10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2008
or
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from               to               

Commission File Number 001-31901

Protective Life Insurance Company

(Exact name of registrant as specified in its charter)

Tennessee	63-0169720
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

2801 Highway 280 South

Birmingham, Alabama 35223

(Address of principal executive offices and zip code)

(205) 268-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o Accelerated Filer o Non-accelerated filer x Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Number of shares of Common Stock, $1.00 par value, outstanding as of November 12, 2008:  5,000,000 shares.

PROTECTIVE LIFE INSURANCE COMPANY

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED SEPTEMBER 30, 2008

TABLE OF CONTENTS

		Page
PART I: Financial Information
Item 1.	Financial Statements (unaudited):
	Consolidated Condensed Statements of Income (Loss) for the Three and Nine Months Ended September 30, 2008 and 2007	3
	Consolidated Condensed Balance Sheets as of September 30, 2008 and December 31, 2007	4
	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007	5
	Notes to Consolidated Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	86
Item 4.	Controls and Procedures	86
PART II: Other Information
Item 1A.	Risk Factors	86
Item 6.	Exhibits	89
Signature		90

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Dollars In Thousands)
Revenues
Premiums and policy fees	$	661,002		$	675,559		$	1,995,928		$	2,024,303
Reinsurance ceded	(363,800		)	(367,700		)	(1,151,216		)	(1,158,480		)
Net of reinsurance ceded	297,202			307,859			844,712			865,823
Net investment income	411,970			410,624			1,234,065			1,202,954
Realized investment (losses) gains:
Derivative financial instruments	91,938			(51,080		)	153,902			31,502
All other investments	(357,532		)	40,645			(498,657		)	(13,978		)
Other income	22,058			23,300			61,442			68,226
Total revenues	465,636			731,348			1,795,464			2,154,527
Benefits and expenses
Benefits and settlement expenses, net of reinsurance ceded: (three months: 2008 - $311,926; 2007 - $354,041 nine months: 2008 - $1,091,521; 2007 - $1,123,324)	531,535			500,305			1,489,644			1,421,066
Amortization of deferred policy acquisition costs and value of business acquired	32,748			67,986			158,550			206,234
Other operating expenses, net of reinsurance ceded: (three months: 2008 - $52,488; 2007 - $73,828 nine months: 2008 - $162,414; 2007 - $209,128)	64,136			74,766			198,986			223,507
Total benefits and expenses	628,419			643,057			1,847,180			1,850,807
Income before income tax	(162,783		)	88,291			(51,716		)	303,720
Income tax expense (benefit)	(59,859		)	28,067			(21,539		)	104,440
Net income (loss)	$	(102,924	)	$	60,224		$	(30,177	)	$	199,280

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
	2008			2007
	(Dollars In Thousands)
Assets
Investments:
Fixed maturities, at fair market value (amortized cost: 2008 - $23,763,216; 2007 - $23,002,701)	$	22,043,177		$	22,943,110
Equity securities, at fair market value (cost: 2008 - $331,656; 2007 - $59,588)	265,674			64,226
Mortgage loans	3,637,807			3,275,678
Investment real estate, net of accumulated depreciation (2008 - $411; 2007 - $283)	7,793			8,026
Policy loans	811,847			818,280
Other long-term investments	334,986			186,299
Short-term investments	977,722			1,218,116
Total investments	28,079,006			28,513,735
Cash	67,690			106,507
Accrued investment income	295,951			274,825
Accounts and premiums receivable, net of allowance for uncollectible amounts (2008 - $2,917; 2007 - $3,552)	152,308			77,997
Reinsurance receivables	5,150,702			5,033,748
Deferred policy acquisition costs and value of business acquired	3,909,980			3,339,748
Goodwill	97,340			92,579
Property and equipment, net of accumulated depreciation (2008 - $114,877; 2007 - $109,307)	38,444			40,754
Other assets	377,566			262,880
Income tax receivable	124,340			140,901
Assets related to separate accounts
Variable annuity	2,426,806			2,910,606
Variable universal life	297,687			350,802
Total Assets	$	41,017,820		$	41,145,082
Liabilities
Policy liabilities and accruals	$	18,076,658		$	17,377,403
Stable value product account balances	6,021,834			5,046,463
Annuity account balances	8,976,496			8,708,383
Other policyholders’ funds	423,791			307,140
Other liabilities	654,821			1,136,086
Deferred income taxes	31,996			511,402
Non-recourse funding obligations	1,450,000			1,375,000
Liabilities related to separate accounts
Variable annuity	2,426,806			2,910,606
Variable universal life	297,687			350,802
Total liabilities	38,360,089			37,723,285
Commitments and contingent liabilities - Note 3
Shareowners’ equity
Preferred Stock; $1 par value, shares authorized: 2,000; liquidation preference $2,000	2			2
Common Stock, $1 par value, shares authorized: 5,000,000	5,000			5,000
Additional paid-in-capital	1,226,734			1,120,996
Note receivable from PLC Employee Stock Ownership Plan	(853		)	(1,445		)
Retained earnings (includes FAS 157 cumulative effect adjustment - $1,470)	2,326,014			2,354,721
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on investments, net of income tax: (2008 - $(484,873); 2007 - $(25,192))	(878,568		)	(45,255		)
Accumulated gain (loss) - hedging, net of income tax: (2008 - $(11,434); 2007 - $(6,779))	(20,598		)	(12,222		)
Total shareowners’ equity	2,657,731			3,421,797
Total liabilities and shareowners’ equity	$	41,017,820		$	41,145,082

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2008			2007
	(Dollars In Thousands)
Cash flows from operating activities
Net income (loss)	$	(30,177	)	$	199,280
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Realized investment losses (gains)	344,755			(20,414		)
Amortization of deferred policy acquisition costs and value of business acquired	158,550			206,234
Capitalization of deferred policy acquisition costs	(278,323		)	(311,065		)
Depreciation expense	7,768			8,016
Deferred income taxes	39,540			114,326
Accrued income taxes	15,753			(160		)
Interest credited to universal life and investment products	773,877			753,170
Policy fees assessed on universal life and investment products	(419,384		)	(423,823		)
Change in reinsurance receivables	(116,954		)	(318,771		)
Change in accrued investment income and other receivables	(95,437		)	50,950
Change in policy liabilities and other policyholders’ funds of traditional life and health products	298,110			235,367
Trading securities:
Maturities and principal reductions of investments	342,193			292,454
Sale of investments	494,738			1,579,938
Cost of investments acquired	(906,136		)	(1,965,075		)
Other net change in trading securities	(104,011		)	207,706
Change in other liabilities	(137,310		)	95,268
Other, net	(165,573		)	(139,396		)
Net cash provided by operating activities	221,979			564,005
Cash flows from investing activities
Investments available-for-sale:
Maturities and principal reductions of investments	1,584,184			1,003,178
Sale of investments	2,518,597			1,724,934
Cost of investments acquired	(5,547,753		)	(3,673,542		)
Mortgage loans:
New borrowings	(633,289		)	(684,491		)
Repayments	269,864			367,475
Change in investment real estate, net	542			33,502
Change in policy loans, net	6,433			22,544
Change in other long-term investments, net	34,821			(7,159		)
Change in short-term investments, net	34,268			35,069
Purchase of property and equipment	(4,639		)	(12,422		)
Sales of property and equipment	408			—
Net cash used in investing activities	(1,736,564		)	(1,190,912		)
Cash flows from financing activities
Payments on liabilities related to variable interest entities	—			(20,395		)
Issuance of non-recourse funding obligations	75,000			750,000
Capital contribution	13,010			—
Net proceeds from securities sold under repurchase agreements	—			127,251
Investments product deposits and change in universal life deposits	4,066,785			2,739,113
Investment product withdrawals	(2,647,740		)	(2,773,473		)
Other financing activities, net	(31,287		)	(97,004		)
Net cash provided by financing activities	1,475,768			725,492
Change in cash	(38,817		)	98,585
Cash at beginning of period	106,507			37,419
Cash at end of period	$	67,690		$	136,004

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements of Protective Life Insurance Company (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the disclosures required by U.S. GAAP for complete financial statements.  In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair statement of the results for the interim periods presented.  Operating results for the three and nine month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.  The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.  For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.  The Company is a wholly owned subsidiary of Protective Life Corporation (“PLC”).

Accounting Pronouncements Recently Adopted

Financial Accounting Standards Board (“FASB”) Statement No. 157, Fair Value Measurement (“SFAS No. 157”).  In September 2006, the FASB issued SFAS No. 157.  On January 1, 2008, the Company adopted this Statement, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.  The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial statements.  Additionally, on January 1, 2008, the Company elected the partial adoption of SFAS No. 157 under the provisions of FASB Staff Position (“FSP”) FAS 157-2, which amends SFAS No. 157 to allow an entity to delay the application of this Statement until periods beginning January 1, 2009 for certain non-financial assets and liabilities.  Under the provisions of this FSP, the Company will delay the application of SFAS No. 157 for fair value measurements used in the impairment testing of goodwill and indefinite-lived intangible assets and eligible non-financial assets and liabilities included within a business combination.  In January 2008, FASB also issued proposed FSP FAS 157-c that would amend SFAS No. 157 to clarify the principles on fair value measurement of liabilities.  Management is monitoring the status of this proposed FSP for any impact on the Company’s consolidated financial statements.  On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (“FSP FAS 157-3”), to clarify the application of SFAS No. 157 in a market that is not active and provides examples to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. It also reaffirms the notion of fair value as an exit price as of the measurement date. This statement was effective upon issuance, including prior periods for which the financial statements have not been issued. For more information, see Note 9, Fair Value of Financial Instruments.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various methods including market, income and cost approaches.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimizes the use of unobservable inputs.  For more information, see Note 9, Fair Value of Financial Instruments.

FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”).  In February 2007, the FASB issued SFAS No. 159.  This Statement provides entities the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period.  SFAS No. 159 permits the fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.  The Company adopted SFAS No. 159 as of January 1, 2008.  The Company has elected not to apply the provisions of SFAS No. 159 to its eligible financial assets and financial liabilities on the date of adoption.

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Accordingly, the initial application of SFAS No. 159 had no effect on the Company’s consolidated results of operations or financial position.

FASB Staff Position (“FSP”) FIN 39-1, Amendment of FASB Interpretation No. 39 (“FSP FIN39-1”).  As of January 1, 2008, the Company adopted FSP FIN39-1.  This FSP amends FIN 39, Offsetting of Amounts Related to Certain Contracts, to allow fair value amounts recognized for collateral to be offset against fair value amounts recognized for derivative instruments that are executed with the same counterparty under certain circumstances.  The FSP also requires an entity to disclose the accounting policy decision to offset, or not to offset, fair value amounts in accordance with FIN 39, as amended.  The Company does not, and has not previously, offset the fair value amounts recognized for derivatives with the amounts recognized as collateral.

Accounting Pronouncements Not Yet Adopted

FASB Statement No. 141(R), Business Combinations (“SFAS No. 141(R)”).  In December of 2007, the FASB issued SFAS No. 141(R).  This Statement is a revision to the original Statement and continues the movement toward a greater use of fair values in financial reporting. It changes how business acquisitions are accounted for and will impact financial statements at the acquisition date and in subsequent periods.  Further, certain of the changes will introduce more volatility into earnings and thus may impact a company’s acquisition strategy.  SFAS No. 141(R) will also impact the annual goodwill impairment test associated with acquisitions that close both before and after the effective date of this Statement.  Thus, any potential goodwill impact from an acquisition that closed prior to the effective date of the Statement will need to be assessed under the provisions of SFAS No. 141(R).  This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”).  In December of 2007, the FASB issued SFAS No. 160.  This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary.  This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends).  The Company does not expect this Statement to have a significant impact on its consolidated results of operations or financial position.

FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”).  In March of 2008, the FASB issued SFAS No. 161.  This Statement requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting Derivative Instruments and Hedging Activities (“SFAS No. 133”).  This statement is effective for fiscal years and interim periods beginning after November 15, 2008.  The Statement will be effective for the Company beginning January 1, 2009.  The Company is currently evaluating the impact, if any, that SFAS No. 161 will have on its consolidated results of operations or financial position.

FSP No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FSP No. 140-3”).  In February of 2008, the FASB issued FSP No. 140-3 to provide guidance on accounting for a transfer of a financial asset and a repurchase financing, which is not directly addressed by FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”).  This FSP is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.  The FSP will be effective for the Company beginning January 1, 2009.  The Company is currently evaluating the impact, if any, that this FSP will have on its consolidated results of operations or financial position.

FSP No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP No. 142-3”).  In April of 2008, the FASB issued FSP No. 142-3 to improve consistency between the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets, and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007), Business Combinations, and other guidance under U.S. GAAP.  This FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  The FSP will be effective for the Company beginning January 1, 2009.  The Company does not expect this FSP to have a significant impact on its consolidated results of operations or financial position.

7

FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”).  In May of 2008, the FASB issued SFAS No. 162.  This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (“the GAAP hierarchy”).  This Statement is effective sixty days following the United States Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.  The Company does not expect this Statement to have a significant impact on its consolidated results of operations or financial position.

FASB Statement No. 163, Accounting for Financial Guarantee Insurance Contracts (“SFAS No. 163”).  In May of 2008, the FASB issued SFAS No. 163.  This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation.  This Statement also clarifies how FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises, (“SFAS No. 60”), applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities.  It also requires expanded disclosures about financial guarantee insurance contracts.  This Statement does not apply to financial guarantee insurance contracts that would be within the scope of SFAS No. 133.  This Statement is effective for fiscal years and interim periods beginning after December 15, 2008.  The standard will be effective for the Company beginning January 1, 2009.  The Company does not expect this Statement to have a significant impact on its consolidated results of operations or financial position.

FSP EITF Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF Issue No. 03-6-1”).   In June of 2008, the FASB issued FSP EITF Issue No. 03-6-1.  This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share.  The FSP will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008.  All prior period EPS data presented shall be adjusted retrospectively to conform to the provisions of this FSP.  The Company is currently evaluating the impact of this FSP, but does not expect it to have a significant impact on its consolidated results of operations or financial position.

FSP FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees:  An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (“FSP FAS 133-1 and FIN 45-4”).   In September of 2008, the FASB issued FSP FAS 133-1 and FIN 45-4.  This FSP amends SFAS No. 133 to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument, and also amends FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee.  In addition, this FSP clarifies the FASB’s intent about the effective date of SFAS No. 161. The FSP will be effective for financial statements issued for fiscal years and interim periods ending after November 15, 2008.  In periods after adoption, this FSP requires comparative disclosures only for periods ending subsequent to initial adoption.  The Company is currently evaluating the impact of this FSP, but does not expect it to have a significant impact on its consolidated results of operations or financial position.

Reclassifications

Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior period amounts comparable to those of the current period.  Such reclassifications had no effect on previously reported net income or shareowners’ equity.

Significant Accounting Policies

Valuation of investment securities

The fair value for fixed maturity, short term, and equity securities, is determined by management after considering and evaluating one of three primary sources of information: third party pricing services, independent broker quotations, or pricing matrices.  Security pricing is applied using a “waterfall” approach whereby publicly

8

available prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for prices, or lastly, securities are priced using a pricing matrix.  Typical inputs used by these three pricing methods include, but are not limited to: reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flows and rates of prepayments.  Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services will normally derive the security prices through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above.  If there are no recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate.  Included in the pricing of asset-backed securities (“ABS”), collateralized mortgage obligations (“CMOs”), and mortgage-backed securities (“MBS”) are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and rates of prepayments previously experienced at the interest rate levels projected for the underlying collateral.

Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets.  For example, assessing the value of certain investments requires that we perform an analysis of expected future cash flows or rates of prepayments.  Other investments, such as collateralized mortgage or bond obligations, represent selected tranches of a structured transaction, supported in the aggregate by underlying investments in a wide variety of issuers.  Management considers a number of factors when determining the impairment status of individual securities.  These include the economic condition of various industry segments and geographic locations and other areas of identified risks.  Although it is possible for the impairment of one investment to affect other investments, we engage in ongoing risk management to safeguard against and limit any further risk to our investment portfolio.  Special attention is given to correlative risks within specific industries, related parties, and business markets. We consider a number of factors in determining whether the impairment is other-than-temporary.  These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline in fair value, 4) the intent and ability to hold the investment until recovery, 5) the time period during which the decline has occurred, 6) an economic analysis of the issuer’s industry, and 7) the financial strength, liquidity, and recoverability of the issuer.  Management performs a security-by-security review each quarter in evaluating the need for any other-than-temporary impairments.  Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures considered.

For the three and nine months ended September 30, 2008, the Company recorded pre-tax other-than-temporary impairments, excluding $20.0 million of modified coinsurance (“Modco”) related impairments, of $202.4 million and $282.4 million, respectively, in our investments compared to no impairments for the same periods in 2007.  The impairments related to debt obligations and preferred stock holdings in Lehman Brothers and Washington Mutual, residential mortgage-backed securities collateralized by Alt-A mortgages, and preferred stock holdings in Fannie Mae and Freddie Mac. The decline in the estimated fair value of these securities resulted from factors including distressed credit markets, the failure or near failure of a number of large financial service companies resulting in intervention by the United States Federal Government, downgrades in rating, and interest rate changes. These other-than-temporary impairments resulted from our analysis of circumstances and our belief that credit events, loss severity, changes in credit enhancement, and/or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to these investments.  For more information on impairments, refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Reinsurance

The Company uses reinsurance extensively in certain of its segments. The following summarizes some of the key aspects of the Company’s accounting policies for reinsurance:

Reinsurance Accounting Methodology – The Company accounts for reinsurance under the provisions of FASB Statement No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts (“SFAS No. 113”).  The methodology for accounting for the impact of reinsurance on the Company’s life insurance and annuity products is determined by whether the specific products are subject to SFAS No. 60 or FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments (“SFAS No. 97”).

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The Company’s traditional life insurance products are subject to SFAS No. 60 and the recognition of the impact of reinsurance costs on the Company’s financial statements reflect the requirements of that pronouncement. Ceded premiums are treated as an offset to direct premium and policy fee revenue and are recognized when due to the assuming company. Ceded claims are treated as an offset to direct benefits and settlement expenses and are recognized when the claim is incurred on a direct basis. Ceded policy reserve changes are also treated as an offset to benefits and settlement expenses and are recognized during the applicable financial reporting period. Expense allowances paid by the assuming companies are treated as an offset to other operating expenses. Since reinsurance treaties typically provide for allowance percentages that decrease over the lifetime of a policy, allowances in excess of the “ultimate” or final level allowance are capitalized. Amortization of capitalized reinsurance expense allowances is treated as an offset to direct amortization of deferred policy acquisition costs or value of business acquired (“VOBA”). Amortization of deferred expense allowances is calculated as a level percentage of expected premiums in all durations given expected future lapses and mortality and accretion due to interest.

The Company’s short duration insurance contracts (primarily issued through the Asset Protection segment) are also subject to SFAS No. 60 and the recognition of the impact of reinsurance costs on the Company’s financial statements also reflect the requirements of that pronouncement.  Reinsurance allowances include such acquisition costs as commissions and premium taxes.  A ceding fee is also collected to cover other administrative costs and profits for the Company.  Reinsurance allowances received are capitalized and charged to expense in proportion to premiums earned.  Ceded unamortized acquisition costs are netted with direct unamortized acquisition costs in the balance sheet.

The Company’s universal life (“UL”), variable universal life, bank-owned life insurance (“BOLI”), and annuity products are subject to SFAS No. 97 and the recognition of the impact of reinsurance costs on the Company’s financial statements reflect the requirements of that pronouncement.  Ceded premiums and policy fees on SFAS No. 97 products reduce premiums and policy fees recognized by the Company. Ceded claims are treated as an offset to direct benefits and settlement expenses and are recognized when the claim is incurred on a direct basis. Ceded policy reserve changes are also treated as an offset to benefits and settlement expenses and are recognized during the applicable valuation period. Commission and expense allowances paid by the assuming companies are treated as an offset to other operating expenses. Since reinsurance treaties typically provide for allowance percentages that decrease over the lifetime of a policy, allowances in excess of the “ultimate” or final level allowance are capitalized.   Amortization of capitalized reinsurance expense allowances are amortized based on future expected gross profits according to SFAS No. 97. Unlike with SFAS No. 60 products, assumptions for SFAS No. 97 regarding mortality, lapses and interest are continuously reviewed and may be periodically changed. These changes will result in “unlocking” that changes the balance in the ceded deferred amortization cost and can affect the amortization of deferred acquisition cost and VOBA. Ceded unearned revenue liabilities are also amortized based on expected gross profits. Assumptions for SFAS No. 97 products are based on the best current estimate of expected mortality, lapses and interest spread. The Company complies with AICPA Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts, which impacts the timing of direct and ceded earnings on certain blocks of the Company’s SFAS No. 97 business.

Reinsurance Allowances - The amount and timing of reinsurance allowances (both first year and renewal allowances) are contractually determined by the applicable reinsurance contract and may or may not bear a relationship to the amount and incidence of expenses actually paid by the ceding company.  Many of the Company’s reinsurance treaties do, in fact, have ultimate renewal allowances that exceed the direct ultimate expenses.  Additionally, allowances are intended to reimburse the ceding company for some portion of the ceding company’s commissions, expenses, and taxes.  As a result, first year expenses paid by the Company may be higher than first year allowances paid by the reinsurer, and reinsurance allowances may be higher in later years than renewal expenses paid by the Company.

The Company recognizes allowances according to the prescribed schedules in the reinsurance contracts, which may or may not bear a relationship to actual expenses incurred by the Company.  A portion of these allowances is deferred while the non-deferrable allowances are recognized immediately as a reduction of other operating expenses.  The Company’s practice is to defer reinsurance allowances in excess of the ultimate allowance.  This practice is consistent with the Company’s practice of capitalizing direct expenses.  While the recognition of reinsurance allowances is consistent with U.S. GAAP, in some cases non-deferred reinsurance allowances may exceed non-deferred direct costs, causing net other operating expenses to be negative.

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Ultimate reinsurance allowances are defined as the lowest allowance percentage paid by the reinsurer in any policy duration over the lifetime of a universal life policy (or through the end of the level term period for a traditional life policy).  The Company determines ultimate allowances as the final amount to be paid over the life of a contract after higher acquisition related expenses (whether first year or renewal) are completed.  Ultimate reinsurance allowances are determined by the reinsurer and set by the individual contract of each treaty during the initial negotiation of each such contract.  Ultimate reinsurance allowances and other treaty provisions are listed within each treaty and will differ between agreements since each reinsurance contract is a separately negotiated agreement.  The Company uses the ultimate reinsurance allowances set by the reinsurers and contained within each treaty agreement to complete its accounting responsibilities.

Amortization of Reinsurance Allowances - Reinsurance allowances do not affect the methodology used to amortize DAC and VOBA, or the period over which such DAC and VOBA are amortized.  Reinsurance allowances offset the direct expenses capitalized, reducing the net amount that is capitalized.  The amortization pattern varies with changes in estimated gross profits arising from the allowances.  DAC and VOBA on SFAS No. 60 policies are amortized based on the pattern of estimated gross premiums of the policies in force.  Reinsurance allowances do not affect the gross premiums, so therefore they do not impact SFAS No. 60 amortization patterns.  DAC and VOBA on SFAS No. 97 products are amortized based on the pattern of estimated gross profits of the policies in force.  Reinsurance allowances are considered in the determination of estimated gross profits, and therefore do impact SFAS No. 97 amortization patterns.

Reinsurance Liabilities - Claim liabilities and policy benefits are calculated consistently for all policies in accordance with U.S. GAAP, regardless of whether or not the policy is reinsured.  Once the claim liabilities and policy benefits for the underlying policies are estimated, the amounts recoverable from the reinsurers are estimated based on a number of factors including the terms of the reinsurance contracts, historical payment patterns of reinsurance partners, and the financial strength and credit worthiness of reinsurance partners.  Liabilities for unpaid reinsurance claims are produced from claims and reinsurance system records, which contain the relevant terms of the individual reinsurance contracts. The Company monitors claims due from reinsurers to ensure that balances are settled on a timely basis. Incurred but not reported claims are reviewed by the Company’s actuarial staff to ensure that appropriate amounts are ceded.

The Company analyzes and monitors the credit worthiness of each of its reinsurance partners to minimize collection issues. For newly executed reinsurance contracts with reinsurance companies that do not meet predetermined standards, the Company requires collateral such as assets held in trusts or letters of credit.

Components of Reinsurance Cost - The following income statement lines are affected by reinsurance cost:

Premiums and policy fees (“reinsurance ceded” on the Company’s financial statements) represent consideration paid to the assuming company for accepting the ceding company’s risks. Ceded premiums and policy fees increase reinsurance cost.

Benefits and settlement expenses include incurred claim amounts ceded and changes in policy reserves. Ceded benefits and settlement expenses decrease reinsurance cost.

Amortization of deferred policy acquisition cost and VOBA reflects the amortization of capitalized reinsurance allowances.  Ceded amortization decreases reinsurance cost.

Other expenses include reinsurance allowances paid by assuming companies to the Company less amounts capitalized.  Non-deferred reinsurance allowances decrease reinsurance cost.

The Company’s reinsurance programs do not materially impact the other income line of the Company’s income statement. In addition, net investment income generally has no direct impact on the Company’s reinsurance cost. However, it should be noted that by ceding business to the assuming companies, the Company forgoes investment income on the reserves ceded to the assuming companies. Conversely, the assuming companies will receive investment income on the reserves assumed which will increase the assuming companies’ profitability on business assumed from the Company.

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Insurance liabilities and reserves

Establishing an adequate liability for the Company’s obligations to policyholders requires the use of assumptions.  Estimating liabilities for future policy benefits on life and health insurance products requires the use of assumptions relative to future investment yields, mortality, morbidity, persistency and other assumptions based on the Company’s historical experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation.  Determining liabilities for the Company’s property and casualty insurance products also requires the use of assumptions, including the projected levels of used vehicle prices, the frequency and severity of claims, and the effectiveness of internal processes designed to reduce the level of claims.  The Company’s results depend significantly upon the extent to which its actual claims experience is consistent with the assumptions the Company used in determining its reserves and pricing its products.  The Company’s reserve assumptions and estimates require significant judgment and therefore, are inherently uncertain.  The Company cannot determine with precision the ultimate amounts that it will pay for actual claims or the timing of those payments.  In addition, effective January 1, 2007, the Company adopted FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140 (“SFAS No. 155”), related to its equity indexed annuity product. SFAS No. 155 requires that the Company determine a fair value for the liability related to this block of business at each balance sheet date, with changes in the fair value recorded through earnings.  Changes in this liability may be significantly affected by interest rate fluctuations.   As a result of the adoption of SFAS No. 157 at January 1, 2008, the Company made certain modifications to the method used to determine fair value for its liability related to equity indexed annuities to take into consideration factors such as policyholder behavior, the Company’s credit rating and other market considerations.  The impact of adopting SFAS No. 157 is discussed further in Note 9, Fair Value of Financial Instruments.

Guaranteed minimum withdrawal benefits

The Company also establishes liabilities for guaranteed minimum withdrawal benefits (“GMWB”) on its variable annuity products.  The GMWB is valued in accordance with SFAS No. 133 which requires the liability to be marked-to-market using current implied volatilities for the equity indices.  The methods used to estimate the liabilities employ assumptions, primarily about mortality and lapses, equity market and interest returns, market volatility and the Company’s credit rating.  The Company assumes mortality of 65% of the National Association of Insurance Commissioners 1994 Variable Annuity GMDB Mortality Table.  Differences between the actual experience and the assumptions used result in variances in profit and could result in losses.

As a result of the adoption of SFAS No. 157 at January 1, 2008, the Company made certain modifications to the method used to determine fair value for its liability related embedded derivatives related to annuities with guaranteed minimum withdrawal benefits to take into consideration factors such as policyholder behavior, the Company’s credit rating and other market considerations.  See Note 9, Fair Value of Financial Instruments for more information related to the impact of adopting SFAS No. 157.

Goodwill

Goodwill is tested for impairment at least annually. The Company evaluates the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The Company plans to evaluate goodwill during the fourth quarter and determine if an adjustment will be necessary in accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets.

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2.NON-RECOURSE FUNDING OBLIGATIONS

The following table shows the non-recourse funding obligations outstanding as of September 30, 2008, listed by issuer:

				Year-to-Date
				Weighted-Avg
Issuer	Balance		Maturity Year	Interest Rate
	(Dollars In Thousands)
Golden Gate Captive Insurance Company	$	875,000	2037	5.10	%
Golden Gate II Captive Insurance Company	575,000		2052	3.95	%
Total	$	1,450,000

On September 30, 2008, Golden Gate Captive Insurance Company (“Golden Gate”), a wholly owned special-purpose financial captive insurance company subsidiary, increased by $200 million the capacity under its surplus notes facility (the “Facility”) through which Golden Gate may issue floating rate surplus notes resulting in a total capacity of $1 billion of aggregate principle amount. On that date, Golden Gate issued $75.0 million in aggregate principal amount of floating rate surplus notes, series B, due August 15, 2037 (the “Series B Notes” and together with the $800 million in aggregate principle amount of floating rate surplus notes previously issued under the Facility (the “Series A Surplus Notes”), the “Notes”) to PLC, resulting in an outstanding balance under the Facility in the aggregate principal amount of $875.0 million. For more information, See Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations “Liquidity”.

3.COMMITMENTS AND CONTINGENT LIABILITIES

Under insurance guaranty fund laws, in most states insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies.  The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements.  Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer’s own financial strength.

A number of civil jury verdicts have been returned against insurers, broker dealers and other providers of financial services involving sales, refund or claims practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or persons with whom the insurer does business, and other matters.  Often these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages.  In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration.  Arbitration awards are subject to very limited appellate review.  In addition, in some class action and other lawsuits, companies have made material settlement payments.  The Company, like other financial service companies, in the ordinary course of business, is involved in such litigation and arbitration.  Although the Company cannot predict the outcome of any such litigation or arbitration, the Company does not believe that any such outcome will have a material impact on the financial condition or results of the operations of the Company.

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4.STOCK-BASED COMPENSATION

Performance shares awarded by PLC during the first nine months of 2008 and 2007, and their estimated fair value at grant date are as follows:

Year	Performance	Estimated		Year	Performance	Estimated
Awarded	Shares	Fair Value		Awarded	Shares	Fair Value
(Dollars In Thousands, Except Share Amounts)
2008	75,900	$	2,900	2007	64,700	$	2,800

The criteria for payment of performance awards is based primarily upon a comparison of the PLC’s average return on average equity (earlier upon the death, disability, or retirement of the executive, or in certain circumstances, upon a change in control of PLC) to that of a comparison group of publicly held life and multi-line insurance companies.  For the 2008 awards, if PLC’s results are below the 25th percentile of the comparison group, no portion of the award is earned. For the 2005-2007 awards, if PLC’s results are below the 40th percentile of the comparison group, no portion of the award is earned.  If PLC’s results are at or above the 90^th percentile, the award maximum is earned.  Awards are paid in shares of PLC’s Common Stock.

During the first nine months of 2008, PLC stock appreciation rights (“SARs”) were granted to certain officers of the Company to provide long-term incentive compensation based solely on the performance of PLC’s Common Stock.  The SARs are exercisable in four equal annual installments beginning one year after the date of grant (earlier upon the death, disability, or retirement of the officer, or in certain circumstances, upon a change in control of PLC) and expire after ten years or upon termination of employment.  The SARs activity as well as weighted-average base price for the first nine months of 2008 is as follows:

	Weighted-Average		Number of
	Base Price		SARs
Balance at December 31, 2007	$	31.98	1,262,704
SARs granted	38.59		327,500
SARs exercised	32.67		(32,131	)
Balance at September 30, 2008	$	33.36	1,558,073

The SARs issued in 2008 had estimated fair values at grant date of $2.2 million.  The fair value of the 2008 SARs was estimated using a Black-Scholes option pricing model.  Significant assumptions used in the model for the 2008 SARs were as follows:  expected volatility ranged from 16.4% to 22.1%, the risk-free interest rate ranged from 2.7% to 3.3%, a dividend rate of 2.1%, a 4.0% forfeiture rate, and the expected exercise date ranged from 2013 to 2016.  PLC will pay an amount in stock equal to the difference between the specified base price of PLC’s Common Stock and the market value at the exercise date for each SAR.

Additionally during 2008, PLC issued 13,100 restricted stock units at an average fair value of $39.07 per unit.  These awards, with a total fair value of $0.5 million, vest ten years after the date of grant.

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5.DEFINED BENEFIT PENSION PLAN AND UNFUNDED EXCESS BENEFITS PLAN

Components of the net periodic benefit cost of PLC’s defined benefit pension plan and unfunded excess benefits plan are as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Dollars In Thousands)
Service cost - Benefits earned during the period	$	2,155		$	2,016		$	7,193		$	6,657
Interest cost on projected benefit obligations	2,316			2,169			7,731			7,163
Expected return on plan assets	(2,571		)	(2,405		)	(8,582		)	(7,943		)
Amortization of prior service cost	49			46			164			152
Amortization of actuarial losses	748			699			2,496			2,309
Net periodic benefit cost	$	2,697		$	2,525		$	9,002		$	8,338

As of September 30, 2008, no contributions have been made to the defined benefit pension plan.  PLC does not expect to make a contribution to the defined benefit pension plan during the fourth quarter of 2008.

In addition to pension benefits, PLC provides life insurance benefits to eligible retirees and limited healthcare benefits to eligible retirees who are not yet eligible for Medicare.  The cost of these plans for the nine months ended September 30, 2008 and 2007 was immaterial to PLC’s financial position.

6.COMPREHENSIVE INCOME (LOSS)

The following table sets forth the Company’s comprehensive income (loss) for the periods presented below:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Dollars In Thousands)
Net income (loss)	$	(102,924	)	$	60,224		$	(30,177	)	$	199,280
Change in net unrealized gains (losses) on investments, net of income tax:
(three months: 2008 - $(313,301); 2007 - $32,692 nine months: 2008 - $(559,856); 2007 - $(46,947))	(564,890		)	60,381			(1,015,458		)	(85,965		)
Change in accumulated gain (losses) - hedging, net of income tax:
(three months: 2008 - $(8,121); 2007 - $(4,303) nine months: 2008 - $(4,703); 2007 - $(5,251))	(15,226		)	(7,753		)	(8,465		)	(9,461		)
Reclassification adjustment for investment amounts included in net income, net of income tax:
(three months: 2008 - $79,366; 2007 - $(622) nine months: 2008 - $100,174; 2007 - $(2,490))	143,823			(1,148		)	182,145			(4,559		)
Reclassification adjustment for hedging amounts included in net income, net of income tax:
(three months: 2008 - $(288); 2007 - $278 nine months: 2008 - $49; 2007 - $177)	88			500			89			319
Comprehensive income (loss)	$	(539,129	)	$	112,204		$	(871,866	)	$	99,614

7.OPERATING SEGMENTS

The Company operates several business segments each having a strategic focus.  An operating segment is generally distinguished by products and/or channels of distribution.  A brief description of each segment follows.

·The Life Marketing segment markets level premium term insurance (“traditional”), UL, variable universal life and BOLI products on a national basis primarily through networks of independent insurance agents and brokers, stockbrokers, and independent marketing organizations.

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·The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies.  The segment’s primary focus is on life insurance policies and annuity products that were sold to individuals.

·The Annuities segment manufactures, sells, and supports fixed and variable annuity products.  These products are primarily sold through stockbrokers, but are also sold through financial institutions and independent agents and brokers.

·The Stable Value Products segment sells guaranteed funding agreements to special purpose entities that in turn issue notes or certificates in smaller, transferable denominations.  The segment also markets fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds.  Additionally, the segment markets guaranteed investment contracts (“GICs”) to 401(k) and other qualified retirement savings plans.

·The Asset Protection segment primarily markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles, watercraft, and recreational vehicles.  In addition, the segment markets a guaranteed asset protection product and an inventory protection product.

·The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on capital and interest on debt).  This segment also includes earnings from several non-strategic lines of business (primarily cancer insurance, residual value insurance, surety insurance, and group annuities), and various investment-related transactions.

The Company uses the same accounting policies and procedures to measure segment operating income and assets as it uses to measure consolidated net income (loss) and assets.  Segment operating income is generally income before income tax excluding net realized investment gains and losses (net of the related amortization of DAC/VOBA and participating income from real estate ventures), and the cumulative effect of change in accounting principle.  Periodic settlements of derivatives associated with certain investments and annuity products are included in realized gains and losses but are considered part of operating income because the derivatives are used to mitigate risk in items affecting consolidated and segment operating income.  Segment operating income represents the basis on which the performance of the Company’s business is internally assessed by management.  Premiums and policy fees, other income, benefits and settlement expenses, and amortization of DAC/VOBA are attributed directly to each operating segment.  Net investment income is allocated based on directly related assets required for transacting the business of that segment.  Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner that most appropriately reflects the operations of that segment.  Investments and other assets are allocated based on statutory policy liabilities, while DAC/VOBA and goodwill are shown in the segments to which they are attributable.

There were no significant intersegment transactions.

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The following tables summarize financial information for the Company’s segments.  Asset adjustments represent the inclusion of assets related to discontinued operations:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Dollars In Thousands)
Revenues
Life Marketing	$	255,566		$	237,023		$	701,117		$	659,863
Acquisitions	161,372			221,430			567,949			680,582
Annuities	75,622			79,961			252,679			230,445
Stable Value Products	96,238			73,168			259,602			224,589
Asset Protection	70,956			84,425			215,046			243,154
Corporate and Other	(194,118		)	35,341			(200,929		)	115,894
Total revenues	$	465,636		$	731,348		$	1,795,464		$	2,154,527
Segment Operating Income
Life Marketing	$	52,111		$	38,331		$	134,919		$	122,730
Acquisitions	33,021			30,375			101,111			93,438
Annuities	(375		)	5,934			9,989			17,289
Stable Value Products	28,184			13,107			61,945			37,648
Asset Protection	5,161			7,527			15,940			21,601
Corporate and Other	(26,338		)	3,616			(49,319		)	4,284
Total segment operating income	91,764			98,890			274,585			296,990
Realized investment gains (losses) - investments(1)	(356,829		)	40,601			(498,533		)	(22,905		)
Realized investment gains (losses) - derivatives(2)	102,282			(51,200		)	172,232			29,635
Income tax expense	59,859			(28,067		)	21,539			(104,440		)
Net income (loss)	$	(102,924	)	$	60,224		$	(30,177	)	$	199,280

(1)	Realized investment gains (losses) - investments	$	(357,532	)	$	40,645		$	(498,657	)	$	(13,978	)
	Less: participating income from real estate ventures	—			—			—			6,857
	Less: related amortization of DAC	(703		)	44			(124		)	2,070
		$	(356,829	)	$	40,601		$	(498,533	)	$	(22,905	)
(2)	Realized investment gains (losses) - derivatives	$	91,938		$	(51,080	)	$	153,902		$	31,502
	Less: settlements on certain interest rate swaps	41			(73		)	145			69
	Less: derivative activity related to certain annuities	(10,385		)	193			(18,475		)	1,798
		$	102,282		$	(51,200	)	$	172,232		$	29,635

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	Operating Segment Assets
	September 30, 2008
	(Dollars In Thousands)
	Life						Stable Value
	Marketing		Acquisitions		Annuities		Products
Investments and other assets	$	7,831,010	$	10,203,761	$	7,673,161	$	5,995,532
Deferred policy acquisition costs and value of business acquired	2,497,526		962,600		363,220		16,622
Goodwill	—		48,783		—		—
Total assets	$	10,328,536	$	11,215,144	$	8,036,381	$	6,012,154

	Asset		Corporate				Total
	Protection		and Other		Adjustments		Consolidated
Investments and other assets	$	958,460	$	4,321,639	$	26,937	$	37,010,500
Deferred policy acquisition costs and value of business acquired	65,632		4,380		—		3,909,980
Goodwill	48,557		—		—		97,340
Total assets	$	1,072,649	$	4,326,019	$	26,937	$	41,017,820

	Operating Segment Assets
	December 31, 2007
	(Dollars In Thousands)
	Life						Stable Value
	Marketing		Acquisitions		Annuities		Products
Investments and other assets	$	9,873,915	$	11,148,212	$	7,727,125	$	5,035,479
Deferred policy acquisition costs and value of business acquired	2,070,903		950,174		221,516		16,359
Goodwill	—		44,741		—		—
Total assets	$	11,944,818	$	12,143,127	$	7,948,641	$	5,051,838

	Asset		Corporate				Total
	Protection		and Other		Adjustments		Consolidated
Investments and other assets	$	1,291,469	$	2,612,140	$	24,415	$	37,712,755
Deferred policy acquisition costs and value of business acquired	80,428		368		—		3,339,748
Goodwill	47,838		—		—		92,579
Total assets	$	1,419,735	$	2,612,508	$	24,415	$	41,145,082

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8.GOODWILL

During the nine months ended September 30, 2008, the Company increased its goodwill balance by approximately $4.8 million. The increase was due to an increase of $4.1 million in the Acquisitions segment and a $0.7 million increase in the Asset Protection segment. The Acquisitions segment increase reflects the net of a purchase accounting adjustment, which was partially offset by an adjustment related to tax benefits realized during the first nine months of 2008 on the portion of tax goodwill in excess of GAAP basis goodwill. The Asset Protection segment increased by $0.4 million due to the purchase of a small administrative subsidiary and $0.6 million due to a contingent consideration related to the Western General acquisition. These increases were partially offset by a decrease of $0.3 million due to the sale of a small insurance subsidiary during the first quarter of 2008. As of September 30, 2008, the Company had an aggregate goodwill balance of $97.3 million.

The Company tests its goodwill balance annually, during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) adverse action or assessment by a regulator.  Additionally, a decline in the market capitalization or market value of an entity’s securities may or may not be indicative of a triggering event to perform an interim or “event driven” impairment analysis.  When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s overall carrying value (including goodwill) to determine if factors are present that would be indicative of impairment.  The Company reviews the market values and carrying values of its reporting units on an ongoing basis and has determined that no such factors were noted as of or during the period ended September 30, 2008.  The Company will perform its full assessment of goodwill during the fourth quarter of 2008.

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9.FAIR VALUE OF FINANCIAL INSTRUMENTS

Effective January 1, 2008, the Company determined the fair value of its financial instruments based on the fair value hierarchy established in SFAS No. 157 which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

In compliance with SFAS No. 157, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded at fair value on the Consolidated Balance Sheets are categorized as follows:

·Level 1. Unadjusted quoted prices for identical assets or liabilities in an active market.

·Level 2. Quoted prices in markets that are not active or significant inputs that are observable either directly or indirectly. Level 2 inputs include the following:

a)Quoted prices for similar assets or liabilities in active markets

b)Quoted prices for identical or similar assets or liabilities in non-active markets

c)Inputs other than quoted market prices that are observable

d)Inputs that are derived principally from or corroborated by observable market data through correlation or other means.

·Level 3. Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

As a result of the adoption of SFAS No. 157, the Company recognized the following adjustment to opening retained earnings for its Equity Indexed Annuities that were previously accounted for under SFAS No. 155:

	Carrying		Carrying
	Value		Value		Transition
	Prior to		After		Adjustment to
	Adoption		Adoption		Retained Earnings
	January 1, 2008		January 1, 2008		Gain (Loss)
	(Dollars In Thousands)
Equity-indexed annuity reserves	$	145,912	$	143,634	$	2,278
Pre-tax cumulative effect of adoption of SFAS No. 157					2,278
Change in deferred income taxes					(808		)
Cumulative effect of adoption of SFAS No. 157					$	1,470

In addition, the Company recognized a transition adjustment for the embedded derivative liability related to annuities with guaranteed minimum withdrawal benefits.  The impact of this adjustment, net of DAC amortization, reduced income before income taxes by $0.4 million during the first quarter of 2008.

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The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2008:

	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Mortgage-backed and asset-backed securities	$	—	$	5,405,742	$	1,630,179	$	7,035,921
US government and authorities	55,617		21,229		—		76,846
State, municipalities and political subdivisions	—		30,933		—		30,933
Public utilities	—		1,719,702		—		1,719,702
All other corporate bonds	—		9,699,772		61,201		9,760,973
Redeemable preferred stocks	—		—		—		—
Convertible bonds with warrants	—		37		—		37
Total fixed maturity securities - available-for-sale	55,617		16,877,415		1,691,380		18,624,412
Fixed maturity securities - trading	284,072		3,111,230		23,463		3,418,765
Total fixed maturity securities	339,689		19,988,645		1,714,843		22,043,177
Equity securities	191,866		14,927		58,881		265,674
Other long-term investments (1)	6,414		13,501		154,110		174,025
Short-term investments	886,722		89,644		1,356		977,722
Total investments	1,424,691		20,106,717		1,929,190		23,460,598
Cash	67,690		—		—		67,690
Assets related to separate accounts
Variable annuity	2,426,806		—		—		2,426,806
Variable universal life	297,687		—		—		297,687
Total assets measured at fair value on a recurring basis	$	4,216,874	$	20,106,717	$	1,929,190	$	26,252,781
Liabilities:
Annuity account balances (2)	$	—	$	—	$	154,154	$	154,154
Other liabilities (1)	—		35,271		13,430		48,701
Total liabilities measured at fair value on a recurring basis	$	—	$	35,271	$	167,584	$	202,855

(1) Includes certain freestanding and embedded derivatives

(2) Represents liabilities related to equity indexed annuities

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The following table presents a reconciliation of the beginning and ending balances for fair value measurements, for the three months ended September 30, 2008, for which we have used significant unobservable inputs (Level 3):

																	Total
																	Gains (losses)
																	included in
			Total Realized and Unrealized														Earnings
			Gains (losses)														related to
						Included in			Purchases,								Instruments
						Other			Issuances, and			Transfers in					still held at
	Beginning		Included in			Comprehensive			Settlements			and/or out of			Ending		the Reporting
	Balance		Earnings			Income			(net)			Level 3			Balance		Date
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Mortgage-backed and asset-backed securities	$	2,116,485	$	—		$	90,545		$	(331,840	)	$	(245,011	)	$	1,630,179	$	—
State, municipalities and political subdivisions	8,928		—			7			—			(8,935		)	—		—
Public utilities	189,162		—			(5,173		)	(29,280		)	(154,709		)	—		—
All other corporate bonds	2,424,161		(41,888		)	(60,175		)	(623,916		)	(1,636,981		)	61,201		—
Convertible bonds with warrants	39		—			(2		)	—			(37		)	—		—
Total fixed maturity securities - available-for-sale	4,738,775		(41,888		)	25,202			(985,036		)	(2,045,673		)	1,691,380		—
Fixed maturity securities - trading	535,216		(14,606		)	—			(100,135		)	(397,012		)	23,463		23,924
Total fixed maturity securities	5,273,991		(56,494		)	25,202			(1,085,171		)	(2,442,685		)	1,714,843		23,924
Equity securities	52,088		—			69			7,220			(496		)	58,881		—
Other long-term investments (1)	48,614		105,496			—			—			—			154,110		105,496
Short-term investments	45,718		—			(612		)	—			(43,750		)	1,356		—
Total investments	5,420,411		49,002			24,659			(1,077,951		)	(2,486,931		)	1,929,190		129,420
Total assets measured at fair value on a recurring basis	$	5,420,411	$	49,002		$	24,659		$	(1,077,951	)	$	(2,486,931	)	$	1,929,190	$	129,420
Liabilities:
Annuity account balances (2)	$	146,579	$	(4,196	)	$	—		$	(3,379	)	$	—		$	154,154	$	(4,196	)
Other liabilities (1)	4,894		(8,536		)										13,430		(8,536		)
Total liabilities measured at fair value on a recurring basis	$	151,473	$	(12,732	)	$	—		$	(3,379	)	$	—		$	167,584	$	(12,732	)

(1)  Represents certain freestanding and embedded derivatives

(2)  Represents liabilities related to equity indexed annuities

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The following table presents a reconciliation of the beginning and ending balances for fair value measurements, for the nine months ended September 30, 2008, for which we have used significant unobservable inputs (Level 3):

																	Total
																	Gains (losses)
																	included in
			Total Realized and Unrealized														Earnings
			Gains (losses)														related to
						Included in			Purchases,								Instruments
						Other			Issuances, and			Transfers in					still held at
	Beginning		Included in			Comprehensive			Settlements			and/or out of			Ending		the Reporting
	Balance		Earnings			Income			(net)			Level 3			Balance		Date
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Mortgage-backed and asset-backed securities	$	1,290,299	$	—		$	(63,139	)	$	516,644		$	(113,625	)	$	1,630,179	$	—
State, municipalities and political subdivisions	9,026		—			(91		)	—			(8,935		)	—		—
Public utilities	176,473		—			(9,762		)	(12,002		)	(154,709		)	—		—
All other corporate bonds	2,244,353		(41,888		)	(161,346		)	(344,927		)	(1,634,991		)	61,201		—
Convertible bonds with warrants	227		—			(47		)	(143		)	(37		)	—		—
Total fixed maturity securities - available-for-sale	3,720,378		(41,888		)	(234,385		)	159,572			(1,912,297		)	1,691,380		—
Fixed maturity securities - trading	837,824		(38,473		)	—			(270,009		)	(505,879		)	23,463		1,646
Total fixed maturity securities	4,558,202		(80,361		)	(234,385		)	(110,437		)	(2,418,176		)	1,714,843		1,646
Equity securities	657		—			(19		)	58,761			(518		)	58,881
Other long-term investments (1)	6,959		147,151			—			—			—			154,110		147,151
Short-term investments	66,327		—			(612		)	—			(64,359		)	1,356
Total investments	4,632,145		66,790			(235,016		)	(51,676		)	(2,483,053		)	1,929,190		148,797
Total assets measured at fair value on a recurring basis	$	4,632,145	$	66,790		$	(235,016	)	$	(51,676	)	$	(2,483,053	)	$	1,929,190	$	148,797
Liabilities:
Annuity account balances (2)	$	143,634	$	(4,365	)	$	—		$	(6,155	)	$	—		$	154,154	$	(4,365	)
Other liabilities (1)	37,270		23,840			—			—			—			13,430		23,840
Total liabilities measured at fair value on a recurring basis	$	180,904	$	19,475		$	—		$	(6,155	)	$	—		$	167,584	$	19,475

(1)  Represents certain freestanding and embedded derivatives

(2)  Represents liabilities related to equity indexed annuities

Certain changes have been made to the January 1, 2008 balances in the table above from the amounts reported in the first quarter to make the amounts comparable to those of the current quarter. These changes had no effect on the Company’s consolidated condensed balance sheets or consolidated condensed statements of income and cash flows. The changes resulted in an increase to the amount of assets categorized as Level 3 by $314.3 million at January 1, 2008, and a corresponding decrease that was predominantly to the amount of assets in Level 2. There were immaterial changes to the amount of liabilities categorized as Level 3 at January 1, 2008.

Total realized and unrealized gains (losses) on Level 3 assets and liabilities are primarily reported in either realized investment gains (losses) within the consolidated statements of income or other comprehensive income (loss) within shareowners’ equity based on the appropriate accounting treatment for the item.

Purchases, sales, issuances and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily relates to purchases and sales of fixed maturity securities, and issuances and settlements of equity indexed annuities accounted for under SFAS No. 155.

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The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities.  Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. The asset transfers in the table(s) above are primarily related to positions moved from Level 3 to Level 2 as the Company determined that certain inputs were observable.

The amount of total gains (losses) for assets and liabilities still held as of the reporting date primarily represents changes in fair value of trading securities and certain derivatives that exist as of the reporting date, and the change in fair value of equity indexed annuities accounted for under SFAS No. 155.

As of September 30, 2008, the Company changed certain assumptions used in its methodology for determining the fair value for retained beneficial interests in commercial mortgage-backed security (“CMBS”) holdings related to the Company’s sponsored commercial mortgage loan securitizations.  Prior to September 30, 2008, the Company used external broker valuations to determine the fair value of these positions. These valuations were based on the cash flows of the commercial mortgages underlying the notes, as well as observable market spread assumptions for investments with similar coupons and/or characteristics based on the fair value hierarchy criteria, and non-observable assumptions and factors utilizing general market information available as of the valuation date.  During the three months ended September 30, 2008, the Company determined that little or no secondary market existed for CMBS holdings similar to those in the Company’s portfolio, and additionally, certain of the tranches within the Company’s holdings fell below the collapse provision levels in the underlying security agreements.  Therefore, the relevant observable inputs from CMBS sales activity could not be obtained for what the Company considered a supportable or appropriate calculation of fair value based on the Company’s previous methodology.

As a result of the factors noted and in accordance with the clarifying guidance issued in SFAS No. 157-3, the Company determined the fair value of these CMBS holdings as of September 30, 2008 using a combination of external broker valuations and an internally developed model.  This model includes inputs derived by the Company based on assumed discount rates relative to the Company’s current mortgage loan lending rate and an expected cash flow analysis based on a review of the commercial mortgage loans underlying the notes.  The model also contains the Company’s determined representative risk adjustment assumptions related to nonperformance and liquidity risks. Changes in these assumptions resulted in an increase of approximately $173.0 million to the fair value of the Company’s retained beneficial interests in CMBS holdings related to the Company’s sponsored commercial mortgage loan securitizations.  The Company believes that this valuation approach provides a more accurate calculation of the fair value of these securities under the fair value hierarchy guidance and given the current inactive market conditions.

10.INCOME TAXES

There have been no material changes to the balance of unrecognized income tax benefits which impacted earnings for the first nine months ended September 30, 2008.  The IRS has completed its examination of the Company’s 2004 and 2005 federal income tax returns. The Company does not expect to have any material adjustments, within the next twelve months, to its balance of unrecognized income tax benefits in any of the tax jurisdictions in which it conducts its business operations.

In general, Accounting Principles Board Opinion No. 28, Interim Financial Reporting, requires that a company compute its interim period effective income tax rate based upon its expectation of what such rate will be at year-end. An exception is made when such a rate cannot be reasonably estimated as of the current interim period. Accordingly, it is then appropriate to compute an effective income tax rate based upon year-to-date reported net income or loss. Due to the unpredictability of additional losses and certain elements of operating income in the fourth quarter of 2008, the Company has therefore computed its effective income tax rate for the three months and nine months ended September 30, 2008 based upon its reported net loss for each of the respective periods.

Based on the Company’s current assessment of future taxable income, including available tax planning opportunities, the Company anticipates that it is more likely than not that it will generate sufficient taxable income to realize its deferred tax assets, and therefore, the Company did not record a valuation allowance against its deferred tax assets as of September 30, 2008.

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11.SUBSEQUENT EVENT

On November 5, 2008, Moody’s announced a one-step downgrade of the insurance financial strength (IFS) rating of the Company, to A1 (Good, 5th highest of 21 ratings) from Aa3. Moody’s stated that the outlook on the rating is stable and this rating action concludes its review of the Company that was begun on October 15, 2008.

Additionally, on November 5, 2008, Fitch Ratings announced a one-step downgrade of its IFS ratings of the Company to A+ (Strong, 5th highest of 22 ratings) from AA-, with a negative outlook. For additional information on the Company’s ratings, see Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations “Capital Resources”.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our consolidated condensed financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report on Form 10-Q and our audited consolidated financial statements for the year ended December 31, 2007, included in our Annual Report on Form 10-K.

For a more complete understanding of our business and current period results, please read the following in conjunction with our latest Annual Report on Form 10-K and other filings with the United States Securities and Exchange Commission (the “SEC”).

Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior period amounts comparable to those of the current period.  Such reclassifications had no effect on previously reported net income or shareowners’ equity.

FORWARD-LOOKING STATEMENTS

This report reviews our financial condition and results of operations including our liquidity and capital resources.  Historical information is presented and discussed and where appropriate, factors that may affect future financial performance are also identified and discussed.  Certain statements made in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements instead of historical facts and may contain words like “believe,” “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,” “shall,” “may,” and other words, phrases, or expressions with similar meaning.  Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from the results contained in the forward-looking statements, and we cannot give assurances that such statements will prove to be correct.  Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.  For more information about the risks, uncertainties and other factors that could affect our future results, please see Exhibit 99 that is filed with this Quarterly Report on Form 10-Q.

OVERVIEW

Our business

We are a wholly owned subsidiary of Protective Life Corporation (“PLC”), an insurance holding company whose common stock is traded on the New York Stock Exchange under the symbol “PL”.  Founded in 1907, we are the largest operating subsidiary of PLC.  We provide financial services through the production, distribution, and administration of insurance and investment products.  Unless the context otherwise requires, “Company,” we,” “us,” or “our” refers to the consolidated group of Protective Life Insurance Company and our subsidiaries.

We operate several business segments, each having a strategic focus.   An operating segment is generally distinguished by products and/or channels of distribution.  We periodically evaluate our operating segments in light of the segment reporting requirements prescribed by the Financial Accounting Standards Board (“FASB”) Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), and make adjustments to our segment reporting as needed.

Our operating segments are Life Marketing, Acquisitions, Annuities, Stable Value Products, Asset Protection, and Corporate and Other.

·Life Marketing - We market level premium term insurance (“traditional”), universal life (“UL”), variable universal life, and bank-owned life insurance (“BOLI”) products on a national basis primarily through networks of independent insurance agents and brokers, stockbrokers, and independent marketing organizations.

·Acquisitions - We focus on acquiring, converting, and servicing policies acquired from other companies.  The segment’s primary focus is on life insurance policies and annuity products sold to

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individuals.  In the ordinary course of business, the Acquisitions segment regularly considers acquisitions of blocks of policies or smaller insurance companies.  The level of the segment’s acquisition activity is predicated upon many factors, including available capital, operating capacity, and market dynamics.  Policies acquired through the Acquisition segment are typically “closed” blocks of business (no new policies are being marketed).  Therefore, earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made.

·Annuities - We manufacture, sell, and support fixed and variable annuity products.  These products are primarily sold through broker-dealers, but are also sold through financial institutions and independent agents and brokers.

·Stable Value Products - We sell guaranteed funding agreement (“GFAs”) to special purpose entities that in turn issue notes or certificates in smaller, transferable denominations.  The segment also markets fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds.  Additionally, the segment markets guaranteed investment contracts (“GICs”) to 401(k) and other qualified retirement savings plans.

·Asset Protection - We primarily market extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles, watercraft, and recreational vehicles.  In addition, the segment markets a guaranteed asset protection (“GAP”) product and an inventory protection product (“IPP”).

·Corporate and Other - This segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on capital and interest on debt).  This segment also includes earnings from several non-strategic lines of business (primarily cancer insurance, residual value insurance, surety insurance, and group annuities), various investment-related transactions.

Reinsurance Ceded

For approximately 10 years prior to mid-2005, we entered into reinsurance contracts in which we ceded a significant percentage, generally 90%, of our newly written business on a first dollar quota share basis. Our traditional life insurance was ceded under coinsurance contracts and universal life insurance was ceded under yearly renewable term (“YRT”) contracts. During this time, we obtained coinsurance on our traditional life business at favorable rates, while reducing the amount of capital deployed and increasing overall returns. We continue to reinsure 90% of the mortality risk, but not the account values, on our newly written universal life insurance.

During recent years, the life reinsurance market continued the process of consolidation and tightening, resulting in a higher net cost of reinsurance for much of our life insurance business.  We have also been challenged by changes in the reinsurance market which have impacted management of capital, particularly in our traditional life business which is required to hold reserves pursuant to Regulation XXX.  In response to these challenges, in 2005 we reduced our overall reliance on reinsurance by changing from coinsurance to YRT reinsurance arrangements for newly issued traditional life products.  Additionally in 2005, for newly issued traditional life products, we increased, from $500,000 to $1,000,000, the amount of insurance we will retain on any one life. During 2008, we have increased our retention limit to $2,000,000 on certain of our traditional life products. These YRT arrangements are utilized to limit our exposure to large claims, and are not a significant factor in capital management or the overall profitability of the business.

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In order to fund the additional statutory reserves required as a result of these changes in our reinsurance arrangements, we established a surplus notes facility under which we issued an aggregate of $800 million, on a consolidated basis, of non-recourse funding obligations through December 2007. In addition, during 2007, we established a surplus notes facility relative to our universal life products.  Under this facility, we issued $575 million of non-recourse funding obligations that will be used to fund statutory reserves required by the Valuation of Life Insurance Policies Model Regulation (“Regulation XXX”), as clarified by Actuarial Guideline 38 (commonly known as “AXXX”). We have received regulatory approval to issue additional series of our floating rate surplus notes up to an aggregate of $675 million principal amount. Our maximum retention for newly issued universal life products is $1,000,000.

During 2006, immediately after the closing of our acquisition of the Chase Insurance Group, we entered into agreements with Commonwealth Annuity and Life Insurance Company (formerly known as Allmerica Financial Life Insurance and Annuity Company) (“CALIC”) and Wilton Reassurance Company and Wilton Reinsurance Bermuda Limited (collectively, the “Wilton Re Group”), whereby CALIC reinsured 100% of the variable annuity business of the Chase Insurance Group and the Wilton Re Group reinsured approximately 42% of the other insurance business of the Chase Insurance Group.

EXECUTIVE SUMMARY

During the third quarter of 2008, domestic and global economies continued to decline.  Gross domestic product (“GDP”) fell a seasonally adjusted 0.3% annual rate for July through September of 2008.  This decline represented the weakest GDP result since a 1.4% decline during the third quarter of 2001.  Global equity markets experienced significant declines.  Financial markets continued to experience increased volatility due to ongoing concerns about the economic outlook, inflation, and asset impairments.  As a result of the extraordinary events taking place in the markets, a number of large financial institutions came close to failure or failed during the third quarter of 2008.   In response to the financial institutions’ distress, on October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (“EESA”), which provides for the United States Treasury to purchase up to $700 billion of securities from financial institutions for the purpose of stabilizing the financial markets.  Under EESA and the Troubled Asset Relief Program (“TARP”) Capital Purchase Plan, Treasury has begun making equity investments in U.S. banks.  Under EESA, Treasury has the power to expand its investments to include insurers. There are reports that the Treasury is considering such action, but the action may be limited to insurers that own or are owned by a federally-regulated bank or thrift institution.  We cannot predict what actions Treasury or other governmental or regulatory bodies may take nor can there be any assurance as to what impact any governmental or regulatory actions will have on the financial markets, the economy, or our consolidated results of operations and financial position.

In light of recent events and uncertain capital and credit market conditions, we have strategically positioned ourselves to have ample liquidity to meet our projected outflows from currently available sources. We have increased our short-term investments; we have $410 million available capacity on our existing credit facility; we have access to the Federal Home Loan Bank (“FHLB”) for short-term borrowing; we have temporarily suspended offering new mortgage loan commitments; and we have reduced our holdings of high-risk assets. As of September 30, 2008 cash and short-term investments were $1.0 billion.

For the three and nine months ended September 30, 2008, our consolidated condensed financial statements include the results of our annual comprehensive review of actuarial assumptions and models underlying insurance-related assets and liabilities commonly known as “unlocking”. The net impact in the Life Marketing segment was $8.8 million favorable unlocking and $2.8 million unfavorable in the Annuities segment.

During the first nine months of 2008, our operating earnings decreased $22.4 million compared to the first nine months of 2007, primarily as a result of $21.0 million lower participating mortgage income and lower prepayment fee income of $6.5 million related to our securities and mortgage investment portfolios and $14.0 million of mark-to-market losses recorded on a trading portfolio acquired during the third quarter. These decreases were partially offset by a $20.3 million increase in net investment income in our Stable Value segment.

Excluding realized losses pursuant to modified coinsurance (“Modco”) arrangements of $33.5 million and $23.2 million for the nine months ended September 30, 2008 and 2007, respectively, under which the economic risks and benefits of the investments are passed to a third-party reinsurer, we experienced net realized losses of $311.2 million for the nine months ended September 30, 2008 compared to net realized gains of $17.5 million for the nine

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months ended September 30, 2007. The 2008 losses were primarily the result of $282.4 million of other-than-temporary impairment charges related to debt obligations and preferred stock holdings in Lehman Brothers and Washington Mutual, residential mortgage-backed securities collateralized by Alt-A mortgages, and preferred stock holdings in Fannie Mae and Freddie Mac.  The decline in the estimated fair value of these securities resulted from factors including distressed credit markets, the recent failure or near failure of a number of large financial service companies, downgrades in ratings, and interest rate changes. These other-than-temporary impairments resulted from our analysis of circumstances and our belief that credit events, loss severity, changes in credit enhancement, and/or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to these investments.

The effective tax rate for the three months ended September 30, 2008 was approximately 37% compared to a rate of 32% for the same period in the prior year. The effective tax rate for the nine months ended September 30, 2008 was 42% compared to a rate of 34% for the same period in the prior year. The effective tax rates in 2008 are higher than historical rates due to the relative percentage of tax permanent differences to total income in 2007 and total loss in 2008 (which was caused by realized losses on investment securities).

The interest rate and credit environment continues to present a significant challenge. Historically low interest rates and market illiquidity continued to create challenges for our fixed income investment portfolio and for our products that generate investment spread profits, such as fixed annuities and stable value contracts.  However, active management of crediting rates on these products allowed us to mitigate spread compression effects and sales allowed us to take advantage of wider credit spreads on investments.

Current costs of reinsurance continue to present challenges from both a new product pricing and capital management perspective.  In response to these challenges, during 2005 we reduced our reliance on reinsurance by changing from coinsurance to yearly renewable term reinsurance and increased the maximum amount retained on any one life from $500,000 to $1,000,000 on certain of our newly written traditional life products.  During the first nine months of 2008, we increased our retention limit to $2,000,000 on certain newly written traditional life products.

Significant financial information related to each of our segments is included in Results of Operations.

RISKS AND UNCERTAINTIES

The factors which could affect our future results include, but are not limited to, general economic conditions and the following risks and uncertainties:

General

·exposure to the risks of natural disasters, pandemics, malicious and terrorist acts could adversely affect our operations;

·computer viruses or network security breaches could affect our data processing systems or those of our business partners and could damage our business and adversely affect our financial condition and results of operations;

·actual experience may differ from management’s assumptions and estimates and negatively affect our results;

·we may not realize our anticipated financial results from our acquisitions strategy;

·we may not be able to achieve the expected results from our recent acquisitions;

·we are dependent on the performance of others;

·our risk management policies and procedures could leave us exposed to unidentified or unanticipated risk, which could negatively affect our business or result in losses;

Financial environment

·interest rate fluctuations could negatively affect our spread income or otherwise impact our business;

·our investments are subject to market and credit risks, which could be heightened during periods of extreme volatility or disruption in the financial and credit markets;

·equity market volatility could negatively impact our business;

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·credit market volatility or disruption could adversely impact our financial condition or results from operations;

·our ability to grow depends in large part upon the continued availability of capital;

·we could be adversely affected by a ratings downgrade or other negative action by a ratings organization;

·a loss of policyholder confidence in our insurance subsidiaries could lead to higher than expected levels of policyholder surrenders and withdrawal of funds;

·we could be forced to sell investments at a loss to cover policyholder withdrawals;

·disruption of the capital and credit markets could negatively affect our ability to meet our liquidity and financing needs;

·difficult conditions in the economy generally could adversely affect our business and results from operations;

·there can be no assurance that the actions of the United States Government or other governmental and regulatory bodies for the purpose of stabilizing the financial markets will achieve their intended effect;

Industry

·insurance companies are highly regulated and subject to numerous legal restrictions and regulations;

·changes to tax law or interpretations of existing tax law could adversely affect our ability to compete with non-insurance products or reduce the demand for certain insurance products;

·financial services companies are frequently the targets of litigation, including class action litigation, which could result in substantial judgments;

·publicly held companies in general and the financial services industry in particular are sometimes the target of law enforcement investigations and the focus of increased regulatory scrutiny;

·new accounting rules or changes to existing accounting rules could negatively impact us;

·reinsurance introduces variability in our statements of income;

·our reinsurers could fail to meet assumed obligations, increase rates or be subject to adverse developments that could affect us;

·policy claims fluctuate from period to period resulting in earnings volatility;

Competition

·operating in a mature, highly competitive industry could limit our ability to gain or maintain our position in the industry and negatively affect profitability;

·our ability to maintain competitive unit costs is dependent upon the level of new sales and persistency of existing business; and

·a ratings downgrade could adversely affect our ability to compete.

For more information about the risks, uncertainties, and other factors that could affect our future results, please see Exhibit 99 that is filed with this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES

Our accounting policies inherently require the use of judgments relating to a variety of assumptions and estimates, in particular expectations of current and future mortality, morbidity, persistency, expenses, and interest rates.  Because of the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could be materially different from those reported in the consolidated financial statements.  A discussion of various critical accounting policies is presented below.  For a more complete listing of our critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2007.

Evaluation of Other-Than-Temporary Impairments - One of the significant estimates related to available-for-sale securities is the evaluation of investments for other-than-temporary impairments. If a decline in the fair value of an available-for-sale security is judged to be other-than-temporary, a charge is recorded in net realized investment losses equal to the difference between the fair value and cost or amortized cost basis of the security.  The fair value of the other-than-temporarily impaired investment becomes its new cost basis. For fixed maturities, we

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accrete the new cost basis to par or to the estimated future value over the expected remaining life of the security by adjusting the security’s yields.

Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets.  For example, assessing the value of certain investments requires that we perform an analysis of expected future cash flows or rates of prepayments.  Other investments, such as collateralized mortgage or bond obligations, represent selected tranches of a structured transaction, supported in the aggregate by underlying investments in a wide variety of issuers.  Management considers a number of factors when determining the impairment status of individual securities.  These include the economic condition of various industry segments and geographic locations and other areas of identified risks.  Although it is possible for the impairment of one investment to affect other investments, we engage in ongoing risk management to safeguard against and limit any further risk to our investment portfolio.  Special attention is given to correlative risks within specific industries, related parties, and business markets.

For certain securitized financial assets with contractual cash flows including asset-backed securities (“ABS”), Emerging Issues Task Force (“EITF”) Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continued to Be Held by a Transferor in Securitized Financial Assets” (“EITF Issue No. 99-20”), requires us to periodically update our best estimate of cash flows over the life of the security. If the fair value of a securitized financial asset is less than its cost or amortized cost and there has been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both timing and amount, an other-than-temporary impairment charge is recognized.  Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. Projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral.  In addition, we consider our intent and ability to retain a temporarily depressed security until recovery.

Securities not subject to EITF Issue No. 99-20 that are in an unrealized loss position, are reviewed at least quarterly to determine if an other-than-temporary impairment is present based on certain quantitative and qualitative factors.  We consider a number of factors in determining whether the impairment is other-than-temporary.  These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) the intent and ability to hold the investment until recovery, 5) the time period during which the decline has occurred, 6) an economic analysis of the issuer’s industry, and 7) the financial strength, liquidity, and recoverability of the issuer.  Management performs a security-by-security review each quarter in evaluating the need for any other-than-temporary impairments.  Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures that we consider.  Based on our analysis, during the three and nine months ended September 30, 2008, we concluded that approximately $202.6 million, excluding $20.0 million of Modco related impairments, and $282.6 million, excluding $20.0 million of Modco related impairments, respectively, of pretax unrealized losses were other-than-temporarily impaired. The impairments related to debt obligations and preferred stock holdings in Lehman Brothers and Washington Mutual, residential mortgage-backed securities collateralized by Alt-A mortgages, and preferred stock holdings in Fannie Mae and Freddie Mac, resulting in a charge to net realized investment losses.

Reinsurance - For each of our reinsurance contracts, we must determine if the contract provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. We must review all contractual features, particularly those that may limit the amount of insurance risk to which we are subject or features that delay the timely reimbursement of claims. If we determine that the possibility of a significant loss from insurance risk will occur only under remote circumstances, we record the contract under a deposit method of accounting with the net amount payable/receivable reflected in other reinsurance assets or liabilities on our consolidated balance sheets. Fees earned on the contracts are reflected as other revenues, as opposed to premiums, on our consolidated statements of income.

The balance of the reinsurance is due from a diverse group of reinsurers. The collectability of reinsurance is largely a function of the solvency of the individual reinsurers. We perform periodic credit reviews on our reinsurers, focusing on, among other things, financial capacity, stability, trends and commitment to the reinsurance business. We also require assets in trust, letters of credit or other acceptable collateral to support balances due from reinsurers not authorized to transact business in the applicable jurisdictions. Despite these measures, a reinsurer’s insolvency,

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inability or unwillingness to make payments under the terms of a reinsurance contract, could have a material adverse effect on our results of operations and financial condition.  As of September 30, 2008 our third-party reinsurance receivables amounted to $5.2 billion.  These amounts include ceded reserve balances and ceded benefit payments.

We account for reinsurance as required by FASB Statement No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts (“SFAS No. 113”).  In addition to SFAS No. 113, we rely on FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises (“SFAS No. 60”) and FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments (“SFAS No. 97”) as applicable. In accordance with those pronouncements, costs for reinsurance are amortized as a level percentage of premiums for SFAS No. 60 products and a level percentage of estimated gross profits for SFAS No. 97 products. Accordingly, ceded reserve and deferred acquisition cost balances are established using methodologies consistent with those used in establishing direct policyholder reserves and deferred acquisition costs.  Establishing these balances requires the use of various assumptions including investment returns, mortality, persistency, and expenses.  The assumptions made for establishing ceded reserves and ceded deferred acquisition costs are consistent with those used for establishing direct policyholder reserves and deferred acquisition costs.

Assumptions are also made regarding future reinsurance premium rates and allowance rates. Assumptions made for mortality, persistency, and expenses are consistent with those used for establishing direct policyholder reserves and deferred acquisition costs.  Assumptions made for future reinsurance premium and allowance rates are consistent with rates provided for in our various reinsurance agreements.  For certain of our reinsurance agreements, premium and allowance rates may be changed by reinsurers on a prospective basis, assuming certain contractual conditions are met (primarily that rates are changed for all companies with which the reinsurer has similar agreements).  We do not anticipate any changes to these rates and therefore, have assumed continuation of these non-guaranteed rates.  To the extent that future rates are modified, these assumptions would be revised and both current and future results would be affected. For products subject to SFAS No. 60, assumptions are not changed unless projected future revenues are expected to be less than future expenses. For products subject to SFAS No. 97, assumptions are periodically updated whenever actual experience and/or expectations for the future differ from that assumed.  When assumptions are updated, changes are reflected in the income statement as part of an “unlocking” process. For the nine months ended September 30, 2008, there were no changes to reinsurance premium and allowance rates that would require an update of assumptions and subsequent unlocking of balances under SFAS No. 97.

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RESULTS OF OPERATIONS

In the following discussion, segment operating income is defined as income before income tax excluding net realized investment gains and losses (net of the related amortization of deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”) and participating income from real estate ventures), and the cumulative effect of change in accounting principle.  Periodic settlements of derivatives associated with corporate debt and certain investments and annuity products are included in realized gains and losses but are considered part of segment operating income because the derivatives are used to mitigate risk in items affecting segment operating income.  Management believes that segment operating income provides relevant and useful information to investors, as it represents the basis on which the performance of our business is internally assessed.  Although the items excluded from segment operating income may be significant components in understanding and assessing our overall financial performance, management believes that segment operating income enhances an investor’s understanding of our results of operations by highlighting the income (loss) attributable to the normal, recurring operations of our business.  However, segment operating income should not be viewed as a substitute for accounting principles generally accepted in the United States of America (“U.S. GAAP”) net income.  In addition, our segment operating income measures may not be comparable to similarly titled measures reported by other companies.

The following table presents a summary of results and reconciles segment operating income to consolidated net income (loss):

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008			2007			Change		2008			2007			Change
	(Dollars In Thousands)
Segment Operating Income
Life Marketing	$	52,111		$	38,331		36.0	%	$	134,919		$	122,730		9.9	%
Acquisitions	33,021			30,375			8.7		101,111			93,438			8.2
Annuities	(375		)	5,934			n/m		9,989			17,289			(42.2	)
Stable Value Products	28,184			13,107			n/m		61,945			37,648			64.5
Asset Protection	5,161			7,527			(31.4	)	15,940			21,601			(26.2	)
Corporate and Other	(26,338		)	3,616			n/m		(49,319		)	4,284			n/m
Total segment operating income	91,764			98,890			(7.2	)	274,585			296,990			(7.5	)
Realized investment gains (losses) - investments(1)	(356,829		)	40,601					(498,533		)	(22,905		)
Realized investment gains (losses) - derivatives(2)	102,282			(51,200		)			172,232			29,635
Income tax expense	59,859			(28,067		)			21,539			(104,440		)
Net income (loss)	$	(102,924	)	$	60,224		n/m		$	(30,177	)	$	199,280		n/m
(1) Realized investment gains (losses) - investments	$	(357,532	)	$	40,645				$	(498,657	)	$	(13,978	)
Less: participating income from real estate ventures	—			—					—			6,857
Less: related amortization of DAC	(703		)	44					(124		)	2,070
	$	(356,829	)	$	40,601				$	(498,533	)	$	(22,905	)
(2) Realized investment gains (losses) - derivatives	$	91,938		$	(51,080	)			$	153,902		$	31,502
Less: settlements on certain interest rate swaps	41			(73		)			145			69
Less: derivative activity related to certain annuities	(10,385		)	193					(18,475		)	1,798
	$	102,282		$	(51,200	)			$	172,232		$	29,635

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Three Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007

The net loss for the three months ended September 30, 2008 included a $7.1 million, or 7.2%, decrease in segment operating income. The decrease was primarily related to a $30.0 million decrease in operating earnings in the Corporate and Other segment, a $6.3 million decrease in the Annuities segment, and a $2.4 million decrease in the Asset Protection segment.  These decreases were partially offset by a $15.1 million increase in operating earnings in the Stable Value segment, a $13.8 million increase in the Life Marketing segment, and a $2.6 million increase in the Acquisitions segment.  Changes in fair value related to the Corporate and Other trading portfolio and the Annuities segment reduced operating earnings by $18.8 million in the three months ended September 30, 2008.

We experienced net realized losses of $265.6 million during the three months ended September 30, 2008, versus $10.4 million for the same period of 2007. The losses realized during the three months ended September 30, 2008 were primarily caused by $202.4 million of other-than-temporary impairment charges related to debt obligations and preferred stock holdings in Lehman Brothers and Washington Mutual, residential mortgage-backed securities collateralized by Alt-A mortgages, and preferred stock holdings in Fannie Mae and Freddie Mac.  These losses were partially offset by mark-to-market gains of $105.6 million on embedded derivatives related to reinsurance arrangements.

·Life Marketing segment operating income was $52.1 million for the three months ended September 30, 2008, representing an increase of $13.8 million, or 36.0%, from the three months ended September 30, 2007.  The increase was primarily due to net favorable prospective unlocking of $8.8 million in the segment’s universal life and BOLI lines, higher investment income, and lower operating expenses. Investment income was higher due to increases in in-force volume and higher overall yields.

·Acquisitions segment operating income was $33.0 million and increased $2.6 million, or 8.7%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to lower operating expenses on the Chase Insurance Group block and improved mortality results, partially offset by expected runoff of the block of business.

·Annuities segment operating income decreased $6.3 million for the three months ended September 30, 2008, compared to the three months ended September 30, 2007, which included $4.8 million of negative fair value changes including $0.2 million on the equity indexed annuity product line and $4.6 million on embedded derivatives associated with the variable annuity guaranteed minimum withdrawal benefits (“GMWB”) rider related to current market conditions.  In addition, unfavorable mortality in the segment’s single premium immediate annuity (“SPIA”) block reduced earnings by $3.9 million. These decreases were partially offset by the continued growth of the single premium deferred annuity (“SPDA”) line which accounted for a $3.2 million increase in earnings.

·Stable Value Products segment operating income was $28.2 million and increased $15.1 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  The increase in operating earnings resulted from the combination of higher average balances, slightly higher asset yields, and lower liability costs. In addition, $3.0 million in other income was generated from the early retirement of a funding agreement backing a medium term note.  Lower liability costs resulted from the increased sales of attractively priced institutional funding agreements.  As a result, the operating spread increased 61 basis points to 170 basis points during the three months ended September 30, 2008, compared to an operating spread of 109 basis points during the three months ended September 30, 2007.

·Asset Protection segment operating income was $5.2 million, representing a decrease of $2.4 million, or 31.4%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  Service contract earnings declined $1.7 million, or 26.5%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to higher loss ratios in certain product lines and lower auto sales. Income from other products declined $1.0 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 due to higher legal expenses. Partially offsetting this loss was an increase in credit insurance earnings of $0.3 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.

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·Corporate and Other segment operating income decreased $30.0 million for the three months ended September 30, 2008, compared to the three months ended September 30, 2007, primarily due to $10.7 million of lower participating mortgage income and a $7.8 million decline in income from other investment income sources due to the current economic environment.  In addition, the segment experienced negative mark-to-market adjustments of $14.0 million on a $387.5 million portfolio of securities designated for trading acquired during the third quarter of 2008.

Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007

The net loss for the nine months ended September 30, 2008 included a $22.4 million, or 7.5%, decrease in segment operating income. The decrease was primarily related to a $53.6 million decrease in operating earnings in the Corporate and Other segment, a $7.3 million decrease in the Annuities segment, and a $5.7 million decrease in the Asset Protection segment.  These decreases were partially offset by a $24.3 million increase in operating earnings in the Stable Value segment, a $12.2 million increase in the Life Marketing segment, and a $7.7 million increase in the Acquisitions segment.  Changes in fair value related to the Corporate and Other trading portfolio and the Annuities segment reduced operating earnings by $22.8 million in the first nine months of 2008.

We experienced net realized losses of $344.8 million during the first nine months of 2008, versus net realized gains of $17.5 million in the first nine months of 2007. The losses realized during the nine months ended September 30, 2008 were primarily caused by $282.4 million of other-than-temporary impairment charges related to debt obligations and preferred stock holdings in Lehman Brothers and Washington Mutual, residential mortgage-backed securities collateralized by Alt-A mortgages, and preferred stock holdings in Fannie Mae and Freddie Mac.  These losses were partially offset by mark-to-market gains of $183.1 million on embedded derivatives related to reinsurance arrangements.

·Life Marketing segment operating income was $134.9 million for the nine months ended September 30, 2008, representing a increase of $12.2 million, or 9.9%, from the nine months ended September 30, 2007.  The increase was primarily related to favorable prospective unlocking of $8.8 million in the third quarter of 2008, higher investment income and lower operating expenses partly offset by less favorable mortality for the nine months ended September 30, 2008. Investment income increased despite the AXXX securitization transaction that occurred early in the third quarter of 2007 that transferred approximately $4 million per quarter of investment income to the Corporate and Other segment.

·Acquisitions segment operating income was $101.1 million and increased $7.7 million, or 8.2%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to lower operating expenses on the Chase Insurance Group block and improved mortality results, partially offset by expected runoff of the block of business.

·Annuities segment operating income was $10.0 million and declined $7.3 million, or 42.2%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, which included $8.8 million of negative fair value changes of $2.4 million on the equity indexed annuity product and $6.4 million on embedded derivatives associated with the variable annuity GMWB rider related to current market conditions.  Included in the mark-to-market adjustment is a SFAS No. 157 transition adjustment loss for the embedded derivative related to the variable annuity GMWB rider of $0.4 million before income taxes. In addition, unfavorable mortality in the segment’s SPIA block reduced earnings by $10.1 million. These items were partially offset by the continued growth of the SPDA line which accounted for a $6.1 million increase in operating income.

·Stable Value Products segment operating income was $61.9 million and increased $24.3 million, or 64.5%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.   The increase in operating earnings resulted from the combination of higher average balances, slightly higher asset yields, and lower liability costs. In addition, $3.0 million in other income was generated from the early retirement of a funding agreement backing a medium term note.  Lower liability costs resulted from the increased sales of attractively priced institutional funding agreements.  As a result, the operating spread increased 44 basis points to 145 basis points during the nine months ended September 30, 2008, compared to an operating spread of 101 basis points during the nine months ended September 30, 2007.

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·Asset Protection segment operating income was $15.9 million, representing a decrease of $5.7 million, or 26.2%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Earnings from other products declined $4.2 million, or 140.1%, due primarily to lower volume in the IPP line and higher legal expenses in the GAP and runoff lines. Service contract earnings declined $2.4 million, or 13.3%, for the nine months ended September 30, 2008 compared to the same period in 2007, primarily due to higher loss ratios in certain product lines and lower auto sales. Credit insurance earnings increased $0.9 million, or 101.6%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 resulted primarily from a decrease in legal expense.

·The Corporate and Other segment operating income declined $53.6 million for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, primarily due to lower participating mortgage income of $21.0 million and lower prepayment fee income of $6.5 million in the securities and mortgage investment portfolios, and an increase in general corporate overhead expense.  In addition, the segment experienced negative mark-to-market adjustments of $14.0 million on a $387.5 million portfolio of securities designated for trading acquired during the third quarter of 2008.

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Life Marketing

Segment results of operations

Segment results were as follows:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008			2007			Change		2008			2007			Change
	(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	372,674		$	360,450		3.4	%	$	1,109,264		$	1,067,759		3.9	%
Reinsurance ceded	(205,699		)	(203,285		)	1.2		(669,303		)	(650,601		)	2.9
Net premiums and policy fees	166,975			157,165			6.2		439,961			417,158			5.5
Net investment income	88,709			79,220			12.0		260,414			241,506			7.8
Other income	(118		)	638			n/m		742			1,199			(38.1	)
Total operating revenues	255,566			237,023			7.8		701,117			659,863			6.3
BENEFITS AND EXPENSES
Benefits and settlement expenses	212,201			182,010			16.6		551,840			483,486			14.1
Amortization of deferred policy acquisition costs	5,009			27,807			(82.0	)	59,166			82,069			(27.9	)
Other operating expenses	(13,755		)	(11,125		)	23.6		(44,808		)	(28,422		)	57.7
Total benefits and expenses	203,455			198,692			2.4		566,198			537,133			5.4
OPERATING INCOME	52,111			38,331			36.0		134,919			122,730			9.9
INCOME BEFORE INCOME TAX	$	52,111		$	38,331		36.0		$	134,919		$	122,730		9.9

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The following table summarizes key data for the Life Marketing segment:

	Three Months Ended							Nine Months Ended
	September 30,							September 30,
	2008			2007		Change		2008		2007		Change
	(Dollars In Thousands)
Sales By Product
Traditional	$	23,039		$	36,326	(36.6	)%	$	76,928	$	113,773	(32.4	)%
Universal life	11,092			24,761		(55.2	)	38,336		57,473		(33.3	)
Variable universal life	1,222			1,826		(33.1	)	4,505		5,835		(22.8	)
	$	35,353		$	62,913	(43.8	)	$	119,769	$	177,081	(32.4	)
Sales By Distribution Channel
Brokerage general agents	$	20,805		$	35,919	(42.1	)	$	68,746	$	107,008	(35.8	)
Independent agents	7,403			11,461		(35.4	)	25,586		30,418		(15.9	)
Stockbrokers / banks	6,587			9,651		(31.7	)	22,341		27,596		(19.0	)
BOLI / other	558			5,882		(90.5	)	3,096		12,059		(74.3	)
	$	35,353		$	62,913	(43.8	)	$	119,769	$	177,081	(32.4	)
Average Life Insurance In-force(1)
Traditional	$	477,021,367		$	441,839,831	8.0		$	470,876,402	$	425,693,626	10.6
Universal life	52,655,080			53,841,008		(2.2	)	52,731,566		52,466,246		0.5
	$	529,676,447		$	495,680,839	6.9		$	523,607,968	$	478,159,872	9.5
Average Account Values
Universal life	$	5,297,640		$	5,053,316	4.8		$	5,250,215	$	4,957,023	5.9
Variable universal life	311,716			349,300		(10.8	)	324,647		331,608		(2.1	)
	$	5,609,356		$	5,402,616	3.8		$	5,574,862	$	5,288,631	5.4
Traditional Life Mortality Experience(2)	$	(53	)	$	1,511			$	866	$	3,716
Universal Life Mortality Experience(2)	$	2,005		$	234			$	3,651	$	1,139

(1)

Amounts are not adjusted for reinsurance ceded.

(2)

Represents the estimated pretax earnings impact resulting from mortality variances. We periodically review and update as appropriate our key assumptions in calculating mortality. Changes to these assumptions result in adjustments which may increase or decrease previously reported mortality amounts. Excludes results related to the Chase Insurance Group which was acquired in the third quarter of 2006 and excludes results related to the BOLI product line.

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Operating expenses detail

Other operating expenses for the segment were as follows:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008			2007			Change		2008			2007			Change
	(Dollars In Thousands)
Insurance Companies:
First year commissions	$	43,998		$	69,863		(37.0	)%	$	147,208		$	198,715		(25.9	)%
Renewal commissions	9,660			8,988			7.5		28,225			27,092			4.2
First year ceding allowances	(4,234		)	(4,731		)	(10.5	)	(14,810		)	(13,575		)	9.1
Renewal ceding allowances	(52,713		)	(54,497		)	(3.3	)	(166,149		)	(167,092		)	(0.6	)
General & administrative	36,667			43,759			(16.2	)	117,349			136,616			(14.1	)
Taxes, licenses and fees	7,659			8,493			(9.8	)	22,391			24,666			(9.2	)
Other operating expenses incurred	41,037			71,875			(42.9	)	134,214			206,422			(35.0	)
Less commissions, allowances & expenses capitalized	(54,792		)	(83,007		)	(34.0	)	(179,022		)	(235,161		)	(23.9	)
Other operating expenses	(13,755		)	(11,132		)	23.6		(44,808		)	(28,739		)	55.9
Marketing Companies:
Other operating expenses	—			7			n/m		—			317			n/m
Other operating expenses	—			7			n/m		—			317			n/m
Other operating expenses	$	(13,755	)	$	(11,125	)	23.6		$	(44,808	)	$	(28,422	)	57.7

Three Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007

Segment operating income

Operating income was $52.1 million for the three months ended September 30, 2008, representing an increase of $13.8 million, or 36.0%, from the three months ended September 30, 2007.  The increase was primarily due to net favorable prospective unlocking of $8.8 million in the segment’s universal life and BOLI lines, higher investment income, and lower operating expenses.  Investment income was higher due to increases in in-force volume and higher overall yields.

Operating revenues

Total revenues for the three months ended September 30, 2008 increased $18.5 million, or 7.8%, compared to the three months ended September 30, 2007. This increase was the result of higher premiums and policy fees in the segment’s traditional line and higher investment income due to increases in in-force volume and higher overall yields.

Net premiums and policy fees

Net premiums and policy fees increased by $9.8 million, or 6.2%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to an increase in retention levels on certain traditional life products. Beginning in the third quarter of 2005, we reduced our reliance on reinsurance by changing from coinsurance to yearly renewable term reinsurance agreements and increased the maximum amount retained on any one life from $500,000 to $1,000,000 on certain of our newly written traditional life products (products written during the third quarter of 2005 and later.)  In addition to increasing net premiums, this change results in higher benefits and settlement expenses, and causes greater variability in financial results due to fluctuations in mortality results.  Our maximum retention level for newly issued universal life products is generally $1,000,000.  During 2008, we increased our retention limit to $2,000,000 on certain of our traditional life products.

39

Net investment income

Net investment income in the segment increased $9.5 million, or 12.0%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  The increase reflects the growth related to increases in in-force volume and higher overall yields.

Other income

Other income decreased $0.8 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  The decrease relates to fluctuations in variable universal life revenues.

Benefits and settlement expenses

Benefits and settlement expenses were $30.2 million, or 16.6%, higher for the three months ended September 30, 2008 than for the three months ended September 30, 2007, due to growth in life insurance in-force, increased retention levels on certain newly written traditional life products and higher credited interest on UL products resulting from increases in account values. Changes to assumptions, from our annual DAC unlocking process, resulted in an adjustment which increased the benefits and settlements expense by $14.4 million this quarter, which was offset by the decrease of $23.2 million in the DAC amortization line. The estimated mortality impact to earnings, related to traditional and universal life products, for the three months ended September 30, 2008 was favorable by $2.0 million, and was approximately $0.2 million more favorable than the estimated mortality impact on earnings for the three months ended September 30, 2007.

Amortization of DAC

DAC amortization decreased $22.8 million, or 82.0%, for the three months ended September 30, 2008 compared to the three months ending September 30, 2007. We periodically review and update as appropriate our key assumptions including future mortality, expenses, lapses, premium persistency, investment yields and interest spreads. Changes to these assumptions result in adjustments which increase or decrease DAC amortization. The periodic review and updating of assumptions is referred to as “unlocking”. DAC amortization for the Life Marketing segment was reduced by $23.2 million during the third quarter of 2008 primarily due to favorable DAC unlocking in the universal life, partially offset by unfavorable unlocking in BOLI.

Other operating expenses

Other operating expenses decreased $2.6 million, or 23.6%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  This decrease related to reduced administrative expenses in our insurance operations.

Sales

Sales for the segment decreased $27.6 million, or 43.8%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, due to a decline in sales across product lines. Lower sales levels of traditional products were primarily the result of pricing changes implemented on certain of our products at the beginning of 2008 and less favorable market conditions. Universal life sales declined $13.7 million, or 55.2%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to competitive pressures in the brokerage general agent, independent general agent, stockbroker channels, and less favorable market conditions. In addition, BOLI sales are subject to significant fluctuation and were $5.3 million lower in the quarter ending September 30, 2008 compared to the quarter ending September 30, 2007.

40

Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007

Segment operating income

Operating income was $134.9 million for the nine months ended September 30, 2008, representing an increase of $12.2 million, or 9.9%, compared to the nine months ended September 30, 2007.  The increase was primarily due to favorable prospective unlocking of $8.8 million in the third quarter of 2008, higher investment income and lower operating expenses offset by less favorable mortality for the nine months ended September 30, 2008. Investment income increased despite the AXXX securitization transaction that occurred early in the third quarter of 2007 that transferred approximately $4 million per quarter of investment income to the Corporate and Other segment.

Operating revenues

Total revenues for the nine months ended September 30, 2008 increased $41.3 million, or 6.3%, compared to the nine months ended September 30, 2007.  This increase was the result of higher premiums and policy fees in the segment’s traditional line and higher investment income due to increases in in-force volume and higher overall yields. Investment income increased despite the approximately $4 million per quarter reduction of investment income related to the AXXX securitization transaction, beginning with the third quarter of 2007.

Net premiums and policy fees

Net premiums and policy fees increased $22.8 million, or 5.5%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. The increase was primarily due to the previously mentioned increase in retention limits on certain traditional life products.

Net investment income

Net investment income in the segment increased $18.9 million, or 7.8%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  The increase reflects the growth of the segment assets caused by growth related to traditional and universal life liabilities, partly offset by a decrease due to the funding of statutory reserves required by Regulation XXX, as clarified by AXXX.  Our AXXX securitization transaction on universal life products was effective early in the third quarter of 2007.  See the “Recent Developments” section for additional information concerning AXXX requirements.

Other income

Other income decreased $0.5 million, or 38.1%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 due to fluctuations in variable universal life revenues.

Benefits and settlement expenses

Benefits and settlement expenses increased $68.4 million, or 14.1%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, due to growth in life insurance in-force, increased retention levels on certain newly written traditional life products and higher credited interest on UL products resulting from increases in account values. Changes to assumptions, from our annual DAC unlocking process, resulted in an adjustment which increased the benefits and settlements expense by $14.4 million this quarter, which was offset by the decrease of $23.2 million in the DAC amortization line. The estimated mortality impact to earnings, related to traditional and universal life products, for the nine months ended September 30, 2008 was favorable by $4.5 million, and was approximately $0.3 million less favorable than the estimated mortality impact on earnings for the nine months ended September 30, 2007.

41

Amortization of DAC

DAC amortization decreased $22.9 million, or 27.9%, for the nine months ended September 30, 2008 compared to the nine months ending September 30, 2007. DAC amortization for the Life Marketing segment was reduced by $23.2 million during the third quarter of 2008 primarily due to favorable DAC unlocking in UL, partially offset by unfavorable unlocking in BOLI.

Other operating expenses

Other operating expenses decreased $16.4 million, or 57.7%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  This decrease primarily related to reduced administrative expenses in our insurance operations.

Sales

Sales for the segment decreased $57.3 million, or 32.4%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, due to a decline in sales across all product lines. Lower sales levels of traditional products were primarily the result of pricing changes implemented on certain of our products at the beginning of 2008.  Universal life sales declined $19.1 million, or 33.3%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to competitive pressures in the brokerage general agent, independent general agent and stockbroker channels. In addition, BOLI sales are subject to significant fluctuation and were $9.0 million lower in the nine months ending September 30, 2008 compared to the nine months ending September 30, 2007.

Reinsurance

Currently, the Life Marketing segment reinsures significant amounts of its life insurance in-force.  Pursuant to the underlying reinsurance contracts, reinsurers pay allowances to the segment as a percentage of both first year and renewal premiums.  Reinsurance allowances represent the amount the reinsurer is willing to pay for reimbursement of acquisition costs incurred by the direct writer of the business.  A portion of reinsurance allowances received is deferred as part of DAC and a portion is recognized immediately as a reduction of other operating expenses. As the non-deferred portion of allowances reduces operating expenses in the period received, these amounts represent a net increase to operating income during that period.

Reinsurance allowances do not affect the methodology used to amortize DAC or the period over which such DAC is amortized. However, they do affect the amounts recognized as DAC amortization. DAC on FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments (“SFAS No. 97”) is amortized based on the estimated gross profits of the policies in-force. Reinsurance allowances are considered in the determination of estimated gross profits, and therefore impact SFAS No. 97 DAC amortization.  Deferred reinsurance allowances on FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises (“SFAS No. 60”) policies are recorded as ceded DAC, which is amortized over estimated ceded premiums of the policies in force.  Thus, deferred reinsurance allowances on SFAS No. 60 policies impact SFAS No. 60 DAC amortization.  A more detailed discussion of the accounting for reinsurance allowances can be found in the Reinsurance section of Note 1, Basis of Presentation and Summary of Significant Accounting Policies.

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Impact of reinsurance

Reinsurance impacted the Life Marketing segment line items as shown in the following table:

Life Marketing Segment

Line Item Impact of Reinsurance

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(205,699	)	$	(203,285	)	$	(669,303	)	$	(650,601	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(184,567		)	(244,465		)	(709,321		)	(703,608		)
Amortization of deferred policy acquisition costs	(12,430		)	(13,610		)	(32,528		)	(49,302		)
Other operating expenses	(33,661		)	(33,611		)	(104,531		)	(100,239		)
Total benefits and expenses	(230,658		)	(291,686		)	(846,380		)	(853,149		)
NET IMPACT OF REINSURANCE (2)	$	24,959		$	88,401		$	177,077		$	202,548
Allowances received	$	(56,947	)	$	(59,228	)	$	(180,958	)	$	(180,667	)
Less: Amount deferred	23,286			25,617			76,427			80,428
Allowances recognized (ceded other operating expenses) (1)
	$	(33,661	)	$	(33,611	)	$	(104,531	)	$	(100,239	)

(1)	Other operating expenses ceded per the income statement are equal to reinsurance allowances recognized after capitalization.
(2)	Assumes no investment income on reinsurance. Foregone investment income would substantially reduce the favorable impact of reinsurance. The Company estimates that the impact of foregone investment income would reduce the net impact of reinsurance by 80% to 120%.

The table above does not reflect the impact of reinsurance on our net investment income.  By ceding business to the assuming companies, we forgo investment income on the reserves ceded.  Conversely, the assuming companies will receive investment income on the reserves assumed which will increase the assuming companies’ profitability on the business we cede.  The net investment income impact to us and the assuming companies has not been quantified.  The impact of including foregone investment income would be to substantially reduce the favorable net impact of reinsurance reflected above. We estimate that the impact of foregone investment income would be to reduce the net impact of reinsurance presented in the table above by 80% to 120%.  The Life Marketing segment’s reinsurance programs do not materially impact the “other income” line of our income statement.

As shown above, reinsurance had a favorable impact on the Life Marketing segment’s operating income for the periods presented above. The impact of reinsurance is largely due to our quota share coinsurance program in place prior to mid-2005. Under that program, 90% of the segment’s traditional new business was ceded to reinsurers. Since mid-2005, a much smaller percentage of overall term business was ceded due to our change in reinsurance strategy on traditional business discussed previously. As a result of that change, the relative impact of reinsurance on the Life Marketing segment’s overall results is expected to decrease over time. While the significance of reinsurance is expected to decline over time, the overall impact of reinsurance for a given year may fluctuate due to variations in mortality and unlocking of balances under SFAS No. 97.

43

Premiums and policy fees ceded had been rising over a number of years with increases in our in-force blocks of traditional and universal life business. Beginning in mid-2005, we changed our reinsurance approach in our traditional life product lines. Instead of generally ceding 90% of new business issued before that date, we began purchasing yearly renewable term on risks in excess of $1 million (now increased to $2 million). This had the effect of reducing reinsurance on new policies issued. The increase in ceded premiums above for the three and nine months ending September 30, 2008 compared to the same periods in 2007, was caused primarily by growth in ceded universal life premiums and policy fees of $9.1 million and $29.5 million, respectively.

Ceded benefits were lower for the three months ending September 30, 2008 compared to the three months ending September 30, 2007, primarily due to lower ceded claims. Ceded benefits and settlement expenses increased for the first nine months of 2008 compared to the first nine months of 2007 primarily due to higher death benefits ceded. Traditional ceded benefits decreased $108.9 million for the three months ending September 30, 2008 compared to the three months ending September 30, 2007 and $79.7 million for the nine months ending September 30, 2008 compared to the nine months ending September 30, 2007 primarily due to lower death benefits. Universal life ceded benefits increased $48.5 million for the three months ending September 30, 2008 compared to the three months ending September 30, 2007 and $85.1 million for the nine months ending September 30, 2008 compared to the nine months ending September 30, 2007 due to higher ceded claims, higher change in ceded reserves associated with growth in the business throughout the year and unlocking in the third quarter of 2008. Ceded universal life claims were $16.7 million higher for the nine months ending September 30, 2008 compared to the nine months ending September 30, 2007. Ceded benefits and settlement expenses will fluctuate over time, largely as a function of the segment’s overall variations in death benefits incurred.

Ceded amortization of deferred policy acquisitions costs decreased for the three months and nine months ending September 30, 2008 compared to 2007. In the first nine months of the year, ceded amortization decreased primarily due to the impact of higher ceded universal life claims on amortization in the first six months of 2008. For the three months ending September 30, 2008, traditional ceded amortization decreased as a result of system refinements which were largely offset by direct amortization. This was partially offset by increased ceded amortization in universal life as a result of unlocking.

Ceded other operating expenses are based on allowances received from reinsurers. Total allowances received in the first nine months of 2008 increased slightly from 2007 as increases associated with growth in the universal life line more than offset decreases associated with the change in our term life reinsurance strategy. Term allowances have decreased since mid-2005 as new YRT reinsurance replaces the 90% coinsured business. For the three months ending September 30, 2008 allowances received decreased relative to the same period in 2007.

44

Acquisitions

Segment results of operations

Segment results were as follows:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008			2007			Change		2008			2007			Change
	(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	188,377		$	198,381		(5.0	)%	$	573,385		$	607,327		(5.6	)%
Reinsurance ceded	(120,785		)	(122,347		)	(1.3	)	(361,627		)	(377,959		)	(4.3	)
Net premiums and policy fees	67,592			76,034			(11.1	)	211,758			229,368			(7.7	)
Net investment income	132,177			143,342			(7.8	)	402,872			437,591			(7.9	)
Other income	1,605			2,405			(33.3	)	4,873			7,178			(32.1	)
Total operating revenues	201,374			221,781			(9.2	)	619,503			674,137			(8.1	)
Realized gains (losses) - investments	(146,976		)	38,431					(233,617		)	(22,852		)
Realized gains (losses) - derivatives	106,974			(38,782		)			182,063			29,297
Total revenues	161,372			221,430					567,949			680,582
BENEFITS AND EXPENSES
Benefits and settlement expenses	145,153			162,460			(10.7	)	442,374			482,648			(8.3	)
Amortization of deferred policy acquisition
costs and value of business acquired	17,181			18,174			(5.5	)	56,195			57,322			(2.0	)
Other operating expenses	6,019			10,772			(44.1	)	19,823			40,729			(51.3	)
Operating benefits and expenses	168,353			191,406			(12.0	)	518,392			580,699			(10.7	)
Amortization of DAC / VOBA related to realized gains (losses) - investments	(1,776		)	261					(1,217		)	1,644
Total benefits and expenses	166,577			191,667			(13.1	)	517,175			582,343			(11.2	)
INCOME (LOSS) BEFORE INCOME TAX	(5,205		)	29,763			n/m		50,774			98,239			(48.3	)
Less: realized gains (losses)	(40,002		)	(351		)			(51,554		)	6,445
Less: related amortization of DAC	1,776			(261		)			1,217			(1,644		)
OPERATING INCOME	$	33,021		$	30,375		8.7		$	101,111		$	93,438		8.2

45

The following table summarizes key data for the Acquisitions segment:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008			2007			Change		2008			2007			Change
	(Dollars In Thousands)
Average Life Insurance In-Force(1)
Traditional	$	209,689,391		$	222,737,352		(5.9	)%	$	212,738,876		$	226,590,005		(6.1	)%
Universal life	29,917,476			31,727,526			(5.7	)	30,370,782			32,026,221			(5.2	)
	$	239,606,867		$	254,464,878		(5.8	)	$	243,109,658		$	258,616,226		(6.0	)
Average Account Values
Universal life	$	2,933,971		$	3,019,429		(2.8	)	$	2,956,324		$	3,042,683		(2.8	)
Fixed annuity(2)	4,350,521			4,853,211			(10.4	)	4,518,949			5,016,594			(9.9	)
Variable annuity	169,418			205,556			(17.6	)	181,767			173,704			4.6
	$	7,453,910		$	8,078,196		(7.7	)	$	7,657,040		$	8,232,981		(7.0	)
Interest Spread - UL & Fixed Annuities
Net investment income yield(4)	6.05		%	6.23		%			6.04		%	6.25		%
Interest credited to policyholders	4.10			4.11					4.11			4.10
Interest spread	1.95		%	2.12		%			1.93		%	2.15		%
Mortality Experience(3)	$	1,938		$	1,608				$	3,184		$	1,654

(1)	Amounts are not adjusted for reinsurance ceded.
(2)	Includes general account balances held within variable annuity products and is net of coinsurance ceded.
(3)	Represents the estimated pretax earnings impact resulting from mortality variance to pricing. Excludes results related to the Chase Insurance Group which was acquired in the third quarter of 2006.
(4)	Includes available-for-sale and trading portfolios. Available-for-sale portfolio yields were 6.37% and 6.33%, respectively, for the three and nine months ended September 30, 2008 compared to 6.27% and 6.24%, respectively, for the same periods ended September 30, 2007.

Three Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007

Segment operating income

Operating income increased $2.6 million, or 8.7%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to lower operating expenses on the Chase Insurance Group block and improved mortality results, partially offset by expected runoff of the block of business.

Revenues

Net premiums and policy fees decreased $8.4 million, or 11.1%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to the runoff of the acquired blocks.  Investment income decreased $11.2 million, or 7.8%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to a decline in annuity account values in the Chase Insurance Group block, resulting in a reduction of invested assets and lower investment income.

Benefits and expenses

Total benefits and expenses decreased $25.1 million, or 13.1%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  The decrease related primarily to the runoff of the acquired blocks, fluctuations in mortality, and lower operating expenses.

46

Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007

Segment operating income

Operating income increased $7.7 million, or 8.2%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to lower operating expenses on the Chase Insurance Group block and improved mortality results, partially offset by expected runoff of the block of business.

Revenues

Net premiums and policy fees decreased $17.6 million, or 7.7%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to expected runoff.  Investment income decreased $34.7 million, or 7.9%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to the runoff of the remaining acquired blocks, particularly a decline in annuity account values in the Chase Insurance block.

Benefits and expenses

Total benefits and expenses decreased $65.2 million, or 11.2%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  The decrease related primarily to the runoff of the business, fluctuations in mortality, and lower operating expenses.

Reinsurance

The Acquisitions segment currently reinsures portions of both its life and annuity in-force.  The impact of reinsurance on the segment’s income statement is reflected in the chart shown below.  A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 1, Basis of Presentation and Summary of Significant Accounting Policies.

Impact of reinsurance

Reinsurance impacted the Acquisitions segment line items as shown in the following table:

Acquisitions Segment

Line Item Impact of Reinsurance

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(120,785	)	$	(122,347	)	$	(361,627	)	$	(377,959	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(101,965		)	(76,788		)	(306,478		)	(316,915		)
Amortization of deferred policy acquisition costs	(2,081		)	(10,010		)	(17,995		)	(13,448		)
Other operating expenses	(18,199		)	(32,496		)	(53,064		)	(84,061		)
Total benefits and expenses	(122,245		)	(119,294		)	(377,537		)	(414,424		)
NET IMPACT OF REINSURANCE	$	1,460		$	(3,053	)	$	15,910		$	36,465

The segment’s reinsurance programs do not materially impact the other income line of the income statement. In addition, net investment income generally has no direct impact on reinsurance cost. However, it should be noted that by ceding business to the assuming companies, we forgo investment income on the reserves ceded to the assuming companies. Conversely, the assuming companies will receive investment income on the reserves assumed which will increase the assuming companies’ profitability on business assumed from the Company. For business ceded under modified coinsurance arrangements, the amount of investment income attributable to the

47

assuming company is included as part of the overall change in policy reserves and, as such, is reflected in benefit and settlement expenses. The net investment income impact to the Company and the assuming companies has not been quantified as it is not fully reflected in our consolidated financial statements.

The net impact of reinsurance increased $4.5 million, or 147.8%, and decreased $20.6 million, or 56.4%, for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007, as a result of fluctuations in ceded claim volume, amortization of deferred acquisition costs related to the claim fluctuations, and expenses ceded to reinsurers involved with the Chase Insurance Group acquisition.

48

Annuities

Segment results of operations

Segment results were as follows:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008			2007			Change		2008			2007			Change
	(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	7,885		$	8,481		(7.0	)%	$	24,525		$	25,376		(3.4	)%
Reinsurance ceded	—			—					—			—
Net premiums and policy fees	7,885			8,481			(7.0	)	24,525			25,376			(3.4	)
Net investment income	89,740			69,301			29.5		252,007			195,026			29.2
Realized gains (losses) - derivatives	(10,385		)	193					(18,475		)	1,798
Other income	2,801			2,252			24.4		7,926			6,794			16.7
Total operating revenues	90,041			80,227			12.2		265,983			228,994			16.2
Realized gains (losses) - investments	(14,419		)	(266		)			(13,304		)	1,451
Total revenues	75,622			79,961					252,679			230,445
BENEFITS AND EXPENSES
Benefits and settlement expenses	81,441			62,731			29.8		220,699			174,781			26.3
Amortization of deferred policy acquisition costs and value of business acquired	1,961			5,239			(62.6	)	15,081			19,633			(23.2	)
Other operating expenses	7,014			6,323			10.9		20,214			17,291			16.9
Operating benefits and expenses	90,416			74,293			21.7		255,994			211,705			20.9
Amortization of DAC / VOBA related to realized gains (losses) - investments	1,073			(217		)			1,093			426
Total benefits and expenses	91,489			74,076			23.5		257,087			212,131			21.2
INCOME (LOSS) BEFORE INCOME TAX	(15,867		)	5,885			n/m		(4,408		)	18,314			n/m
Less: realized gains (losses)	(14,419		)	(266		)			(13,304		)	1,451
Less: related amortization of DAC	(1,073		)	217					(1,093		)	(426		)
OPERATING INCOME (LOSS)	$	(375	)	$	5,934		n/m		$	9,989		$	17,289		(42.2	)

49

The following table summarizes key data for the Annuities segment:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008			2007			Change		2008			2007			Change
	(Dollars In Thousands)
Sales
Fixed annuity	$	339,785		$	363,694		(6.6	)%	$	1,295,821		$	905,439		43.1	%
Variable annuity	132,374			147,275			(10.1	)	340,614			349,520			(2.5	)
	$	472,159		$	510,969		(7.6	)	$	1,636,435		$	1,254,959		30.4
Average Account Values
Fixed annuity(1)	$	5,796,717		$	4,566,357		26.9		$	5,448,717		$	4,283,865		27.2
Variable annuity	2,419,949			2,674,634			(9.5	)	2,523,281			2,653,235			(4.9	)
	$	8,216,666		$	7,240,991		13.5		$	7,971,998		$	6,937,100		14.9
Interest Spread - Fixed Annuities(2)
Net investment income yield	6.12		%	6.01		%			6.11		%	5.99		%
Interest credited to policyholders	4.89			5.39					4.96			5.38
Interest spread	1.23		%	0.62		%			1.15		%	0.61		%

	As of
	September 30,
	2008		2007		Change
	(Dollars In Thousands)
GMDB - Net amount at risk(3)	$	438,694	$	—	n/m	%
GMDB - Reserves	—		2,176		n/m
Account value subject to GMWB rider	286,589		77,882		n/m
S&P 500® Index	1,165		1,527		(23.7	)

(1) Includes general account balances held within variable annuity products.

(2) Interest spread on average general account values.

(3) Guaranteed death benefits in excess of contract holder account balance.

Three Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007

Segment operating income (loss)

Operating income decreased $6.3 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, which included $4.8 million of negative fair value changes including $0.2 million on the equity indexed annuity product and $4.6 million on embedded derivatives associated with the variable annuity GMWB rider related to current market conditions.  In addition, unfavorable mortality in the segment’s SPIA block reduced earnings by $3.9 million. These decreases were partially offset by the continued growth of the SPDA line which accounted for a $3.2 million increase in earnings.

Operating revenues

Segment operating revenues increased $9.8 million, or 12.2%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to an increase in net investment income.  Average account balances grew 13.5% in the three months ended September 30, 2008, resulting in higher investment income.  The additional income resulting from the larger account balances was partially reduced in the three months ended September 30, 2008 by losses on derivatives.  The segment continually monitors and adjusts credited rates as appropriate in an effort to maintain and/or improve its interest spread.

Benefits and expenses

Operating benefits and expenses increased $16.1 million, or 21.7%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  This increase was primarily the result of higher credited interest and unfavorable SPIA mortality fluctuations.  Mortality was unfavorable by $6.5 million in the

50

three months ended September 30, 2008 compared to unfavorable mortality of $2.6 million in the three months ended September 30, 2007, an unfavorable change of $3.9 million.  The unfavorable mortality variances primarily relate to sales of large SPIA cases.  These amounts were partially offset by a favorable change of $2.7 million in unlocking of the unearned premium reserve for the three months ended September 30, 2008.  Unfavorable unearned premium reserve unlocking of $0.2 million was recorded by the segment during the three months ended September 30, 2007.

Amortization of DAC

The decrease in DAC amortization (not related to realized capital gains and losses) for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 was primarily due to fair value losses on the variable annuity line. This was offset by higher DAC amortization in other annuity lines of business. We periodically review and update as appropriate our key assumptions including future mortality, expenses, lapses, premium persistency, investment yields and interest spreads.  Changes to these assumptions result in adjustments which increase or decrease DAC amortization.  The periodic review and updating of assumptions is referred to as “unlocking”.  DAC amortization for the Annuities segment increased by $1.1 million primarily due to favorable DAC unlocking of $6.9 million in the market value adjusted (“MVA”) annuity line and $0.8 million of favorable unlocking in the SPDA line, which were partially offset by unfavorable unlocking of $8.8 million in the variable annuity line. Favorable DAC unlocking of $0.9 million was recorded by the segment during the three months ended September 30, 2007.

Sales

Total sales decreased $38.8 million, or 7.6%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  Sales of fixed annuities decreased $23.9 million, or 6.6%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  The decrease in fixed annuity sales was driven by reduced sales in the SPDA and immediate annuity lines and was partially offset by increased sales in the MVA annuity products. The decrease in SPIA and SPDA sales reflects our interest rate positioning in the third quarter of 2008 versus strong competitor pricing in the bank and agent channel. MVA sales continued to be strong in the first part of the three months ended September 30, 2008 due to the higher interest rate environment. The continuation of new annuity sales through the Chase distribution system contributed $58.3 million in fixed annuity sales in the three months ended September 30, 2008 compared to $130.3 million for the three months ended September 30, 2007.  Sales of variable annuities decreased $14.9 million, or 10.1%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 primarily due to weaker demand caused by current unfavorable equity markets.

Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007

Segment operating income

Operating income declined $7.3 million, or 42.2%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, which included $8.8 million of negative fair value changes of $2.4 million on the equity indexed annuity product and $6.4 million on embedded derivatives associated with the variable annuity GMWB rider related to current market conditions.  Included in the mark-to-market adjustment is a SFAS No. 157 transition adjustment loss for the embedded derivative related to the variable annuity GMWB rider of $0.4 million before income taxes. In addition, unfavorable mortality in the segment’s SPIA block reduced earnings by $10.1 million. These items were partially offset by the continued growth of the SPDA line which accounted for a $6.1 million increase in operating income.

Operating revenues

Segment operating revenues increased $37.0 million, or 16.2%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to an increase in net investment income.  Average account balances grew 14.9% for the nine months ended September 30, 2008, resulting in higher investment income.  The additional income resulting from the larger account balances was partially reduced in the first nine months of 2008 by losses on derivatives related to the GMWB rider caused by current unfavorable market conditions.

51

Benefits and expenses

Operating benefits and expenses increased $44.3 million, or 20.9%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  This increase was primarily the result of higher credited interest and unfavorable mortality fluctuations.  Mortality was unfavorable by $17.7 million for the nine months ended September 30, 2008 compared to unfavorable mortality of $7.6 million for the nine months ended September 30, 2007, an unfavorable change of $10.1 million.  The unfavorable mortality variances primarily relate to the sales of large SPIA cases previously mentioned.  These amounts are partially offset by a favorable change of $2.7 million in unlocking of the unearned premium reserve for the nine months ended September 30, 2008.  Unfavorable unearned premium reserve unlocking of $0.2 million was recorded by the segment during the nine months ended September 30, 2007.

Amortization of DAC

The decrease in DAC amortization (not related to realized capital gains and losses) for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 was primarily due to fair value losses on the variable annuity line. This was offset by higher DAC amortization in other annuity lines of business. For the nine months ended September 30, 2008, DAC amortization for the Annuities segment was reduced by $0.2 million primarily due to unfavorable DAC unlocking of $8.8 million in the variable annuity line, which was partially offset by favorable DAC unlocking of $7.7 million in the MVA annuity line and $0.9 million of favorable unlocking in the SPDA line.  Favorable DAC unlocking of $2.5 million was recorded by the segment during the nine months ended September 30, 2007.

Sales

Total sales increased $381.5 million, or 30.4%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  Sales of fixed annuities increased $390.4 million, or 43.1%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  The increase in fixed annuity sales was primarily due to strong sales in the SPIA, SPDA, and MVA annuity products, as well as our continued efforts to increase wholesale distribution. The increase in sales for MVA and SPDA was due to an environment of higher interest rates versus 2007 and a more volatile equity market for most of 2008. The increase in SPIA was due to institutional sales in early 2008 which did not occur in 2007. The continuation of new annuity sales through the Chase distribution system contributed $325.7 million in fixed annuity sales for the nine months ended September 30, 2008 compared to $314.5 million for nine months ended September 30, 2007.  Sales of variable annuities decreased $8.9 million, or 2.5%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to weaker demand caused by current unfavorable equity markets.

52

Stable Value Products

Segment results of operations

Segment results were as follows:

	Three Months Ended							Nine Months Ended
	September 30,							September 30,
	2008		2007			Change		2008		2007		Change
	(Dollars In Thousands)
REVENUES
Net investment income	$	88,254	$	73,501		20.1	%	$	244,362	$	224,080	9.1	%
Other income	3,000		—					3,000		—
Realized gains (losses)	4,984		(333		)			12,240		509
Total revenues	96,238		73,168			31.5		259,602		224,589		15.6
BENEFITS AND EXPENSES
Benefits and settlement expenses	60,128		58,340			3.1		177,542		180,156		(1.5	)
Amortization of deferred policy acquisition costs	1,211		985			22.9		3,373		3,140		7.4
Other operating expenses	1,731		1,069			61.9		4,502		3,136		43.6
Total benefits and expenses	63,070		60,394			4.4		185,417		186,432		(0.5	)
INCOME BEFORE INCOME TAX	33,168		12,774			n/m		74,185		38,157		94.4
Less: realized gains (losses)	4,984		(333		)			12,240		509
OPERATING INCOME	$	28,184	$	13,107		n/m		$	61,945	$	37,648	64.5

The following table summarizes key data for the Stable Value Products segment:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008			2007			Change		2008			2007			Change
	(Dollars In Thousands)
Sales
GIC	$	22,600		$	54,500		(58.5	)%	$	107,945		$	132,000		(18.2	)%
GFA - Direct Institutional	636,651			—			n/m		1,061,651			—			n/m
GFA - Registered Notes - Institutional	—			475,000			n/m		450,000			525,000			(14.3	)
GFA - Registered Notes - Retail	25,719			42,735			(39.8	)	290,848			65,870			n/m
	$	684,970		$	572,235		19.7		$	1,910,444		$	722,870		n/m
Average Account Values	$	5,824,533		$	4,826,108				$	5,369,926		$	5,021,185
Operating Spread
Net investment income yield	5.96		%	6.10		%			6.00		%	6.01		%
Interest credited	4.06			4.84					4.36			4.83
Operating expenses	0.20			0.17					0.19			0.17
Operating spread	1.70		%	1.09		%			1.45		%	1.01		%

53

Three Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007

Segment operating income

Operating income increased $15.1 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  The increase in operating earnings resulted from the combination of higher average balances, slightly higher asset yields, and lower liability costs. In addition, $3.0 million in other income was generated from the early retirement of a funding agreement backing a medium term note.  Lower liability costs resulted from the increased sales of attractively priced institutional funding agreements.  As a result, the operating spread increased 61 basis points to 170 basis points during the three months ended September 30, 2008, compared to an operating spread of 109 basis points during the three months ended September 30, 2007.

Sales

Total sales increased $112.7 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  The increase was primarily due to increased sales in the institutional market.

Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007

Segment operating income

Operating income increased $24.3 million, or 64.5%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  The increase in operating earnings resulted from the combination of higher average balances, slightly higher asset yields, and lower liability costs.  In addition, $3.0 million in other income was generated from the voluntary early retirement of a funding agreement backing a medium term note. Lower liability costs resulted from the increased sales of attractively priced institutional funding agreements.  As a result, the operating spread increased 44 basis points to 145 basis points during the nine months ended September 30, 2008, compared to an operating spread of 101 basis points during the nine months ended September 30, 2007.

Sales

Total sales increased $1.2 billion, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  The increase was primarily due to increased sales in the institutional market.

54

Asset Protection

Segment results of operations

Segment results were as follows:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008			2007			Change		2008			2007			Change
	(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	85,301		$	100,248		(14.9	)%	$	265,395		$	298,215		(11.0	)%
Reinsurance ceded	(37,315		)	(42,066		)	(11.3	)	(120,282		)	(129,910		)	(7.4	)
Net premiums and policy fees	47,986			58,182			(17.5	)	145,113			168,305			(13.8	)
Net investment income	8,219			9,015			(8.8	)	25,231			25,455			(0.9	)
Other income	14,751			17,228			(14.4	)	44,702			49,394			(9.5	)
Total operating revenues	70,956			84,425			(16.0	)	215,046			243,154			(11.6	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	23,717			26,179			(9.4	)	69,234			72,134			(4.0	)
Amortization of deferred policy acquisition costs	7,571			15,414			(50.9	)	23,226			41,413			(43.9	)
Other operating expenses	34,507			35,305			(2.3	)	106,646			108,006			(1.3	)
Total benefits and expenses	65,795			76,898			(14.4	)	199,106			221,553			(10.1	)
INCOME BEFORE INCOME TAX	5,161			7,527			(31.4	)	15,940			21,601			(26.2	)
OPERATING INCOME	$	5,161		$	7,527		(31.4	)	$	15,940		$	21,601		(26.2	)

The following table summarizes key data for the Asset Protection segment:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008			2007			Change		2008			2007			Change
	(Dollars In Thousands)
Sales
Credit insurance	$	15,628		$	27,933		(44.1	)%	$	56,799		$	88,139		(35.6	)%
Service contracts	66,228			82,717			(19.9	)	210,130			225,648			(6.9	)
Other products	16,126			28,175			(42.8	)	51,443			102,001			(49.6	)
	$	97,982		$	138,825		(29.4	)	$	318,372		$	415,788		(23.4	)
Loss Ratios (1)
Credit insurance	32.7		%	24.4		%			35.1		%	29.9		%
Service contracts	52.3			52.1					49.1			48.4
Other products	56.9			37.1					60.2			33.2

(1) Incurred claims as a percentage of earned premiums

Three Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007

Segment operating income

Operating income was $5.2 million, representing a decrease of $2.4 million, or 31.4%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  Service contract earnings declined $1.7 million, or 26.5%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to higher loss ratios in certain product lines and lower auto sales. Income from other products declined $1.0 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 due to higher legal expenses. Partially offsetting this loss was an increase in credit insurance earnings of $0.3 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.

55

Net premiums and policy fees

Net premiums and policy fees decreased $10.2 million, or 17.5%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. Credit insurance premiums decreased $6.8 million, or 46.1%, due to the sale of a small insurance subsidiary and its related operations during the first quarter of 2008 and lower auto sales. Net premiums in the service contract line decreased $4.0 million, or 10.0%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 primarily due to a decrease in auto sales. Within the other product lines, net premiums increased $0.5 million, or 13.9%, for the three months ended September 30, 2008 compared to the prior year, primarily due to growth in the GAP product line.

Other income

Other income decreased $2.5 million, or 14.4%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to a decline in service contract volume.

Benefits and settlement expenses

Benefits and settlement expenses decreased $2.5 million, or 9.4%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. Service contract claims decreased $2.0 million, or 9.7%, and credit insurance claims decreased $1.0 million, or 27.8%, for the three months ended September 30, 2008 compared to the prior year, with both decreases resulting from lower sales volume. Other products claims increased $0.5 million, or 35.8%, primarily due to higher claims in the GAP line.

Amortization of DAC and Other Operating Expenses

Amortization of DAC was $7.8 million, or 50.9%, lower for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, mainly due to lower premium in the credit insurance lines. Also contributing to the decrease was a $2.7 million decrease resulting from the sale of a small insurance subsidiary and its related operations during the first quarter of 2008. Other operating expenses decreased $0.8 million, or 2.3%, for the three months ended September 30, 2008, primarily due to the sale of a small insurance subsidiary and its related operations during the first quarter of 2008.

Sales

Total segment sales decreased $40.8 million, or 29.4%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  The decrease in credit insurance was primarily due to the sale of a small subsidiary and its related operations in the first quarter of 2008 and declines in auto sales. Service contract sales were unfavorable due to declines in auto sales. The decline in the other products line is primarily the result of lower GAP sales, which was primarily due to price increases, tighter underwriting controls, and lower auto sales.

56

Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007

Segment operating income

Operating income was $15.9 million, representing a decrease of $5.7 million, or 26.2%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Earnings from other products declined $4.2 million, or 140.1%, due primarily to lower volume in the IPP line and higher legal expenses in the GAP and runoff lines. Service contract earnings declined $2.4 million, or 13.3%, for the nine months ended September 30, 2008 compared to the same period in 2007, primarily due to higher loss ratios in certain product lines and lower auto sales. Credit insurance earnings increased $0.9 million, or 101.6%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 resulted primarily from a decrease in legal expense.

Net premiums and policy fees

Net premiums and policy fees decreased $23.2 million, or 13.8%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Credit insurance earned premiums decreased $22.3 million, or 49.5%, mainly due to the sale of a small insurance subsidiary during the first quarter of 2008 and lower auto sales. Within the other product lines, net premiums decreased $2.6 million, or 19.3% for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to a decline in the IPP line partially offset by growth in the GAP line. Net premiums in the service contract line increased $1.7 million, or 1.5%, for the nine months ended September 30, 2008 compared the nine months ended September 30, 2007 primarily the result of an increase in in-force business.

Other income

Other income decreased $4.7 million, or 9.5%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to a decline in GAP and service contract volume.

Benefits and settlement expenses

Benefits and settlement expenses decreased $2.9 million, or 4.0%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. The credit insurance and related claims for the nine months ended September 30, 2008 compared to the prior year decreased $5.5 million, or 40.8%, as a result of lower volume and a $2.3 million decrease related to the sale of a small insurance subsidiary and its related operations in the first quarter of 2008. Service contract claims increased $1.5 million, or 2.9%, due to higher loss ratios in certain product lines and an increase in in-force business. Other products claims increased $1.1 million, or 19.6%, primarily attributable to higher GAP claims.

Amortization of DAC and Other Operating Expenses

Amortization of DAC decreased $18.2 million, or 43.9%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to lower premiums in the credit insurance products and an $8.2 million decrease resulting from the sale of a small insurance subsidiary and its related operations during the first quarter of 2008. Other operating expenses decreased $1.4 million, or 1.3%, for the nine months ended September 30, 2008, primarily due to lower expenses in the IPP line compared to the nine months ended September 30, 2007.

Sales

Total segment sales decreased $97.4 million, or 23.4%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  The decreases in credit insurance sales was primarily due to the sale of a small insurance subsidiary and its related operations in the first quarter of 2008 and declines in auto sales. The decline in the other products line was primarily the result of lower GAP sales, which was primarily due to price increases, tighter underwriting controls, and lower auto sales.

57

Reinsurance

The majority of the Asset Protection segment’s reinsurance activity relates to the cession of single premium credit life and credit accident and health insurance, credit property, vehicle service contracts and guaranteed asset protection insurance to producer affiliated reinsurance companies (“PARC’s”). These arrangements are coinsurance contracts ceding the business on a first dollar quota share basis at levels ranging from 50% to 100% to limit our exposure and allow the PARC’s to share in the underwriting income of the product. Reinsurance contracts do not relieve us from our obligations to our policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company or our affiliates. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 1, Basis of Presentation and Summary of Significant Accounting Policies.

Reinsurance impacted the Asset Protection segment line items as shown in the following table:

Asset Protection Segment

Line Item Impact of Reinsurance

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(37,315	)	$	(42,066	)	$	(120,282	)	$	(129,910	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(24,507		)	(21,907		)	(72,599		)	(72,203		)
Amortization of deferred policy acquisition costs	(12,559		)	(8,123		)	(42,814		)	(27,299		)
Other operating expenses	(1,249		)	(6,418		)	(5,836		)	(17,084		)
Total Benefits and Expenses	(38,315		)	(36,448		)	(121,249		)	(116,586		)
NET IMPACT OF REINSURANCE	$	1,000		$	(5,618	)	$	967		$	(13,324	)

Reinsurance premiums ceded decreased $4.8 million, or 11.3%, and $9.6 million, or 7.4%, for the three and nine months ended September 30, 2008, respectively, compared to the three and nine months ended September 30, 2007. The current quarter and year-to-date decreases were primarily due to the discontinuation of the marketing of credit insurance products through financial institutions in 2005 in which a majority of this business was ceded to PARC’s and a decrease in dealer credit ceded premiums due to a decline in auto sales.  This was partially offset by an increase in ceded premiums in the service contract and GAP lines.

Benefits and settlement expenses ceded increased $2.6 million, or 11.9%, and $0.4 million, or 0.5%, for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007.  The current quarter increases were mainly due to increases in losses ceded related to the Lender’s Indemnity program in runoff and in the service contract line, partially offset by decreases in the credit line. The year-to-date increases were mainly due to increases in the service contract and GAP lines mostly offset by decreases in the credit line.

Amortization of DAC ceded increased $4.4 million, or 54.6%, and $15.5 million, or 56.8%, for the three and nine months ended September 30, 2008, respectively, compared to the three and nine months ended September 30, 2007, mainly as the result of increases in the credit insurance and GAP lines.  Other operating expenses ceded decreased $5.2 million, or 80.5%, and $11.2 million, or 65.8%, for the three and nine months ended September 30, 2008, respectively compared to the three and nine months ended September 30, 2007. The fluctuation is partly attributable to an overall decline in credit insurance sales.

Net investment income has no direct impact on reinsurance cost. However, it should be noted that by ceding business to the assuming companies, we forgo investment income on the reserves ceded to the assuming companies. Conversely, the assuming companies will receive investment income on the reserves assumed which will increase the assuming companies’ profitability on business assumed from the Company. The net investment income impact to the Company and the assuming companies has not been quantified as it is not reflected in our consolidated financial statements.

58

Corporate and Other

Segment results of operations

Segment results were as follows:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008			2007			Change		2008			2007			Change
	(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	6,765		$	7,999		(15.4	)%	$	23,359		$	25,626		(8.8	)%
Reinsurance ceded	(1		)	(2		)	(50.0	)	(4		)	(10		)	(60.0	)
Net premiums and policy fees	6,764			7,997			(15.4	)	23,355			25,616			(8.8	)
Net investment income	4,871			36,245			(86.6	)	49,179			79,296			(38.0	)
Realized gains (losses) - investments	—			—					—			6,857
Realized gains (losses) - derivatives	41			(73		)			145			69
Other income	19			777			(97.6	)	199			3,661			(94.6	)
Total operating revenues	11,695			44,946			(74.0	)	72,878			115,499			(36.9	)
Realized gains (losses) - investments	(204,317		)	1,301					(266,598		)	4,076
Realized gains (losses) - derivatives	(1,496		)	(10,906		)			(7,209		)	(3,681		)
Total revenues	(194,118		)	35,341			n/m		(200,929		)	115,894			n/m
BENEFITS AND EXPENSES
Benefits and settlement expenses	8,895			8,585			3.6		27,955			27,861			0.3
Amortization of deferred policy acquisition costs	518			323			60.4		1,633			587			n/m
Other operating expenses	28,620			32,422			(11.7	)	92,609			82,767			11.9
Total benefits and expenses	38,033			41,330			(8.0	)	122,197			111,215			9.9
INCOME (LOSS) BEFORE INCOME TAX	(232,151		)	(5,989		)	n/m		(323,126		)	4,679			n/m
Less: realized gains (losses) - investments	(204,317		)	1,301					(266,598		)	4,076
Less: realized gains (losses) - derivatives	(1,496		)	(10,906		)			(7,209		)	(3,681		)
OPERATING INCOME (LOSS)	$	(26,338	)	$	3,616		n/m		$	(49,319	)	$	4,284		n/m

Three Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007

Segment operating income (loss)

The Corporate and Other segment operating income decreased $30.0 million for the three months ended September 30, 2008, compared to the three months ended September 30, 2007, primarily due to $10.7 million of lower participating mortgage income and a $7.8 million decline in income from other investment income sources due to the current economic environment. In addition, the segment experienced negative mark-to-market adjustments of $14.0 million on a $387.5 million portfolio of securities designated for trading acquired during the third quarter of 2008.

Operating revenues

Operating revenues for the Corporate and Other segment are primarily comprised of net investment income on capital and net premiums and policy fees related to several non-strategic lines of business.  Net investment income for this segment decreased $31.4 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, and net premiums and policy fees declined $1.2 million, or 15.4%.  The decrease in net investment income was primarily the result of mark-to-market changes on the trading portfolio, a decline in participating mortgage income in the securities and mortgage investment portfolios, and a decline in income from other investment income sources, resulting primarily from unfavorable market conditions.

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Benefits and expenses

Benefits and expenses decreased $3.3 million, or 8.0%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  The decrease was primarily due to a decrease in interest expense of $5.5 million, or 24.6%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.  Of this decrease in interest expense, approximately $2.6 million relates to non-recourse funding obligations and was primarily due to a decline in 1-month LIBOR rates. Additionally, approximately $3.0 million of the reduction relates to a decline in borrowings.  These decreases were partially offset by an increase in general corporate overhead expenses.

Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007

Segment operating income (loss)

The Corporate and Other segment operating income declined $53.6 million for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, primarily due to lower participating mortgage income of $21.0 million and lower prepayment fee income of $6.5 million in the securities and mortgage investment portfolios, and an increase in general corporate overhead expense.  In addition, the segment experienced negative mark-to-market adjustments of $14.0 million on a $387.5 million portfolio of securities designated for trading acquired during the third quarter of 2008.

Operating revenues

Net investment income for this segment decreased $30.1 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, and net premiums and policy fees declined $2.3 million, or 8.8%.  The decrease in net investment income was primarily the result of a decline in participating mortgage income and prepayment fee income in the securities and mortgage investment portfolios and mark-to-market changes on the trading portfolio, resulting primarily from unfavorable market conditions.

Benefits and expenses

Benefits and expenses increased $11.0 million, or 9.9%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  The increase was primarily due to an increase in interest expense of $9.1 million, or 20.8%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.  Of this increase in interest expense, approximately $13.9 million relates to additional issuances of non-recourse funding obligations. This increase was partially offset by a decrease in interest expense of $3.7 million related to a decline in borrowings.

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CONSOLIDATED INVESTMENTS

Portfolio Description

As of September 30, 2008, our investment portfolio equaled approximately $28.1 billion.  The types of assets in which we may invest are influenced by various state laws which prescribe qualified investment assets.  Within the parameters of these laws, we invest in assets giving consideration to such factors as liquidity needs, investment quality, investment return, matching of assets and liabilities, and the overall composition of the investment portfolio by asset type and credit exposure.

The following table shows the reported values of our invested assets:

	September 30, 2008				December 31, 2007
	(Dollars In Thousands)
Publicly-issued bonds (amortized cost: 2008 - $19,334,609; 2007 $19,207,255)	$	17,938,118	63.9	%	$	19,187,474	67.3	%
Privately issued bonds (amortized cost: $4,428,557; 2007 - $3,795,396)	4,105,021		14.6		3,755,594		13.2
Redeemable preferred stock (amortized cost: 2008 - $50; 2007 $50)	38		0.0		42		0.0
Fixed maturities	22,043,177		78.5		22,943,110		80.5
Equity securities (cost: 2008 $331,656; 2007 $59,588)	265,674		0.9		64,226		0.2
Mortgage loans	3,637,807		13.0		3,275,678		11.5
Investment real estate	7,793		0.0		8,026		0.0
Policy loans	811,847		2.9		818,280		2.9
Other long-term investments	334,986		1.2		186,299		0.6
Short-term investments	977,722		3.5		1,218,116		4.3
Total investments	$	28,079,006	100.0	%	$	28,513,735	100.0	%

Included in the preceding table are $3.4 billion and $3.6 billion of fixed maturities and $149.1 million and $52.0 million of short-term investments classified as trading securities as of September 30, 2008 and December 31, 2007, respectively. The trading portfolio includes invested assets of $3.0 billion and $3.6 billion as of September 30, 2008 and December 31, 2007, respectively, held pursuant to Modco arrangements under which the economic risks and benefits of the investments are passed to third-party reinsurers.

Fixed Maturity Investments

As of September 30, 2008, our fixed maturity investment holdings were approximately $22.0 billion. The approximate percentage distribution of our fixed maturity investments by quality rating as of September 30, 2008, is as follows:

	Percentage of
	Fixed Maturity
Type	Investments
AAA	38.5	%
AA	7.1
A	18.8
BBB	30.3
Below investment grade	5.3
	100.0	%

Our portfolio consists primarily of fixed maturity securities (bonds and redeemable preferred stocks) and commercial mortgage loans.  Within our fixed maturity securities, we maintain portfolios classified as “available-for-sale” and “trading”.  We generally purchase our investments with the intent to hold to maturity by purchasing investments that match future cash flow needs.  However, we may sell any of our investments to maintain proper matching of assets and liabilities.  Accordingly, we classified $18.6 billion or 84.3% of our fixed maturities as “available-for-sale” as of September 30, 2008.  These securities are carried at fair value on our Consolidated Balance Sheets.  Changes in fair value, net of related DAC and VOBA, are charged or credited directly to shareowners’ equity.  Changes in fair value that are other-than-temporary are recorded as realized losses in the

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Consolidated Statements of Income.  For more information regarding our evaluation of other-than-temporary losses, refer to “Critical Accounting Policies”.

Our trading portfolio accounts for $3.4 billion or 15.5% of our fixed maturities as of September 30, 2008. Of this balance, fixed maturities with a market value of $3.0 billion and short-term investments with a market value of $149.1 million were added as part of the Chase Insurance Group acquisition.  Investment results for the Chase Insurance Group portfolios, including gains and losses from sales, are passed to the reinsurers through the contractual terms of the reinsurance arrangements.  Trading securities are carried at fair value and changes in fair value are recorded in net income (loss) as they occur.  Offsetting these amounts are corresponding changes in the fair value of the embedded derivative liability associated with the underlying reinsurance arrangement.

$3.0 billion of our trading portfolio is held pursuant to Modco arrangements under which the economic risks and benefits of the investments are passed to third-party reinsurers. The total Modco trading portfolio fixed maturities by rating is as follows:

	September 30, 2008		December 31, 2007
	(Dollars In Thousands)
AAA	$	1,338,734	$	1,651,198
AA	201,388		349,157
A	648,181		810,342
BBB	793,451		754,974
Below investment grade	49,489		38,964
Total Modco trading fixed maturities	$	3,031,243	$	3,604,635

A portion of our bond portfolio is invested in residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities.  These holdings as of September 30, 2008 were approximately $8.1 billion.  Mortgage-backed securities are constructed from pools of mortgages and may have cash flow volatility as a result of changes in the rate at which prepayments of principal occur with respect to the underlying loans.  Prepayments of principal on the underlying loans can be expected to accelerate with decreases in market interest rates and diminish with increases in interest rates.  In addition, we have entered into derivative contracts at times to partially offset the volatility in the market value of these securities.

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Residential mortgage-backed securities - The tables below show a breakdown of our residential mortgage-backed securities portfolio by type and rating as of September 30, 2008.  As of September 30, 2008, these holdings were approximately $5.6 billion. Planned amortization class securities (“PACs”) pay down according to a schedule.  Sequentials receive payments in order until each class is paid off.  Pass through securities receive principal as principal of the underlying mortgages is received.

	Percentage of
	Residential
	Mortgage-Backed
Type	Securities
Sequential	68.4	%
PAC	15.7
Pass Through	4.9
Other	11.0
	100.0	%

	Percentage of
	Residential
	Mortgage-Backed
Rating	Securities
AAA	97.7	%
AA	0.5
A	0.0
BBB	0.7
Below investment grade	1.1
	100.0	%

As of September 30, 2008, we held $654.9 million, or 2.3% of invested assets, of securities supported by collateral classified as Alt-A.  As of June 30, 2008, March 31, 2008, and December 31, 2007, we held securities with a market value of $753.8 million, $662.9 million, and $273.4 million, respectively, of securities supported by collateral classified as Alt-A.

The following table shows the percentage of our collateral classified as Alt-A grouped by rating category as of September 30, 2008:

	Percentage of
	Alt-A
Rating	Securities
AAA	79.7	%
AA	3.5
A	6.5
BBB	6.2
Below investment grade	4.1
	100.0	%

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The following tables categorize the estimated fair value and unrealized gain/ (loss) of our mortgage-backed securities collateralized by Alt-A mortgage loans by rating as of September 30, 2008:

Alt-A Collateralized Holdings

	Estimated Fair Value of Security Origination
Rating	2004 and Prior		2005		2006		2007		2008		Total
	(Dollars In Millions)
AAA	$	7.8	$	88.3	$	226.4	$	199.2	$	—	$	521.7
AA	—		—		—		23.1		—		23.1
Subtotal	$	7.8	$	88.3	$	226.4	$	222.3	$	—	$	544.8
A	—		—		42.8		—		—		42.8
BBB	—		2.9		37.8		—		—		40.7
Below investment grade	—		—		19.5		7.1		—		26.6
Total mortgage-backed securities collateralized by Alt-A mortgage loans	$	7.8	$	91.2	$	326.5	$	229.4	$	—	$	654.9

	Estimated Unrealized Gain (Loss) by Year of Security Origination
	2004 and
Rating	Prior			2005			2006			2007			2008		Total
	(Dollars In Millions)
AAA	$	(1.2	)	$	(5.4	)	$	(10.6	)	$	(15.5	)	$	—	$	(32.7	)
AA	—			—			—			(1.1		)	—		(1.1		)
Subtotal	$	(1.2	)	$	(5.4	)	$	(10.6	)	$	(16.6	)	$	—	$	(33.8	)
A	—			—			(4.6		)	—			—		(4.6		)
BBB	—			(4.9		)	(18.4		)	—			—		(23.3		)
Below investment grade	—			—			(4.8		)	(59.3		)	—		(64.1		)
Total mortgage-backed securities collateralized by Alt-A mortgage loans	$	(1.2	)	$	(10.3	)	$	(38.4	)	$	(75.9	)	$	—	$	(125.8	)

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As of September 30, 2008, we had residential mortgage-backed securities with a total market value of $57.4 million, or 0.2% of total invested assets, that were supported by collateral classified as sub-prime. $29.0 million, or 50.5%, of these securities were rated AAA.  As of June 30, 2008, March 31, 2008, and December 31, 2007, we held securities with a market value of $72.8 million, $78.8 million, and $89.9 million, respectively, of securities supported by collateral classified as sub-prime.

The following tables categorize the estimated fair value and unrealized gain/ (loss) of our mortgage-backed securities collateralized by sub-prime mortgage loans by rating as of September 30, 2008:

Sub-prime Collateralized Holdings

	Estimated Fair Value of Security Origination
	2004 and
Rating	Prior		2005		2006		2007		2008		Total
	(Dollars In Millions)
AAA	$	1.9	$	3.7	$	17.2	$	6.1			$	28.9
AA	0.8		—		11.4		5.9				18.1
Subtotal	$	2.7	$	3.7	$	28.6	$	12.0	$	—	$	47.0
A	—		—		—		—		—		—
BBB	1.0		—		—		8.1				9.1
Below investment grade	0.7		—		—		0.6				1.3
Total mortgage-backed securities collateralized by sub-prime mortgage loans	$	4.4	$	3.7	$	28.6	$	20.7	$	—	$	57.4

	Estimated Unrealized Gain (Loss) by Year of Security Origination
	2004 and
Rating	Prior			2005			2006			2007			2008		Total
	(Dollars In Millions)
AAA	$	(0.5	)	$	(0.3	)	$	(2.7	)	$	(4.0	)			$	(7.5	)
AA	(0.1		)	—			(2.6		)	(5.1		)			(7.8		)
Subtotal	$	(0.6	)	$	(0.3	)	$	(5.3	)	$	(9.1	)	$	—	$	(15.3	)
A	—			—			—			—			—		—
BBB	(0.9		)	—			—			(5.1		)			(6.0		)
Below investment grade	(0.3		)	—			—			(4.5		)			(4.8		)
Total mortgage-backed securities collateralized by sub-prime mortgage loans	$	(1.8	)	$	(0.3	)	$	(5.3	)	$	(18.7	)	$	—	$	(26.1	)

The tables above referencing our holdings collateralized by Alt-A and sub-prime mortgage loans exclude approximately $2.5 million of securities collateralized by Alt-A mortgage loans which are part of a modified coinsurance trading portfolio. The reinsurer bears the ultimate investment risk related to these securities.

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Commercial mortgage-backed securities - Our commercial mortgage-backed security (“CMBS”) portfolio consists of commercial mortgage-backed securities issued in securitization transactions.  Portions of the CMBS are sponsored by the Company, in which we securitized portions of our mortgage loan portfolio. As of September 30, 2008, the CMBS holdings were approximately $1.2 billion.  Of this amount, $910.6 million related to retained beneficial interests of commercial mortgage loan securitizations the Company completed. The following table shows the percentages of our CMBS holdings grouped by rating category as of September 30, 2008:

	Percentage of
	Commercial
	Mortgage-Backed
Rating	Securities
AAA	79.4	%
AA	7.4
A	5.1
BBB	2.0
Below investment grade	6.1
	100.0	%

Asset-backed securities - Asset-backed securities (“ABS”) pay down based on cash flow received from the underlying pool of assets, such as receivables on auto loans, student loans, credit cards, etc. As of September 30, 2008, these holdings were approximately $1.2 billion.  The following table shows the percentages of our ABS holdings grouped by rating category as of September 30, 2008:

	Percentage of
	Asset-Backed
Rating	Securities
AAA	89.2	%
AA	7.2
A	2.4
BBB	1.2
	100.0	%

We obtained ratings of our fixed maturities from Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Corporation (“S&P”) and Fitch Ratings (“Fitch”).  If a bond is not rated by Moody’s, S&P, or Fitch, we use ratings from the Securities Valuation Office of the National Association of Insurance Commissioners (“NAIC”), or we rate the bond based upon a comparison of the unrated issue to rated issues of the same issuer or rated issues of other issuers with similar risk characteristics.  As of September 30, 2008, over 99.0% of our bonds were rated by Moody’s, S&P, Fitch, and/or the NAIC.

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The industry segment composition of our fixed maturity securities is presented in the following table:

			% Market				% Market
	September 30, 2008		Value		December 31, 2007		Value
	(Dollars In Thousands)
Non-Agency Mortgages	$	5,021,800	22.8	%	$	5,346,177	23.3	%
Other Finance	2,447,673		11.1		2,103,489		9.2
Electric	2,168,683		9.8		1,938,478		8.4
Banking	2,330,549		10.6		2,088,838		9.1
Agency Mortgages	1,107,448		5.0		2,434,012		10.6
Natural Gas	1,436,662		6.5		1,180,119		5.1
Insurance	1,040,486		4.7		954,832		4.2
Energy	1,090,548		4.9		896,994		3.9
Communications	922,982		4.2		972,870		4.2
Basic Industrial	769,842		3.5		691,944		3.0
Brokerage	140,830		0.6		735,249		3.2
Consumer Noncyclical	722,412		3.3		660,299		2.9
Consumer Cyclical	572,883		2.6		614,851		2.7
Finance Companies	478,561		2.2		596,544		2.6
Capital Goods	447,522		2.0		427,364		1.9
Transportation	440,512		2.0		436,855		1.9
U.S. Govt Agencies	235,940		1.1		190,423		0.8
Other Industrial	201,540		0.9		142,003		0.6
U.S. Government	181,965		0.8		165,349		0.7
Technology	128,038		0.6		152,491		0.7
Real Estate	42,854		0.2		55,371		0.2
Canadian Governments	47,707		0.2		108,006		0.5
Other Utility	21,413		0.2		19,796		0.1
Municipal Agencies	18,404		0.1		24,955		0.1
Other Government Agencies	20,009		0.1		—		0.0
Foreign Governments	5,914		0.0		5,801		0.1
Total	$	22,043,177	100.0	%	$	22,943,110	100.0	%

Our investments in debt and equity securities are reported at market value, and investments in mortgage loans are reported at amortized cost.  As of September 30, 2008, our fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $22.0 billion, which was 7.6% below amortized cost of $23.8 billion.  We had $3.6 billion in mortgage loans as of September 30, 2008.  While our mortgage loans do not have quoted market values, as of September 30, 2008, we estimated the market value of our mortgage loans to be $3.9 billion (using discounted cash flows from the next call date), which was 5.4% greater than the amortized cost.  Most of our mortgage loans have significant prepayment fees.  These assets are invested for terms approximately corresponding to anticipated future benefit payments.  Thus, market fluctuations are not expected to adversely affect liquidity.

Market values for private, non-traded securities are determined as follows: 1) we obtain estimates from independent pricing services and 2) we estimate market value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics.  We analyze the independent pricing services valuation methodologies and related inputs, including an assessment of the observability of market inputs. For retained beneficial interests in Company sponsored commercial mortgage loan securitizations as of September 30, 2008, we used an internally developed model that includes discount rates based on our current mortgage loan lending rate and expected cash flows based on a review of the commercial mortgage loans underlying the securities.  Upon obtaining this information related to market value, management makes a determination as to the appropriate valuation amount.

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Mortgage Loans

We invest a portion of our investment portfolio in commercial mortgage loans.  As of September 30, 2008, our mortgage loan holdings were approximately $3.6 billion. We generally do not lend on speculative properties and have specialized in making loans on either credit-oriented commercial properties or credit-anchored strip shopping centers and apartments.  Our underwriting procedures relative to our commercial loan portfolio are based on a conservative, disciplined approach.  We concentrate our underwriting expertise on a small number of commercial real estate asset types associated with the necessities of life (retail, multi-family, professional office buildings, and warehouses). We believe these asset types tend to weather economic downturns better than other commercial asset classes in which we have chosen not to participate. We believe this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout our history.

We record mortgage loans net of an allowance for credit losses.  This allowance is calculated through analysis of specific loans that have indicators of potential impairment based on current information and events.  As of September 30, 2008 and December 31, 2007, our allowance for mortgage loan credit losses was $1.4 million and $0.5 million, respectively.

Our mortgage lending criteria generally require that the loan-to-value ratio on each mortgage be at or less than 75% at the time of origination.  Projected rental payments from credit anchors (i.e., excluding rental payments from smaller local tenants) generally exceed 70% of the property’s projected operating expenses and debt service.  We also offer a commercial loan product under which we will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate.  Approximately $693.8 million of our mortgage loans have this participation feature.

Many of our mortgage loans have call or interest rate reset provisions between 3 and 10 years.  However, if interest rates were to significantly increase, we may be unable to call the loans or increase the interest rates on our existing mortgage loans commensurate with the significantly increased market rates.

As of September 30, 2008, delinquent mortgage loans and foreclosed properties were less than 0.1% of invested assets.  We do not expect these investments to adversely affect our liquidity or ability to maintain proper matching of assets and liabilities.  As of September 30, 2008, $15.2 million, or 0.4%, of the mortgage loan portfolio was nonperforming.  It is our policy to cease to carry accrued interest on loans that are over 90 days delinquent.  For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible.  If a loan becomes over 90 days delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place.

Between 1996 and 1999, we securitized $1.4 billion of our mortgage loans. We sold the senior tranches while retaining the subordinate tranches.  We continue to service the securitized mortgage loans.  During 2007, we securitized an additional $1.0 billion of our mortgage loans.  We sold the highest rated tranche for approximately $218.3 million, while retaining the remaining tranches.  We continue to service the securitized mortgage loans.  As of September 30, 2008, we had investments related to retained beneficial interests of mortgage loan securitizations of $910.6 million.

Securities Lending

We participate in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned to third parties for short periods of time.  We require initial collateral of 102% of the market value of the loaned securities to be separately maintained.  The loaned securities’ market value is monitored on a daily basis.  As of September 30, 2008, securities with a market value of $115.4 million were loaned under this program.  As collateral for the loaned securities, we hold investments, which are recorded in “fixed maturities” and “short-term investments” with a corresponding liability recorded in “other liabilities” to account for our obligation to return the collateral.  As of September 30, 2008, the fair market value of the collateral related to this program was $107.0 million and we have an obligation to return $121.4 million of collateral to the securities borrowers.

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Risk Management and Impairment Review

We monitor the overall credit quality of our portfolio within established guidelines.  The following table shows our available-for-sale fixed maturities by credit rating as of September 30, 2008:

			Percent of
S&P or Equivalent Designation	Market Value		Market Value
	(Dollars In Thousands)
AAA	$	6,969,784	37.4	%
AA	1,350,872		7.3
A	3,428,391		18.4
BBB	5,749,316		30.9
Investment grade	17,498,363		94.0
BB	739,510		4.0
B	225,313		1.2
CCC or lower	160,485		0.8
In or near default	703		0.0
Below investment grade	1,126,011		6.0
Redeemable preferred stock	38		0.0
Total	$	18,624,412	100.0	%

Not included in the table above are $3.4 billion of investment grade and $49.4 million of below investment grade fixed maturities classified as trading securities.

Limiting bond exposure to any creditor group is another way we manage credit risk.  The following table includes securities held in our Modco portfolio and summarizes our ten largest fixed maturity exposures to an individual creditor group as of September 30, 2008:

Creditor	Market Value
	(Dollars In Millions)
Toyota Motor Credit	$	135.2
AT&T	129.8
Citigroup	128.8
Wells Fargo & Company	127.7
Metlife Inc.	123.8
Prudential Financial	121.4
JPMorgan Chase & Co	118.4
Dominion Resources	116.5
Bank of America Corp	114.3
General Electric	112.6

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Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets.  We review our positions on a monthly basis for possible credit concerns and review our current exposure, credit enhancement, and delinquency experience.  Management considers a number of factors when determining the impairment status of individual securities.  These include the economic condition of various industry segments and geographic locations and other areas of identified risks.  Although it is possible for the impairment of one investment to affect other investments, we engage in ongoing risk management to safeguard against and limit any further risk to our investment portfolio.  Special attention is given to correlative risks within specific industries, related parties, and business markets.

For certain securitized financial assets with contractual cash flows including ABS, EITF Issue No. 99-20 requires us to periodically update our best estimate of cash flows over the life of the security.  If the fair value of a securitized financial asset is less than its cost or amortized cost and there has been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both timing and amount, an other-than-temporary impairment charge is recognized.  Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral.  Projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral.  In addition, we consider our intent and ability to retain a temporarily depressed security until recovery.

On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, (“FSP 157-3”), to clarify the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. It also reaffirms the notion of fair value as an exit price as of the measurement date. FSP 157-3 was effective upon issuance, including prior periods for which the financial statements have not been issued. Based on the guidance in FSP 157-3, we utilized internal models to determine the fair value of retained beneficial interests of Company sponsored commercial mortgage loan securitizations for which there was no active market as of September 30, 2008.

Securities not subject to EITF Issue No. 99-20 that are in an unrealized loss position, are reviewed at least quarterly to determine if an other-than-temporary impairment is present based on certain quantitative and qualitative factors.  We consider a number of factors in determining whether the impairment is other-than-temporary.  These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) the intent and ability to hold the investment until recovery, 5) the time period during which the decline has occurred, 6) an economic analysis of the issuer’s industry, and 7) the financial strength, liquidity, and recoverability of the issuer.  Management performs a security-by-security review each quarter in evaluating the need for any other-than-temporary impairments.  Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures considered.  Based on our analysis, during the three months ended September 30, 2008, we concluded that approximately $202.4 million of pretax unrealized losses were other-than-temporarily impaired resulting in a charge to net realized investment losses.

There are certain risks and uncertainties associated with determining whether declines in market values are other-than-temporary.  These include significant changes in general economic conditions and business markets, trends in certain industry segments, interest rate fluctuations, rating agency actions, changes in significant accounting estimates and assumptions, commission of fraud, and legislative actions.  We continuously monitor these factors as they relate to the investment portfolio in determining the status of each investment.

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Realized Gains and Losses

The following table sets forth realized investment gains and losses for the periods shown.

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2008			2007			Change			2008			2007			Change
	(Dollars In Thousands)
Fixed maturity gains - sales	$	21,868		$	2,331		$	19,537		$	43,366		$	6,091		$	37,275
Fixed maturity losses - sales	(42,635		)	(549		)	(42,086		)	(43,337		)	(4,941		)	(38,396		)
Equity gains - sales	3			—			3			63			5,911			(5,848		)
Equity losses - sales	—			(12		)	12			—			(12		)	12
Impairments on fixed maturity securities	—			—			—			—			—			—
Impairments on equity securities	(202,425		)	—			(202,425		)	(282,411		)	—			(282,411		)
Modco trading portfolio activity	(133,625		)	42,080			(175,705		)	(220,148		)	(23,189		)	(196,959		)
Other	(718		)	(3,205		)	2,487			3,810			2,162			1,648
Total realized gains (losses) - investments	$	(357,532	)	$	40,645		$	(398,177	)	$	(498,657	)	$	(13,978	)	$	(484,679	)
Foreign currency swaps	$	(3,977	)	$	1,723		$	(5,700	)	$	(1,115	)	$	6,695		$	(7,810	)
Foreign currency adjustments on stable value contracts	4,169			(1,750		)	5,919			1,304			(2,559		)	3,863
Derivatives related to mortgage loan commitments	(509		)	—			(509		)	(5,401		)	—			(5,401		)
Embedded derivatives related to reinsurance	105,568			(38,144		)	143,712			183,134			32,265			150,869
Other derivatives	(13,313		)	(12,909		)	(404		)	(24,020		)	(4,899		)	(19,121		)
Total realized (losses) gains - derivatives	$	91,938		$	(51,080	)	$	143,018		$	153,902		$	31,502		$	122,400

Realized gains and losses on investments reflect portfolio management activities designed to maintain proper matching of assets and liabilities and to enhance long-term investment portfolio performance.  The change in net realized investment gains (losses), excluding impairments, during the nine months ended September 30, 2008 primarily reflects the normal operation of our asset/liability program within the context of the changing interest rate and spread environment.

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Realized losses are comprised of both write-downs on other-than-temporary impairments and actual sales of investments.  For the nine months ended September 30, 2008, there were pre-tax other-than-temporary impairments of $282.4 million, excluding $20.0 million of Modco related impairments, in our investments compared to no impairments for the nine months ended September 30, 2007.  The impairments related to debt obligations and preferred stock holdings in Lehman Brothers and Washington Mutual, residential mortgage-backed securities collateralized by Alt-A mortgages, and preferred stock holdings in Fannie Mae and Freddie Mac. The decline in the estimated fair value of these securities resulted from factors including distressed credit markets, the failure or near failure of a number of large financial service companies resulting in intervention by the United States Federal Government, downgrades in rating, and interest rate changes. These other-than-temporary impairments resulted from our analysis of circumstances and our belief that credit events, loss severity, changes in credit enhancement, and/or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to these investments. These other-than-temporary impairments, net of Modco, are presented in the chart below:

	Pre-Tax Impairments
	(Net of Modco)
	Three Months		Nine Months
	Ended		Ended
	September 30, 2008
	(Dollars In Millions)
Freddie Mac	$	7.1	$	7.1
Fannie Mae	21.9		21.9
Lehman	92.1		92.1
Washington Mutual	45.4		45.4
Alt-A Bonds	35.9		115.9
Total	$	202.4	$	282.4

As previously discussed, management considers several factors when determining other-than-temporary impairments.  Although we generally intend to hold securities until maturity, we may change our position as a result of a change in circumstances.  Any such decision is consistent with our classification of all but a specific portion of our investment portfolio as available-for-sale.  For the nine months ended September 30, 2008, we sold securities in an unrealized loss position with a market value of $227.3 million resulting in a realized loss of $43.3 million. Of this total, approximately $33.8 million related to the sale of Washington Mutual debt obligations.  These obligations were sold subsequent to the takeover of Washington Mutual by the Office of Thrift Supervision.  For such securities, the proceeds, realized loss, and total time period that the security had been in an unrealized loss position are presented in the table below:

	Proceeds		% Proceeds		Realized Loss			% Realized Loss
	(Dollars In Thousands)
<= 90 days	$	95,446	42.0	%	$	(821	)	1.9	%
>90 days but <= 180 days	61,484		27.0		(2,687		)	6.2
>180 days but <= 270 days	29,751		13.1		(2,533		)	5.8
>270 days but <= 1 year	17,833		7.8		(5,992		)	13.8
>1 year	22,814		10.1		(31,304		)	72.3
Total	$	227,328	100.0	%	$	(43,337	)	100.0	%

The $3.8 million of other realized gains recognized for the nine months ended September 30, 2008 includes foreign exchange gains of $6.0 million and other losses totaling $2.2 million.  As of September 30, 2008, net losses of $220.1 million primarily related to mark-to-market changes on our Modco trading portfolios associated with the Chase Insurance Group acquisition were also included in realized gains and losses.  Of this amount, approximately $33.5 million of losses were realized through the sale of certain securities, which will be reimbursed to us over time through the reinsurance settlement process for this block of business. Additional details on our investment performance and evaluation are provided in the sections below.

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Realized investment gains and losses related to derivatives represent changes in the fair value of derivative financial instruments and gains (losses) on derivative contracts closed during the period.  We have entered into foreign currency swaps to mitigate the risk of changes in the value of principal and interest payments to be made on certain of our foreign currency denominated stable value contracts.  We recorded net realized gains of $0.2 million from these securities for both the three months and nine months ended September 30, 2008.  These losses were the result of differences in the related foreign currency spot and forward rates used to value the stable value contracts and foreign currency swaps.  We have taken short positions in U.S. Treasury futures to mitigate interest rate risk related to our mortgage loan commitments.  The net losses for the three months ended September 30, 2008 were the result of $7.1 million of losses related to closed positions, partially offset by $6.6 million of mark-to-market gains.  The net losses for the nine months ended September 30, 2008 were the result of $12.1 million of losses related to closed positions, partially offset by $6.7 million of mark-to-market gains.

  We also have in place various modified coinsurance and funds withheld arrangements that, in accordance with DIG B36 (“Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments”), contain embedded derivatives.  The $105.6 million and $183.1 million of gains on these embedded derivatives in the three and nine months ended September 30, 2008, respectively, were a result of spread widening, partially offset by lower interest rates.  In the three and nine months ended September 30, 2008, the investment portfolios that support the related modified coinsurance reserves and funds withheld arrangements had mark-to-market losses that offset the gains on these embedded derivatives.

We also use various swaps, options, and swaptions to mitigate risk related to other exposures.  We realized losses of $1.4 million on interest rate swaps for both the three months and nine months ended September 30, 2008. Included in the 2008 losses was a $2.4 million loss resulting from the termination of a hedging relationship related to the early retirement of a funding agreement backed-note. Swaptions realized losses of $0.9 million and $3.9 million for the three and nine months ended September 30, 2008, respectively.  Equity call options generated losses of $1.5 million and $6.2 million for the three and nine months ended September 30, 2008, respectively.  The GMWB rider embedded derivatives on certain variable deferred annuities had realized losses of $8.8 million and $12.2 million for the three and nine months ended September 30, 2008, respectively.  Other derivative contracts generated net losses of $0.7 million and $0.3 million for the three and nine months ended September 30, 2008, respectively.

Unrealized Gains and Losses – Available-for-Sale Securities

The information presented below relates to investments at a certain point in time and is not necessarily indicative of the status of the portfolio at any time after September 30, 2008, the balance sheet date.  Information about unrealized gains and losses is subject to rapidly changing conditions, including volatility of financial markets and changes in interest rates.  As indicated above, management considers a number of factors in determining if an unrealized loss is other-than-temporary, including our ability and intent to hold the security until recovery.  Furthermore, since the timing of recognizing realized gains and losses is largely based on management’s decisions as to the timing and selection of investments to be sold, the tables and information provided below should be considered within the context of the overall unrealized gain (loss) position of the portfolio.  As of September 30, 2008, we had an overall pre-tax net unrealized loss of $1.8 billion.

Credit markets have experienced reduced liquidity, higher volatility and widening credit spreads across numerous asset classes over the past several quarters, primarily as a result of marketplace uncertainty arising from the failure or near failure of a number of large financial service companies resulting in intervention by the United States Federal Government, downgrades in rating, interest rate changes, higher defaults in sub-prime and Alt-A residential mortgage loans and a weakening of the overall economy.  In connection with this uncertainty, we believe investors have departed from many investments in asset-backed securities including those associated with sub-prime and Alt-A residential mortgage loans, as well as types of debt investments with fewer lender protections or those with reduced transparency and/or complex features which may hinder investor understanding. We believe these factors have contributed to an increase in our net unrealized investment losses through declines in market values.  We expect to experience continued volatility in connection with the valuation of our fixed maturity investments.

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For fixed maturity and equity securities held that are in an unrealized loss position as of September 30, 2008, the estimated market value, amortized cost, unrealized loss, and total time period that the security has been in an unrealized loss position are presented in the table below:

	Estimated		% Market		Amortized		% Amortized		Unrealized			% Unrealized
	Market Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)
<= 90 days	$	3,147,090	20.2	%	$	3,306,986	18.9	%	$	(159,896	)	8.2	%
>90 days but <= 180 days	3,081,544		19.8		3,438,390		19.6		(356,846		)	18.3
>180 days but <= 270 days	4,994,579		32.1		5,468,211		31.2		(473,632		)	24.3
>270 days but <= 1 year	1,330,138		8.5		1,557,849		8.9		(227,711		)	11.7
>1 year but <= 2 years	1,813,186		11.6		2,269,847		13.0		(456,661		)	23.4
>2 years but <= 3 years	527,178		3.4		636,776		3.6		(109,598		)	5.6
>3 years but <= 4 years	561,824		3.6		683,580		3.9		(121,756		)	6.2
>4 years but <= 5 years	55,530		0.4		85,380		0.5		(29,850		)	1.5
>5 years	56,204		0.4		68,577		0.4		(12,373		)	0.8
Total	$	15,567,273	100.0	%	$	17,515,596	100.0	%	$	(1,948,323	)	100.0	%

The unrealized losses as of September 30, 2008, primarily relate to the widening of credit spreads and fluctuations in treasury rates during the quarter. Factors such as credit enhancements within the deal structures and the underlying collateral performance/characteristics support the recoverability of the investments. We do not consider these unrealized loss positions to be other-than-temporary, based on the factors discussed and because we have the ability and intent to hold these investments until maturity or until the fair values of the investments have recovered.

As of September 30, 2008, there were estimated gross unrealized losses of $126.3 million and $26.2 million, related to our mortgage-backed securities collateralized by Alt-A mortgage loans and sub-prime mortgage loans, respectively.  Gross unrealized losses in our securities collateralized by sub-prime and Alt-A residential mortgage loans as of September 30, 2008, were primarily the result of continued widening spreads during 2008, representing marketplace uncertainty arising from higher defaults in sub-prime and Alt-A residential mortgage loans and rating agency downgrades of securities collateralized by sub-prime and Alt-A residential mortgage loans.  For the nine months ended September 30, 2008, we recorded $115.9 million of pre-tax other-than-temporary impairments on residential mortgage-backed securities collateralized by Alt-A mortgages.  The decline in the estimated fair value of these securities resulted from factors including downgrades in rating, interest rate changes, and the current distressed credit markets. These other-than-temporary impairments resulted from our analysis of circumstances and our belief that credit events, loss severity, changes in credit enhancement, and/or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to these investments.  Excluding the securities on which other-than-temporary impairments were recorded, we expect these investments to continue to perform in accordance with their original contractual terms. We have the ability and intent to hold these investments until maturity or until the fair values of the investments have recovered, which may be at maturity.  Additionally, we do not expect these investments to adversely affect our liquidity or ability to maintain proper matching of assets and liabilities.

As of September 30, 2008, securities with a market value of $642.8 million and unrealized losses of $84.8 million were issued in commercial mortgage loan securitizations that we sponsored, including $2.0 million of unrealized losses greater than five years.  We do not consider these unrealized positions to be other-than-temporary because the underlying mortgage loans continue to perform consistently with our original expectations.  Our underwriting procedures relative to our commercial loan portfolio are based on a conservative, disciplined approach.  We concentrate our underwriting expertise on a small number of commercial real estate asset types associated with the necessities of life (retail, multi-family, professional office buildings, and warehouses). We believe these asset types tend to weather economic downturns better than other commercial asset classes that we have chosen to avoid. We believe this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout our history.

In assessing whether or not these unrealized positions should be considered other-than-temporary, we review the underlying cash flows, as well as the associated values of the real estate collateral for the loans included in our commercial mortgage loan securitizations.

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We have no material concentrations of issuers or guarantors of fixed maturity securities.  The industry segment composition of all securities in an unrealized loss position held as of September 30, 2008, is presented in the following table:

	Estimated		% Market		Amortized		% Amortized		Unrealized			% Unrealized
	Market Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)
Agency Mortgages	$	544,665	3.5	%	$	573,653	3.3	%	$	(28,988	)	1.5	%
Banking	1,722,748		11.1		2,128,367		12.2		(405,619		)	20.8
Basic Industrial	547,112		3.5		627,311		3.6		(80,199		)	4.1
Brokerage	115,637		0.7		141,788		0.8		(26,151		)	1.3
Canadian Government	18,198		0.1		18,688		0.1		(490		)	0.0
Capital Goods	244,239		1.6		268,977		1.5		(24,738		)	1.3
Communications	580,483		3.7		687,897		3.9		(107,414		)	5.5
Consumer Cyclical	388,212		2.5		459,506		2.6		(71,294		)	3.7
Consumer Noncyclical	447,302		2.9		487,903		2.8		(40,601		)	2.1
Electric	1,598,605		10.3		1,754,703		10.0		(156,098		)	8.0
Energy	690,931		4.4		759,846		4.3		(68,915		)	3.5
Finance Companies	341,368		2.2		417,375		2.4		(76,007		)	3.9
Insurance	790,349		5.1		958,778		5.5		(168,429		)	8.6
Municipal Agencies	1,281		0.0		1,365		0.0		(84		)	0.0
Natural Gas	947,359		6.1		1,047,984		6.0		(100,625		)	5.2
Non-Agency Mortgages	4,240,510		27.2		4,602,075		26.3		(361,565		)	18.6
Other Finance	1,752,356		11.3		1,928,623		11.0		(176,267		)	9.0
Other Industrial	146,088		0.9		158,971		0.9		(12,883		)	0.7
Other Utility	21,434		0.1		24,044		0.1		(2,610		)	0.1
Real Estate	17,359		0.1		19,242		0.1		(1,883		)	0.1
Technology	88,865		0.6		97,596		0.6		(8,731		)	0.4
Transportation	231,305		1.5		253,300		1.4		(21,995		)	1.2
U.S. Govt Agencies	90,867		0.6		97,604		0.6		(6,737		)	0.4
Total	$	15,567,273	100.0	%	$	17,515,596	100.0	%	$	(1,948,323	)	100.0	%

 The range of maturity dates for securities in an unrealized loss position as of September 30, 2008, varies, with 16.9% maturing in less than 5 years, 20.5% maturing between 5 and 10 years, and 62.6% maturing after 10 years.  The following table shows the credit rating of securities in an unrealized loss position as of September 30, 2008:

S&P or Equivalent	Estimated		% Market		Amortized		% Amortized		Unrealized			% Unrealized
Designation	Market Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)
AAA/AA/A	$	10,168,301	65.3	%	$	11,240,847	64.2	%	$	(1,072,546	)	55.0	%
BBB	4,436,421		28.5		5,009,379		28.6		(572,958		)	29.5
Investment grade	14,604,722		93.8		16,250,226		92.8		(1,645,504		)	84.5
BB	643,056		4.1		775,023		4.4		(131,967		)	6.8
B	203,099		1.3		295,787		1.7		(92,688		)	4.8
CCC or lower	116,396		0.8		194,560		1.1		(78,164		)	3.9
Below investment grade	962,551		6.2		1,265,370		7.2		(302,819		)	15.5
Total	$	15,567,273	100.0	%	$	17,515,596	100.0	%	$	(1,948,323	)	100.0	%

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As of September 30, 2008, securities in an unrealized loss position that were rated as below investment grade represented 6.2% of the total market value and 15.5% of the total unrealized loss.  Unrealized losses related to below investment grade securities that had been in an unrealized loss position for more than twelve months were $146.6 million.  Securities in an unrealized loss position rated below investment grade were 3.4% of invested assets.  We primarily purchase our investments with the intent to hold to maturity.  We do not expect these investments to adversely affect our liquidity or ability to maintain proper matching of assets and liabilities.

The following table shows the estimated market value, amortized cost, unrealized loss, and total time period that the security has been in an unrealized loss position for all below investment grade securities:

	Estimated		% Market		Amortized		% Amortized		Unrealized			% Unrealized
	Market Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)
<= 90 days	$	185,985	19.3	%	$	201,612	15.9	%	$	(15,627	)	5.2	%
>90 days but <= 180 days	194,988		20.3		234,772		18.6		(39,784		)	13.1
>180 days but <= 270 days	123,544		12.8		182,645		14.4		(59,101		)	19.5
>270 days but <= 1 year	164,703		17.1		206,401		16.3		(41,698		)	13.8
>1 year but <= 2 years	141,251		14.7		192,159		15.2		(50,908		)	16.8
>2 years but <= 3 years	32,132		3.3		48,361		3.8		(16,229		)	5.4
>3 years but <= 4 years	97,783		10.2		151,594		12.0		(53,811		)	17.8
>4 years but <= 5 years	21,041		2.2		45,335		3.6		(24,294		)	8.0
>5 years	1,124		0.1		2,491		0.2		(1,367		)	0.4
Total	$	962,551	100.0	%	$	1,265,370	100.0	%	$	(302,819	)	100.0	%

Of the total below investment grade securities, approximately $764.6 million and $105.9 million, respectively, relate to corporate securities and public utility securities.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

We meet our liquidity requirements primarily through positive cash flows from our operating activities.  Primary sources of cash are insurance premiums, deposits for policyholder accounts, investment sales and maturities, and investment income.  Primary uses of cash include benefit payments, withdrawals from policyholder accounts, investment purchases, policy acquisition costs, and other operating expenses.

While we anticipate that our cash flow will be sufficient to meet our investment commitments and operating cash needs in a normal credit market environment, we recognize that investment commitments scheduled to be funded may, from time to time, exceed the funds then available.  Therefore, we have established repurchase agreement programs to provide liquidity when needed.  We expect that the rate received on our investments will equal or exceed our borrowing rate.  As of September 30, 2008, we had no outstanding balance related to such borrowings. Additionally, we may, from time to time, sell short-duration stable value products to complement our cash management practices.  Depending on market conditions, we may also use securitization transactions involving our commercial mortgage loans to increase liquidity for the operating subsidiaries.

During the second quarter of 2008, we joined the FHLB of Cincinnati.  FHLB advances provide an attractive funding source for short-term borrowing and for the sale of funding agreements.  Membership in the FHLB requires that we purchase FHLB capital stock based on a minimum requirement and a percentage of the dollar amount of advances outstanding.  We held $58.1 million of common stock as of September 30, 2008, which is included in equity securities.  In addition, our obligations under the advances must be collateralized.  We maintain control over any such pledged assets, including the right of substitution.  As of September 30, 2008, we had $976 million of funding agreement-related advances outstanding under the FHLB program.

Under a revolving line of credit arrangement, we have the ability to borrow on an unsecured basis up to a maximum principal amount of $500 million (the “Credit Facility”).  This replaced our previously existing $200 million revolving line of credit.  The Company and PLC have the right in certain circumstances to request that the

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commitment under the Credit Facility be increased up to a maximum principal amount of $600 million. Balances outstanding under the Credit Facility accrue interest at a rate equal to (i) either the prime rate or the London Interbank Offered Rate (LIBOR), plus (ii) a spread based on the ratings of PLC’s senior unsecured long-term debt. The Credit Agreement provides that we are liable for the full amount of any obligations for borrowings or letters of credit, and will not be responsible for the obligations of PLC.  The maturity date on the Credit Facility is April 16, 2013.  PLC had an outstanding balance of $90.0 million at an interest rate of LIBOR plus 0.30% under the Credit Facility as of September 30, 2008. Of this amount, $75.0 million was used to purchase non-recourse funding obligations issued by a wholly owned special-purpose financial captive insurance company. For additional information related to special purpose financial captives, see “Capital Resources”. Both the Company and PLC were in compliance with all financial debt covenants of the Credit Facility as of September 30, 2008.

Our positive cash flows from operations are used to fund an investment portfolio that provides for future benefit payments.  We employ a formal asset/liability program to manage the cash flows of our investment portfolio relative to our long-term benefit obligations.  We were committed as of September 30, 2008, to fund mortgage loans in the amount of $840.0 million.  In response to the volatility and disruption in the credit markets, during the third quarter of 2008 we increased our cash and short-term investment balances to provide liquidity for cash outflows projected for the coming months.  Our subsidiaries held approximately $318.2 million in cash and short-term investments as of September 30, 2008, and we held $727.2 million in cash and short-term investments.

As of September 30, 2008, we reported approximately $684.9 million (fair value) of Auction Rate Securities (ARSs), which were all rated AAA. These holdings are student loan-backed auction rate securities, for which the underlying collateral is at least 97% guaranteed by the Federal Family Education Loan Program. While the auction rate market has experienced liquidity constraints, we believe that based on our current liquidity position and our operating cash flows, any lack of liquidity in the ARS market will not have a material impact on our liquidity, financial condition, or cash flows.

Sources and Uses of Cash

Our primary sources of funding are from our insurance operations and revenues from investments.  The states in which we and our insurance subsidiaries are domiciled impose certain restrictions on the ability to pay dividends.  These restrictions are generally based in part on the prior year’s statutory income and surplus.  Generally, these restrictions pose no short-term liquidity concerns.  We plan to retain substantial portions of our earnings primarily to support future growth.

Our liquidity requirements primarily relate to the liabilities associated with our various insurance and investment products, operating expenses, and income taxes.  Liabilities arising from insurance and investment products include the payment of policyholder benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans and obligations to redeem funding agreements.

We have used cash flows from operations and investment activities as a primary source to fund our liquidity requirements. Our primary cash inflows from operating activities are derived from premiums, annuity deposits, stable value contract deposits, and insurance and investment product fees and other income, including cost of insurance and surrender charges, contract underwriting fees, and intercompany dividends or distributions.  The principal cash inflows from investment activities result from repayments of principal, investment income and, as necessary, sales of invested assets.

We maintain investment strategies intended to provide adequate funds to pay benefits and expected surrenders, withdrawals, loans and redemption obligations without forced sales of investments.  In addition, we hold highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund our expected operating expenses, surrenders, and withdrawals. As of September 30, 2008, our total cash, cash equivalents and invested assets were $28.1 billion.

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The following chart shows the cash flows provided by or used in operating, investing, and financing activities for the nine months ended September 30, 2008 and September 30, 2007:

	Nine Months Ended
	September 30,
	2008			2007
	(Dollars In Thousands)
Net cash provided by operating activities	$	221,979		$	564,005
Net cash used in investing activities	(1,736,564		)	(1,190,912		)
Net cash provided by financing activities	1,475,768			725,492
Total	$	(38,817	)	$	98,585

Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007

Net cash provided by operating activities - Cash flows from operating activities are affected by the timing of premiums received, fees received, investment income, and expenses paid. Principal sources of cash include sales of our products and services. As an insurance business, we typically generate positive cash flows from operating activities, as premiums and deposits collected from our insurance and investment products exceed benefits paid and redemptions, and we invest the excess.  Accordingly, in analyzing our cash flows we focus on the change in the amount of cash available and used in investing activities.

Net cash used in investing activities- The variance in net cash used in investing activities for the nine months ended September 30, 2008 compared to September 30, 2007 was primarily the result of activity related to our investment portfolio.

Net cash provided by financing activities - Changes in cash from financing activities primarily relate to the issuance and repayment of borrowings and other capital transactions, as well as the issuance of, and redemptions and benefit payments on, investment contracts. The increase for the nine months ended September 30, 2008 compared to September 30, 2007 was primarily the result of fluctuations in investment product deposits and withdrawals.

Capital Resources

We have a $500 million revolving line of credit (the “Credit Facility”), under which we could borrow funds with balances due April 16, 2013.  PLC and the Company have the right in certain circumstances to request that the commitment under the Credit Facility be increased up to a maximum principal amount of $600 million.  No compensating balances are required to maintain the line of credit.  The line of credit arrangement contains, among other provisions, requirements for maintaining certain financial ratios and restrictions on the indebtedness that we and our subsidiaries can incur.  Additionally, the line of credit arrangement precludes us, on a consolidated basis, from incurring debt in excess of 40% of our total capital.  PLC had a $90.0 million outstanding balance as of September 30, 2008 under the Credit Facility at an interest rate of LIBOR plus 0.30%. Of this amount, $75.0 million was utilized by PLC to purchase non-recourse funding obligations issued by Golden Gate Captive Insurance Company (“Golden Gate”) a wholly owned special-purpose financial captive insurance company.  As the need arises and in light of the current credit market environment, we may utilize the Credit Facility to purchase additional non-recourse funding obligations from this wholly owned special-purpose financial captive insurance company in future quarters.  PLC and the Company were in compliance with our debt covenants under this facility as of September 30, 2008.

On September 30, 2008, Golden Gate increased by $200 million the capacity under its surplus notes facility (the “Facility”) through which Golden Gate may issue floating rate surplus notes resulting in a total capacity of $1 billion of aggregate principle amount. On that date, Golden Gate issued $75.0 million in aggregate principal amount of floating rate surplus notes, series B, due August 15, 2037 (the “Series B Notes” and together with the $800 million in aggregate principle amount of floating rate surplus notes previously issued under the Facility (the “Series A Surplus Notes”), the “Notes”) to PLC, resulting in an outstanding balance under the Facility in the aggregate principal amount of $875.0 million. The Series B Notes accrue interest at the rate of LIBOR plus 30 basis points. The Notes are direct financial obligations of Golden Gate and are not guaranteed by the Company or PLC. As the block of business grows and ages, unless additional funding

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mechanisms are put into place, reserving increases will reduce our available statutory capital and surplus.  We have experienced higher borrowing costs associated with the Series A Surplus Notes. The current rate on the Series A Surplus Notes is LIBOR plus 275 basis points; the maximum rate we could be required to pay is LIBOR plus 425 basis points.

Golden Gate II Captive Insurance Company (“Golden Gate II”), a special purpose financial captive insurance company wholly owned subsidiary, had $575.0 million of non-recourse funding obligations outstanding as of September 30, 2008.  These non-recourse funding obligations mature in 2052.  We do not anticipate having to pursue additional funding related to this block of business; however, we have contingent approval to issue an additional $100 million of obligations if necessary.  $275 million of this amount is currently accruing interest at a rate of LIBOR plus 30 basis points.  We have experienced higher proportional borrowing costs associated with $300 million of our non-recourse funding obligations supporting the business reinsured to Golden Gate II. These higher costs are the result of higher interest costs associated with the illiquidity of the current market for auction rate securities, as well as a rating downgrade of our guarantor by certain rating agencies.  The current rate associated with these obligations is LIBOR plus 200 basis points, which is the maximum rate we can be required to pay under these obligations.  These costs have partially been mitigated by a decrease in LIBOR during the nine months ended September 30, 2008.

A life insurance company’s statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners (“NAIC”), as modified by state law.  Generally speaking, other states in which a company does business defer to the interpretation of the domiciliary state with respect to NAIC rules, unless inconsistent with the other state’s law.  Statutory accounting rules are different from U.S. GAAP and are intended to reflect a more conservative view, for example, requiring immediate expensing of policy acquisition costs.  The NAIC’s risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula.  The achievement of long-term growth will require growth in our statutory capital.  We may secure additional statutory capital through various sources, such as retained statutory earnings or equity contributions by PLC.

We cede material amounts of insurance and transfer related assets to other insurance companies through reinsurance.  However, notwithstanding the transfer of related assets, we remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations that such reinsurer assumed.  We evaluate the financial condition of our reinsurers and monitor the concentration of credit risk arising from them.  During the three and nine months ended September 30, 2008, we ceded premiums to third-party reinsurers amounting to $363.8 million and $1.2 billion, respectively.  In addition, we had receivables from reinsurers amounting to $5.2 billion as of September 30, 2008.  We review reinsurance receivable amounts for collectability and establish appropriate bad debt reserves if deemed appropriate.

As of September 30, 2008, we reported residential mortgage-backed securities with a total market value of $57.4 million, or 0.2% of total invested assets, that were supported by collateral classified as sub-prime. $29.0 million, or 50.5%, of these securities were rated AAA.  Additionally, as of September 30, 2008, we held $654.9 million, or 2.3% of invested assets, of securities supported by collateral classified as Alt-A. While the estimated fair market values of certain of these securities have experienced significant declines, we believe that based on our current liquidity position and our operating cash flows, continuing to hold these securities until the fair value recovers will not have a material impact on our liquidity, financial condition, or cash flows.

In an effort to improve our capital position, during the three months ended September 30, 2008, certain noninsurance subsidiaries loaned securities with a fair value amount of $100.9 million, including accrued interest, to PLC.  PLC then transferred these securities to us through a capital contribution.

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Ratings

Various Nationally Recognized Statistical Rating Organizations (“rating organizations”) review the financial performance and condition of insurers, including the Company, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations. These ratings are important to maintaining public confidence in an insurer’s products, its ability to market its products and its competitive position.  The following table summarizes our insurance financial ratings from the major independent rating organizations as of November 6, 2008:

			Standard &
Financial Strength Rating	A.M. Best	Fitch	Poor’s	Moody’s
Insurance financial strength ratings:
Protective Life Insurance Company	A+	A+	AA	A1
West Coast Life Insurance Company	A+	A+	AA	A1
Protective Life and Annuity Insurance Company	A+	A+	AA	—
Lyndon Property Insurance Company	A-	—	—	—

Our ratings are subject to review and change by the rating organizations at any time and without notice.  A downgrade or other negative action by a ratings organization with respect to our financial strength ratings could adversely affect sales, relationships with distributors, the level of policy surrenders and withdrawals, competitive position in the marketplace, and the cost or availability of reinsurance.

During September of 2008, Fitch Ratings (“Fitch”) revised its outlook for the U.S. life insurance sector to negative from stable. Fitch stated that this revision reflected the significant deterioration in the credit and equity markets, and the expected impact of realized and unrealized investment losses on life insurers’ capital levels and profitability.  In addition, during October of 2008, Standard & Poor’s (“S&P”) and Moody’s Investor Service (“Moody’s”) each revised their outlook for the U.S. Life Insurance sector to negative. S&P stated that it expects to revise the ratings or outlooks on several life insurers in the next few months because of the impact of challenging macroeconomic conditions. Moody’s said it expects to take negative rating actions on life insurers that are “weakly positioned at their rating levels” and are most exposed and vulnerable to current negative trends, including rising investment losses and weakening economic conditions.

On November 5, 2008, Moody’s announced a one-step downgrade of the insurance financial strength (“IFS”) ratings of Protective Life Insurance Company and West Coast Life Insurance Company to A1 from Aa3. Moody’s stated that the outlook on the ratings is stable and that this rating action concludes its review of the Company that was begun on October 15, 2008. Also on November 5^th, Fitch announced a one-step downgrade of its IRS ratings of Protective Life Insurance Company, West Coast Life Insurance Company and Protective Life and Annuity Insurance Company to A+ from AA-. Fitch stated that the rating outlook is negative. The ratings downgrades announced by Moody’s and Fitch did not trigger any requirements for us to post collateral or otherwise negatively impact current obligations of the Company.

LIABILITIES

Many of our products contain surrender charges and other features that are designed to reward persistency and penalize the early withdrawal of funds.  Certain stable value and annuity contracts have market-value adjustments that protect us against investment losses if interest rates are higher at the time of surrender than at the time of issue.

As of September 30, 2008, we had policy liabilities and accruals of approximately $18.1 billion.  Our interest-sensitive life insurance policies have a weighted average minimum credited interest rate of approximately 3.70%.

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Contractual Obligations

The table below sets forth future maturities of non-recourse funding obligations, stable value products, operating lease obligations, other property lease obligations, mortgage loan commitments, and policyholder obligations.

We enter into various obligations to third parties in the ordinary course of our operations. However, we do not believe that our cash flow requirements can be assessed based upon an analysis of these obligations. The most significant factor affecting our future cash flows is our ability to earn and collect cash from our customers. Future cash outflows, whether they are contractual obligations or not, also will vary based upon our future needs. Although some outflows are fixed, others depend on future events. Examples of fixed obligations include our obligations to pay principal and interest on fixed-rate borrowings. Examples of obligations that will vary include obligations to pay interest on variable-rate borrowings and insurance liabilities that depend on future interest rates, market performance, or surrender provisions.  Many of our obligations are linked to cash-generating contracts. In addition, our operations involve significant expenditures that are not based upon commitments.  These include expenditures for income taxes and payroll.

As of September 30, 2008, in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109, we carried a $30.7 million liability for uncertain tax positions, including interest on unrecognized tax benefits.  These amounts are not included in the long-term contractual obligations table because of the difficulty in making reasonably reliable estimates of the occurrence or timing of cash settlements with the respective taxing authorities.

	Payments due by period
			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
	(Dollars In Thousands)
Non-recourse funding obligations(1)	$	4,262,137	$	84,024	$	168,047	$	168,047	$	3,842,019
Stable value products(2)	6,893,311		2,018,350		2,682,491		1,270,322		922,148
Operating leases(3)	28,473		6,447		10,863		6,232		4,931
Home office lease(4)	93,426		3,533		6,981		7,019		75,893
Mortgage loan commitments	840,013		840,013		—		—		—
Policyholder obligations(5)	21,122,990		1,355,990		2,891,409		2,688,464		14,187,127

(1)	Non-recourse funding obligations include all principal amounts owed on note agreements and expected interest payments due over the term of the notes.
(2)	Anticipated stable value products cash flows including interest.
(3)	Includes all lease payments required under operating lease agreements.
(4)	The lease payments shown assume we exercise our option to purchase the building at the end of the lease term. Additionally, the payments due by period above were computed based on the terms of the renegotiated lease agreement, which was entered in January 2007.
(5)	Estimated contractual policyholder obligations are based on mortality, morbidity, and lapse assumptions comparable to our historical experience, modified for recent observed trends. These obligations are based on current balance sheet values and include expected interest crediting, but do not incorporate an expectation of future market growth, or future deposits. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. As variable separate account obligations are legally insulated from general account obligations, the variable separate account obligations will be fully funded by cash flows from variable separate account assets. We expect to fully fund the general account obligations from cash flows from general account investments.

FAIR VALUE OF FINANCIAL INSTRUMENTS

On January 1, 2008, we adopted SFAS No. 157.  This standard defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.  The term “fair value” as used in this document is defined in accordance with SFAS No. 157. The cumulative effect of adopting this standard resulted in an increase to January 1, 2008 retained earnings of $1.5 million and a decrease in income before income taxes of $0.4 million for the nine months ended September 30, 2008. The standard describes three levels of inputs that may be used to measure fair value. For more information, see Note 1, Basis of Presentation and Summary of Significant Accounting Policies and Note 9, Fair Value of Financial Instruments.

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Available-for-sale securities and trading account securities are recorded at fair value, which is primarily based on actively traded markets where prices are based on either direct market quotes or observed transactions. Liquidity is a significant factor in the determination of the fair value for these securities.  Market price quotes may not be readily available for some positions, or for some positions within a market sector where trading activity has slowed significantly or ceased.  These situations are generally triggered by the market’s perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer’s financial position, changes in credit ratings, and cash flows on the investments.  As of September 30, 2008, $1.7 billion of available-for-sale and trading account assets were classified as level three fair value assets.

The fair values of derivative assets and liabilities include adjustments for market liquidity, counterparty credit quality and other deal specific factors, where appropriate. The fair values of derivative assets and liabilities traded in the over-the-counter market are determined using quantitative models that require the use of multiple market inputs including interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors, which are used to value the position. The predominance of market inputs are actively quoted and can be validated through external sources. Estimation risk is greater for derivative asset and liability positions that are either option-based or have longer maturity dates where observable market inputs are less readily available or are unobservable, in which case quantitative based extrapolations of rate, price or index scenarios are used in determining fair values. As of September 30, 2008, the level three fair values of derivative assets and liabilities determined by these quantitative models were $154.1 million and $13.4 million. These amounts reflect the full fair value of the derivatives as defined in accordance with SFAS No. 157 and do not isolate the discrete value associated with the specific subjective valuation variable.

The liabilities of certain of our annuity account balances are calculated at fair value using actuarial valuation models. These models use various observable and unobservable inputs including projected future cash flows, policyholder behavior, the Company’s credit rating and other market conditions.  As of September 30, 2008, the level three fair value of these liabilities was $154.2 million. This amount reflects the full fair value of the liabilities as defined in accordance with SFAS No. 157 and does not isolate the discrete value associated with the specific subjective valuation variable.

As of September 30, 2008, we changed certain assumptions used in our methodology for determining the fair value for retained beneficial interests in commercial mortgage-backed security (“CMBS”) holdings related to our sponsored commercial mortgage loan securitizations.  Prior to September 30, 2008, we used external broker valuations to determine the fair value of these positions. These valuations were based on the cash flows of the commercial mortgages underlying the notes, as well as observable market spread assumptions for investments with similar coupons and/or characteristics based on the fair value hierarchy criteria, and non-observable assumptions and factors utilizing general market information available as of the valuation date.  During the three months ended September 30, 2008, we determined that little or no secondary market existed for CMBS holdings similar to those in our portfolio, and additionally, certain of the tranches within our holdings fell below the collapse provision levels in the underlying security agreements.  Therefore, the relevant observable inputs from CMBS sales activity could not be obtained for what we considered a supportable or appropriate calculation of fair value based on our previous methodology.

As a result of the factors noted and in accordance with the clarifying guidance issued in SFAS No. 157-3, we determined the fair value of these CMBS holdings as of September 30, 2008 using a combination of external broker valuations and an internally developed model.  This model includes inputs derived by us based on assumed discount rates relative to our current mortgage loan lending rate and an expected cash flow analysis based on a review of the commercial mortgage loans underlying the notes.  The model also contains our determined representative risk adjustment assumptions related to nonperformance and liquidity risks.  We believe that this valuation approach provides a more accurate calculation of the fair value of these securities under the fair value hierarchy guidance and given the current inactive market conditions.

MARKET RISK EXPOSURES AND OFF-BALANCE SHEET ARRANGEMENTS

Our financial position and earnings are subject to various market risks including changes in interest rates, changes in the yield curve, changes in spreads between risk-adjusted and risk-free interest rates, changes in foreign currency rates, changes in used vehicle prices, equity price risks, and issuer defaults.  We analyze and manage the

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risks arising from market exposures of financial instruments, as well as other risks, through an integrated asset/liability management process.  Our asset/liability management programs and procedures involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, risk, and cash flow characteristics.  These programs also incorporate the use of derivative financial instruments primarily to reduce our exposure to interest rate risk, inflation risk, currency exchange risk, and equity market risk.

 The primary focus of our asset/liability program is the management of interest rate risk within the insurance operations.  This includes monitoring the duration of both investments and insurance liabilities to maintain an appropriate balance between risk and profitability for each product category, and for us as a whole.  It is our policy to generally maintain asset and liability durations within one-half year of one another, although, from time to time, a broader interval may be allowed.

We are exposed to credit risk within our investment portfolio and through derivative counterparties.  Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the instrument or contract. We manage credit risk through established investment policies which attempt to address quality of obligors and counterparties, credit concentration limits, diversification requirements and acceptable risk levels under expected and stressed scenarios.  Derivative counterparty credit risk is measured as the amount owed to us based upon current market conditions and potential payment obligations between us and our counterparties. We minimize the credit risk in derivative instruments by entering into transactions with high quality counterparties rated AA or higher.

Derivative instruments that are used as part of our interest rate risk management strategy include interest rate swaps, interest rate futures, interest rate options and interest rate swaptions.  Our inflation risk management strategy involves the use of swaps that require us to pay a fixed rate and receive a floating rate that is based on changes in the Consumer Price Index (“CPI”).  We use foreign currency swaps to manage our exposure to changes in the value of foreign currency denominated stable value contracts.  We also use S&P 500^® options to mitigate our exposure to the value of equity indexed annuity contracts.

Derivative instruments expose us to credit and market risk and could result in material changes from quarter-to-quarter.  We minimize our credit risk by entering into transactions with highly rated counterparties.  We manage the market risk associated with interest rate and foreign exchange contracts by establishing and monitoring limits as to the types and degrees of risk that may be undertaken.  We monitor our use of derivatives in connection with our overall asset/liability management programs and procedures.

In the ordinary course of our commercial mortgage lending operations, we will commit to provide a mortgage loan before the property to be mortgaged has been built or acquired.  The mortgage loan commitment is a contractual obligation to fund a mortgage loan when called upon by the borrower.  The commitment is not recognized in our financial statements until the commitment is actually funded.  The mortgage loan commitment contains terms, including the rate of interest, which may be different than prevailing interest rates.  As of September 30, 2008, we had outstanding mortgage loan commitments of $840.0 million at an average rate of 6.45%.

We believe our asset/liability management programs and procedures and certain product features provide protection against the effects of changes in interest rates under various scenarios.  Additionally, we believe our asset/liability management programs and procedures provide sufficient liquidity to enable us to fulfill our obligation to pay benefits under our various insurance and deposit contracts.  However, our asset/liability management programs and procedures incorporate assumptions about the relationship between short-term and long-term interest rates (i.e., the slope of the yield curve), relationships between risk-adjusted and risk-free interest rates, market liquidity, spread movements and other factors, and the effectiveness of our asset/liability management programs and procedures may be negatively affected whenever actual results differ from those assumptions.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 1, Basis of Presentation and Summary of Significant Accounting Policies, to the Consolidated Condensed Financial Statements for information regarding recently issued accounting standards.

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RECENT DEVELOPMENTS

On October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008 (the “EESA”) into law.  Pursuant to the EESA, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of securities from financial institutions for the purpose of stabilizing the financial markets.  Under EESA and the Troubled Asset Relief Program (“TARP”) Capital Purchase Plan, the U.S. Treasury has begun making equity investments in U.S. banks.  Under EESA, Treasury has the power to expand its investments to include insurers. There are reports that the Treasury is considering such action, but the action may be limited to insurers that own or are owned by a federally-regulated bank or thrift institution.  We cannot predict whether Treasury will include insurers in its program or, if it does, the criteria it will use in selecting participants and whether participation, or lack thereof, would be viewed positively or negatively. Further, we cannot predict what other actions Treasury or other governmental and regulatory bodies may take, nor can there be any assurance as to the impact any governmental or regulatory actions will have on the financial markets, the economy or our consolidated results of operations and financial position.

Credit markets have experienced reduced liquidity, higher volatility and widening credit spreads across numerous asset classes over the past several quarters, primarily as a result of marketplace uncertainty arising from higher defaults in sub-prime and Alt-A residential mortgage loans and a weakening of the overall economy.  In connection with this uncertainty, we believe investors and lenders have retreated from many investments in asset-backed securities including those associated with sub-prime and Alt-A residential mortgage loans, as well as types of debt investments with weak lender protections or those with limited transparency and/or complex features which hinder investor understanding. We believe such uncertainty has contributed to an increase in our net unrealized investment losses through declines in market values.  We expect to experience continued volatility in connection with the valuation of our fixed maturity investments. However, we believe that the current credit environment also provides us with opportunities to invest in select asset classes and sectors that may enhance our investment yields over time.

Revised Actuarial Guideline 38 was approved by the NAIC, with an effective date of July 1, 2005.  Actuarial Guideline 38, also known as AXXX, sets forth the reserve requirements for universal life insurance with secondary guarantees (“ULSG”).  The changes to Actuarial Guideline 38 increased the reserve levels required for many ULSG products, and potentially make those products more expensive and less competitive as compared to other products including term and whole life products.  To the extent that the additional reserves are considered to be economically redundant, capital market or other solutions may emerge to reduce the impact of the amendment.  See Note 2, Summary of Significant Accounting Policies to the Consolidated Audited Financial Statements for information regarding a recent capital market transaction designed to fund statutory reserves required by AXXX.  The NAIC has issued additional changes to AG38 and Regulation XXX, which had the effect of modestly decreasing the reserves required for certain traditional and universal life policies that are issued on January 1, 2007, and later.  In addition, accounting and actuarial groups within the NAIC are studying whether to change the accounting standards that relate to certain reinsurance credits, and whether, if changes are made, they are to be applied retrospectively, prospectively only, or in a phased-in manner; a requirement to reduce the reserve credit on ceded business, if applied retroactively, would have a negative impact on our statutory capital.  The NAIC is also currently working to reform state regulation in various areas, including comprehensive reforms relating to life insurance reserves.

Our ability to implement financing solutions designed to fund a portion of our statutory reserves on both the traditional and universal life blocks of business is dependent on factors such as our ratings, the size of the blocks of business affected, our mortality experience, credit market guarantors, and other factors.  We cannot predict the continued availability of such solutions or the form that the solution may take.  To the extent that such solutions are not available, our financial position could be adversely affected through impacts including, but not limited to, higher borrowing costs, surplus strain, lower sales capacity and possible reduced earnings expectations.  Management continues to monitor options related to these financing solutions.

During 2006, the NAIC made the determination that certain securities previously classified as “preferred securities” had both debt and equity characteristics and because of this, required unique reporting treatment.  Under a “short-term solution”, NAIC guidance mandated that certain of these securities may have to carry a lower rating for asset valuation reserve and risk-based capital calculations.  As a result, certain securities receive a lower rating classification for asset valuation reserve and risk-based capital calculations.  Our insurance subsidiaries currently invest in hybrid securities.  As of September 30, 2008, we (including both insurance and non-insurance subsidiaries)

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held approximately $1.3 billion (statutory carrying value) in securities that meet the aforementioned “notch-down” criteria, based on evaluation of the underlying characteristics of the securities.  The NAIC has since established a long-term solution, which effective January 1, 2009, provides for the classification of these hybrid securities as debt securities.

During 2006, the NAIC’s Reinsurance Task Force adopted a proposal suggesting broad changes to the United States reinsurance market, with the stated intent to establish a regulatory system that distinguishes financially strong reinsurers from weak reinsurers, without relying exclusively on their state or country of domicile, with collateral to be determined as appropriate.  The task force recommended that regulation of reinsurance procedures be amended to focus on broad based risk and credit criteria and not solely on U.S. licensure status.  Evaluation of this proposal will be taken under consideration by the NAIC’s Financial Condition (E) Committee, the Reinsurance Task Force’s parent committee, as one of its charges during 2007.  We cannot provide any assurance as to what impact such changes to the United States reinsurance industry will have on the availability, cost, or collateral restrictions associated with ongoing or future reinsurance transactions.

The NAIC adopted amendment(s) to the Unfair Trade Practices Act regarding the use of travel in insurance underwriting.  The amendment states that the denial of life insurance based upon an individual’s past lawful travel experiences or future lawful travel plans, is prohibited unless (i) the risk of loss for individuals traveling to a specified destination at a specified time is reasonably anticipated to be greater than if the individuals did not travel to that destinations at that time, and (ii) the risk of traveling to a specific destination is based on sound actuarial principles and actual or reasonably anticipated experience.  We cannot predict at this time what impact, if any, such changes would have on us.

The California Department of Insurance has promulgated proposed regulations that would characterize some life insurance agents as brokers and impose certain obligations on those agents that may conflict with the interests of insurance carriers or require the agent to, among other things, advise the client with respect to the best available insurer.  We cannot predict the outcome of this regulatory proposal or whether any other state will propose or adopt similar actions.

In connection with our discontinued Lender’s Indemnity product, we have discovered facts and circumstances that support allegations against third parties (including policyholders and the administrator of the associated loan program), and we have instituted litigation to establish the rights and liabilities of various parties.  A counterclaim in the litigation and separate related lawsuits have been filed by various parties (including the Chapter 11 Plan trustee) seeking to assert liability against us for various matters.  Claims that have been asserted against us in this litigation include alleged contractual claims, bad faith, claims with respect to policies for which premiums were not received by us, and recoupment based on a fraudulent transfer theory; we are vigorously defending these claims.  In addition, we are defending an arbitration claim by the reinsurer of this Lender’s Indemnity product.  The reinsurer asserts that it is entitled to a return of most of the Lender’s Indemnity claims that were paid on behalf of us by the administrator, claiming that the claims were not properly payable under the terms of the policies.  The reinsurer was under common ownership with the program administrator, and we are vigorously defending this arbitration.  Although we cannot predict the outcome of any litigation or arbitration, we do not believe that the outcome of these matters will have a material impact on our financial condition or results of operations.

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IMPACT OF INFLATION

Inflation increases the need for life insurance.  Many policyholders who once had adequate insurance programs may increase their life insurance coverage to provide the same relative financial benefit and protection.  Higher interest rates may result in higher sales of certain of our investment products.

The higher interest rates that have traditionally accompanied inflation could also affect our operations.  Policy loans increase as policy loan interest rates become relatively more attractive.  As interest rates increase, disintermediation of stable value and annuity account balances and individual life policy cash values may increase.  The market value of our fixed-rate, long-term investments may decrease, we may be unable to implement fully the interest rate reset and call provisions of our mortgage loans, and our ability to make attractive mortgage loans, including participating mortgage loans, may decrease.  In addition, participating mortgage loan income may decrease.  The difference between the interest rate earned on investments and the interest rate credited to life insurance and investment products may also be adversely affected by rising interest rates.

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Executive Summary” and “Liquidity and Capital Resources”, and Part II, Item 1A, Risk Factors, and Item 6, Exhibit 99, of this Report for market risk disclosures in light of the current difficult conditions in the financial and credit markets, and the economy generally.

Item 4.  CONTROLS AND PROCEDURES

(a)Disclosure controls and procedures

In order to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis, the Company’s management, under the direction of its Chief Executive Officer and Chief Financial Officer, evaluated its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of such date.  It should be noted that any system of controls, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.  Further, the design of any control system is based in part upon certain judgments, including the costs and benefits of controls and the likelihood of future events.  Because of these and other inherent limitations of control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been detected.

(b)Changes in internal control over financial reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the period ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.  The Company’s internal controls exist within a dynamic environment and the Company continually strives to improve its internal controls and procedures to enhance the quality of its financial reporting.

PART II

Item 1A.         Risk Factors

The operating results of companies in the insurance industry have historically been subject to significant fluctuations.  The factors which could affect the Company’s future results include, but are not limited to, general economic conditions and the risks and uncertainties.  In addition to the factors listed in the following paragraphs within this section and other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, Risk Factors and Cautionary Factors that may Affect Future Results in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect the Company’s business, financial condition, or future results of operations.

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A ratings downgrade or other negative action by a ratings organization could adversely affect the Company.

Various Nationally Recognized Statistical Rating Organizations (“rating organizations”) review the financial performance and condition of insurers, including the Company, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations.  These ratings are important to maintaining public confidence in the Company’s products, its ability to market its products and its competitive position.  A downgrade or other negative action by a ratings organization with respect to the financial strength ratings of the Company could adversely affect the Company in many ways, including the following: reducing new sales of insurance and investment products; adversely affecting relationships with distributors and sales agents; increasing the number or amount of policy surrenders and withdrawals of funds; requiring a reduction in prices for the Company’s insurance products and services in order to remain competitive; and adversely affecting the Company’s ability to obtain reinsurance at a reasonable price on reasonable terms or at all.  A downgrade of sufficient magnitude could result in the Company being required to collateralize reserves, balances or obligations under reinsurance, funding, swap and securitization agreements. A downgrade of sufficient magnitude could also result in the termination of funding and swap agreements.

Rating organizations assign ratings based upon several factors.  While most of the factors relate to the rated company, some of the factors relate to the views of the rating organization, general economic conditions and circumstances outside the rated company’s control.  In addition, rating organizations use various models and formulas to assess the strength of a rated company, and from time to time rating organizations have, in their discretion, altered the models.  Changes to the models could impact the rating organizations’ judgment of the rating to be assigned to the rated company.  The Company cannot predict what actions the rating organizations may take, or what actions the Company may take in response to the actions of the rating organizations, which could adversely affect the Company.

The Company may be required to establish a valuation allowance against its deferred tax assets, which could materially adversely affect the Company’s results of operations, financial condition and capital position.

Deferred tax assets refer to assets that are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income, including capital gains.  If it is determined that the deferred tax assets cannot be realized a deferred tax valuation allowance must be established.

Based on the Company’s current assessment of future taxable income, including available tax planning opportunities, the Company anticipates that it is more likely than not that it will generate sufficient taxable income to realize its deferred tax assets, and, therefore, the Company did not record a valuation allowance against its deferred tax assets as of September 30, 2008. If future events differ from the Company’s current forecasts, a valuation allowance may need to be established, which could have a material adverse effect on the Company’s results of operations, financial condition and capital position.

The Company’s investments are subject to market and credit risks.  These risks could be heightened during periods of extreme volatility or disruption in financial and credit markets.

The Company’s invested assets and derivative financial instruments are subject to customary risks of credit defaults and changes in market values.  These risks could be heightened during periods of extreme volatility or disruption in the financial and credit markets.  A widening of credit spreads will increase the unrealized losses in the Company’s investment portfolio.  The factors affecting the financial and credit markets could lead to other-than-temporary impairments of assets in the Company’s investment portfolio.

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The value of the Company’s commercial mortgage loan portfolio depends in part on the financial condition of the tenants occupying the properties that the Company has financed.  Factors that may affect the overall default rate on, and market value of, the Company’s invested assets, derivative financial instruments, and mortgage loans include interest rate levels, financial market performance, and general economic conditions as well as particular circumstances affecting the businesses of individual borrowers and tenants.

Significant continued financial and credit market volatility, changes in interest rates and credit spreads, credit defaults, market illiquidity, declines in equity prices, and declines in general economic conditions, either alone or in combination, could have a material adverse impact on the Company’s results of operations, financial condition or cash flows through realized losses, impairments and changes in unrealized loss positions.  In addition, market volatility can make it difficult for the Company to value certain of its assets, especially if trading becomes less frequent.  Valuations may include assumptions or estimates that may have significant period-to-period changes that could have an adverse impact on the Company’s results of operations or financial condition.

Credit market volatility or disruption could adversely impact the Company’s financial condition or results from operations.

The Company’s statutory surplus is also impacted by widening credit spreads as a result of the accounting for the assets and liabilities on its fixed market value adjusted (“MVA”) annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair value. In determining the statutory reserve for the fixed MVA annuities, the Company is required to use current crediting rates in the U.S. In many capital market scenarios, current crediting rates in the U.S. are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in the statutory reserve from period to period will likely substantially offset the change in the fair value of the statutory separate account assets. However, in periods of volatile credit markets, such as those the Company is now experiencing, actual credit spreads on investment assets may increase sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value losses. As actual credit spreads are not fully reflected in current crediting rates in the U.S., the calculation of statutory reserves will not substantially offset the change in fair value of the statutory separate account assets resulting in reductions in statutory surplus. This has resulted and may continue to result in the need to devote significant additional capital to support the product.

Disruption of the capital and credit markets could negatively affect the Company’s ability to meet its liquidity needs.

The Company needs liquidity to meet its obligations to its policyholders and its debt holders, and to pay its operating expenses.  The Company’s sources of liquidity include insurance premiums, annuity considerations, deposit funds, cash flow from investments and assets, and other income from its operations.  In normal credit and capital market conditions, the Company’s sources of liquidity also include, either directly or through PLC, a variety of short and long-term borrowing arrangements, including issuing debt securities, as well as raising capital by issuing a variety of equity securities.

When the credit and capital markets are disrupted as they have been recently, the Company may not be able, either directly or through PLC, to borrow or raise equity capital, or the cost of borrowing or raising equity capital may be prohibitively high.  If the Company’s internal sources of liquidity are inadequate during such periods, the Company could suffer negative effects from not being able, either directly or through PLC, to borrow or raise capital, or from having to do so on unfavorable terms.  The negative effects could include being forced to sell assets at a loss, a lowering of the Company’s financial strength ratings, and the possibility that customers, lenders, ratings agencies or regulators develop a negative perception of the Company’s financial prospects, which could lead to further adverse effects on the Company.

Difficult conditions in the economy generally could adversely affect the Company’s business and results from operations.

A general economic slowdown could adversely affect the Company in the form of consumer behavior and pressure on the Company’s investment portfolios.   Consumer behavior could include decreased demand for the Company’s products and elevated levels of policy lapses, policy loans, withdrawals and surrenders.  The Company’s investment and mortgage loan portfolios could be adversely affected as a result of deteriorating financial and

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business conditions affecting the issuers of the securities in the Company’s investment portfolio and the Company’s commercial mortgage loan borrowers and their tenants.

There can be no assurance that the actions of the U.S. Government or other governmental and regulatory bodies for the purpose of stabilizing the financial markets will achieve the intended effect.

On October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008 (the “EESA”) into law.  Pursuant to the EESA, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of securities from financial institutions for the purpose of stabilizing the financial markets.  Under EESA and the Troubled Asset Relief Program (“TARP”) Capital Purchase Plan, the U.S. Treasury has begun making equity investments in U.S. banks.  Under EESA, Treasury has the power to expand its investments to include insurers, and there are reports that the Treasury is considering such action.  The Company cannot predict whether Treasury will include insurers in its program or, if it does, the criteria it will use in selecting participants.  In addition, the Company cannot predict whether participation, or lack thereof, would be viewed positively or negatively.  If Treasury fails to include insurers in its programs, insurers could be at a competitive disadvantage as compared to other financial services companies.  The Company cannot predict what other actions Treasury or other governmental and regulatory bodies may take, nor can there be any assurance as to the impact any governmental or regulatory actions will have on the financial markets, the economy or the Company.

Item 6.            Exhibits

Exhibit 12	-	Consolidated Earnings Ratios.
Exhibit 31(a)	-	Certification Pursuant to §302 of the Sarbanes Oxley Act of 2002.
Exhibit 31(b)	-	Certification Pursuant to §302 of the Sarbanes Oxley Act of 2002.
Exhibit 32(a)	-	Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
Exhibit 32(b)	-	Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
Exhibit 99	-	Safe Harbor for Forward Looking Statements.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PROTECTIVE LIFE INSURANCE COMPANY
Date:     November 13, 2008	/s/ Steven G. Walker
	Steven G. Walker
	Senior Vice President, Controller
	and Chief Accounting Officer

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EX-12

Exhibit 12

CONSOLIDATED EARNINGS RATIOS

The following table sets forth, for the years and periods indicated, Protective Life Insurance Company’s (the “Company”) ratios of:

·Consolidated earnings to fixed charges.

·Consolidated earnings to fixed charges before interest credited on investment products.

	Nine Months Ended
	September 30,		Year Ended December 31,
	2008	2007	2007	2006	2005	2004	2003
Ratio of Consolidated Earnings to Fixed Charges(1)	0.9	1.4	1.4	1.5	1.5	1.6	1.5
Ratio of Consolidated Earnings to Fixed Charges before Interest Credited on Investment Products(2)	0.1	7.7	6.9	20.1	38.5	46.4	83.4

(1)

The Company calculates the ratio of “Consolidated Earnings to Fixed Charges” by dividing the sum of income (loss) from continuing operations before income tax (BT), interest expense (which includes an estimate of the interest component of operating lease expenses) (I) and interest credited on investment products (IP) by the sum of interest expense (I) and by interest expense on investment products (IP). The formula for this ratio is (BT+I+IP)/(I+IP). The Company continues to sell investment products that credit interest to the contract holder. Investment products include products such as guaranteed investment contracts, annuities, and variable universal life insurance policies. The inclusion of interest credited on investment products results in a negative impact on the ratio of earnings to fixed charges because the effect of increases in interest credited to contract holders more than offsets the effect of the increases in earnings.

(2)

The Company calculates the ratio of “Consolidated Earnings to Fixed Charges before Interest Credited on Investment Products” by dividing the sum of income (loss) from continuing operations before income tax (BT) and interest expense (I) by interest expense (I). The formula for this calculation, therefore, would be: (BT+I)/I.

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Exhibit 12

(continued)

COMPUTATION OF CONSOLIDATED EARNINGS RATIOS

	Nine Months Ended
	September 30,					Year Ended December 31,
	2008			2007		2007		2006		2005		2004		2003
	(Dollars In Thousands)
Computation of Ratio of Consolidated Earnings to Fixed Charges
Income (Loss) from Continuing Operations before Income Tax	$	(51,716	)	$	303,720	$	395,956	$	419,748	$	361,215	$	371,163	$	349,972
Add Interest Expense	54,452			45,618		66,707		22,012		9,632		8,167		4,249
Add Interest Credited on Investment Products	773,877			753,170		1,010,944		891,627		726,301		649,216		647,695
Earnings before Interest, Interest Credited on Investment Products and Taxes	$	776,613		$	1,102,508	$	1,473,607	$	1,333,387	$	1,097,148	$	1,028,546	$	1,001,916
Earnings before Interest, Interest Credited on Investment Products and Taxes Divided by Interest expense and Interest Credited on Investment Products	0.9			1.4		1.4		1.5		1.5		1.6		1.5
Computation of Ratio of Consolidated Earnings to Fixed Charges Before Interest Credited on Investment Products
Income (Loss) from Continuing Operations before Income Tax	$	(51,716	)	$	303,720	$	395,956	$	419,748	$	361,215	$	371,163	$	349,972
Add Interest Expense	54,452			45,618		66,707		22,012		9,632		8,167		4,249
Earnings before Interest and Taxes	$	2,736		$	349,338	$	462,663	$	441,760	$	370,847	$	379,330	$	354,221
Earnings before Interest and Taxes Divided by Interest Expense	0.1			7.7		6.9		20.1		38.5		46.4		83.4

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EX-31.(A)

Exhibit 31(a)

Certification Pursuant to §302 of the Sarbanes-Oxley Act of 2002

I, John D. Johns, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Protective Life Insurance Company for the period ended September 30, 2008;

2.Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 13, 2008
	/s/ John D. Johns
	John D. Johns
	Chairman of the Board, President and Chief Executive Officer

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EX-31.(B)

Exhibit 31(b)

Certification Pursuant to §302 of the Sarbanes-Oxley Act of 2002

I, Richard J. Bielen, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Protective Life Insurance Company for the period ended September 30, 2008;

2.Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 13, 2008
	/s/ Richard J. Bielen
	Richard J. Bielen
	Vice Chairman and Chief Financial Officer

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EX-32.(A)

Exhibit 32(a)

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Protective Life Insurance Company (the “Company”) for the period ending September 30, 2008 as filed with the Securities and Exchange Commission (the “Report”), I, John D. Johns, Chairman of the Board, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ John D. Johns

John D. Johns

Chairman of the Board, President and Chief Executive Officer

November 13, 2008

This certification accompanies the Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.

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EX-32.(B)

Exhibit 32(b)

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Protective Life Insurance Company (the “Company”) for the period ending September 30, 2008 as filed with the Securities and Exchange Commission (the “Report”), I, Richard J. Bielen, Vice Chairman and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Richard J. Bielen

Richard J. Bielen

Vice Chairman and Chief Financial Officer

November 13, 2008

This certification accompanies the Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.

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EX-99

Exhibit 99

to

Form 10-Q

of

Protective Life Insurance Company

for the nine months

ended September 30, 2008

Safe Harbor for Forward-Looking Statements

 The Private Securities Litigation Reform Act of 1995 (the “Act”) encourages companies to make “forward-looking statements” by creating a safe harbor to protect the companies from securities law liability in connection with forward-looking statements.  Forward-looking statements are based on future expectations rather than on historical facts.  Forward-looking statements can be identified by use of words such as “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” and similar expressions.  Protective Life Insurance Company (the “Company”) intends to qualify both its written and oral forward-looking statements for protection under the Act.

To qualify oral forward-looking statements for protection under the Act, a readily available written document must identify important factors that could cause actual results to differ materially from those in the forward-looking statements.  The Company provides the following information to qualify forward-looking statements for the safe harbor protection of the Act.

The operating results of companies in the insurance industry have historically been subject to significant fluctuations.  The factors which could affect the Company’s future results include, but are not limited to, general economic conditions and the risks and uncertainties that are discussed more fully below.

The Company is exposed to the risks of natural disasters, pandemics, malicious and terrorist acts that could adversely affect the Company’s operations.

While the Company has obtained insurance, implemented risk management and contingency plans, and taken preventive measures and other precautions, no predictions of specific scenarios can be made nor can assurance be given that there are not scenarios that could have an adverse effect on the Company.  A natural disaster or pandemic could adversely affect the mortality or morbidity experience of the Company or its reinsurers. A severe pandemic could result in a substantial increase in mortality experience and have a significant negative impact on the Company’s surplus capital. A pandemic could also have an adverse effect on lapses and surrenders of existing policies, as well as sales of new policies.  In addition, a pandemic could result in large areas being subject to quarantine, with the result that economic activity slows or ceases, adversely affecting the marketing or administration of the Company’s business within such area and/or the general economic climate, which in turn could have an adverse affect on the Company.  The possible macroeconomic effects of a pandemic could also adversely affect the Company’s asset portfolio, as well as many other variables.

The Company operates in a mature, highly competitive industry, which could limit its ability to gain or maintain its position in the industry and negatively affect profitability.

The insurance industry is a mature and highly competitive industry.  In recent years, the industry has experienced little growth in life insurance sales, though the aging population has increased the demand for retirement savings products.  The Company encounters significant competition in all lines of business from other insurance companies, many of which have greater financial resources than the Company and which may have a greater market share, offer a broader range of products, services or features, assume a greater level of risk, have lower operating or financing costs, or have different profitability expectations than the Company.  The Company also faces competition from other providers of financial services.  Competition could result in, among other things, lower sales or higher lapses of existing products.

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The Company’s move away from relying on reinsurance for newly written traditional life products results in a net reduction of current taxes (but an increase in deferred taxes).  The Company allocates the benefits of reduced current taxes to the Life Marketing segment and the profitability and competitive position of certain products is dependent on the continuation of existing tax rules and interpretations and the Company’s ability to generate taxable income.

The insurance industry is consolidating, with larger, potentially more efficient organizations emerging from consolidation.  Participants in certain of the Company’s independent distribution channels are also consolidating into larger organizations.  Some mutual insurance companies have converted to stock ownership, which gives them greater access to capital markets.  The ability of banks to increase their securities-related business or to affiliate with insurance companies may materially and adversely affect sales of all of the Company’s products by substantially increasing the number and financial strength of potential competitors.

The Company’s ability to compete is dependent upon, among other things, its ability to attract and retain distribution channels to market its insurance and investment products, its ability to develop competitive and profitable products, its ability to maintain low unit costs, and its maintenance of strong ratings from rating agencies.

As technology evolves, comparison of a particular product of any company for a particular customer with competing products for that customer is more readily available, which could lead to increased competition as well as agent or customer behavior, including persistency that differs from past behavior.

A ratings downgrade or other negative action by a ratings organization could adversely affect the Company.

Various Nationally Recognized Statistical Rating Organizations (“rating organizations”) review the financial performance and condition of insurers, including the Company, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations.  These ratings are important to maintaining public confidence in the Company’s products, its ability to market its products and its competitive position.  A downgrade or other negative action by a ratings organization with respect to the financial strength ratings of the Company could adversely affect the Company in many ways, including the following: reducing new sales of insurance and investment products; adversely affecting relationships with distributors and sales agents; increasing the number or amount of policy surrenders and withdrawals of funds; requiring a reduction in prices for the Company’s insurance products and services in order to remain competitive; and adversely affecting the Company’s ability to obtain reinsurance at a reasonable price on reasonable terms or at all.  A downgrade of sufficient magnitude could result in the Company being required to collateralize reserves, balances or obligations under reinsurance, funding, swap and securitization agreements. A downgrade of sufficient magnitude could also result in the termination of funding and swap agreements.

Rating organizations assign ratings based upon several factors.  While most of the factors relate to the rated company, some of the factors relate to the views of the rating organization, general economic conditions and circumstances outside the rated company’s control.  In addition, rating organizations use various models and formulas to assess the strength of a rated company, and from time to time rating organizations have, in their discretion, altered the models.  Changes to the models could impact the rating organizations’ judgment of the rating to be assigned to the rated company.  The Company cannot predict what actions the rating organizations may take, or what actions the Company may take in response to the actions of the rating organizations, which could adversely affect the Company.

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The Company’s policy claims fluctuate from period to period resulting in earnings volatility.

The Company’s results may fluctuate from period to period due to fluctuations in policy claims received by the Company.  Certain of the Company’s businesses may experience higher claims if the economy is growing slowly or in recession, or equity markets decline.  Additionally, beginning in the third quarter of 2005, the Company increased its retained amounts on newly written traditional life products.  This change will cause greater variability in financial results due to fluctuations in mortality results.

The Company’s results may be negatively affected should actual experience differ from management’s assumptions and estimates.

In the conduct of business, the Company makes certain assumptions regarding the mortality, persistency, expenses and interest rates, tax liability, business mix, frequency of claims, contingent liabilities or other factors appropriate to the type of business it expects to experience in future periods.  These assumptions are also used to estimate the amounts of deferred policy acquisition costs, policy liabilities and accruals, future earnings, and various components of the Company’s balance sheet.  These assumptions are used in the operations of the Company’s business in making decisions crucial to the success of the Company, including the pricing of products and expense structures relating to products.  The Company’s actual experience, as well as changes in estimates, is used to prepare the Company’s statements of income.  To the extent the Company’s actual experience and changes in estimates differ from original estimates, the Company’s financial condition is affected.

Mortality, morbidity, and casualty expectations incorporate assumptions about many factors, including for example, how a product is distributed, for what purpose the product is purchased, the mix of customers purchasing the products, persistency and lapses, future progress in the fields of health and medicine, and the projected level of used vehicle values.  Actual mortality, morbidity, and/or casualty experience will differ from expectations if actual results differ from those assumptions.  In addition, continued activity in the viatical, stranger-owned and/or life settlement industry could cause the Company’s level of lapses to differ from its assumptions about persistency and lapses, which could negatively impact the Company’s performance.

The calculations the Company uses to estimate various components of its balance sheet and statements of income are necessarily complex and involve analyzing and interpreting large quantities of data.  The Company currently employs various techniques for such calculations and it from time to time will develop and implement more sophisticated administrative systems and procedures capable of facilitating the calculation of more precise estimates.

Assumptions and estimates involve judgment, and by their nature are imprecise and subject to changes and revisions over time.  Accordingly, the Company’s results may be affected, positively or negatively, from time to time, by actual results differing from assumptions, by changes in estimates, and by changes resulting from implementing more sophisticated administrative systems and procedures that facilitate the calculation of more precise estimates.

The use of reinsurance introduces variability in the Company’s statements of income.

The timing of premium payments to and receipt of expense allowances from reinsurers may differ from the Company’s receipt of customer premium payments and incurrence of expenses.  These timing differences introduce variability in certain components of the Company’s statements of income and may also introduce variability in the Company’s quarterly results.

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The Company could be forced to sell investments at a loss to cover policyholder withdrawals.

Many of the products offered by the Company allow policyholders and contract holders to withdraw their funds under defined circumstances.  The Company manages its liabilities and configures its investment portfolios so as to provide and maintain sufficient liquidity to support expected withdrawal demands and contract benefits and maturities.  While the Company owns a significant amount of liquid assets, a certain portion of their assets are relatively illiquid.  If the Company experiences unexpected withdrawal or surrender activity, the Company could exhaust its liquid assets and be forced to liquidate other assets, perhaps at a loss or on other unfavorable terms.  If the Company is forced to dispose of assets at a loss or on unfavorable terms, it could have an adverse effect on the Company’s financial condition.  The degree of the adverse effect could vary in relation to the magnitude of the unexpected surrender or withdrawal activity.

Interest rate fluctuations could negatively affect the Company’s spread income or otherwise impact its business.

Significant changes in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the credited interest rates paid on outstanding policies and contracts.  Both rising and declining interest rates can negatively affect the Company’s spread income.  While the Company develops and maintains asset/liability management programs and procedures designed to mitigate the effect on spread income in rising or falling interest rate environments, no assurance can be given that changes in interest rates will not affect such spreads.

From time to time, the Company has participated in securities repurchase transactions that have contributed to the Company’s investment income.  No assurance can be given that such transactions will continue to be entered into and contribute to the Company’s investment income in the future.

Changes in interest rates may also impact its business in other ways.  Lower interest rates may result in lower sales of certain of the Company’s insurance and investment products.  In addition, certain of the Company’s insurance and investment products guarantee a minimum credited interest rate, and the Company could become unable to earn its spread income should interest rates decrease significantly.

Higher interest rates may create a less favorable environment for the origination of mortgage loans and decrease the investment income the Company receives in the form of prepayment fees, make-whole payments, and mortgage participation income.  Higher interest rates may also increase the cost of debt and other obligations having floating rate or rate reset provisions and may result in lower sales of variable products.

Additionally, the Company’s asset/liability management programs and procedures incorporate assumptions about the relationship between short-term and long-term interest rates (i.e., the slope of the yield curve) and relationships between risk-adjusted and risk-free interest rates, market liquidity, and other factors.  The effectiveness of the Company’s asset/liability management programs and procedures may be negatively affected whenever actual results differ from these assumptions.

In general, the Company’s results are improved when the yield curve is positively sloped (i.e., when long-term interest rates are higher than short-term interest rates), and will be adversely affected by a flat or negatively sloped curve.

Equity market volatility could negatively impact the Company’s business.

The amount of policy fees received from variable products is affected by the performance of the equity markets, increasing or decreasing as markets rise or fall.  Equity market volatility can also affect the profitability of variable products in other ways, in particular as a result of death benefit and withdrawal benefit guarantees in these products. The estimated cost of providing guaranteed minimum death benefits and guaranteed minimum withdrawal benefits incorporate various assumptions about the overall performance of equity markets. Periods of significant and sustained downturns in equity markets, increased equity volatility, or reduced interest rates could result in an

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increase in the valuation of the future policy benefit or policyholder account balance liabilities associated with such products, resulting in a reduction to net income.

The amortization of deferred policy acquisition costs relating to variable products and the estimated cost of providing guaranteed minimum death benefits and guaranteed minimum withdrawal benefits incorporate various assumptions about the overall performance of equity markets over certain time periods.  The rate of amortization of deferred policy acquisition costs and the cost of providing guaranteed minimum death benefits and guaranteed minimum withdrawal benefits could increase if equity market performance is worse than assumed.

Insurance companies are highly regulated and subject to numerous legal restrictions and regulations.

The Company and its subsidiaries are subject to government regulation in each of the states in which they conduct business.  Such regulation is vested in state agencies having broad administrative and in some instances discretionary power dealing with many aspects of the Company’s business, which may include, among other things, premium rates and increases thereto, reserve requirements, marketing practices, advertising, privacy, policy forms, reinsurance reserve requirements, acquisitions, mergers, and capital adequacy, and is concerned primarily with the protection of policyholders and other customers.  At any given time, a number of financial and/or market conduct examinations of the Company may be ongoing.  From time to time, regulators raise issues during examinations or audits of the Company that could, if determined adversely, have a material impact on the Company.  The Company is required to obtain state regulatory approval for rate increases for certain health insurance products, and the Company’s profits may be adversely affected if the requested rate increases are not approved in full by regulators in a timely fashion.

The purchase of life insurance products is limited by state insurable interest laws, which generally require that the purchaser of life insurance name a beneficiary that has some interest in the sustained life of the insured.  To some extent, the insurable interest laws present a barrier to the life settlement, or “stranger-owned” industry, in which a financial entity acquires an interest in life insurance proceeds, and efforts have been made in some states to liberalize the insurable interest laws.  To the extent these laws are relaxed, the Company’s lapse assumptions may prove to be incorrect.

The Company cannot predict whether or when regulatory actions may be taken that could adversely affect the Company or its operations.  Interpretations of regulations by regulators may change and statutes, regulations and interpretations may be applied with retroactive impact, particularly in areas such as accounting or reserve requirements.  Although the Company is subject to state regulation, in many instances the state regulatory models emanate from the National Association of Insurance Commissioners (“NAIC”).  Some of the NAIC pronouncements, particularly as they affect accounting issues, take effect automatically in the various states without affirmative action by the states.  Also, regulatory actions with prospective impact can potentially have a significant impact on currently sold products.  As an example of both retroactive and prospective impacts, in late 2005, the NAIC approved an amendment to Actuarial Guideline 38, commonly known as AXXX, which interprets the reserve requirements for universal life insurance with secondary guarantees.  This amendment retroactively increased the reserve requirements for universal life insurance with secondary guarantee products issued after July 1, 2005.  This change to Actuarial Guideline 38 (“AG38”) also affected the profitability of universal life products sold after the adoption date.  The NAIC is continuing to study reserving methodology and has issued additional changes to AXXX and Regulation XXX, which has had the effect of modestly decreasing the reserves required for certain traditional and universal life policies that are issued on January 1, 2007 and later.  In addition, accounting and actuarial groups within the NAIC have studied whether to change the accounting standards that relate to certain reinsurance credits, and if changes were made, whether they should be applied retrospectively, prospectively only, or in a phased-in manner.  A requirement to reduce the reserve credit on ceded business, if applied retroactively, would have a negative impact on the statutory capital of the Company.  The NAIC is also currently working to reform state regulation in various areas, including comprehensive reforms relating to life insurance reserves.

At the federal level, bills have been introduced in the U. S. Senate and the U.S. House of Representatives that would provide for an optional federal charter for life and property and casualty insurers, and another bill has been introduced in the U. S. House of Representatives that would pre-empt state law in certain respects with regard to the regulation of reinsurance.  Still other bills have been introduced in the House and Senate that are related to insurance. The Company cannot predict whether or in what form reforms will be enacted and, if so, whether the

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enacted reforms will positively or negatively affect the Company or whether any effects will be material.  Moreover, although with respect to some financial regulations and guidelines, states sometimes defer to the interpretation of the insurance department of the state of domicile, neither the action of the domiciliary state nor action of the NAIC is binding on a state.  Accordingly, a state could choose to follow a different interpretation.

The Company may be subject to regulation by the United States Department of Labor when providing a variety of products and services to employee benefit plans governed by the Employee Retirement Income Security Act (“ERISA”).  Severe penalties are imposed for breach of duties under ERISA.

Certain policies, contracts, and annuities offered by the Company are subject to regulation under the federal securities laws administered by the Securities and Exchange Commission.  The federal securities laws contain regulatory restrictions and criminal, administrative, and private remedial provisions.

Other types of regulation that could affect the Company include insurance company investment laws and regulations, state statutory accounting practices, anti-trust laws, minimum solvency requirements, state securities laws, federal privacy laws, insurable interest laws, federal anti-money laundering and anti-terrorism laws, and because the Company owns and operates real property, state, federal, and local environmental laws.  The Company cannot predict what form any future changes in these or other areas of regulation affecting the insurance industry might take or what effect, if any, such proposals might have on the Company if enacted into law.

Changes to tax law or interpretations of existing tax law could adversely affect the Company and its ability to compete with non-insurance products or reduce the demand for certain insurance products.

Under the Internal Revenue Code of 1986, as amended (the “Code”), income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products.  This favorable tax treatment may give certain of the Company’s products a competitive advantage over other non-insurance products.  To the extent that the Code is revised to reduce the tax-deferred status of life insurance and annuity products, or to increase the tax-deferred status of competing products, all life insurance companies, including the Company, would be adversely affected with respect to their ability to sell such products, and, depending upon grandfathering provisions, would be affected by the surrenders of existing annuity contracts and life insurance policies.  For example, changes in laws or regulations could restrict or eliminate the advantages of certain corporate or bank-owned life insurance products.  Changes in tax law, which have reduced the federal income tax rates on corporate dividends in certain circumstances, could make the tax advantages of investing in certain life insurance or annuity products less attractive.  Additionally, changes in tax law based on proposals to establish new tax advantaged retirement and life savings plans, if enacted, could reduce the tax advantage of investing in certain life insurance or annuity products.  In addition, life insurance products are often used to fund estate tax obligations.  Legislation has been enacted that would, over time, reduce and eventually eliminate the federal estate tax.  Under the legislation that has been enacted, the estate tax will be reinstated, in its entirety, in 2011 and thereafter.  President Bush and members of Congress have expressed a desire to modify the existing legislation, which modification could result in faster or more complete reduction or repeal of the estate tax.  If the estate tax is significantly reduced or eliminated, the demand for certain life insurance products could be adversely affected.  Additionally, the Company is subject to the federal corporation income tax.  The Company cannot predict what changes to tax law or interpretations of existing tax law may ultimately be enacted or adopted or whether such changes could adversely affect the Company.

The Company’s move away from relying on reinsurance for newly written traditional life products results in a net reduction of current taxes (but an increase in deferred taxes.)  The resulting benefit of reduced current taxes is attributed to the applicable life products and is an important component of the profitability of these products.  The profitability and competitive position of these products is dependent on the continuation of current tax law and the ability to generate taxable income.

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The Company may be required to establish a valuation allowance against its deferred tax assets, which could materially adversely affect the Company’s results of operations, financial condition and capital position.

Deferred tax assets refer to assets that are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income, including capital gains.  If it is determined that the deferred tax assets cannot be realized a deferred tax valuation allowance must be established.

Based on the Company’s current assessment of future taxable income, including available tax planning opportunities, the Company anticipates that it is more likely than not that it will generate sufficient taxable income to realize its deferred tax assets, and, therefore, the Company did not record a valuation allowance against its  deferred tax assets as of September 30, 2008. If future events differ from the Company’s current forecasts, a valuation allowance may need to be established, which could have a material adverse effect on the Company’s results of operations, financial condition and capital position.

Financial services companies are frequently the targets of litigation, including class action litigation, which could result in substantial judgments.

A number of civil jury verdicts have been returned against insurers, broker-dealers, and other providers of financial services involving sales, refund or claims practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or other persons with whom the insurer does business, and other matters.  Often these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive non-economic compensatory damages.  In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages, which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration.  Arbitration awards are subject to very limited appellate review.  In addition, in some class action and other lawsuits, companies have made material settlement payments.

Group health coverage issued through associations and credit insurance coverages have received some negative coverage in the media as well as increased regulatory consideration and review and litigation.  The Company has a small closed block of group health insurance coverage that was issued to members of an association; a purported class action lawsuit is currently pending against the Company in connection with this business.  The Company is also defending purported class action litigation challenging its practices relating to issuing refunds of unearned premiums upon termination of credit insurance.

In connection with our discontinued Lender’s Indemnity product, we have discovered facts and circumstances that support allegations against third parties (including policyholders and the administrator of the associated loan program), and we have instituted litigation to establish the rights and liabilities of various parties.  A counterclaim in the litigation and separate related lawsuits have been filed by various parties (including the Chapter 11 Plan trustee) seeking to assert liability against us for various matters.  Claims that have been asserted against us in this litigation include alleged contractual claims, bad faith, claims with respect to policies for which premiums were not received by us, and recoupment based on a fraudulent transfer theory; we are vigorously defending these claims.  In addition, we are defending an arbitration claim by the reinsurer of this Lender’s Indemnity product.  The reinsurer asserts that it is entitled to a return of most of the Lender’s Indemnity claims that were paid on behalf of us by the administrator, claiming that the claims were not properly payable under the terms of the policies.  The reinsurer was under common ownership with the program administrator, and we are vigorously defending this arbitration.  Although we cannot predict the outcome of any litigation or arbitration, we do not believe that the outcome of these matters will have a material impact on our financial condition or results of operations.

The Company, like other financial services companies, in the ordinary course of business is involved in litigation and arbitration.  Although the Company cannot predict the outcome of any litigation or arbitration, the Company does not believe that any such outcome will have a material impact on the financial condition or results of operations of the Company.

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Publicly held companies in general and the financial services industry in particular are sometimes the target of law enforcement investigations and the focus of increased regulatory scrutiny.

Publicly held companies in general and the financial services industry in particular are sometimes the target of law enforcement investigations relating to the numerous laws that govern publicly held companies and the financial services and insurance business.  The Company cannot predict the impact of any such investigations on PLC, the Company or the industry.

The financial services industry has become the focus of increased scrutiny by regulatory and law enforcement authorities relating to allegations of improper special payments, price-fixing, bid-rigging and other alleged misconduct, including payments made by insurers and other financial services providers to brokers and the practices surrounding the placement of insurance business and sales of other financial products as well as practices related to finite reinsurance.  Some publicly held companies have been the subject of enforcement or other actions relating to corporate governance and the integrity of financial statements, most recently relating to the issuance of stock options.  Such publicity may generate inquiries to or litigation against publicly held companies and/or financial service providers, even those who do not engage in the business lines or practices currently at issue.  It is impossible to predict the outcome of these investigations or proceedings, whether they will expand into other areas not yet contemplated, whether they will result in changes in insurance regulation, whether activities currently thought to be lawful will be characterized as unlawful, or the impact, if any, of this increased regulatory and law enforcement scrutiny of the financial services industry on the Company.  As some inquiries appear to encompass a large segment of the financial services industry, it would not be unusual for large numbers of companies in the financial services industry to receive subpoenas, requests for information from regulatory authorities or other inquiries relating to these and similar matters.  From time to time, the Company receives subpoenas, requests or other inquires and responds to them in the ordinary course of business.

The Company’s ability to maintain competitive unit costs is dependent upon the level of new sales and persistency of existing business.

The Company’s ability to maintain competitive unit costs is dependent upon a number of factors, such as the level of new sales, persistency (continuation or renewal) of existing business, and expense management.  A decrease in sales or persistency without a corresponding reduction in expenses may result in higher unit costs.

Additionally, a decrease in persistency may result in higher or more rapid amortization of deferred policy acquisition costs and thus higher unit costs, and lower reported earnings.  Although many of the Company’s products contain surrender charges, the charges decrease over time and may not be sufficient to cover the unamortized deferred policy acquisition costs with respect to the insurance policy or annuity contract being surrendered.  Some of the Company’s products do not contain surrender charge features and such products can be surrendered or exchanged without penalty.  A decrease in persistency may also result in higher claims.

The Company’s investments are subject to market and credit risks.  These risks could be heightened during periods of extreme volatility or disruption in financial and credit markets.

The Company’s invested assets and derivative financial instruments are subject to customary risks of credit defaults and changes in market values.  These risks could be heightened during periods of extreme volatility or disruption in the financial and credit markets.  A widening of credit spreads will increase the unrealized losses in the Company’s investment portfolio.  The factors affecting the financial and credit markets could lead to other-than-temporary impairments of assets in the Company’s investment portfolio.

The value of the Company’s commercial mortgage loan portfolio depends in part on the financial condition of the tenants occupying the properties that the Company has financed.  Factors that may affect the overall default rate on, and market value of, the Company’s invested assets, derivative financial instruments, and mortgage loans include interest rate levels, financial market performance, and general economic conditions as well as particular circumstances affecting the businesses of individual borrowers and tenants.

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Significant continued financial and credit market volatility, changes in interest rates and credit spreads, credit defaults, market illiquidity, declines in equity prices, acts of corporate malfeasance, ratings downgrades of the issuers or guarantors of these investments, and declines in general economic conditions, either alone or in combination, could have a material adverse impact on the Company’s results of operations, financial condition or cash flows through realized losses, impairments and changes in unrealized loss positions.  In addition, market volatility can make it difficult for the Company to value certain of its assets, especially if trading becomes less frequent.  Valuations may include assumptions or estimates that may have significant period-to-period changes that could have an adverse impact on the Company’s results of operations or financial condition.

The Company may not realize its anticipated financial results from its acquisitions strategy.

The Company’s acquisitions have increased its earnings in part by allowing the Company to enter new markets and to position itself to realize certain operating efficiencies.  There can be no assurance, however, that suitable acquisitions presenting opportunities for continued growth and operating efficiencies, or capital to fund acquisitions will continue to be available to the Company, or that the Company will realize the anticipated financial results from its acquisitions.

The Company may be unable to complete an acquisition, or completion of an acquisition may be more costly or take longer than expected or may have a different financing structure than initially contemplated.  The Company may be unable to obtain regulatory approvals that may be required to complete an acquisition.  There may be unforeseen liabilities that arise in connection with businesses that the Company acquires.

Additionally, in connection with its acquisitions, the Company assumes or otherwise becomes responsible for the obligations of policies and other liabilities of other insurers.  Any regulatory, legal, financial, or other adverse development affecting the other insurer could also have an adverse effect on the Company.

The Company may not be able to achieve the expected results from its recent acquisition.

On July 3, 2006, the Company completed its acquisition from JP Morgan Chase & Co. of the stock of five life insurance companies and the stock of four related non-insurance companies.  The Company may not achieve the returns projected from its analysis of the acquisition opportunity, and the effects of the purchase generally accepted in the United States of America (“U.S. GAAP”) accounting on the Company’s financial statements may be different than originally contemplated.

The Company is dependent on the performance of others.

The Company’s results may be affected by the performance of others because the Company has entered into various arrangements involving other parties.  For example, most of the Company’s products are sold through independent distribution channels, and variable annuity deposits are invested in funds managed by third parties.  Also, a substantial portion of the Chase Insurance Group acquisition business is being administered by third-party administrators.  Additionally, the Company’s operations are dependent on various technologies, some of which are provided and/or maintained by other parties.

Certain of these other parties may act on behalf of the Company or represent the Company in various capacities.  Consequently, the Company may be held responsible for obligations that arise from the acts or omissions of these other parties.

As with all financial services companies, its ability to conduct business is dependent upon consumer confidence in the industry and its products.  Actions of competitors and financial difficulties of other companies in the industry could undermine consumer confidence and adversely affect retention of existing business and future sales of the Company’s insurance and investment products.

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The Company’s reinsurers could fail to meet assumed obligations, increase rates or be subject to adverse developments that could affect the Company.

The Company cedes material amounts of insurance and transfer related assets to other insurance companies through reinsurance.  The Company may enter into third-party reinsurance arrangements under which the Company will rely on the third party to collect premiums, pay claims, and/or perform customer service functions.  However, notwithstanding the transfer of related assets or other issues, the Company remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed  Therefore, the failure of one or more of the Company’s reinsurers could negatively impact the Company’s earnings and financial position.

The Company’s ability to compete is dependent on the availability of reinsurance or other substitute financing solutions.  Premium rates charged by the Company are based, in part, on the assumption that reinsurance will be available at a certain cost.  Under certain reinsurance agreements, the reinsurer may increase the rate it charges the Company for the reinsurance.  Therefore, if the cost of reinsurance were to increase or if reinsurance were to become unavailable or if alternatives to reinsurance were not available to the Company, or if a reinsurer should fail to meet its obligations, the Company could be adversely affected.

Recently, access to reinsurance has become more costly for the Company as well as the insurance industry in general.  This could have a negative effect on the Company’s ability to compete.  In recent years, the number of life reinsurers has decreased as the reinsurance industry has consolidated.  The decreased number of participants in the life reinsurance market results in increased concentration risk for insurers, including the Company.  If the reinsurance market further contracts, the Company’s ability to continue to offer its products on terms favorable to the Company could be adversely impacted.

The Company has implemented, and plans to continue to expand, a reinsurance program through the use of captive reinsurers.  Under these arrangements, an insurer owned by the Company serves as the reinsurer, and the consolidated books and tax returns of the Company reflects a liability consisting of the full reserve amount attributable to the reinsured business.  The success of the Company’s captive reinsurance program and related marketing efforts is dependent on a number of factors outside the control of the Company, including continued access to financial solutions, a favorable regulatory environment, and the overall tax position of the Company.  If the captive reinsurance program is not successful the Company’s ability to continue to offer its products on terms favorable to the Company would be adversely impacted.

Computer viruses or network security breaches could affect the data processing systems of the Company or its business partners and could damage our business and adversely affect our financial condition and results of operations.

A computer virus could affect the data processing systems of the Company or its business partners, destroying valuable data or making it difficult to conduct business.  In addition, despite the Company’s implementation of network security measures, its servers could be subject to physical and electronic break-ins, and similar disruptions from unauthorized tampering with its computer systems.

The Company retains confidential information in its computer systems, and relies on sophisticated commercial technologies to maintain the security of those systems.  Anyone who is able to circumvent the Company’s security measures and penetrate the Company’s computer systems could access, view, misappropriate, alter, or delete any information in the systems, including personally identifiable customer information and proprietary business information.  In addition, an increasing number of states require that customers be notified of unauthorized access, use or disclosure of their information.  Any compromise of the security of the Company’s computer systems that result in inappropriate access, use or disclosure of personally identifiable customer information could damage the Company’s reputation in the marketplace, deter people from purchasing the Company’s products, subject the Company to significant civil and criminal liability and require the Company to incur significant technical, legal and other expenses.

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The Company’s ability to grow depends in large part upon the continued availability of capital.

The Company has recently deployed significant amounts of capital to support its sales and acquisitions efforts.  An amendment to Actuarial Guideline 38 increased the reserve requirements for universal life insurance with secondary guarantees for products issued after July 1, 2005.  This amendment, along with the continued reserve requirements of Regulation XXX for traditional life insurance products, has caused the sale of these products to consume additional capital.  The Company’s future marketing plans are dependent on its ability to access financing solutions.  Continuing disruption of the credit markets, or the Company’s inability to access capital could have a negative impact on the Company’s ability to grow.  Although the Company believes it has sufficient capital to fund its immediate capital needs, the amount of capital available can vary significantly from period to period due to a variety of circumstances, some of which are neither predictable nor foreseeable, nor within the Company’s control.  A lack of sufficient capital could impair the Company’s ability to grow.

New accounting rules or changes to existing accounting rules could negatively impact the Company.

The Company is required to comply with U.S. GAAP.  A number of organizations are instrumental in the development and interpretation of U.S. GAAP such as the United States Securities and Exchange Commission (the “SEC”), the Financial Accounting Standards Board (“FASB”), and the American Institute of Certified Public Accountants (“AICPA”).  U.S. GAAP is subject to constant review by these organizations and others in an effort to address emerging accounting rules and issue interpretative accounting guidance on a continual basis.  The Company can give no assurance that future changes to U.S. GAAP will not have a negative impact on the Company.  U.S. GAAP includes the requirement to carry certain investments and insurance liabilities at fair value. These fair values are sensitive to various factors including, but not limited to, interest rate movements, credit spreads, and various other factors. Because of this, changes in these fair values may cause increased levels of volatility in the Company’s financial statements.

In addition, the Company is required to comply with statutory accounting principles (“SAP”).  SAP and various components of SAP (such as actuarial reserving methodology) are subject to constant review by the NAIC and its task forces and committees as well as state insurance departments in an effort to address emerging issues and otherwise improve or alter financial reporting.  Various proposals either are currently or have previously been pending before committees and task forces of the NAIC, some of which, if enacted, would negatively affect the Company, including one that relates to certain reinsurance credits, and some of which could positively impact the Company.  The NAIC is also currently working to reform state regulation in various areas, including comprehensive reforms relating to life insurance reserves and the accounting for such reserves.  The Company cannot predict whether or in what form reforms will be enacted and, if so, whether the enacted reforms will positively or negatively affect the Company.  Moreover, although in general with respect to regulations and guidelines, states defer to the interpretation of the insurance department of the state of domicile, neither the action of the domiciliary state nor action of the NAIC is binding on a state.  Accordingly, a state could choose to follow a different interpretation.  The Company can give no assurance that future changes to SAP or components of SAP will not have a negative impact on the Company.

The Company’s risk management policies and procedures could leave it exposed to unidentified or unanticipated risk, which could negatively affect our business or result in losses.

The Company has developed risk management policies and procedures and expects to continue to enhance these in the future.  Nonetheless, the Company’s policies and procedures to identify, monitor, and manage both internal and external risks may not predict future exposures, which could be different or significantly greater than expected.

These may not be the only risks facing the Company.  Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may adversely affect our business, financial condition and/or operating results.

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Credit market volatility or disruption could adversely impact the Company’s financial condition or results from operations.

Significant volatility or disruption in credit markets could have an adverse impact on either the Company’s financial condition or results from operations in several ways.  Changes in interest rates and credit spreads could cause market price and cash flow variability in the fixed income instruments in the Company’s investment portfolio.  Significant volatility and lack of liquidity in the credit markets could cause issuers of the fixed-income securities in the Company’s investment portfolio to default on either principal or interest payments on these securities.  Additionally, market price valuations may not accurately reflect the underlying expected cash flows of securities within the Company’s investment portfolio.

The Company’s statutory surplus is also impacted by widening credit spreads as a result of the accounting for the assets and liabilities on its fixed market value adjusted (“MVA”) annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair value. In determining the statutory reserve for the fixed MVA annuities, the Company is required to use current crediting rates in the U.S. In many capital market scenarios, current crediting rates in the U.S. are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in the statutory reserve from period to period will likely substantially offset the change in the fair value of the statutory separate account assets. However, in periods of volatile credit markets, such as those the Company is now experiencing, actual credit spreads on investment assets may increase sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value losses. As actual credit spreads are not fully reflected in current crediting rates in the U.S., the calculation of statutory reserves will not substantially offset the change in fair value of the statutory separate account assets resulting in reductions in statutory surplus. This has resulted and may continue to result in the need to devote significant additional capital to support the product.

Volatility or disruption in the credit markets could also impact the Company’s ability to efficiently access financial solutions for purposes of issuing long term debt for financing purposes or obtain financial solutions for purposes of supporting certain traditional and universal life insurance products for capital management purposes or result in an increase in the cost of existing securitization structures.

The ability of the Company to implement financing solutions designed to fund a portion of statutory reserves on both the traditional and universal life blocks of business is dependent upon factors such as the ratings of the Company, the size of the blocks of business affected, the mortality experience of the Company, the credit market and other factors.  The Company cannot predict the continued availability of such solutions to the Company or the form that the market may dictate.  To the extent that such financing solutions are not available, the Company’s financial position could be adversely affected through impacts including, but not limited to, higher borrowing costs, surplus strain, lower sales capacity and possible reduced earnings expectations.

Disruption of the capital and credit markets could negatively affect the Company’s ability to meet its liquidity and financing needs.

The Company needs liquidity to meet its obligations to its policyholders and its debt holders, and to pay its operating expenses.  The Company’s sources of liquidity include insurance premiums, annuity considerations, deposit funds, cash flow from investments and assets, and other income from its operations.  In normal credit and capital market conditions, the Company’s sources of liquidity also include, either directly or through PLC, a variety of short and long-term borrowing arrangements, including issuing debt securities, as well as raising capital by issuing a variety of equity securities.

The Company’s business is dependent on the capital and credit markets, including confidence in such markets. When the credit and capital markets are disrupted and confidence is eroded, as has been the case recently, the Company may not be able, either directly or through PLC, to borrow or raise equity capital, or the cost of borrowing or raising equity capital may be prohibitively high.  If the Company’s internal sources of liquidity are inadequate during such periods, the Company could suffer negative effects from not being able, either directly or through PLC, to borrow or raise capital, or from having to do so on unfavorable terms.  The negative effects could include being forced to sell assets at a loss, a lowering of the Company’s financial strength ratings, and the possibility that

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customers, lenders, ratings agencies or regulators develop a negative perception of the Company’s financial prospects, which could lead to further adverse effects on the Company.

Difficult conditions in the economy generally could adversely affect the Company’s business and results from operations.

A general economic slowdown could adversely affect the Company in the form of consumer behavior and pressure on the Company’s investment portfolios.   Consumer behavior could include decreased demand for the Company’s products and elevated levels of policy lapses, policy loans, withdrawals and surrenders.  The Company’s investment and mortgage loan portfolios could be adversely affected as a result of deteriorating financial and business conditions affecting the issuers of the securities in the Company’s investment portfolio and the Company’s commercial mortgage loan borrowers and their tenants.

There can be no assurance that the actions of the U.S. Government or other governmental and regulatory bodies for the purpose of stabilizing the financial markets will achieve their intended effect.

On October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008 (the “EESA”) into law.  Pursuant to the EESA, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of securities from financial institutions for the purpose of stabilizing the financial markets.  Under EESA and the Troubled Asset Relief Program (“TARP”) Capital Purchase Plan, the U.S. Treasury has begun making equity investments in U.S. banks.  Under EESA, Treasury has the power to expand its investments to include insurers, and there are reports that the Treasury is considering such action.  The Company cannot predict whether Treasury will include insurers in its program or, if it does, the criteria it will use in selecting participants. In addition, the Company cannot predict whether participation, or lack thereof, would be viewed positively or negatively. If Treasury fails to include insurers in its programs, insurers could be at a competitive disadvantage as compared to other financial services companies. The Company cannot predict what other actions Treasury or other governmental and regulatory bodies may take, nor can there be any assurance as to the impact any governmental or regulatory actions will have on the financial markets, the economy or the Company.

Forward-looking statements express expectations of future events and/or results.  All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.  Due to these inherent uncertainties, investors are urged not to place undue reliance on forward-looking statements.  In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to projections over time.

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