7. Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

Financial instruments carried at fair value by ASC 820-10 valuation hierarchy

Fair Values of Financial Instruments by Level:	As of June 30, 2012
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale debt securities
U.S. government and agency	$	183,772	$	32,746	$	--	$	216,518
State and political subdivision		--		110,637		--		110,637
Foreign government		--		48,616		--		48,616
Corporate		--		1,496,823		41,121		1,537,944
CMBS		--		269,613		8,527		278,140
RMBS		--		519,427		6,461		525,888
CDO/CLO		--		--		62,521		62,521
Other asset-backed		--		125,500		7,438		132,938
Derivative assets		15,418		114,231		--		129,649
Separate account assets		2,076,772		--		--		2,076,772
Fair value option investments(1)		--		--		7,337		7,337
Total assets	$	2,275,962	$	2,717,593	$	133,405	$	5,126,960
Liabilities
Derivative liabilities	$	--	$	39,479	$	--	$	39,479
Embedded derivatives		--		--		154,035		154,035
Total liabilities	$	--	$	39,479	$	154,035	$	193,514

⁽¹⁾ Fair value option investments at June 30, 2012 include $7,337 thousand of available-for-sale debt securities in which the fair value option has been elected. Changes in the fair value of these assets are recorded through net investment income.

Fair Values of Financial Instruments by Level:	As of December 31, 2011
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale debt securities
U.S. government and agency	$	138,947	$	36,381	$	--	$	175,328
State and political subdivision		--		82,397		--		82,397
Foreign government		--		31,877		--		31,877
Corporate		--		1,179,889		28,488		1,208,377
CMBS		--		269,514		20,441		289,955
RMBS		--		546,975		6,544		553,519
CDO/CLO		--		1,044		66,972		68,016
Other asset-backed		--		128,861		8,062		136,923
Derivative assets		16,185		97,037		--		113,222
Separate account assets(1)		2,419,655		78,325		--		2,497,980
Fair value option investments(2)		--		--		7,299		7,299
Total assets	$	2,574,787	$	2,452,300	$	137,806	$	5,164,893
Liabilities
Derivative liabilities	$	--	$	22,457	$	--	$	22,457
Embedded derivatives		--		--		120,862		120,862
Total liabilities	$	--	$	22,457	$	120,862	$	143,319

⁽¹⁾ Excludes $40,086 thousand in limited partnerships and real estate investments accounted for on the equity method as well as $8,941 thousand in cash and cash equivalents and money market funds.

⁽²⁾ Fair value option investments at December 31, 2011 include $7,299 thousand of available-for-sale debt securities in which the fair value option has been elected. Changes in the fair value of these assets are recorded through net investment income.

Fair value Assets and Liabilities

Level 3 Financial Assets:	Three Months Ended June 30, 2012
($ in thousands)	Asset-				Corp &						Fair Value		Total
	Backed		CDO/CLO		Other		CMBS		RMBS		Options		Assets
Balance, beginning of period	$	7,525	$	68,302	$	40,873	$	19,597	$	6,533	$	7,422	$	150,252
Purchases		40		2,925		2,010		--		--		--		4,975
Sales		(103)		(8,558)		(8)		(775)		(103)		(22)		(9,569)
Transfers into Level 3(1)		--		--		13,883		--		--		--		13,883
Transfers out of Level 3(2)		--		--		(16,105)		(10,875)		--		--		(26,980)
Realized gains (losses)   included in earnings		(39)		--		--		--		--		(26)		(65)
Unrealized gains (losses)   included in other comprehensive   income (loss)		17		(279)		474		577		1		--		790
Amortization/accretion		(2)		131		(6)		3		30		(37)		119
Balance, end of period	$	7,438	$	62,521	$	41,121	$	8,527	$	6,461	$	7,337	$	133,405

⁽¹⁾ Transfers into Level 3 for the three months ended June 30, 2012 represent securities for which Level 2 input assumptions for valuation pricing were no longer applicable.

⁽²⁾ Transfers out of Level 3 for the three months ended June 30, 2012 represent securities for which reliable Level 2 input assumptions for valuation pricing became obtainable.

Level 3 Financial Assets:	Three Months Ended June 30, 2011
($ in thousands)	Asset-										Fair Value		Total
	Backed		CDO/CLO		Corporate		CMBS		RMBS		Options		Assets
Balance, beginning of period	$	14,889	$	64,112	$	32,779	$	22,081	$	11,767	$	7,482	$	153,110
Purchases		4,000		--		2,026		2,875		--		--		8,901
Sales		(687)		(4,235)		(26)		(463)		(144)		(19)		(5,574)
Transfers into Level 3(1)		--		--		2,213		--		--		--		2,213
Transfers out of Level 3(2)		(3,030)		--		--		--		(4,645)		--		(7,675)
Realized gains (losses)   included in earnings		(59)		(222)		9		--		--		27		(245)
Unrealized gains (losses)   included in other comprehensive   income (loss)		260		(1,002)		1,097		58		448		119		980
Amortization/accretion		8		126		13		9		34		9		199
Balance, end of period	$	15,381	$	58,779	$	38,111	$	24,560	$	7,460	$	7,618	$	151,909

⁽¹⁾ Transfers into Level 3 for the three months ended June 30, 2011 represent securities for which Level 2 input assumptions for valuation pricing were no longer applicable.

⁽²⁾ Transfers out of Level 3 for the three months ended June 30, 2011 represent securities for which reliable Level 2 input assumptions for valuation pricing became obtainable.

Level 3 Financial Assets:	Six Months Ended June 30, 2012
($ in thousands)	Asset-				Corp &						Fair Value		Total
	Backed		CDO/CLO		Other		CMBS		RMBS		Options		Assets
Balance, beginning of period	$	8,062	$	66,972	$	28,488	$	20,441	$	6,544	$	7,299	$	137,806
Purchases		40		2,925		14,774		--		--		--		17,739
Sales		(639)		(9,425)		(2,597)		(2,183)		(201)		(22)		(15,067)
Transfers into Level 3(1)		--		1,261		3,674		--		--		--		4,935
Transfers out of Level 3(2)		--		--		(4,834)		(10,875)		--		--		(15,709)
Realized gains (losses)   included in earnings		6		56		--		--		(1)		(26)		35
Unrealized gains (losses)   included in other comprehensive   income (loss)		(30)		533		1,603		1,138		58		--		3,302
Amortization/accretion		(1)		199		13		6		61		86		364
Balance, end of period	$	7,438	$	62,521	$	41,121	$	8,527	$	6,461	$	7,337	$	133,405

———————

⁽¹⁾ Transfers into Level 3 for the six months ended June 30, 2012 represent securities for which Level 2 input assumptions for valuation pricing were no longer applicable.

⁽²⁾ Transfers out of Level 3 for the three months ended June 30, 2012 represent securities for which reliable Level 2 input assumptions for valuation pricing became obtainable.

Level 3 Financial Assets:	Six Months Ended June 30, 2011
($ in thousands)	Asset-										Fair Value		Total
	Backed		CDO/CLO		Corporate		CMBS		RMBS		Options		Assets
Balance, beginning of period	$	19,671	$	63,184	$	30,060	$	10,308	$	7,437	$	7,289	$	137,949
Purchases		6,600		--		2,056		14,169		4,500		--		27,325
Sales		(1,682)		(6,262)		(35)		(584)		(341)		(19)		(8,923)
Transfers into Level 3(1)		--		--		2,213		--		--		--		2,213
Transfers out of Level 3(2)		(9,441)		--		--		--		(4,645)		--		(14,086)
Realized gains (losses)   included in earnings		(11)		(293)		9		--		--		146		(149)
Unrealized gains (losses)   included in other comprehensive   income (loss)		229		1,958		3,779		658		427		179		7,230
Amortization/accretion		15		192		29		9		82		23		350
Balance, end of period	$	15,381	$	58,779	$	38,111	$	24,560	$	7,460	$	7,618	$	151,909

———————

⁽¹⁾ Transfers into Level 3 for the six months ended June 30, 2011 represent securities for which Level 2 input assumptions for valuation pricing were no longer applicable.

⁽²⁾ Transfers out of Level 3 for the six months ended June 30, 2011 represent securities for which reliable Level 2 input assumptions for valuation pricing became obtainable.

Level 3 Financial Liabilities:	Embedded Derivative Liabilities
($ in thousands)	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Balance, beginning of period	$	113,828	$	27,082	$	120,862	$	26,484
Net purchases/(sales)		13,713		10,929		28,348		24,230
Transfers into Level 3		--		--		--		--
Transfers out of Level 3		(1,912)		--		(3,495)		--
Realized (gains) losses		18,088		4,913		(2,904)		(7,247)
Unrealized gains (losses) included in other comprehensive loss		--		--		--		--
Deposits less benefits		--		--		--		--
Change in fair value(1)		10,318		3		11,224		(540)
Amortization/accretion		--		--		--		-
Balance, end of period	$	154,035	$	42,927	$	154,035	$	42,927

———————

Quantitative information about unobservable inputs

(1) Represents change in fair value related to fixed index credits recognized in policy benefits on the statements of comprehensive income.

Level 3 Assets:	As of June 30, 2012
($ in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input	Range
CDO/CLO	$	60,845	Discounted cash flow	Prepayment rate	20% (CLOs)
				Default rate	2.5% (CLOs)
				Recovery rate	65% (Loans), 35% (High yield bonds),   45% (Investment grade bonds)
				Reinvestment spread	3 mo LIBOR + 400bps (CLOs)
Fair value options		7,337	Discounted cash flow	Default rate	0.6% - 0.8% (CDOs)
				Recovery rate	45% (Investment grade bonds)
Other asset-backed		1,290	Discounted cash flow	Prepayment rate	20% (CLOs)
				Default rate	2.53% for 48 mos then .33% thereafter
				Recovery rate	65% (Loans)
				Reinvestment spread	3mo LIBOR + 400bps (CLOs)
Total Level 3 assets(1)	$	69,472

———————

(1) Excludes $63,933 thousand of Level 3 assets which are valued based upon non-binding independent third-party valuations for which unobservable inputs are not reasonably available to us.

Level 3 Liabilities:	As of June 30, 2012
($ in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input	Range
Embedded derivatives (GMAB / GMWB)	$	37,762	Risk neutral stochastic   valuation methodology	Volatility surface	12.26% - 48.88%
				Swap curve	0.17% - 2.61%
				Mortality rate	75% of A2000 basic table
				Lapse rate	0.00% - 60.00%
				CSA	5.03%
Embedded derivatives (GPAF)	$	1,101	Real world single scenario   cash flow projection	Interest rate	3.46%
				Mortality rate	70% 1994 MGDB
Embedded derivatives	$	115,172	Budget method	Swap curve	0.17% - 2.61%
(Index Credits)				Mortality rate	75% of A2000 basic table
				Lapse rate	1.00% - 35.00%
				CSA	5.03%
Total Level 3 liabilities	$	154,035

Company's financial instruments where the carrying amounts and fair values differ

Carrying Amounts and Fair Values of Financial Instruments:	As of June 30, 2012				As of December 31, 2011
($ in thousands)	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial liabilities:
Investment contracts	$	2,054,657	$	2,061,222	$	1,721,219	$	1,728,887