NOTES PAYABLE - DIRECT CORPORATE OBLIGATIONS

The following notes payable were direct corporate obligations of the Company as of June 30, 2012 and December 31, 2011 (dollars in millions):



	June 30, 2012			December 31, 2011
7.0% Debentures	$	293.0		$	293.0
Senior Secured Credit Agreement (as defined below)	223.8			255.2
9.0% Senior Secured Notes due January 2018 (the “9.0% Senior Secured Notes”)	275.0			275.0
Senior Health Note due November 12, 2013 (the “Senior Health Note”)	—			50.0
Unamortized discount on 7.0% Debentures	(11.9		)	(12.9		)
Unamortized discount on Senior Secured Credit Agreement	(1.7		)	(2.4		)
Direct corporate obligations	$	778.2		$	857.9

In March 2012, we amended our senior secured term loan facility maturing on September 30, 2016 (the "Senior Secured Credit Agreement"). The changes to the Senior Secured Credit Agreement included:

(i)

a change in the definition of “Total Capitalization” (used to calculate compliance with the Debt to Total Capitalization Ratio covenant) to provide that any change to the Company's shareholders' equity resulting from the adoption by the Company of ASU 2010-26, related to the accounting for deferred acquisition costs, shall be disregarded for the purpose of such covenant to the extent the Company going forward quantifies the impact of ASU 2010-26 for each fiscal quarter or fiscal year and the cumulative impact since its adoption; and


(ii)	an increase in the cap on investments in “Capital Stock” (as defined in the amended credit agreement) from 1 percent to 3 percent.

In the first six months of 2012, as required under the terms of the Senior Secured Credit Agreement, we made mandatory prepayments of $31.4 million due to our repurchase of $58.2 million of our common stock and a common stock dividend payment of $4.7 million made in June 2012. As a result of the prepayments, we recognized a loss on the extinguishment of debt totaling $.7 million representing the write-off of unamortized discount and issuance costs associated with the Senior Secured Credit Agreement.

In March 2012, we also paid in full the remaining $50.0 million principal balance on the Senior Health Note, which had been scheduled to mature in November 2013. The repayment in full of the Senior Health Note removed the previous restriction on our ability to pay cash dividends on our common stock.

The Senior Secured Credit Agreement requires the Company to maintain: (i) a debt to total capitalization ratio of not more than 30 percent (such ratio, calculated in accordance with the Senior Secured Credit Agreement, was 15.7 percent at June 30, 2012); (ii) an interest coverage ratio of not less than 2.00 to 1.00 for each rolling four quarters (such ratio was 5.24 to 1.00 for the rolling four quarters ended June 30, 2012); (iii) an aggregate ratio of total adjusted capital to company action level risk-based capital for the Company’s insurance subsidiaries of not less than 250 percent (such ratio was 369 percent at June 30, 2012); and (iv) a combined statutory capital and surplus for the Company’s insurance subsidiaries of at least $1,200.0 million (combined statutory capital and surplus at June 30, 2012, was $1,832.1 million). The Company is in compliance with all debt covenants as of June 30, 2012.

The scheduled repayment of our direct corporate obligations was as follows at June 30, 2012 (dollars in millions):



Year ending June 30,
2013	$	47.5
2014	65.0
2015	80.0
2016	31.3
2017	293.0
Thereafter	275.0
	$	791.8

We may prepay, in whole or in part, the Senior Secured Credit Agreement, together with any accrued and unpaid interest, with prior notice but without premium or penalty in minimum amounts of $1.0 million or any multiple thereof.

Mandatory prepayments of the Senior Secured Credit Agreement will be required in an amount equal to: (i) 100 percent of the net cash proceeds from certain asset sales or casualty events; (ii) 100 percent of the net cash proceeds received by the Company or any of its subsidiaries from certain debt issuances; (iii) 50 percent of the net cash proceeds received from certain equity issuances; and (iv) 100 percent of the amount of certain restricted payments made (including any common stock dividends and share repurchases) as defined in the Senior Secured Credit Agreement provided that if, as of the end of the fiscal quarter immediately preceding such restricted payment, the debt to total capitalization ratio is: (i) equal to or less than 17.5 percent, but greater than 12.5 percent, the prepayment requirement shall be reduced by one-half; or (ii) equal to or less than 12.5 percent, the prepayment requirement shall not apply.

Notwithstanding the foregoing, no mandatory prepayments pursuant to items (i) or (iii) in the preceding paragraph shall be required if: (x) the debt to total capitalization ratio is equal or less than 20 percent; and (y) either (A) the financial strength rating of certain insurance subsidiaries is equal or better than A- (stable) from A.M. Best Company ("A.M. Best") or (B) the Senior Secured Credit Agreement is rated equal or better than BBB- (stable) from S&P and Baa3 (stable) by Moody's Investor Services, Inc. ("Moody's").

The 9.0% Senior Secured Notes were issued pursuant to an Indenture, dated as of December 21, 2010 (the “Indenture”), by and among the Company, the Subsidiary Guarantors and Wilmington Trust FSB, as trustee and collateral agent (“Wilmington”). The Indenture contains covenants that, among other things, limit (subject to certain exceptions) the Company's ability and the ability of the Company's Restricted Subsidiaries (as defined in the Indenture) to:


•	incur or guarantee additional indebtedness or issue preferred stock;


•	pay dividends or make other distributions to shareholders;


•	purchase or redeem capital stock or subordinated indebtedness;


•	make certain investments;


•	create liens;


•	incur restrictions on the Company's ability and the ability of the Restricted Subsidiaries to pay dividends or make

other payments to the Company;


•	sell assets, including capital stock of the Company's subsidiaries;


•	consolidate or merge with or into other companies or transfer all or substantially all of the Company's assets; and


•	engage in transactions with affiliates.

Under the Indenture, the Company can make Restricted Payments (as such term is defined in the Indenture) up to a calculated limit, provided that the Company's pro forma risk-based capital ratio exceeds 225% after giving effect to the Restricted Payment and certain other conditions are met. Restricted Payments include, among other items, stock repurchases, common stock dividends and investments in excess of $75 million made at the holding company level that are other than cash and cash equivalents. The limit of Restricted Payments permitted under the Indenture is the sum of (x) 50% of the Company's “Consolidated Net Income” (as defined in the Indenture) for the period (taken as one accounting period) from January 1, 2011 to the end of the Company's most recently ended fiscal quarter for which financial statements are available at the time of such Restricted Payment and (y) certain other amounts. Based on the Company's Consolidated Net Income through June 30, 2012, the Company could make additional Restricted Payments under this Indenture covenant of approximately $122 million.