109,000	$	204,496
Operating expenses, as previously reported	$	90,177	$	99,094	$	120,986	$	97,504
Impact of adoption		1,256		1,968		12,223		55,966
Operating expenses, as revised	$	91,433	$	101,062	$	133,209	$	153,470
Income (loss) before income taxes, as previously reported	$	7,551	$	(35,583)	$	(15,146)	$	(282,691)
Impact of adoption		20,611		27,336		19,309		2,148
Income (loss) before income taxes, as revised	$	28,162	$	(8,247)	$	4,163	$	(280,543)
Income tax expense (benefit), as previously reported	$	(9,412)	$	(10,707)	$	6,007	$	(87,497)
Impact of adoption		7,214		3,968		6,758		25,660
Income tax expense (benefit), as revised	$	(2,198)	$	(6,739)	$	12,765	$	(61,837)
Net income (loss), as previously reported	$	16,963	$	(24,876)	$	(21,153)	$	(195,194)
Impact of adoption		13,397		23,368		12,551		(23,512)
Net income (loss), as revised	$	30,360	$	(1,508)	$	(8,602)	$	(218,706)

Accounting standards not yet adopted

Disclosures about Offsetting Assets and Liabilities

In December 2011, the FASB issued amended guidance to ASC 210, Balance Sheet, with respect to disclosure of offsetting assets and liabilities as part of the effort to establish common requirements in accordance with GAAP and IFRS. This amended guidance requires the disclosure of both gross information and net information about both financial instruments and derivative instruments eligible for offset in our balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. This guidance is effective for periods beginning on or after January 1, 2013, with respective disclosures required retrospectively for all comparative periods presented. The adoption of this guidance effective January 1, 2013 is not expected to have a material effect on our financial statements.

Significant Accounting Policies

Our significant accounting policies are presented in the notes to our financial statements in our 2011 Annual Report on Form 10-K.