10-Q

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, 2010

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 (State or other jurisdiction of incorporation or organization) 63-0169720 (IRS Employer Identification Number)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. 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 Act).  Yes o  No x

Number of shares of Common Stock, $1.00 Par Value, outstanding as of November 1, 2010:  5,000,000

PROTECTIVE LIFE INSURANCE COMPANY

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS

		Page
	PART I: Financial Information
Item 1.	Financial Statements (unaudited):
	Consolidated Condensed Statements of Income for the Three and Nine Months Ended September 30, 2010 and 2009	3
	Consolidated Condensed Balance Sheets as of September 30, 2010 and December 31, 2009	4
	Consolidated Condensed Statement of Shareowners’ Equity For The Nine Months Ended September 30, 2010	5
	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009	7
	Notes to Consolidated Condensed Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	99
Item 4.	Controls and Procedures	99
	PART II
Item 1A.	Risk Factors and Cautionary Factors that may Affect Future Results	100
Item 6.	Exhibits	106
	Signature	107

2

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

	For The						For The
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars In Thousands)
Revenues
Premiums and policy fees	$	636,239		$	648,660		$	1,936,279		$	1,980,473
Reinsurance ceded	(326,716		)	(347,262		)	(999,555		)	(1,091,483		)
Net of reinsurance ceded	309,523			301,398			936,724			888,990
Net investment income	413,377			395,697			1,220,113			1,214,330
Realized investment (losses) gains:
Derivative financial instruments	(95,474		)	(195,971		)	(239,297		)	(201,305		)
All other investments	111,643			165,784			230,009			292,461
Other-than-temporary impairment losses	(12,656		)	(14,873		)	(71,066		)	(180,920		)
Portion of loss recognized in other comprehensive income (before taxes)	5,151			(16,095		)	34,923			19,299
Net impairment losses recognized in earnings	(7,505		)	(30,968		)	(36,143		)	(161,621		)
Other income	30,579			20,105			78,341			56,364
Total revenues	762,143			656,045			2,189,747			2,089,219
Benefits and expenses
Benefits and settlement expenses, net of reinsurance ceded: (three months: 2010 - $309,408; 2009 - $312,118; nine months: 2010 - $974,483; 2009 - $1,024,075)	545,817			516,031			1,572,289			1,489,314
Amortization of deferred policy acquisition costs and value of business acquired	37,507			41,652			130,902			231,814
Other operating expenses, net of reinsurance ceded: (three months: 2010 - $50,119; 2009 - $55,714; nine months: 2010 - $147,028; 2009 - $163,604)	76,614			55,339			210,709			154,440
Total benefits and expenses	659,938			613,022			1,913,900			1,875,568
Income before income tax	102,205			43,023			275,847			213,651
Income tax expense	34,557			14,551			91,408			73,602
Net income	$	67,648		$	28,472		$	184,439		$	140,049

See Notes to Consolidated Condensed Financial Statements

3

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

	As of
	September 30,			December 31,
	2010			2009
	(Dollars In Thousands)
Assets
Fixed maturities, at fair value (amortized cost: 2010 - $23,568,043; 2009 - $23,190,949)	$	24,803,717		$	22,795,260
Equity securities, at fair value (cost: 2010 - $290,118; 2009 - $240,764)	295,223			235,124
Mortgage loans (2010 includes: $951,105 related to securitizations)	4,870,905			3,870,587
Investment real estate, net of accumulated depreciation (2010 - $743; 2009 - $615)	7,219			7,347
Policy loans	767,214			794,276
Other long-term investments	265,659			216,189
Short-term investments	477,543			1,039,947
Total investments	31,487,480			28,958,730
Cash	107,185			162,858
Accrued investment income	318,058			280,467
Accounts and premiums receivable, net of allowance for uncollectible amounts (2010 - $4,530; 2009 - $5,130)	48,629			44,786
Reinsurance receivables	5,460,513			5,239,852
Deferred policy acquisition costs and value of business acquired	3,611,251			3,625,271
Goodwill	90,744			93,068
Property and equipment, net of accumulated depreciation (2010 - $126,842; 2009 - $121,948)	36,847			35,823
Other assets	426,664			402,062
Income tax receivable	7,967			122,208
Assets related to separate accounts
Variable annuity	3,899,308			2,948,457
Variable universal life	336,299			316,007
Total Assets	$	45,830,945		$	42,229,589
Liabilities
Policy liabilities and accruals	$	19,087,214		$	18,503,181
Stable value product account balances	3,105,822			3,581,150
Annuity account balances	10,451,322			9,911,040
Other policyholders’ funds	577,162			514,952
Other liabilities	1,000,056			644,663
Mortgage loan backed certificates	74,324			—
Deferred income taxes	1,133,005			577,349
Non-recourse funding obligations	1,372,500			1,555,000
Liabilities related to separate accounts
Variable annuity	3,899,308			2,948,457
Variable universal life	336,299			316,007
Total liabilities	41,037,012			38,551,799
Commitments and contingencies - Note 7
Shareowners’ equity
Preferred Stock, $1 par value, shares authorized: 2,000; Liquidation preference: $2,000	2			2
Common Stock, $1 par value, shares authorized and issued: 2010 and 2009 - 5,000,000	5,000			5,000
Additional paid-in-capital	1,361,734			1,361,734
Retained earnings	2,778,233			2,579,504
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on investments, net of income tax: (2010 - $366,077; 2009 - $(118,243))	679,858			(219,121		)
Net unrealized losses relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (2010 - $(7,633); 2009 - $(16,694))	(14,176		)	(31,002		)
Accumulated loss - derivatives, net of income tax: (2010 - $(9,002); 2009 - $(10,182))	(16,718		)	(18,327		)
Total shareowners’ equity	4,793,933			3,677,790
Total liabilities and shareowners’ equity	$	45,830,945		$	42,229,589

See Notes to Consolidated Condensed Financial Statements

4

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNERS’ EQUITY

(Unaudited)

									Accumulated Other
									Comprehensive Income (Loss)
					Additional				Net Unrealized			Accumulated			Total
	Preferred		Common		Paid-In-		Retained		Gains / (Losses)			Gain / (Loss)			Shareowners’
	Stock		Stock		Capital		Earnings		on Investments			Derivatives			Equity
	(Dollars In Thousands)
Balance, December 31, 2009	$	2	$	5,000	$	1,361,734	$	2,579,504	$	(250,123	)	$	(18,327	)	$	3,677,790
Net income for the three months ended March 31, 2010							76,177								76,177
Change in net unrealized gains/losses on investments (net of income tax - $141,790)									262,782						262,782
Reclassification adjustment for investment amounts included in net income (net of income tax - $1,168)									2,238						2,238
Change in net unrealized gains/losses relating to other-than-temporary impaired investments for which a portion has been recognized in earnings (net of income tax $(3,495))									(6,492		)				(6,492		)
Change in accumulated gain (loss) derivatives (net of income tax - $3,423)												5,718			5,718
Reclassification adjustment for derivatives amounts included in net income (net of income tax - $(974))												(1,752		)	(1,752		)
Comprehensive income for the three months ended March 31, 2010															338,671
Capital contributions					—										—
Cumulative effect adjustments							14,290								14,290
Balance, March 31, 2010	$	2	$	5,000	$	1,361,734	$	2,669,971	$	8,405		$	(14,361	)	$	4,030,751
Net income for the three months ended June 30, 2010							40,614								40,614
Change in net unrealized gains/losses on investments (net of income tax - $130,532)									242,408						242,408
Reclassification adjustment for investment amounts included in net income (net of income tax - $3,801)									7,069						7,069
Change in net unrealized gains/losses relating to other-than-temporary impaired investments for which a portion has been recognized in earnings (net of income tax $(6,924))									(12,860		)				(12,860		)
Change in accumulated gain (loss) derivatives (net of income tax - $(3,229))												(5,952		)	(5,952		)
Reclassification adjustment for derivative amounts included in net income (net of income tax - $768)												1,382			1,382
Comprehensive income for the three months ended June 30, 2010															272,661
Capital contributions					—										—
Cumulative effect adjustments							—								—
Balance, June 30, 2010	$	2	$	5,000	$	1,361,734	$	2,710,585	$	245,022		$	(18,931	)	$	4,303,412

See Notes to Consolidated Condensed Financial Statements

5

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNERS’ EQUITY

(Unaudited)

(continued)

									Accumulated Other
									Comprehensive Income (Loss)
					Additional				Net Unrealized			Accumulated			Total
	Preferred		Common		Paid-In-		Retained		Gains / (Losses)			Gain / (Loss)			Shareowners’
	Stock		Stock		Capital		Earnings		on Investments			Derivatives			Equity
	(Dollars In Thousands)
Net income for the three months ended September 30, 2010							67,648								67,648
Change in net unrealized gains/losses on investments (net of income tax - $210,650)									391,216						391,216
Reclassification adjustment for investment amounts included in net income (net of income tax - $(3,621))									(6,734		)				(6,734		)
Change in net unrealized gains/losses relating to other-than-temporary impaired investments for which a portion has been recognized in earnings (net of income tax $19,480)									36,178						36,178
Change in accumulated gain (loss) derivatives (net of income tax - $1,951)												3,581			3,581
Reclassification adjustment for derivative amounts included in net income (net of income tax - $(760))												(1,368		)	(1,368		)
Comprehensive income for the three months ended September 30, 2010															490,521
Capital contributions					—										—
Cumulative effect adjustments							—								—
Balance, September 30, 2010	$	2	$	5,000	$	1,361,734	$	2,778,233	$	665,682		$	(16,718	)	$	4,793,933

See Notes to Consolidated Condensed Financial Statements

6

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	For The
	Nine Months Ended
	September 30,
	2010			2009
	(Dollars In Thousands)
Cash flows from operating activities
Net income	$	184,439		$	140,049
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Realized investment losses (gains)	45,431			70,465
Amortization of deferred policy acquisition costs and value of business acquired	130,902			231,814
Capitalization of deferred policy acquisition costs	(356,486		)	(308,963		)
Depreciation expense	6,661			5,386
Deferred income tax	(8,527		)	(55,167		)
Accrued income tax	114,241			21,833
Interest credited to universal life and investment products	658,488			749,552
Policy fees assessed on universal life and investment products	(471,383		)	(441,410		)
Change in reinsurance receivables	(220,661		)	(71,954		)
Change in accrued investment income and other receivables	(35,380		)	(32,396		)
Change in policy liabilities and other policyholders’ funds of traditional life and health products	330,849			175,863
Trading securities:
Maturities and principal reductions of investments	262,153			446,993
Sale of investments	555,904			595,676
Cost of investments acquired	(769,120		)	(587,057		)
Other net change in trading securities	20,078			(152,691		)
Change in other liabilities	(32,492		)	(107,074		)
Other, net	117,875			45,856
Net cash provided by operating activities	532,972			726,775
Cash flows from investing activities
Maturities and principal reductions of investments, available-for-sale	1,368,646			1,998,977
Sale of investments, available-for-sale	2,802,632			1,235,988
Cost of investments acquired, available-for-sale	(5,269,090		)	(3,286,195		)
Mortgage loans:
New borrowings	(216,614		)	(192,849		)
Repayments	240,745			191,836
Change in investment real estate, net	128			227
Change in policy loans, net	27,062			22,531
Change in other long-term investments, net	(136,550		)	(18,867		)
Change in short-term investments, net	512,528			110,575
Net unsettled security transactions	80,412			48,494
Purchase of property and equipment	(6,975		)	(5,798		)
Net cash (used in) provided by investing activities	(597,076		)	104,919
Cash flows from financing activities
Issuance (repayment) of non-recourse funding obligations	(182,500		)	50,000
Capital contributions	—			135,000
Investments product deposits and change in universal life deposits	2,652,811			1,956,715
Investment product withdrawals	(2,459,566		)	(2,902,277		)
Other financing activities, net	(2,314		)	(18,333		)
Net cash provided by (used in) financing activities	8,431			(778,895		)
Change in cash	(55,673		)	52,799
Cash at beginning of period	162,858			127,809
Cash at end of period	$	107,185		$	180,608

See Notes to Consolidated Condensed Financial Statements

7

PROTECTIVE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.             BASIS OF PRESENTATION

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 (“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 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, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by 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, 2009. The Company is a wholly owned subsidiary of Protective Life Corporation (“PLC”).

The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to changing competition, economic conditions, interest rates, investment performance, insurance ratings, claims, persistency, and other factors.

Reclassifications

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

Entities Included

The consolidated condensed financial statements include the accounts of Protective Life Insurance Company and its affiliate companies in which the Company holds a majority voting or economic interest. Intercompany balances and transactions have been eliminated.

2.             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Pronouncements Recently Adopted

Accounting Standard Update (“ASU” or “Update”) No. 2010-06 — Fair Value Measurements and Disclosures — Improving Disclosures about Fair Value Measurements. In January of 2010, Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-06 — Fair Value Measurements and Disclosures — Improving Disclosures about Fair Value Measurements. This Update provides amendments to Subtopic 820-10 that requires the following new disclosures. 1) A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).

This Update provides amendments to Subtopic 820-10 that clarifies existing disclosures. 1) A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. 2) A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. This Update also includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets (Subtopic 715-20). The conforming amendments to Subtopic 715-20 change the terminology from major categories of assets to classes of assets and provide a cross reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures. This

8

Update is effective for interim and annual reporting periods beginning after December 15, 2009, which became effective for the Company for the period ending March 31, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. This Update did not have a material impact on the Company’s consolidated results of operations or financial position.

ASU No. 2009-16 — Transfers and Servicing — Accounting for Transfers of Financial Assets. In December of 2009, FASB issued ASU No. 2009-16 — Transfers and Services — Accounting for Transfers of Financial Assets. The amendments in this Update incorporate FASB Statement No. 166, Accounting for Transfers of Financial Assets an amendment of SFAS No. 140 into the Accounting Standards Codification (“ASC”). That Statement was issued by the Board on June 12, 2009. This Update enhances the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a continuing interest in transferred financial assets. This Update also eliminates the concept of a qualifying special-purpose entity (“QSPE”), changes the requirements for de-recognition of financial assets, and calls upon sellers of the assets to make additional disclosures. This Update is effective for interim or annual reporting periods beginning after November 15, 2009. This guidance was effective for the Company on January 1, 2010. As of January 1, 2010, the Company held interests in two previous transfers of financial assets to QSPEs, the 2007 Commercial Mortgage Securitization and the 1996 — 1999 Commercial Mortgage Securitization. As part of adoption of this guidance the Company reviewed these entities as part of our consolidation analysis of variable interest entities (“VIEs”). The conclusion of the review was that the former QSPEs should be consolidated by the Company. Please refer to Note 4, Variable Interest Entities for more information. The Company has not transferred any financial assets since the adoption of this standard. The Company will apply this guidance to all future transfers of financial assets.

ASU No. 2009-17 — Consolidations — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. In December of 2009, FASB issued ASU No. 2009-17 — Consolidations — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The amendments to this Update incorporate FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”) into the ASC. SFAS No. 167 was issued by the Board on June 12, 2009. This Statement applies to all investments in VIEs beginning for the Company on January 1, 2010. This analysis will include QSPEs used for securitizations as SFAS No. 166 eliminated the concept of a QSPE which subjects former QSPEs to the provisions of FIN 46(R) as amended by this statement. Based on our review of our December 31, 2009 information, the impact of adoption of ASU No. 2009-17 (SFAS No. 167) resulted in the consolidation of two securitization trusts, the 2007 Commercial Mortgage Securitization and the 1996 — 1999 Commercial Mortgage Securitization. Please refer to Note 4, Variable Interest Entities for more information regarding the consolidation of these two trusts.

Accounting Pronouncements Not Yet Adopted

ASU No. 2010-15 — Financial Services—Insurance — How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments. The amendments in this Update clarify that an insurance entity should not consider any separate account interests held for the benefit of policy holders in an investment to be the insurer’s interests. The entity should not combine general account and separate account interests in the same investment when assessing the investment for consolidation. Additionally, the amendments do not require an insurer to consolidate an investment in which a separate account holds a controlling financial interest if the investment is not or would not be consolidated in the standalone financial statements of the separate account. The amendments in this Update also provide guidance on how an insurer should consolidate an investment fund in situations in which the insurer concludes that consolidation is required. This Update is effective for fiscal years beginning after December 15, 2010. For the Company this Update will be effective January 1, 2011. The Company is currently evaluating the impact of this Update.

ASU No. 2010-20 — Receivables — Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The objective of this Update is to require disclosures that facilitate financial statement users in evaluating the nature of credit risk inherent in the portfolio of financing receivables (loans); how that risk is analyzed and assessed in arriving at the allowance for credit losses; and any changes and the reasons for those changes to the allowance for credit losses. The Update requires several new disclosures regarding the reserve for credit losses and other disclosures related to the credit quality of the Company’s mortgage loan portfolio. These new disclosure requirements will be effective for reporting periods ending on or after December 15, 2010. For the Company this will be December 31, 2010. This standard does not change current accounting for Financing

9

Receivables and Loans, but only requires additional disclosures. The Company is evaluating the impact this Update will have on the footnotes to the financial statements.

ASU No. 2010-26 — Financial Services — Insurance - Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The objective of this Update is to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. This Update prescribes that certain incremental direct costs of successful initial or renewal contract acquisitions may be deferred. It defines incremental direct costs as those costs that result directly from and are essential to the contract transaction and would not have been incurred by the insurance entity had the contract transaction not occurred. This Update also clarifies the definition of the types of incurred costs that may be capitalized and the accounting and recognition treatment of advertising, research, and other administrative costs related to the acquisition of insurance contracts. This Update is effective for periods beginning after December 15, 2011 and is to be applied prospectively. Early adoption and retrospective application are optional. The Company is currently evaluating the impact this Update will have on our financial position and results of operations.

Significant Accounting Policies

For a full description of significant accounting policies, see Note 2 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. There were no significant changes to the Company’s accounting policies during the nine months ended September 30, 2010, except as noted above.

3.             INVESTMENT OPERATIONS

Net realized investment gains (losses) for all other investments are summarized as follows:

	For The			For The
	Three Months Ended			Nine Months Ended
	September 30, 2010			September 30, 2010
	(Dollars In Thousands)
Fixed maturities	$	17,859		$	32,209
Equity securities	—			13
Impairments on fixed maturity securities	(7,505		)	(36,143		)
Mark-to-market Modco trading portfolio	96,689			204,749
Mortgage loans and other investments	(2,905		)	(6,962		)
	$	104,138		$	193,866

For the three and nine months ended September 30, 2010, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $18.5 million and $63.7 million and gross realized losses were $7.9 million and $67.3 million, including $7.4 million and $35.9 million of impairment losses, respectively. The $7.4 million and $35.9 million exclude $0.1 million and $0.3 million of impairment losses in the trading portfolio for the three and nine months ended September 30, 2010, respectively.

For the three and nine months ended September 30, 2010, the Company sold securities in an unrealized gain position with a fair value (proceeds) of $648.3 million and $2.4 billion, respectively. The gains realized on the sale of these securities were $18.5 million and $63.7 million, respectively.

For the three and nine months ended September 30, 2010, the Company sold securities in an unrealized loss position with a fair value (proceeds) of $207.5 million and $446.3 million, respectively. The loss realized on the sale of these securities was $0.6 million and $31.5 million, respectively. The $31.5 million loss recognized on available-for-sale securities for the nine months ended September 30, 2010, includes $12.2 million of loss on the sale of certain oil industry holdings. The Company made the decision to sell these securities due to circumstances regarding the oil spill in the Gulf of Mexico. In addition, a $3.8 million loss was recognized on the sale of securities of which the issuer was a European financial institution. Also included in the $31.5 million loss is a $10.4 million loss due to the exchange of certain holdings as the issuer exited bankruptcy proceedings.

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The amortized cost and estimated fair value of the Company’s investments classified as available-for-sale as of September 30, 2010, are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
	(Dollars In Thousands)
2010
Fixed maturities:
Bonds
Residential mortgage-backed securities	$	3,009,134	$	63,879	$	(193,099	)	$	2,879,914
Commercial mortgage-backed securities	164,024		9,423		—			173,447
Other asset-backed securities	867,645		1,625		(70,926		)	798,344
U.S. government-related securities	1,186,830		75,157		(91		)	1,261,896
Other government-related securities	195,447		8,074		(68		)	203,453
States, municipals, and political subdivisions	751,169		54,079		(578		)	804,670
Corporate bonds	14,255,051		1,429,021		(140,821		)	15,543,251
	20,429,300		1,641,258		(405,583		)	21,664,975
Equity securities	277,788		13,803		(8,698		)	282,893
Short-term investments	406,011		—		—			406,011
	$	21,113,099	$	1,655,061	$	(414,281	)	$	22,353,879

As of September 30, 2010, the Company had an additional $3.1 billion of fixed maturities, $12.3 million of equity securities, and $71.5 million of short-term investments classified as trading securities.

The amortized cost and fair value of available-for-sale fixed maturities as of September 30, 2010, by expected maturity, are shown below. Expected maturities of securities without a single maturity date are allocated based on estimated rates of prepayment that may differ from actual rates of prepayment.

	Amortized		Fair
	Cost		Value
	(Dollars In Thousands)
Due in one year or less	$	482,223	$	491,960
Due after one year through five years	3,770,248		3,877,209
Due after five years through ten years	5,840,213		6,347,111
Due after ten years	10,336,616		10,948,695
	$	20,429,300	$	21,664,975

Each quarter the Company reviews investments with unrealized losses and tests for other-than-temporary impairments. The Company analyzes various factors to determine if any specific other-than-temporary asset impairments exist. 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) an assessment of the Company’s intent to sell the security (including a more likely than not assessment of whether the Company will be required to sell the security) before recovering the security’s amortized cost, 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, and in some cases, an analysis regarding the Company’s expectations for recovery of the security’s entire amortized cost basis through the receipt of future cash flows is performed. Once a determination has been made that a specific other-than-temporary impairment exists, the security’s basis is adjusted and an other-than-temporary impairment is recognized. Equity securities that are other-than-temporarily impaired are written down to fair value with a realized loss recognized in earnings. Other-than-temporary impairments to debt securities that the Company does not intend to sell and does not expect to be required to sell before recovering the security’s amortized cost are written down to discounted expected future cash flows (“post impairment cost”) and credit losses are recorded in earnings. The difference between the securities’ discounted expected future cash flows and the fair value of the securities is recognized in other comprehensive income (loss) as a non-credit portion of the recognized other-than-temporary impairment. When calculating the post impairment cost for residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), and other asset-backed securities, the Company considers all known market data related to cash flows to estimate future cash flows. When calculating

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the post impairment cost for corporate debt securities, the Company considers all contractual cash flows to estimate expected future cash flows. To calculate the post impairment cost, the expected future cash flows are discounted at the original purchase yield. Debt securities that the Company intends to sell or expects to be required to sell before recovery are written down to fair value with the change recognized in earnings.

During the three and nine months ended September 30, 2010, the Company recorded other-than-temporary impairments of investments of $12.7 million and $71.1 million, respectively. Of the $12.7 million of impairments for the three months ended September 30, 2010, $7.5 million was recorded in earnings and $5.2 million was recorded in other comprehensive income (loss). Of the $71.1 million of impairments for the nine months ended September 30, 2010, $36.1 million was recorded in earnings and $35.0 million was recorded in other comprehensive income (loss). For the three and nine months ended September 30, 2010, there were no other-than-temporary impairments related to equity securities. For the three and nine months ended September 30, 2010, there were $12.7 million and $71.1 million of other-than-temporary impairments related to debt securities, respectively. During these periods, there were no other-than-temporary impairments related to debt securities or equity securities that the Company intends to sell or expects to be required to sell.

The following chart is a rollforward of credit losses on debt securities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss):

	For The						For The
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars In Thousands)
Beginning balance	$	31,541		$	46,728		$	25,066		$	—
Additions for newly impaired securities	6,100			11,601			25,525			67,019
Additions for previously impaired securities	1,179			—			2,930			7,136
Reductions for previously impaired securities due to a change in expected cash flows	—			(16,625		)	—			(32,451		)
Reductions for previously impaired securities that were sold in the current period	(2,947		)	(17,949		)	(17,648		)	(17,949		)
Ending balance	$	35,873		$	23,755		$	35,873		$	23,755

The following table includes investments’ gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2010:

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(Dollars In Thousands)
Residential mortgage-backed securities	$	100,951	$	(18,021	)	$	1,410,210	$	(175,078	)	$	1,511,161	$	(193,099	)
Commercial mortgage-backed securities	—		—			—		—			—		—
Other asset-backed securities	79,388		(3,055		)	600,645		(67,871		)	680,033		(70,926		)
U.S. government-related securities	44,270		(91		)	—		—			44,270		(91		)
Other government-related securities	48,902		(58		)	19,990		(10		)	68,892		(68		)
States, municipals, and political subdivisions	24,423		(578		)	—		—			24,423		(578		)
Corporate bonds	374,879		(25,174		)	1,199,272		(115,647		)	1,574,151		(140,821		)
Equities	11,716		(3,792		)	12,430		(4,906		)	24,146		(8,698		)
	$	684,529	$	(50,769	)	$	3,242,547	$	(363,512	)	$	3,927,076	$	(414,281	)

The RMBS have a gross unrealized loss greater than twelve months of $175.1 million as of September 30, 2010. These losses relate to a widening in spreads and defaults as a result of continued weakness in the residential housing market which have reduced the fair value of the RMBS holdings. Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of the investments.

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The corporate bonds category has gross unrealized losses greater than twelve months of $115.6 million as of September 30, 2010. These losses relate primarily to fluctuations in credit spreads. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information including the Company’s ability and intent to hold these securities to recovery.

The other asset-backed securities have a gross unrealized loss greater than twelve months of $67.9 million as of September 30, 2010. This category predominately includes student-loan backed auction rate securities whose underlying collateral is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). These losses relate to the auction rate securities (“ARS”) market collapse during 2008. At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary. In addition, the Company has the ability and intent to hold these securities until their values recover or maturity.

The Company does not consider these unrealized loss positions to be other-than-temporary, based on the factors discussed and because the Company has the ability and intent to hold these investments until the fair values recover, and does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of debt securities.

As of September 30, 2010, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $3.0 billion and had an amortized cost of $3.2 billion. In addition, included in the Company’s trading portfolio, the Company held $362.0 million of securities which were rated below investment grade. Approximately $561.2 million of the below investment grade securities were not publicly traded.

The change in unrealized gains (losses), net of income tax, on fixed maturity and equity securities, classified as available-for-sale is summarized as follows:

	For The		For The
	Three Months Ended		Nine Months Ended
	September 30, 2010		September 30, 2010
	(Dollars In Thousands)
Fixed maturities	$	470,882	$	1,060,387
Equity securities	13,971		6,985

4.VARIABLE INTEREST ENTITIES

In June of 2009, the FASB amended the guidance related to VIEs which was later codified in the ASC through ASU No. 2009-17. Among other accounting and disclosure requirements, this guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a VIE with an approach focused on identifying which enterprise has the power to direct the activities of a VIE that most significantly impact its economics and the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Additionally, the FASB amended the guidance related to accounting for transfers of financial assets which was later codified in the ASC through ASU No. 2009-16. This guidance, among other requirements, removed the concept of a QSPE used for the securitization of financial assets. Previously, QSPEs were excluded from the guidance related to VIEs. Upon adoption of ASU No. 2009-17 and ASU No. 2009-16 on January 1, 2010, the Company will no longer exclude QSPEs from the analysis of VIEs.

As part of adopting these updates, the Company updated its process for evaluating VIEs. The Company’s analysis consists of a review of entities in which the Company has an ownership interest that is less than 100% (excluding debt and equity securities held as trading and available-for-sale), as well as entities with which the Company has significant contracts or other relationships that could possibly be considered variable interests. The Company reviews the characteristics of each of these applicable entities and compares those characteristics to the criteria of a VIE set forth in Topic 810 of the FASB ASC. If the entity is determined to be a VIE, the Company then performs a detailed review of all significant contracts and relationships (individually an “interest”, collectively “interests”) with the entity to determine whether the interest would be considered a variable interest under the guidance. The Company then performs a qualitative review of all variable interests with the entity and determines whether the Company: 1) has the power to direct the activities of the VIE that most significantly impact the VIE’s

13

economic performance and 2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

Based on this analysis the Company had interests in two former QSPEs that were determined to be VIEs as of January 1, 2010. These two VIEs were trusts used to facilitate commercial mortgage loan securitizations. The determining factor was that the trusts had negligible or no equity at risk. The Company’s variable interests in the trusts are created by the contract to service the mortgage loans held by the trusts as well as the retained beneficial interests in certain of these securities issued by the trusts. The activities that most significantly impact the economics of the trusts are predominantly related to the servicing of the mortgage loans, such as timely collection of principal and interest, direction of foreclosure proceedings, and management and sale of foreclosed real estate owned by the trusts. The Company is the servicer responsible for these activities and has the sole power to appoint such servicer through its beneficial interests in the securities. These criteria give the Company the power to direct the activities of the trusts that most significantly impact the trusts economic performance. Additionally, the Company is obligated, as an owner of the securities issued by the trusts, to absorb its share of losses on the securities. The Company’s share of losses could potentially be significant to the trusts. Based on the fact that the Company has the power to direct the activities that most significantly impact the economics of the trusts and the obligation to absorb losses that could potentially be significant, it was determined that the Company is the primary beneficiary of the trusts, thus resulting in consolidation.

The assets of the trusts consist entirely of commercial mortgage loans and accrued interest, which are restricted and can only be used to satisfy the obligations of the trusts. The obligations of the trusts consist of commercial mortgage-backed certificates. The assets and obligations of the trusts are equal and thus, the trusts have no equity interest. The certificates are direct obligations of the trusts and are not guaranteed by the Company. The Company has no other obligations to the trusts other than those that are customary for a servicer of mortgage loans.  Over the life of the trusts, the Company has not provided and will not provide any financial or other support to the trusts other than customary actions taken by a servicer of mortgage loans.

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The following adjustments to the Company’s consolidated condensed balance sheet were made as of January 1, 2010:

Adjustments to the Consolidated Condensed Balance Sheets

	As of
	January 1, 2010
	(Dollars In Thousands)
Assets
Fixed maturities:
Commercial mortgage-backed securities at fair value (amortized cost - $873,196)	$	(844,535	)(1)
Mortgage loans - securitized (net of loan loss reserve of $1.1 million)	1,018,000		(2)
Total investments	173,465
Accrued investment income	361		(2)
Total Assets	$	173,826
Liabilities
Deferred income taxes	$	17,744	(3)
Mortgage loan backed certificates	124,580		(2)
Other liabilities	(1,400		)(4)
Total liabilities	140,924
Shareowners’ equity
Retained earnings	14,290		(2)
Accumulated other comprehensive income (loss)	18,612		(5)
Total shareowners’ equity	32,902
Total liabilities and shareowners’ equity	$	173,826

(1)	The noncash portion for the consolidated condensed statements of cash flows for the three months ended March 31, 2010, was $873.2 million.
(2)	The noncash portion for the consolidated condensed statements of cash flows for the three months ended March 31, 2010, is the amount presented.
(3)	The noncash portion for the consolidated condensed statements of cash flows for the three months ended March 31, 2010, was $7.7 million.
(4)	The other liabilities did not have an effect on the consolidated condensed statements of cash flows for the three months ended March 31, 2010.
(5)	The accumulated other comprehensive income (loss) did not have an effect on the consolidated condensed statements of cash flows for the three months ended March 31, 2010.
The adjustments had a net zero impact to the consolidated condensed statements of cash flows.

The reduction in fixed maturity CMBS represents the beneficial interests held by the Company that have been removed due to the consolidation of the trusts. This amount is reflected in fixed maturities on the consolidated condensed balance sheet.

The increase in mortgage loans represents the mortgage loans held by the trusts that have been consolidated. This balance is net of a loan loss reserve of $1.1 million.

The increase in accrued investment income is the result of accruing interest on the entire pool of mortgage loans.

The increase in deferred income taxes is a result of a change in temporary tax differences arising from the adjustments to shareowners’ equity.

The mortgage loan backed certificates liability represents the CMBS issued by the trusts and held by third parties.

The decrease in other liabilities is a decrease in amounts payable to the trusts of approximately $1.4 million. Upon consolidation of the trusts as of January 1, 2010, the Company adjusted retained earnings to reflect after tax interest income not recognized in prior periods due to the securitization of the commercial mortgage loans. If the Company had held the mortgage loans as opposed to the retained beneficial interest securities, the Company’s retained earnings would have been $14.3 million higher over the life of the securities.

The adjustment to accumulated other comprehensive income (loss) was a result of different accounting basis for mortgage loans and the CMBS. As of December 31, 2009, the retained beneficial interest securities were carried at fair value in the balance sheet and had an after tax unrealized loss in accumulated other comprehensive

15

income (loss) of $18.6 million. Upon consolidation of the trusts on January 1, 2010, the Company consolidated the mortgage loans held by the trusts which are carried at amortized cost less any related loan loss reserve. The retained beneficial interest securities as well as the associated unrealized loss were eliminated in consolidation.

5.GOODWILL

During the nine months ended September 30, 2010, the Company decreased its goodwill balance by approximately $2.3 million. The decrease was due to an adjustment in the Acquisitions segment related to tax benefits realized during 2010 on the portion of tax goodwill in excess of GAAP basis goodwill. As of September 30, 2010, the Company had an aggregate goodwill balance of $90.7 million.

Accounting for goodwill requires an estimate of the future profitability of the associated lines of business to assess the recoverability of the capitalized acquisition goodwill. The Company evaluates the carrying value of goodwill at the segment (or reporting unit) level at least annually and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the 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 compared its estimate of the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The Company utilizes a fair value measurement (which includes a discounted cash flows analysis) to assess the carrying value of the reporting units in consideration of the recoverability of the goodwill balance assigned to each reporting unit as of the measurement date. The Company’s material goodwill balances are attributable to its operating segments (which are considered to be reporting units). The cash flows used to determine the fair value of the Company’s reporting units are dependent on a number of significant assumptions. The Company’s estimates are subject to change given the inherent uncertainty in predicting future results and cash flows, which are impacted by such things as policyholder behavior, competitor pricing, capital limitations, new product introductions, and specific industry and market conditions. Additionally, the discount rate used is based on the Company’s judgment of the appropriate rate for each reporting unit based on the relative risk associated with the projected cash flows. As of December 31, 2009, the Company performed its annual evaluation of goodwill and determined that no adjustment to impair goodwill was necessary.

6.             DEBT AND OTHER OBLIGATIONS

Non-recourse funding obligations outstanding as of September 30, 2010, on a consolidated basis, are shown in the following table:

				Year-to-Date
				Weighted-Avg
Issuer	Balance		Maturity Year	Interest Rate
	(Dollars In Thousands)
Golden Gate Captive Insurance Company	$	800,000	2037	6.00	%
Golden Gate II Captive Insurance Company	572,500		2052	1.48	%
Total	$	1,372,500

Golden Gate Captive Insurance Company (“Golden Gate”), a special purpose financial captive insurance company wholly owned by the Company, had $800 million of outstanding non-recourse funding obligations as of September 30, 2010. In the second quarter of 2010, $180 million of non-recourse funding obligations were retired by Golden Gate. PLC holds the entire $800 million outstanding balance of Golden Gate non-recourse funding obligations.

Golden Gate II Captive Insurance Company (“Golden Gate II”), a special purpose financial captive insurance company wholly owned by the Company, had $575.0 million of outstanding non-recourse funding obligations as of September 30, 2010. Of this amount, $548.0 million were held by external parties, $24.5 million were held by a nonconsolidated affiliate, and $2.5 million were held by a consolidated subsidiary of the Company. The table above excludes the $2.5 million that was repurchased in the third quarter of 2010, by a consolidated subsidiary.

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7.             COMMITMENTS AND CONTINGENCIES

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, in the ordinary course of business, is involved in such litigation and arbitration. The occurrence of such litigation and arbitration may become more frequent and/or severe when general economic conditions have deteriorated. 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 its financial condition or results of the operations.

8.             COMPREHENSIVE INCOME (LOSS)

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

	For The						For The
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars In Thousands)
Net income	$	67,648		$	28,472		$	184,439		$	140,049
Change in net unrealized (losses) gains on investments, net of income tax: (three months: 2010 - $210,650; 2009 - $341,768; nine months: 2010 - $482,972; 2009 - $654,092)	391,216			624,145			896,406			1,188,861
Change in net unrealized (losses) gains relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (three months: 2010 - $19,480; 2009 - $5,633; nine months: 2010 - $9,061; 2009 - $(6,755))	36,178			10,462			16,826			(12,544		)
Change in accumulated gain (loss) - derivative, net of income tax: (three months: 2010 - $1,951; 2009 - $1,833; nine months: 2010 - $2,145; 2009 - $12,154)	3,581			3,299			3,347			21,877
Reclassification adjustment for investment amounts included in net income, net of income tax: (three months: 2010 - $(3,621); 2009 - $9,305; nine months: 2010 - $1,348; 2009 - $48,699)	(6,734		)	17,368			2,573			89,610
Reclassification adjustment for derivative amounts included in net income, net of income tax: (three months: 2010 - $(760); 2009 - $(666); nine months: 2010 - $(966); 2009 - $(363))	(1,368		)	(1,198		)	(1,738		)	(654		)
Comprehensive income (loss)	$	490,521		$	682,548		$	1,101,853		$	1,427,199

9.             STOCK-BASED COMPENSATION

The criteria for payment of performance awards is based primarily upon a comparison of PLC’s average return on average equity over a four-year period (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 90th percentile, the award maximum is earned. Awards are paid in shares of PLC’s Common Stock. There were no performance share awards issued during the nine months ended September 30, 2010 or 2009.

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Stock Appreciation Rights (“SARs”) have been granted to certain officers of PLC to provide long-term incentive compensation based solely on the performance of PLC’s common stock. The SARs are exercisable either five years after the date of grants or in three or 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, of 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 is as follows:

	Weighted-Average
	Base Price per share		No. of SARs
Balance as of December 31, 2009	$	22.28	2,469,202
SARs granted	18.34		344,400
SARs exercised / forfeited / expired	21.11		(457,404	)
Balance as of September 30, 2010	$	21.93	2,356,198

The SARs issued for the nine months ended September 30, 2010, had estimated fair values at grant date of $3.3 million. These fair values were estimated using a Black-Scholes option pricing model. The assumptions used in this pricing model varied depending on the vesting period of awards. Assumptions used in the model for the 2010 SARs granted (the simplified method under the ASC Compensation-Stock Compensation Topic was used for the 2010 awards) were as follows: an expected volatility of 69.4%, a risk-free interest rate of 2.6%, a dividend rate of 2.4%, a zero percent forfeiture rate, and an expected exercise date of 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, PLC issued 360,450 restricted stock units for the nine months ended September 30, 2010. These awards had a total fair value at grant date of $6.6 million. Approximately half of these restricted stock units vest in 2013, and the remainder vest in 2014.

10.          EMPLOYEE BENEFIT PLANS

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

	For The						For The
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars In Thousands)
Service cost – benefits earned during the period	$	2,068		$	1,889		$	6,204		$	5,667
Interest cost on projected benefit obligation	2,357			2,395			7,071			7,185
Expected return on plan assets	(2,312		)	(2,531		)	(6,936		)	(7,593		)
Amortization of prior service cost	(98		)	(98		)	(294		)	(294		)
Amortization of actuarial losses	1,026			568			3,078			1,704
Total benefit cost	$	3,041		$	2,223		$	9,123		$	6,669

During the nine months ended September 30, 2010, PLC made a $6.5 million contribution to its defined benefit pension plan for the 2009 plan year and a $0.2 million contribution to its defined benefit pension plan for the 2010 plan year. In addition, during October of 2010, PLC contributed $1.6 million to the defined benefit pension plan for the 2010 plan year. PLC will continue to make contributions in future periods as necessary to at least satisfy minimum funding requirements. PLC may also make additional contributions in future periods to maintain an adjusted funding target percentage of at least 80%.

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. For a closed group of retirees over age 65, PLC provides a prescription drug benefit. The cost of these plans for the nine months ended September 30, 2010, was immaterial to PLC’s financial statements.

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11.          INCOME TAXES

During the three months ended September 30, 2010, earnings were impacted favorably by $0.3 million due to the release of an unrecognized income tax benefit liability that related to a compensation-related tax issue. The measurement of the unrecognized tax benefit was recently reassessed due to recent developments related to the issue, and the Company now believes that the full amount of the tax benefit has a greater than 50% chance of being fully realized. During the nine months ended September 30, 2010, earnings were impacted favorably by $2.9 million due to the aforementioned issue, the release of an unrecognized income tax benefit liability that related to a tax-basis policy liability issue, and the closing of the 2005 tax year’s statute of limitations. The Company reassessed the tax-basis policy liability issue due to recent technical guidance that confirmed the Company’s historical calculations. Within the next twelve months, the Company does not expect to have any material adjustments to its unrecognized income tax benefits liability with regard to any of the tax jurisdictions in which it conducts its business operations.

The Company has computed its effective income tax rate for the three and nine months ended September 30, 2010, based upon its estimate of its annual 2010 income. For the three and nine months ended September 30, 2009, due to the unpredictability at that time of future investment losses and certain elements of operating income, the Company was not able to reasonably estimate an expected annual effective tax rate. Instead, the Company computed an effective income tax rate based upon year-to-date reported income. The effective tax rate for the three and nine months ended September 30, 2010, was 33.8% and 33.1%, respectively, and 33.8% and 34.4% for the three and nine months ended September 30, 2009, respectively.

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 all of its material deferred tax assets.  The Company did not record a valuation allowance against its material deferred tax assets as of September 30, 2010.

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12.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 FASB guidance referenced in the Fair Value Measurements and Disclosures Topic which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In the first quarter of 2009, the Company adopted the provisions from the FASB guidance that is referenced in the Fair Value Measurements and Disclosures Topic for non-financial assets and liabilities (such as property and equipment, goodwill, and other intangible assets) that are required to be measured at fair value on a periodic basis. The effect on the Company’s periodic fair value measurements for non-financial assets and liabilities was not material.

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 condensed 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.

20

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, 2010:

	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	2,879,894	$	20	$	2,879,914
Commercial mortgage-backed securities	—		153,281		20,166		173,447
Other asset-backed securities	—		196,125		602,219		798,344
U.S. government-related securities	974,282		272,491		15,123		1,261,896
States, municipals, and political subdivisions	—		804,670		—		804,670
Other government-related securities	14,993		188,460		—		203,453
Corporate bonds	100		15,402,887		140,264		15,543,251
Total fixed maturity securities - available-for-sale	989,375		19,897,808		777,792		21,664,975
Fixed maturity securities - trading
Residential mortgage-backed securities	—		472,360		—		472,360
Commercial mortgage-backed securities	—		137,632		—		137,632
Other asset-backed securities	—		16,131		62,756		78,887
U.S. government-related securities	409,105		43,661		3,686		456,452
States, municipals, and political subdivisions	—		145,286		—		145,286
Other government-related securities	—		158,567		—		158,567
Corporate bonds	—		1,685,026		4,532		1,689,558
Total fixed maturity securities - trading	409,105		2,658,663		70,974		3,138,742
Total fixed maturity securities	1,398,480		22,556,471		848,766		24,803,717
Equity securities	204,811		19,399		71,013		295,223
Other long-term investments (1)	1,459		340		20,918		22,717
Short-term investments	469,220		8,323		—		477,543
Total investments	2,073,970		22,584,533		940,697		25,599,200
Cash	107,185		—		—		107,185
Other assets	—		—		—		—
Assets related to separate accounts
Variable annuity	3,899,308		—		—		3,899,308
Variable universal life	336,299		—		—		336,299
Total assets measured at fair value on a recurring basis	$	6,416,762	$	22,584,533	$	940,697	$	29,941,992
Liabilities:
Annuity account balances (2)	$	—	$	—	$	144,166	$	144,166
Other liabilities (1)	14,031		38,095		339,581		391,707
Total liabilities measured at fair value on a recurring basis	$	14,031	$	38,095	$	483,747	$	535,873

(1)	Includes certain freestanding and embedded derivatives.
(2)	Represents liabilities related to equity indexed annuities.

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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 December 31, 2009:

	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	3,357,952	$	23	$	3,357,975
Commercial mortgage-backed securities	—		142,483		844,535		987,018
Other asset-backed securities	—		360,797		693,930		1,054,727
U.S. government-related bonds	441,662		30,198		15,102		486,962
States, municipals and political subdivisions	—		350,632		—		350,632
Other government-related bonds	16,992		389,379		—		406,371
Corporate bonds	200		13,108,681		86,292		13,195,173
Total fixed maturity securities - available-for-sale	458,854		17,740,122		1,639,882		19,838,858
Fixed maturity securities - trading	277,108		2,574,205		105,089		2,956,402
Total fixed maturity securities	735,962		20,314,327		1,744,971		22,795,260
Equity securities	174,829		92		60,203		235,124
Other long-term investments (1)	—		22,926		28,025		50,951
Short-term investments	973,461		66,486		—		1,039,947
Total investments	1,884,252		20,403,831		1,833,199		24,121,282
Cash	162,858		—		—		162,858
Other assets	4,977		—		—		4,977
Assets related to separate accounts
Variable annuity	2,948,457		—		—		2,948,457
Variable universal life	316,007		—		—		316,007
Total assets measured at fair value on a recurring basis	$	5,316,551	$	20,403,831	$	1,833,199	$	27,553,581
Liabilities:
Annuity account balances (2)	$	—	$	—	$	149,893	$	149,893
Other liabilities (1)	—		40,873		105,838		146,711
Total liabilities measured at fair value on a recurring basis	$	—	$	40,873	$	255,731	$	296,604

(1)	Includes certain freestanding and embedded derivatives.
(2)	Represents liabilities related to equity indexed annuities.

Determination of fair values

The valuation methodologies used to determine the fair values of assets and liabilities reflect market participant assumptions and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market prices, where available. The Company also determines certain fair values based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s credit standing, liquidity, and where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments as listed in the above table.

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The fair value of fixed maturity, short-term, and equity securities is determined by management after considering one of three primary sources of information: third party pricing services, non-binding independent broker quotations, or pricing matrices. Security pricing is applied using a ‘‘waterfall’’ approach whereby publicly available prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for non-binding prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these three pricing methods include, but are not limited to: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. Third party pricing services price over 90% of the Company’s fixed maturity securities. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services derive the majority of security prices from observable market inputs such as recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information 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. Certain securities are priced via independent non-binding broker quotations, which are considered to have no significant unobservable inputs. When using non-binding independent broker quotations, the Company obtains one quote per security, typically from the broker from which we purchased the security. A pricing matrix is used to price securities for which the Company is unable to obtain or effectively rely on either a price from a third party pricing service or an independent broker quotation.

The pricing matrix used by the Company begins with current spread levels to determine the market price for the security. The credit spreads, assigned by brokers, incorporate the issuer’s credit rating, liquidity discounts, weighted-average of contracted cash flows, risk premium, if warranted, due to the issuer’s industry, and the security’s time to maturity. The Company uses credit ratings provided by nationally recognized rating agencies.

For securities that are priced via non-binding independent broker quotations, the Company assesses whether prices received from independent brokers represent a reasonable estimate of fair value through an analysis using internal and external cash flow models developed based on spreads and, when available, market indices. The Company uses a market-based cash flow analysis to validate the reasonableness of prices received from independent brokers. These analytics, which are updated daily, incorporate various metrics (yield curves, credit spreads, prepayment rates, etc.) to determine the valuation of such holdings. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly. The Company did not adjust any quotes or prices received from brokers during the nine months ended September 30, 2010.

The Company has analyzed the third party pricing services’ valuation methodologies and related inputs and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs that is in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. Based on this evaluation and investment class analysis, each price was classified into Level 1, 2, or 3. Most prices provided by third party pricing services are classified into Level 2 because the significant inputs used in pricing the securities are market observable and the observable inputs are corroborated by the Company. Since the matrix pricing of certain debt securities includes significant non-observable inputs, they are classified as Level 3.

Asset-Backed Securities

This category mainly consists of RMBS, CMBS, and other asset-backed securities (collectively referred to as asset-backed securities “ABS”). As of September 30, 2010, the Company held $3.9 billion of ABS classified as Level 2. These securities are priced from information provided by a third party pricing service and independent broker quotes. The third party pricing services and brokers mainly value securities using both a market and income approach to valuation. As part of this valuation process they consider the following characteristics of the item being measured to be relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, and 7) credit ratings of the securities.

After reviewing these characteristics of the ABS, the third party pricing service and brokers use certain inputs to determine the value of the security. For ABS classified as Level 2, the valuation would consist of predominantly market observable inputs such as, but not limited to: 1) monthly principal and interest payments on

23

the underlying assets, 2) average life of the security, 3) prepayment speeds, 4) credit spreads, 5) treasury and swap yield curves, and 6) discount margin.

As of September 30, 2010, the Company held $685.2 million of Level 3 ABS, which included $62.8 million of other asset-backed securities classified as trading. These securities are predominantly ARS whose underlying collateral is at least 97% guaranteed by the FFELP. The model uses the discount margin and projected average life of comparable actively traded FFELP student loan-backed floating-rate asset-backed securities, along with a discount related to the current illiquidity of the ARS. These comparable securities are selected based on their underlying assets (i.e. FFELP-backed student loans) and vintage. As a result of the ARS market collapse during 2008, the Company prices its ARS using an internally developed model which utilizes a market based approach to valuation. As part of the valuation process the Company reviews the following characteristics of the ARS in determining the relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, and 7) credit ratings of the securities.

Available-for-sale ABSs classified as Level 3 had, but were not limited to, the following inputs:

Investment grade credit rating	100.0%
Weighted-average yield	1.5%
Amortized cost	$672.7 million
Weighted-average life	2.8 years

Corporate bonds, U.S. Government-related securities, and Other government related securities

As of September 30, 2010, the Company classified approximately $18.7 billion of corporate bonds, U.S. government-related securities, and other government-related securities as Level 2. The fair value of the Level 2 bonds and securities is predominantly priced by broker quotes and a third party pricing service. The Company has reviewed the valuation techniques of the brokers and third party pricing service and has determined that such techniques used Level 2 market observable inputs. The following characteristics of the bonds and securities are considered to be the primary relevant inputs to the valuation: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) seniority, and 4) credit ratings.

The brokers and third party pricing service utilizes a valuation model that consists of a hybrid income and market approach to valuation. The pricing model utilizes the following inputs: 1) principal and interest payments, 2) treasury yield curve, 3) credit spreads from new issue and secondary trading markets, 4) dealer quotes with adjustments for issues with early redemption features, 5) liquidity premiums present on private placements, and 6) discount margins from dealers in the new issue market.

As of September 30, 2010, the Company classified approximately $163.6 million of bonds and securities as Level 3 valuations. The fair value of the Level 3 bonds and securities are derived from an internal pricing model that utilizes a hybrid market/income approach to valuation. The Company reviews the following characteristics of the bonds and securities to determine the relevant inputs to use in the pricing model: 1) coupon rate, 2) years to maturity, 3) seniority, 4) embedded options, 5) trading volume, and 6) credit ratings.

Level 3 bonds and securities primarily represent investments in illiquid bonds for which no price is readily available. To determine a price, the Company uses a discounted cash flow model with both observable and unobservable inputs. These inputs are entered into an industry standard pricing model to determine the final price of the security. These inputs include: 1) principal and interest payments, 2) coupon, 3) sector and issuer level spreads, 4) underlying collateral, 5) credit ratings, 6) maturity, 7) embedded options, 8) recent new issuance, 9) comparative bond analysis, and 10) an illiquidity premium.

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Bonds and securities classified as Level 3 used security specific inputs that included, but were not limited to, the following:

Investment grade credit rating	89.9%
Weighted-average market yield	4.6%
Weighted-average coupon	6.3%
Amortized cost	$149.4 million
Weighted-average stated maturity	6.5 years

Equities

As of September 30, 2010, the Company held approximately $90.4 million of equity securities classified as Level 2 and Level 3. Of this total, $60.7 million represents Federal Home Loan Bank stock. The Company believes that the cost of the Federal Home Loan Bank stock approximates fair value. The remainder of these equity securities is primarily made up of holdings we have obtained through bankruptcy proceedings or debt restructurings.

Other long-term investments and Other liabilities

Other long-term investments and other liabilities consist entirely of free standing and embedded derivative instruments. Refer to Note 13, Derivative Financial Instruments for additional information related to derivatives. Derivative instruments are valued using exchange prices, independent broker quotations, or pricing valuation models, which utilize market data inputs. Excluding embedded derivatives, as of September 30, 2010, 51.5% of derivatives based upon notional values were priced using exchange prices or independent broker quotations. The remaining derivatives were priced by pricing valuation models, which predominantly utilize observable market data inputs. Inputs used to value derivatives include, but are not limited to, interest swap rates, credit spreads, interest and equity volatility, equity index levels, and treasury rates. The Company performs a monthly analysis on derivative valuations that includes both quantitative and qualitative analysis.

Derivative instruments classified as Level 1 include futures and certain options, which are traded on active exchange markets.

Derivative instruments classified as Level 2 primarily include interest rate, inflation, and currency exchange swaps. These derivative valuations are determined using independent broker quotations, which are corroborated with observable market inputs.

Derivative instruments classified as Level 3 were certain freestanding and embedded derivatives and include at least one non-observable significant input. A derivative instrument containing Level 1 and Level 2 inputs will be classified as a Level 3 financial instrument in its entirety if it has at least one significant Level 3 input.

The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instruments may not be classified within the same fair value hierarchy level as the associated assets and liabilities. Therefore, the changes in fair value on derivatives reported in Level 3 may not reflect the offsetting impact of the changes in fair value of the associated assets and liabilities.

The guaranteed minimum withdrawal benefit (“GMWB”) embedded derivative is carried at fair value in “other assets” and “other liabilities” on the Company’s consolidated condensed balance sheet. The changes in fair value are recorded in earnings as “Realized investment gains (losses) — Derivative financial instruments”, refer to Note 13 — Derivative Financial Instruments for more information related to GMWB embedded derivative gains and losses. The fair value of the GMWB embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using 1,000 risk neutral equity scenarios and policyholder behavior assumptions. The risk neutral scenarios are generated using the current swap curve and projected equity volatilities and correlations. The projected equity volatilities are based on a blend of historical volatility and near-term equity market implied volatilities. The equity correlations are based on historical price observations. For policyholder behavior assumptions, expected lapse and utilization assumptions are used and updated for actual experience, as necessary. The Company assumes mortality of 65% of the National Association of Insurance Commissioners 1994 Variable Annuity GMDB Mortality Table. The present value of the cash flows is found using the discount rate curve, which is London Interbank Offered Rate (“LIBOR”) plus a credit spread (to represent the Company’s non-performance risk). As a result of using significant unobservable inputs, the GMWB embedded derivative is categorized as Level 3. These assumptions are reviewed on a quarterly basis.

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The Company has ceded certain blocks of policies under modified coinsurance agreements in which the investment results of the underlying portfolios are passed directly to the reinsurers. As a result, these agreements are deemed to contain embedded derivatives that must be reported at fair value. Changes in fair value of the embedded derivatives are reported in earnings. The investments supporting these agreements are designated as “trading securities”; therefore changes in fair value of such investments are reported in earnings. The fair value of the embedded derivatives represents the unrealized gain or loss on the block of business in relation to the unrealized gain or loss of the trading securities. As a result, changes in fair value of the embedded derivatives reported in earnings are largely offset by the changes in fair value of the investments.

Annuity account balances

The equity indexed annuity (“EIA”) model calculates the present value of future benefit cash flows less the projected future profits to quantify the net liability that is held as a reserve. This calculation is done on a stochastic basis using 1,000 risk neutral equity scenarios. The cash flows are discounted using LIBOR plus a credit spread. Best estimate assumptions are used for partial withdrawals, lapses, expenses and asset earned rate with a risk margin applied to each. These assumptions are reviewed annually as a part of the formal unlocking process.

Included in the chart below, are current key assumptions which include risk margins for the Company. These assumptions are reviewed for reasonableness on a quarterly basis.

Asset Earned Rate	5.90%
Admin Expense per Policy	$91
Partial Withdrawal Rate (for ages less than 70)	2.20%
Partial Withdrawal Rate (for ages 70 and greater)	2.20%
Mortality	65% of 94 GMDB table
Lapse	2% to 50% depending on the surrender charge period
Return on Assets	1.5% to 1.85% depending on the guarantee period

The discount rate for the equity indexed annuities is based on an upward sloping rate curve which is updated each quarter. The discount rates for September 30, 2010, ranged from a one month rate of 0.84%, a 5 year rate of 2.98%, and a 30 year rate of 4.84%.

Separate Accounts

Separate account assets are invested in open-ended mutual funds and are included in Level 1.

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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, 2010, for which the Company has 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
Residential mortgage-backed securities	$	21	$	—		$	—		$	(1	)	$	—		$	20	$	—
Commercial mortgage-backed securities	39,952		—			1,932			(85		)	(21,633		)	20,166		—
Other asset-backed securities	597,291		—			4,923			5			—			602,219		—
U.S. government-related securities	15,149		—			(29		)	3			—			15,123		—
States, municipals, and political subdivisions	—		—			—			—			—			—		—
Other government-related securities	—		—			—			—			—			—		—
Corporate bonds	108,340		—			5,289			19,221			7,414			140,264		—
Total fixed maturity securities - available-for-sale	760,753		—			12,115			19,143			(14,219		)	777,792		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—			—			—			—			—		—
Commercial mortgage-backed securities	—		—			—			—			—			—		—
Other asset-backed securities	61,137		905			—			714			—			62,756		643
U.S. government-related securities	3,562		126			—			(2		)	—			3,686		126
States, municipals, and political subdivisions	—		—			—			—			—			—		—
Other government-related securities	—		—			—			—			—			—		—
Corporate bonds	43		—			—			—			4,489			4,532		616
Total fixed maturity securities - trading	64,742		1,031			—			712			4,489			70,974		1,385
Total fixed maturity securities	825,495		1,031			12,115			19,855			(9,730		)	848,766		1,385
Equity securities	62,632		1,225			1,171			—			5,985			71,013		1,224
Other long-term investments (1)	19,531		1,387			—			—			—			20,918		1,387
Short-term investments	—		—			—			—			—			—		—
Total investments	907,658		3,643			13,286			19,855			(3,745		)	940,697		3,996
Total assets measured at fair value on a recurring basis	$	907,658	$	3,643		$	13,286		$	19,855		$	(3,745	)	$	940,697	$	3,996
Liabilities:
Annuity account balances (2)	$	149,440	$	2,578		$	—		$	2,696		$	—		$	144,166	$	—
Other liabilities (1)	233,197		(106,384		)	—			—			—			339,581		(106,384		)
Total liabilities measured at fair value on a recurring basis	$	382,637	$	(103,806	)	$	—		$	2,696		$	—		$	483,747	$	(106,384	)

(1)	Represents certain freestanding and embedded derivatives.
(2)	Represents liabilities related to equity indexed annuities.

For the three months ended September 30, 2010, $55.6 million of securities were transferred into Level 3. This amount was transferred almost entirely from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous quarters, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of September 30, 2010.

For the three months ended September 30, 2010, $59.4 million of securities were transferred out of Level 3. This amount was transferred entirely to Level 2. These transfers resulted from securities that were previously valued using an internal model that utilized significant unobservable inputs but were valued by independent pricing services or brokers, utilizing no significant unobservable inputs, as of September 30, 2010.

For the three months ended September 30, 2010, there were no transfers between Level 1 and 2.

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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, 2009, for which the Company has 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
Residential mortgage-backed securities	$	30	$	(13,987	)	$	9,418	$	1,012		$	3,555		$	28	$	—
Commercial mortgage-backed securities	817,585		—			35,205		(28,990		)	—			823,800		—
Other asset-backed securities	724,186		—			9,985		10,147			(3,477		)	740,841		—
U.S. government-related bonds	15,060		—			1,633		(97		)	(1,374		)	15,222		—
States, municipals and political subdivisions	—		—			—		—			—			—		—
Other government-related bonds	—		—			—		—			—			—		—
Corporate bonds	69,382		—			6,494		18,612			11,102			105,590		—
Total fixed maturity securities - available-for-sale	1,626,243		(13,987		)	62,735		684			9,806			1,685,481		—
Fixed maturity securities - trading	86,355		4,808			—		(449		)	(1,355		)	89,359		3,393
Total fixed maturity securities	1,712,598		(9,179		)	62,735		235			8,451			1,774,840		3,393
Equity securities	59,078		—			14		1,251			(21		)	60,322		—
Other long-term investments (1)	166,236		(114,383		)	—		—			—			51,853		(114,383		)
Short-term investments	664		—			—		—			(664		)	—		—
Total investments	1,938,576		(123,562		)	62,749		1,486			7,766			1,887,015		(110,990		)
Total assets measured at fair value on a recurring basis	$	1,938,576	$	(123,562	)	$	62,749	$	1,486		$	7,766		$	1,887,015	$	(110,990	)
Liabilities:
Annuity account balances (2)	$	152,427	$	(1,992	)	$	—	$	4,348		$	—		$	150,071	$	—
Other liabilities (1)	66,131		(75,648		)	—		—			—			141,779		(75,648		)
Total liabilities measured at fair value on a recurring basis	$	218,558	$	(77,640	)	$	—	$	4,348		$	—		$	291,850	$	(75,648	)

(1)	Represents certain freestanding and embedded derivatives.
(2)	Represents liabilities related to equity indexed annuities.

28

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the nine months ended September 30, 2010, for which the Company has 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
Residential mortgage-backed securities	$	23	$	4		$	—	$	(7	)	$	—		$	20	$	—
Commercial mortgage-backed securities	844,535		—			40,213		(842,949		)(3)	(21,633		)	20,166		—
Other asset-backed securities	693,930		5,868			1,227		(89,468		)	(9,338		)	602,219		—
U.S. government-related securities	15,102		—			11		10			—			15,123		—
States, municipals, and political subdivisions	—		—			—		—			—			—		—
Other government-related securities	—		—			—		—			—			—		—
Corporate bonds	86,292		—			8,454		37,954			7,564			140,264		—
Total fixed maturity securities - available-for-sale	1,639,882		5,872			49,905		(894,460		)	(23,407		)	777,792		—
Fixed maturity securities - trading
Residential mortgage-backed securities	7,244		(1		)	—		(3,855		)	(3,388		)	—		—
Commercial mortgage-backed securities	—		—			—		—			—			—		—
Other asset-backed securities	47,509		150			—		15,097			—			62,756		(377		)
U.S. government-related securities	3,310		381			—		(5		)	—			3,686		381
States, municipals, and political subdivisions	4,994		77			—		—			(5,071		)	—		—
Other government-related securities	41,965		1,058			—		(47		)	(42,976		)	—		—
Corporate bonds	67		323			—		26,786			(22,644		)	4,532		616
Total fixed maturity securities - trading	105,089		1,988			—		37,976			(74,079		)	70,974		620
Total fixed maturity securities	1,744,971		7,860			49,905		(856,484		)	(97,486		)	848,766		620
Equity securities	60,203		1,229			1,171		2,425			5,985			71,013		1,224
Other long-term investments (1)	28,025		(7,107		)	—		—			—			20,918		(7,107		)
Short-term investments	—		—			—		—			—			—		—
Total investments	1,833,199		1,982			51,076		(854,059		)	(91,501		)	940,697		(5,263		)
Total assets measured at fair value on a recurring basis	$	1,833,199	$	1,982		$	51,076	$	(854,059	)	$	(91,501	)	$	940,697	$	(5,263	)
Liabilities:
Annuity account balances (2)	$	149,893	$	(263	)	$	—	$	5,990		$	—		$	144,166	$	—
Other liabilities (1)	105,838		(233,743		)	—		—			—			339,581		(233,743		)
Total liabilities measured at fair value on a recurring basis	$	255,731	$	(234,006	)	$	—	$	5,990		$	—		$	483,747	$	(233,743	)

(1)	Represents certain freestanding and embedded derivatives.
(2)	Represents liabilities related to equity indexed annuities.
(3)	Represents mortgage loan held by the trusts that have been consolidated upon the adoption of ASU No. 2009-17. See Note 4, Variable Interest Entities.

For the nine months ended September 30, 2010, $55.8 million of securities were transferred into Level 3. This amount was transferred almost entirely from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous quarters, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of September 30, 2010.

For the nine months ended September 30, 2010, $147.3 million of securities were transferred out of Level 3. This amount was transferred entirely to Level 2. These transfers resulted from securities that were previously valued using an internal model that utilized significant unobservable inputs but were valued internally or by independent pricing services or brokers, utilizing no significant unobservable inputs, as of September 30, 2010.

For the nine months ended September 30, 2010, there were no transfers between Level 1 and 2.

29

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the nine months ended September 30, 2009, for which the Company has 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
Residential mortgage-backed securities	$	34	$	(13,987	)	$	9,417		$	1,009		$	3,555		$	28	$	—
Commercial mortgage-backed securities	855,817		—			12,768			(44,785		)	—			823,800		—
Other asset-backed securities	682,710		(31		)	51,957			9,682			(3,477		)	740,841		—
U.S. government-related bonds	10,072		—			932			14,769			(10,551		)	15,222		—
States, municipals and political subdivisions	—		—			—			—			—			—		—
Other government-related bonds	—		—			—			—			—			—		—
Corporate bonds	78,599		(8		)	6,182			(11,729		)	32,546			105,590		—
Total fixed maturity securities - available-for-sale	1,627,232		(14,026		)	81,256			(31,054		)	22,073			1,685,481		—
Fixed maturity securities - trading	32,645		8,345			—			75,044			(26,675		)	89,359		6,496
Total fixed maturity securities	1,659,877		(5,681		)	81,256			43,990			(4,602		)	1,774,840		6,496
Equity securities	58,933		—			17			1,393			(21		)	60,322		—
Other long-term investments (1)	264,173		(212,320		)	—			—			—			51,853		(212,320		)
Short-term investments	1,161		—			(286		)	—			(875		)	—		—
Total investments	1,984,144		(218,001		)	80,987			45,383			(5,498		)	1,887,015		(205,824		)
Total assets measured at fair value on a recurring basis	$	1,984,144	$	(218,001	)	$	80,987		$	45,383		$	(5,498	)	$	1,887,015	$	(205,824	)
Liabilities:
Annuity account balances (2)	$	152,762	$	(3,261	)	$	—		$	5,952		$	—		$	150,071	$	—
Other liabilities (1)	113,311		(28,468		)	—			—			—			141,779		(28,468		)
Total liabilities measured at fair value on a recurring basis	$	266,073	$	(31,729	)	$	—		$	5,952		$	—		$	291,850	$	(28,468	)

(1)	Represents certain freestanding and embedded derivatives.
(2)	Represents liabilities related to equity indexed annuities.

Total realized and unrealized gains (losses) on Level 3 assets and liabilities are primarily reported in either realized investment gains (losses) within the consolidated condensed 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.

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 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.

30

Estimated Fair Value of Financial Instruments

The carrying amounts and estimated fair values of the Company’s financial instruments as of the periods shown below are as follows:

	As of
	September 30, 2010				December 31, 2009
	Carrying				Carrying
	Amounts		Fair Values		Amounts		Fair Values
	(Dollars In Thousands)
Assets:
Mortgage loans on real estate	$	4,870,905	$	5,534,531	$	3,876,890	$	4,123,375
Policy loans	767,214		767,214		794,276		794,276
Liabilities:
Stable value product account balances	$	3,105,822	$	3,363,073	$	3,581,150	$	3,758,422
Annuity account balances	10,451,322		10,208,697		9,911,040		9,655,208
Mortgage loan backed certificates	74,324		76,397		—		—
Non-recourse funding obligations	1,372,500		1,166,603		1,555,000		1,360,759

Except as noted below, fair values were estimated using quoted market prices.

Fair Value Measurements

Mortgage loans on real estate

The Company estimates the fair value of mortgage loans using 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 mortgage loan terms. The model also contains the Company’s determined representative risk adjustment assumptions related to nonperformance and liquidity risks.

Policy loans

The Company believes the fair value of policy loans approximates book value. Policy loans are funds provided to policy holders in return for a claim on the account value of the policy. The funds provided are limited to a certain percent of the account balance. The nature of policy loans is to have low default risk as the loans are fully collateralized by the value of the policy. The majority of policy loans do not have a stated maturity and the balances and accrued interest are repaid with proceeds from the policy account balance. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the fair value of policy loans approximates carrying value.

Stable value product and Annuity account balances

The Company estimates the fair value of stable value product account balances and annuity account balances using models based on discounted expected cash flows. The discount rates used in the models were based on a current market rate for similar financial instruments.

Non-recourse funding obligations

As of September 30, 2010, the Company estimated the fair value of its non-recourse funding obligations using internal discounted cash flow models. The discount rates used in the model were based on a current market yield for similar financial instruments.

31

13.DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes a risk management strategy that incorporates the use of derivative financial instruments to reduce exposure to interest rate risk, inflation risk, currency exchange risk, and equity market risk. These strategies are developed through the Company’s analysis of data from financial simulation models and other internal and industry sources, and are then incorporated into the Company’s risk management program.

Derivative instruments expose the Company to credit and market risk and could result in material changes from period to period. The Company minimizes its credit risk by entering into transactions with highly rated counterparties. The Company manages 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. The Company monitors its use of derivatives in connection with its overall asset/liability management programs and risk management strategies.

Derivative instruments that are used as part of the Company’s interest rate risk management strategy include interest rate swaps, interest rate futures, interest rate options, and interest rate swaptions. The Company’s inflation risk management strategy involves the use of swaps that requires the Company to pay a fixed rate and receive a floating rate that is based on changes in the Consumer Price Index (“CPI”). No foreign currency swaps remain outstanding. The Company also uses S&P 500® options and equity futures to mitigate its exposure to the value of equity indexed annuity contracts and guaranteed benefits related to variable annuity contracts.

The Company records its derivative instruments in the consolidated condensed balance sheet in “other long-term investments” and “other liabilities” in accordance with GAAP, which requires that all derivative instruments be recognized in the balance sheet at fair value. The accounting for changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship in accordance with GAAP. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge related to foreign currency exposure. For derivatives that are designated and qualify as cash flow hedges, the effective portion of the gain or loss realized on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction impacts earnings. The remaining gain or loss on these derivatives is recognized as ineffectiveness in current earnings during the period of the change. For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of change in fair values. Effectiveness of the Company’s hedge relationships is assessed on a quarterly basis. The Company accounts for changes in fair values of derivatives that are not part of a qualifying hedge relationship through earnings in the period of change. Changes in the fair value of derivatives that are recognized in current earnings are reported in “realized investment gains (losses) - derivative financial instruments”.

Cash-Flow Hedges

·During 2004 and 2005, in connection with the issuance of inflation adjusted funding agreements, the Company entered into swaps to convert the floating CPI-linked interest rate on the contracts to a fixed rate. The Company paid a fixed rate on the swap and received a floating rate equal to the CPI change paid on the funding agreements.

·During 2006 and 2007, the Company entered into interest rate swaps to convert LIBOR based floating rate interest payments on funding agreements to fixed rate interest payments.

Other Derivatives

The Company also uses various other derivative instruments for risk management purposes that either do not qualify for hedge accounting treatment or have not currently been designated by the Company for hedge accounting treatment. Changes in the fair value of these derivatives are recognized in earnings during the period of change.

·The Company uses equity and interest rate futures to mitigate the risk related to certain guaranteed minimum benefits within our variable annuity products. In general, the cost of such benefits varies with the level of equity and interest rate markets and overall volatility. The equity futures resulted in

32

net pre-tax losses of $8.4 million for the three and nine months ended September 30, 2010, and the interest rate futures resulted in a net pre-tax gain of $23.0 million for the three and nine months ended September 30, 2010. Such positions were not held in the year-ago periods.

·The interest rate futures held by the Company during 2009 were used to mitigate interest rate risk associated with our commitment to fund pending commercial mortgage loans. For the nine months ended September 30, 2009, the Company recognized pre-tax gains of $6.9 million as a result of changes in value of these futures positions.

·The Company uses certain interest rate swaps to mitigate interest rate risk related to floating rate exposures. The Company recognized pre-tax losses of $4.7 million and $13.5 million for the three and nine months ended September 30, 2010, respectively, and a pre-tax loss of $8.0 million and a pre-tax gain of $28.4 million on interest rate swaps for the three and nine months ended September 30, 2009, respectively.

·The Company uses other swaps and options to manage risk related to other exposures. The Company recognized pre-tax losses of $0.4 million for the three months ended September 30, 2010, and pre-tax gains of $0.4 million for the nine months ended September 30, 2010. The Company recognized pre-tax gains of $2.4 million and $4.6 million for the three and nine months ended September 30, 2009, respectively, for the change in fair value of these derivatives.

·The Company is involved in various modified coinsurance and funds withheld arrangements which contain embedded derivatives that must be reported at fair value. Changes in fair value are recorded in current period earnings. The investment portfolios that support the related modified coinsurance reserves and funds withheld arrangements had mark-to-market changes which substantially offset the gains or losses on these embedded derivatives.

·The Company has an interest rate floor agreement and an YRT premium support arrangement with PLC. The Company recognized pre-tax losses of $0.4 million and $1.9 million for three and nine months ended September 30, 2010 and a pre-tax loss of $0.3 million and a pre-tax gain of $2.4 million for the three and nine months ended September 30, 2009, respectively, related to the interest rate floor agreement. There are no YRT premium support arrangement gains or losses for the three and nine months ended September 30, 2010.

·The Company markets certain variable annuity products with a GMWB rider. The GMWB component is considered an embedded derivative, not considered to be clearly and closely related to the host contract. The Company recognized pre-tax losses of $19.1 million and $59.3 million for the three and nine months ended September 30, 2010, respectively, and a pre-tax loss of $31.2 million and a pre-tax gain of $1.1 million for the three and nine months ended September 30, 2009, respectively, related to these embedded derivatives.

33

The tables below present information about the nature and accounting treatment of the Company’s primary derivative financial instruments and the location in and effect on the consolidated condensed financial statements for the periods presented below:

	As of September 30, 2010				As of December 31, 2009
	Notional		Fair		Notional		Fair
	Amount		Value		Amount		Value
	(Dollars In Thousands)
Other long-term investments
Derivatives not designated as hedging instruments:
Interest rate swaps	$	25,000	$	340	$	75,000	$	16,174
Interest rate floors/YRT(1) premium support arrangements	674,478		9,600		660,734		11,500
Embedded derivative - Modco reinsurance treaties	29,797		2,395		1,883,109		5,907
Embedded derivative - GMWB	533,442		8,885		429,562		10,579
Interest rate futures	500,641		1,337		—		—
Other	13,090		160		66,250		6,791
	$	1,776,448	$	22,717	$	3,114,655	$	50,951
Other liabilities
Cash flow hedges:
Inflation	$	293,379	$	19,087	$	343,526	$	19,141
Interest rate	75,000		6,712		175,000		11,965
Derivatives not designated as hedging instruments:
Interest rate swaps	110,000		12,296		110,000		7,011
Embedded derivative - Modco reinsurance treaties	2,870,743		257,480		1,077,376		81,339
Embedded derivative GMWB	1,615,776		82,037		660,090		24,423
Equity futures	309,932		14,031		—		—
Other	1,068		64		12,703		2,832
	$	5,275,898	$	391,707	$	2,378,695	$	146,711

(1)YRT - yearly renewable term

Gain (Loss) on Derivatives in Cash Flow Hedging Relationships

	For The Three Months Ended September 30, 2010								For The Nine Months Ended September 30, 2010
	Realized		Benefits and			Other			Realized			Benefits and			Other
	investment		settlement			comprehensive			investment			settlement			comprehensive
	gains (losses)		expenses			income (loss)			gains (losses)			expenses			income (loss)
	(Dollars In Thousands)
Gain (loss) recognized in other comprehensive income (effective portion):
Interest rate	$	—	$	—		$	(842	)	$	—		$	—		$	(2,958	)
Inflation	—		—			1,532			—			—			(2,360		)
Gain (loss) reclassified from accumulated other comprehensive income into income (effective portion):
Interest rate	$	—	$	(1,774	)	$	—		$	—		$	(5,747	)	$	—
Inflation	—		(965		)	—			—			(2,049		)	—
Gain (loss) recognized in income (ineffective portion):
Inflation	$	25	$	—		$	—		$	(311	)	$	—		$	—

34

Gain (Loss) on Derivatives in Cash Flow Hedging Relationships

	For The Three Months Ended September 30, 2009								For The Nine Months Ended September 30, 2009
	Realized		Benefits and			Other			Realized		Benefits and			Other
	investment		settlement			comprehensive			investment		settlement			comprehensive
	gains (losses)		expenses			income (loss)			gains (losses)		expenses			income (loss)
	(Dollars In Thousands)
Gain (loss) recognized in other comprehensive income (effective portion):
Interest rate	$	—	$	—		$	(5,822	)	$	—	$	—		$	(1,958	)
Inflation	—		—			(3,049		)	—		—			21,987
Gain (loss) reclassified from accumulated other comprehensive income into income (effective portion):
Interest rate	$	—	$	(1,979	)	$	—		$	—	$	(5,876	)	$	—
Inflation	—		(3,682		)	—			—		(8,151		)	—
Gain (loss) recognized in income (ineffective portion):
Inflation	$	87	$	—		$	—		$	1,041	$	—		$	—

Based on the expected cash flows of the underlying hedged items, the Company expects to reclassify $0.7 million out of accumulated other comprehensive income into earnings during the next twelve months.

Realized investment gains (losses) - derivative financial instruments

	For The						For The
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars In Thousands)
Interest rate risk
Interest rate futures	$	23,047		$	—		$	23,047		$	6,889
Interest rate swaps	(4,676		)	(8,008		)	(13,450		)	28,351
Interest rate floors/YRT premium support arrangements	(400		)	(250		)	(1,899		)	2,400
Embedded derivative - Modco reinsurance treaties	(85,496		)	(158,937		)	(179,654		)	(244,726		)
Embedded derivative - GMWB	(19,105		)	(31,210		)	(59,307		)	1,132
Derivatives related to equity futures	(8,444		)	—			(8,444		)	—
Other	(400		)	2,434			410			4,649
	$	(95,474	)	$	(195,971	)	$	(239,297	)	$	(201,305	)

Realized investment gains (losses) - all other investments

	For The				For The
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
	(Dollars In Thousands)
Fixed income Modco trading portfolio(1)	$	96,689	$	164,732	$	204,749	$	273,639

(1) The Company elected to include the use of alternate disclosures for trading activities

35

14.OPERATING SEGMENTS

The Company has several operating segments each having a strategic focus. An operating segment is distinguished by products, channels of distribution, and/or other strategic distinctions. The Company periodically evaluates its operating segments, as prescribed in the ASC Segment Reporting Topic, and makes adjustments to its segment reporting as needed. A brief description of each segment follows.

·The Life Marketing segment markets level premium term insurance (“traditional”), universal life, 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.

·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. In the ordinary course of business, the Acquisitions segment regularly considers acquisitions of blocks of policies or 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 Acquisitions segment are typically “closed” blocks of business (no new policies are being marketed). Therefore, in such instances, earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made.

·The Annuities segment markets and supports fixed and variable annuity products. These products are primarily sold through broker-dealers, financial institutions and independent agents and brokers.

·The Stable Value Products segment sells guaranteed funding agreements (“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.

·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 (“GAP”) product.

·The Corporate and Other segment primarily consists of net investment income (including the impact of carrying excess liquidity), expenses not attributable to the segments above, and a trading portfolio that was previously part of a variable interest entity. This segment also includes earnings from several non-strategic lines of business and various investment-related transactions.

The Company uses the same accounting policies and procedures to measure segment operating income (loss) and assets as it uses to measure consolidated net income and assets. Segment operating income (loss) is income before income tax excluding net realized investment gains and losses (net of the related amortization of deferred 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 operating income because the derivatives are used to mitigate risk in items affecting consolidated and segment operating income (loss). Segment operating income (loss) 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.

During the first quarter of 2010, the Company recorded a $7.8 million decrease in reserves related to the final settlement in the runoff Lender’s Indemnity line of business.

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There were no significant intersegment transactions during the nine months ended September 30, 2010 and 2009.

The following tables summarize financial information for the Company’s segments:

	For The						For The
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars In Thousands)
Revenues
Life Marketing	$	286,903		$	266,378		$	851,768		$	775,681
Acquisitions	188,177			189,942			564,473			590,694
Annuities	140,926			95,608			365,878			359,423
Stable Value Products	42,037			49,075			127,504			173,129
Asset Protection	68,472			67,902			202,855			199,739
Corporate and Other	35,628			(12,860		)	77,269			(9,447		)
Total revenues	$	762,143		$	656,045		$	2,189,747		$	2,089,219
Segment Operating Income (Loss)
Life Marketing	$	31,054		$	26,994		$	108,379		$	107,300
Acquisitions	27,866			33,061			89,425			101,723
Annuities	21,472			15,324			37,635			34,950
Stable Value Products	8,339			14,339			30,345			51,522
Asset Protection	3,258			4,015			19,196			11,541
Corporate and Other	(1,048		)	(19,157		)	(5,544		)	(19,700		)
Total segment operating income	90,941			74,576			279,436			287,336
Realized investment (losses) gains - investments(1)(3)	102,532			135,596			191,718			132,484
Realized investment (losses) gains - derivatives(2)	(91,268		)	(167,149		)	(195,307		)	(206,169		)
Income tax expense	(34,557		)	(14,551		)	(91,408		)	(73,602		)
Net income	$	67,648		$	28,472		$	184,439		$	140,049
(1) Realized investment (losses) gains - investments	$	104,138		$	134,816		$	193,866		$	130,840
Less: related amortization of DAC	1,606			(780		)	2,148			(1,644		)
	$	102,532		$	135,596		$	191,718		$	132,484
(2) Realized investment gains (losses) - derivatives	$	(95,474	)	$	(195,971	)	$	(239,297	)	$	(201,305	)
Less: settlements on certain interest rate swaps	42			42			126			1,247
Less: derivative activity related to certain annuities	(4,248		)	(28,864		)	(44,116		)	3,617
	$	(91,268	)	$	(167,149	)	$	(195,307	)	$	(206,169	)

(3) Includes other-than-temporary impairments of $7.5 million and $36.1 million for the three and nine months ended September 30, 2010, respectively, and $31.0 million and $161.6 million for the three and nine months ended September 30, 2009, respectively.

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	Operating Segment Assets
	As of September 30, 2010
	(Dollars In Thousands)
	Life						Stable Value
	Marketing		Acquisitions		Annuities		Products
Investments and other assets	$	9,453,752	$	9,100,225	$	12,023,747	$	3,096,748
Deferred policy acquisition costs and value of business acquired	2,430,994		733,653		380,812		9,074
Goodwill	—		42,587		—		—
Total assets	$	11,884,746	$	9,876,465	$	12,404,559	$	3,105,822

	Asset		Corporate				Total
	Protection		and Other		Adjustments		Consolidated
Investments and other assets	$	697,078	$	7,733,881	$	23,519	$	42,128,950
Deferred policy acquisition costs and value of business acquired	53,060		3,658		—		3,611,251
Goodwill	48,157		—		—		90,744
Total assets	$	798,295	$	7,737,539	$	23,519	$	45,830,945

	Operating Segment Assets
	As of December 31, 2009
	(Dollars In Thousands)
	Life						Stable Value
	Marketing		Acquisitions		Annuities		Products
Investments and other assets	$	8,753,633	$	9,136,474	$	9,977,456	$	3,569,038
Deferred policy acquisition costs and value of business acquired	2,277,256		839,829		430,704		12,112
Goodwill	—		44,911		—		—
Total assets	$	11,030,889	$	10,021,214	$	10,408,160	$	3,581,150

	Asset		Corporate				Total
	Protection		and Other		Adjustments		Consolidated
Investments and other assets	$	751,313	$	6,296,964	$	26,372	$	38,511,250
Deferred policy acquisition costs and value of business acquired	59,820		5,550		—		3,625,271
Goodwill	48,157		—		—		93,068
Total assets	$	859,290	$	6,302,514	$	26,372	$	42,229,589

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15.SUBSEQUENT EVENTS

The Company has evaluated the effects of events subsequent to September 30, 2010, and through the date we filed our consolidated condensed financial statements with the United States Securities and Exchange Commission. All accounting and disclosure requirements related to subsequent events are included in our consolidated condensed financial statements.

On October 22, 2010, the Company, a wholly owned subsidiary of PLC, (i) entered into a stock purchase agreement (the “Stock Purchase Agreement”) among RBC Insurance Holdings (USA) Inc. (“RBC”), Athene Holding Ltd. (“Athene”), the Company and, for the purposes of certain sections of the Stock Purchase Agreement, RBC USA Holdco Corporation, and (ii) agreed to enter into a coinsurance agreement (the “Coinsurance Agreement”) with Liberty Life Insurance Company (“Liberty”) under the terms of which the Company will coinsure substantially all of the life and health business of Liberty, subject to certain exceptions. The transactions contemplated by the Coinsurance Agreement transaction will close in conjunction with the acquisition of Liberty by Athene from RBC, an affiliate of Royal Bank of Canada, pursuant to the Stock Purchase Agreement. Pursuant to the Stock Purchase Agreement, RBC has agreed to sell the stock of Liberty to Athene for total consideration of approximately $628.1 million, which price is subject to adjustment, and which price includes a redemption of shares of Liberty from Seller immediately prior to the closing. Under the Coinsurance Agreement, the Company is to pay to Liberty a ceding commission of $200.5 million, subject to adjustment. Using information currently available, the Company estimates that an additional $39 million will be added to the ceding commission for adjustments. The closing of the acquisition of Liberty by Athene and execution of the Coinsurance Agreement by the Company and Liberty is conditioned on, among other things, the termination or expiration of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in respect of the acquisition of Liberty by Athene and receipt of approvals from certain regulatory authorities. In connection with the transaction, the Company, Liberty and RBC will enter into a transition services agreement at closing, pursuant to which RBC will provide certain administrative services and assistance to the Company and Liberty for a period of time thereafter and the Company and Liberty will enter into an administrative services agreement, pursuant to which PLC will provide certain administrative services to Liberty for prescribed time periods following the closing. The closing is expected to occur in the first quarter of 2011.

The Company has publicly disclosed plans to enter into an agreement that will provide for a letter of credit (“LOC”) to support statutory reserves related to a certain block of traditional life business. The Company plans for the transaction to close in the fourth quarter of 2010. This transaction will be contingent upon, among other things, receipt of approvals from certain regulatory authorities.

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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, 2009, 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 MD&A 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 — CAUTIONARY LANGUAGE

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. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. For more information about the risks, uncertainties and other factors that could affect our future results, please see Part I, Item II, Risks and Uncertainties and Part II, Item 1A, Risk Factors, of this report, as well as Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

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 have several operating segments, each having a strategic focus. An operating segment is distinguished by products, channels of distribution, and/or other strategic distinctions. We periodically evaluate our operating segments, as prescribed in the Accounting Standards Codification (“ASC”) Segment Reporting Topic, 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 that were

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sold to individuals. In the ordinary course of business, the Acquisitions segment regularly considers acquisitions of blocks of policies or 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, in such instances, 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 market and support fixed and variable annuity products. These products are primarily sold through broker-dealers, financial institutions and independent agents and brokers.

·Stable Value Products - - We sell guaranteed funding agreements (“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.

·Corporate and Other - This segment primarily consists of net investment income (including the impact of carrying excess liquidity), expenses not attributable to the segments above, and a trading portfolio that was previously part of a variable interest entity. This segment also includes earnings from several non-strategic lines of business and various investment-related transactions.

EXECUTIVE SUMMARY

We delivered solid financial results during the first three quarters of 2010. Mortality continued a favorable trend in all three quarters and we continued to take advantage of depressed market valuations by repurchasing portions of our outstanding non-recourse funding obligations at a significant discount. While we experienced negative fair value changes in the Annuities segment during the third quarter, the impact of this was mitigated to a large degree by a program we began in the third quarter of 2010 of transacting in equity and interest rate futures to mitigate the risk related to certain guaranteed minimum benefits, including guaranteed minimum withdrawal benefits (“GMWB”), within our variable annuity products.

We continued our strategy of growth in the Annuities segment and are encouraged by the sales momentum we have gained in moving our life sales product mix to a universal life product focus. We remain focused on introducing innovative, differentiated products to our markets, optimizing capital deployment, managing crediting rates and growing our distribution networks.

In addition, we have signed agreements that, upon closing, will allow us to deploy an estimated $570 million of capital through the acquisition of United Investors Life Insurance Company and the reinsurance of a life and health insurance block from Liberty Life Insurance Company.

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

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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 and man-made catastrophes, pandemics, malicious acts, terrorist acts, or climate change could adversely affect our operations and results;

·computer viruses, network security breaches, disasters, or other unanticipated events 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 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;

·our strategies for mitigating risks arising from our day-to-day operations may prove ineffective and adversely affect our results of operations and financial condition;

Financial environment

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

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

·equity market and interest rate volatility could negatively impact our business;

·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 us or 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;

·continued deterioration of general economic conditions could result in a severe and extended economic recession, which could materially 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;

·we may be required to establish a valuation allowance against our deferred tax assets, which could materially adversely affect our results of operations, financial condition, and capital position;

·we could be adversely affected by an inability to access our credit facility;

·our financial condition or results of operations could be adversely impacted if our assumptions regarding the fair value and future performance of our investments differ from actual experience;

·the amount of statutory capital we have and must hold to maintain our financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors outside of our control;

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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;

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

·new accounting rules, changes to existing accounting rules, or the grant of permitted accounting practices to competitors 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

·we operate in a mature, highly competitive industry, which 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;

·a ratings downgrade could adversely affect our ability to compete; and

·we may not be able to protect our intellectual property and could also be subject to infringement claims.

For more information about the risks, uncertainties, and other factors that could affect our future results, please see Part II, Item 1A of this report and our Annual Report on Form 10-K.

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 condensed financial statements. For a complete listing of our critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2009.

RESULTS OF OPERATIONS

In the following discussion, segment operating income (loss) is defined as income before income tax excluding net realized investment gains and losses (net of the related deferred acquisitions 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 (loss) because the derivatives are used to mitigate risk in items affecting segment operating income (loss). Management believes that segment operating income (loss) 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 (loss) may be significant components in understanding and assessing our overall financial performance, management believes that segment operating income (loss) enhances an investor’s understanding of our results of operations by highlighting the income usually attributable to the normal, recurring operations of our business. However, segment operating income (loss) should not be viewed as a substitute for accounting principles generally accepted in the United States of America (“GAAP”) net income. In addition, our segment operating income (loss) measures may not be comparable to similarly titled measures reported by other companies.

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

	For The									For The
	Three Months Ended September 30,									Nine Months Ended September 30,
	2010				2009			Change		2010			2009			Change
	(Dollars In Thousands)
Segment Operating Income (Loss)
Life Marketing	$		31,054		$	26,994		15.0	%	$	108,379		$	107,300		1.0	%
Acquisitions	27,866				33,061			(15.7	)	89,425			101,723			(12.1	)
Annuities	21,472				15,324			40.1		37,635			34,950			7.7
Stable Value Products	8,339				14,339			(41.8	)	30,345			51,522			(41.1	)
Asset Protection	3,258				4,015			(18.9	)	19,196			11,541			66.3
Corporate and Other	(1,048			)	(19,157		)	(94.5	)	(5,544		)	(19,700		)	(71.9	)
Total segment operating income	90,941				74,576			21.9		279,436			287,336			(2.7	)
Realized investment gains (losses) - investments(1)(3)	102,532				135,596					191,718			132,484
Realized investment gains (losses) - derivatives(2)	(91,268			)	(167,149		)			(195,307		)	(206,169		)
Income tax expense	(34,557			)	(14,551		)			(91,408		)	(73,602		)
Net income	$		67,648		$	28,472		n/m		$	184,439		$	140,049		31.7
(1) Realized investment gains (losses) - investments(3)	$	104,138			$	134,816				$	193,866		$	130,840
Less: related amortization of DAC	1,606				(780		)			2,148			(1,644		)
	$	102,532			$	135,596				$	191,718		$	132,484
(2) Realized investment gains (losses) - derivatives	$	(95,474		)	$	(195,971	)			$	(239,297	)	$	(201,305	)
Less: settlements on certain interest rate swaps	42				42					126			1,247
Less: derivative activity related to certain annuities	(4,248			)	(28,864		)			(44,116		)	3,617
	$	(91,268		)	$	(167,149	)			$	(195,307	)	$	(206,169	)

(3)  Includes other-than-temporary impairments of $7.5 million and $36.1 million for the three and nine months ended September 30, 2010, respectively, and $31.0 million and $161.6 million for the three and nine months ended September 30, 2009, respectively.

For The Three Months Ended September 30, 2010 as compared to The Three Months Ended September 30, 2009

Net income for the three months ended September 30, 2010, included a $16.4 million, or 21.9%, increase in segment operating income. The increase was primarily related to a $4.1 million increase in the Life Marketing segment, a $6.1 million increase in the Annuities segment, and an $18.1 million increase in the Corporate and Other segment. These increases were partially offset by a decrease of $5.2 million in the Acquisitions segment, a $6.0 million decrease in the Stable Value Products segment, and a $0.8 million decrease in the Asset Protection segment. Changes in fair value related to the Corporate and Other trading portfolio and the Annuities segment increased operating earnings by $5.6 million in the three months ended September 30, 2010, and fair value changes represented $4.7 million of the overall decrease in segment operating income compared to the same quarter last year.

We experienced net realized gains of $8.7 million for the three months ended September 30, 2010, as compared to net realized losses of $61.2 million for the three months ended September 30, 2009. The gains realized for the three months ended September 30, 2010, were primarily caused by $11.2 million of gains related to the net activity of the modified coinsurance portfolio and derivative activity and $17.9 million of gains related to investment securities sale activity. Additionally, net gains of $14.6 million related to equity and interest rate futures that were entered into to mitigate risk related to certain guaranteed minimum benefits. Offsetting these gains were $19.1 million of losses related to GMWB embedded derivative valuation changes, $7.5 million of other-than-temporary impairment credit-related losses, and mark-to-market losses of $4.7 million on interest rate swaps.

·Life Marketing segment operating income was $31.1 million for the three months ended September 30, 2010, representing an increase of $4.1 million, or 15.0%, from the three months ended September 30, 2009. The increase was primarily due to more favorable mortality results partially offset by higher operating expenses.

·Acquisitions segment operating income was $27.9 million for the three months ended September 30, 2010, a decrease of $5.2 million, or 15.7%, as compared to the three months ended September 30, 2009, primarily due to unfavorable DAC unlocking of $2.0 million in the current quarter, as compared to favorable DAC unlocking of $1.7 million in the year-ago quarter.

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·Annuities segment operating income was $21.5 million for the three months ended September 30, 2010, as compared to $15.3 million for the three months ended September 30, 2009, an increase of $6.1 million. This change included a favorable $1.2 million variance related to fair value changes, made up of a $1.4 million unfavorable variance related to the equity indexed annuity (“EIA”) product and a $2.6 million favorable variance related to derivatives associated with the variable annuity (“VA”) GMWB rider. The remaining favorable $4.9 variance in operating income was driven by a $5.2 million increase in VA operating income (excluding the fair value change previously mentioned), largely due to increased policy fees and other income.

·Stable Value Products segment operating income was $8.3 million and decreased $6.0 million, or 41.8%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. The decrease in operating earnings resulted from a decline in average account values and lower operating spreads. Additionally, we called certain retail notes, which has accelerated DAC amortization on those called contracts. The operating spread decreased 42 basis points to 100 basis points for the three months ended September 30, 2010, as compared to an operating spread of 142 basis points during the three months ended September 30, 2009.

·Asset Protection segment operating income was $3.3 million, representing a decrease of $0.8 million for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. Credit insurance earnings decreased $1.1 million as compared to the prior year, primarily due to lower volume. Service contract earnings decreased $1.2 million as compared to the prior year, primarily due to higher loss ratios and higher expenses in certain product lines. Earnings from other products increased $1.5 million for the three months ended September 30, 2010, as compared to the prior year due to favorable loss experience in the GAP product line.

·Corporate and Other segment operating loss was $1.0 million for the three months ended September 30, 2010, as compared to an operating loss of $19.2 million for the three months ended September 30, 2009. This improvement was primarily due to an increase in net investment income of $18.6 million, which includes a decrease of $5.9 million related to a portfolio of securities designated for trading. In addition, the segment experienced a $1.0 million pre-tax gain on the repurchase of non-recourse funding obligations.

For The Nine Months Ended September 30, 2010 as compared to The Nine Months Ended September 30, 2009

Net income for the nine months ended September 30, 2010, included a $7.9 million, or 2.7%, decrease in segment operating income. The decrease was primarily related to a $12.3 million decrease in the Acquisitions segment and a $21.2 million decrease in the Stable Value Products segment. These decreases were partially offset by an increase of $1.1 million in the Life Marketing segment, a $2.7 million increase in the Annuities segment, a $7.7 million increase in the Asset Protection segment, and a $14.2 million improvement in the Corporate & Other segment. Changes in fair value related to the Corporate and Other trading portfolio and the Annuities segment decreased operating earnings by $1.8 million in the nine months ended September 30, 2010.

We experienced net realized losses of $45.4 million for the nine months ended September 30, 2010, as compared to net realized losses of $70.5 million for the nine months ended September 30, 2009. The losses realized for the nine months ended September 30, 2010, were primarily caused by $59.3 million of losses related to GMWB embedded derivative valuation changes, $36.1 million of other-than-temporary impairment credit-related losses, and mark-to-market losses of $13.5 million on interest rate swaps. Offsetting these losses were $25.1 million of gains related to the net activity related to the modified coinsurance portfolio and derivative activity and $32.2 million of gains related to investment securities sale activity. Additionally, net gains of $14.6 million related to equity and interest rate futures that were entered into to mitigate risk related to certain guaranteed minimum benefit.

·Life Marketing segment Operating income was $108.4 million for the nine months ended September 30, 2010, representing an increase of $1.1 million, or 1.0%, from the nine months ended September 30, 2009. The increase was primarily due to more favorable mortality results partially offset by higher operating expenses.

·Acquisitions segment operating income was $89.4 million for the nine months ended September 30, 2010, a decrease of $12.3 million, or 12.1%, as compared to the nine months ended September 30, 2009, primarily due to unfavorable DAC unlocking of $2.0 million in the current quarter, as compared to favorable DAC unlocking of $1.7 million in the year-ago quarter, and expected runoff of the business.

45

·Annuities segment operating income was $37.6 million for the nine months ended September 30, 2010, as compared to $35.0 million for the nine months ended September 30, 2009, an increase of $2.7 million. This change included an unfavorable $27.1 million variance related to fair value changes, of which $3.2 million was related to the EIA product and $23.9 million was related to derivatives associated with the VA GMWB rider, caused primarily by changes in equity markets and lower interest rates. The remaining favorable $29.8 million variance in operating income was primarily driven by a $19.3 million unlocking charge recorded within the VA line during the nine months ended September 30, 2009. Other items accounted for the remainder of the variance, including a $6.1 million reduction in death benefit payments on the VA line and a $7.4 million increase in earnings related to wider spreads and average account value growth of 46.8% in the single premium deferred annuity (“SPDA”) line.

·Stable Value Products segment operating income was $30.3 million and decreased $21.2 million, or 41.1%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The decrease in operating earnings resulted from a decline in average account values and lower operating spreads. In addition, no income was generated from the early retirement of funding agreements backing medium-term notes for the nine months ended September 30, 2010, compared with $1.9 million for the nine months ended September 30, 2009. We also called certain retail notes, which has accelerated DAC amortization on those called contracts. The operating spread decreased 38 basis points to 117 basis points for the nine months ended September 30, 2010, as compared to an operating spread of 155 basis points during the nine months ended September 30, 2009.

·Asset Protection segment operating income was $19.2 million, representing an increase of $7.7 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. Income for the nine months ended September 30, 2010, was comprised of $11.7 million of income from core operations and $7.5 million of income from runoff lines. Credit insurance earnings decreased $3.1 million as compared to the prior year, primarily due to unfavorable loss experience and lower investment income. Service contract earnings increased $0.6 million, or 8.7%, as compared to the prior year. Earnings from other products, including runoff lines, increased $10.1 million for the nine months ended September 30, 2010, as compared to the prior year. The increase resulted primarily from a $7.8 million excess reserve release in the first quarter of 2010 related to the final settlement in the runoff Lender’s Indemnity line of business. Favorable loss experience in the GAP product line also contributed to the increase.

·Corporate and Other segment operating loss decreased $14.2 million for the nine months ended September 30, 2010, as compared the nine months ended September 30, 2009. This variance was primarily due to growth in the segment’s investment income due to deploying liquidity and yield improvements. Offsetting this increase was a negative variance related to mark-to-market adjustments on a portfolio of securities designated for trading. The trading portfolio accounted for a decrease of $33.0 million as compared to the prior year.

46

Life Marketing

Segment results of operations

Segment results were as follows:

	For The								For The
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2010			2009			Change		2010			2009			Change
	(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	379,745		$	379,823		(0.0	)%	$	1,161,035		$	1,152,676		0.7	%
Reinsurance ceded	(190,877		)	(202,708		)	(5.8	)	(595,172		)	(650,874		)	(8.6	)
Net premiums and policy fees	188,868			177,115			6.6		565,863			501,802			12.8
Net investment income	96,940			88,998			8.9		282,791			273,219			3.5
Other income	1,095			265			n/m		3,114			660			n/m
Total operating revenues	286,903			266,378			7.7		851,768			775,681			9.8
BENEFITS AND EXPENSES
Benefits and settlement expenses	260,177			215,567			20.7		697,765			600,078			16.3
Amortization of deferred policy acquisition costs	1,172			40,142			(97.1	)	66,142			109,274			(39.5	)
Other operating expenses	(5,500		)	(16,325		)	(66.3	)	(20,518		)	(40,971		)	(49.9	)
Total benefits and expenses	255,849			239,384			6.9		743,389			668,381			11.2
INCOME BEFORE INCOME TAX	31,054			26,994			15.0		108,379			107,300			1.0
OPERATING INCOME	$	31,054		$	26,994		15.0		$	108,379		$	107,300		1.0

47

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

	For The							For The
	Three Months Ended							Nine Months Ended
	September 30,							September 30,
	2010		2009			Change		2010		2009		Change
	(Dollars In Thousands)
Sales By Product
Traditional	$	8,291	$	25,589		(67.6	)%	$	46,682	$	74,842	(37.6	)%
Universal life	30,427		15,383			97.8		75,645		40,998		84.5
Variable universal life	1,113		912			22.0		3,383		2,408		40.5
	$	39,831	$	41,884		(4.9	)	$	125,710	$	118,248	6.3
Sales By Distribution Channel
Brokerage general agents	$	24,033	$	26,301		(8.6	)	$	77,038	$	73,548	4.7
Independent agents	5,369		6,923			(22.4	)	18,314		21,287		(14.0	)
Stockbrokers / banks	8,425		7,753			8.7		25,427		21,435		18.6
BOLI / other	2,004		907			n/m		4,931		1,978		n/m
	$	39,831	$	41,884		(4.9	)	$	125,710	$	118,248	6.3
Average Life Insurance In-force(1)
Traditional	$	495,354,664	$	492,663,792		0.5		$	496,241,622	$	488,097,799	1.7
Universal life	55,642,909		53,218,615			4.6		54,623,736		53,105,121		2.9
	$	550,997,573	$	545,882,407		0.9		$	550,865,358	$	541,202,920	1.8
Average Account Values
Universal life	$	5,607,058	$	5,346,218		4.9		$	5,512,750	$	5,349,260	3.1
Variable universal life	320,361		279,935			14.4		322,216		258,323		24.7
	$	5,927,419	$	5,626,153		5.4		$	5,834,966	$	5,607,583	4.1
Traditional Life Mortality Experience(2)	$	3,187	$	(4,911	)			$	24,387	$	3,991
Universal Life Mortality Experience(2)	$	127	$	1,305				$	3,084	$	4,295

(1)	Amounts are not adjusted for reinsurance ceded.
(2)	Represents the estimated pre-tax 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.

Operating expenses detail

Other operating expenses for the segment were as follows:

	For The								For The
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2010			2009			Change		2010			2009			Change
	(Dollars In Thousands)
First year commissions	$	49,391		$	48,747		1.3	%	$	152,871		$	135,908		12.5	%
Renewal commissions	8,832			8,966			(1.5	)	26,588			27,264			(2.5	)
First year ceding allowances	(2,480		)	(2,587		)	(4.1	)	(6,958		)	(11,989		)	(42.0	)
Renewal ceding allowances	(44,526		)	(52,271		)	(14.8	)	(138,752		)	(160,341		)	(13.5	)
General & administrative	40,963			44,621			(8.2	)	122,478			119,206			2.7
Taxes, licenses, and fees	9,044			7,847			15.3		25,563			22,599			13.1
Other operating expenses incurred	61,224			55,323			10.7		181,790			132,647			37.0
Less: commissions, allowances & expenses capitalized	(66,724		)	(71,648		)	(6.9	)	(202,308		)	(173,618		)	16.5
Other insurance expenses	$	(5,500	)	$	(16,325	)	(66.3	)	$	(20,518	)	$	(40,971	)	(49.9	)

48

For The Three Months Ended September 30, 2010 as compared to The Three Months Ended September 30, 2009

Segment operating income

Operating income was $31.1 million for the three months ended September 30, 2010, representing an increase of $4.1 million, or 15.0%, from the three months ended September 30, 2009. The increase was primarily due to more favorable mortality results partially offset by higher operating expenses.

Operating revenues

Total revenues for the three months ended September 30, 2010, increased $20.5 million, or 7.7%, as compared to the three months ended September 30, 2009. This increase was the result of higher premiums and policy fees and higher investment income.

Net premiums and policy fees

Net premiums and policy fees increased by $11.8 million, or 6.6%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, primarily due to an increase in retention levels on certain traditional life products and continued growth in universal life in-force business. Our maximum retention level for newly issued traditional life and universal life products is generally $2,000,000.

Net investment income

Net investment income in the segment increased $7.9 million, or 8.9%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. Increased retained traditional and universal life reserves led to increased investment income in the second quarter of 2010 as compared to the second quarter of 2009. Decreases in BOLI fund value led to slightly lower BOLI investment income in the same period. In addition, the impact of our traditional and universal life capital markets programs on investment income allocated to the segment caused an increase of $1.0 million compared to the prior year’s quarter.

Other income

Other income increased $0.8 million for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009.

Benefits and settlement expenses

Benefits and settlement expenses increased by $44.6 million, or 20.7%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, due to growth in retained 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. The estimated mortality impact to earnings related to traditional and universal life products, for the three months ended September 30, 2010, was favorable by $3.3 million and was approximately $6.9 million more favorable than the estimated mortality impact on earnings for the three months ended September 30, 2009. Additionally, the unlocking process increased this line by $29.4 million during the three months ended September 30, 2010, primarily due to the impact of changes in lapse and mortality assumptions.

Amortization of DAC

DAC amortization decreased $39.0 million, or 97.1%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. The decrease was primarily driven by a $32.1 million impact related to more favorable unlocking on universal life and BOLI amortization, partially offset by growth in retained life insurance in-force as compared to 2009. The effect of unlocking was primarily driven by lower lapses and mortality experience and their impact on the unlocking process.

49

Other operating expenses

Other operating expenses increased $10.8 million for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. This increase reflects higher general administrative expenses, a reduction in reinsurance allowances, and interest expense of $3.9 million associated with a letter of credit facility designed to fund traditional life statutory reserves.

Sales

Sales for the segment decreased $2.1 million, or 4.9%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. Lower sales levels of traditional products were primarily the result of pricing changes implemented on certain of our products resulting in less competitive product positioning and greater focus on the universal life product line. Universal life sales increased $15.0 million, or 97.8%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, primarily due to our increased focus on the product line.

For The Nine Months Ended September 30, 2010 as compared to The Nine Months Ended September 30, 2009

Segment operating income

Operating income was $108.4 million for the nine months ended September 30, 2010, representing an increase of $1.1 million, or 1.0%, from the nine months ended September 30, 2009. The increase was primarily due to more favorable mortality results partially offset by higher operating expenses.

Operating revenues

Total revenues for the nine months ended September 30, 2010, increased $76.1 million, or 9.8%, as compared to the nine months ended September 30, 2009. This increase was the result of higher premiums and policy fees and higher investment income due to increases in net in-force reserves.

Net premiums and policy fees

Net premiums and policy fees increased by $64.1 million, or 12.8%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, primarily due to an increase in retention levels on certain traditional life products and continued growth in universal life in-force business. Our maximum retention level for newly issued traditional life and universal life products is generally $2,000,000.

Net investment income

Net investment income in the segment increased $9.6 million, or 3.5%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. Increased retained universal life reserves led to increased investment income for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. Decreases in BOLI fund value led to lower BOLI investment income in the same period. Traditional life statutory reserving methodology changes have reduced our statutory reserves, thus reducing the investment income allocated to the segment in the first quarter of 2010 as compared to the first quarter of 2009. However, growth in traditional in-force more than offset the impact of the reserve methodology changes. In addition, the impact of our traditional and universal life capital markets programs on investment income allocated to the segment caused a reduction of $4.3 million between 2009 and 2010.

Other income

Other income increased $2.5 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009.

50

Benefits and settlement expenses

Benefits and settlement expenses increased by $97.7 million, or 16.3%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, due to growth in retained 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, partially offset by more favorable mortality. The estimated mortality impact to earnings related to traditional and universal life products, for the nine months ended September 30, 2010, was favorable by $27.5 million and was approximately $19.2 million more favorable than the estimated mortality impact on earnings for the nine months ended September 30, 2009. Additionally, the unlocking process increased this line by $29.4 million during the nine months ended September 30, 2010, primarily due to the impact of changes in lapse and mortality assumptions.

Amortization of DAC

DAC amortization decreased $43.1 million, or 39.5%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The decrease was primarily driven by a $32.1 million impact related to more favorable unlocking on universal life and BOLI amortization, partially offset by growth in retained life insurance in-force as compared to 2009. The effect of unlocking was primarily driven by lower lapses and mortality experience and their impact on the unlocking process.

Other operating expenses

Other operating expenses increased $20.5 million, or 49.9%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. This increase reflects higher general administrative expenses, a reduction in reinsurance allowances, and interest expense of $6.8 million associated with a letter of credit facility designed to fund traditional life statutory reserves.

Sales

Sales for the segment increased $7.5 million, or 6.3%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. Lower sales levels of traditional products were primarily the result of pricing changes implemented on certain of our products resulting in a less competitive product positioning and greater focus on the universal life product line. Universal life sales increased $34.6 million, or 84.5%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, primarily due to our increased focus on the product line.

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 universal life-type, limited-payment long duration, and investment contracts business 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 DAC amortization on these lines of business. Deferred reinsurance allowances on level term business as required by the ASC Financial Services-Insurance Topic are recorded as ceded DAC, which is amortized over estimated ceded premiums of the policies in force. Thus, deferred reinsurance allowances on policies as required under the Financial Services-Insurance Topic may impact DAC amortization.

51

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

	For The						For The
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(190,877	)	$	(202,708	)	$	(595,172	)	$	(650,874	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(194,544		)	(184,794		)	(633,286		)	(653,683		)
Amortization of deferred policy acquisition costs	17,010			(7,015		)	(2,971		)	(36,236		)
Other operating expenses (1)	(34,525		)	(39,379		)	(101,481		)	(108,394		)
Total benefits and expenses	(212,059		)	(231,188		)	(737,738		)	(798,313		)
NET IMPACT OF REINSURANCE (2)	$	21,182		$	28,480		$	142,566		$	147,439
Allowances received	$	(47,006	)	$	(54,858	)	$	(145,710	)	$	(172,331	)
Less: Amount deferred	12,481			15,479			44,229			63,937
Allowances recognized (ceded other operating expenses) (1)	$	(34,525	)	$	(39,379	)	$	(101,481	)	$	(108,394	)

(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 90% to 130%.

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 90% to 130%. 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, generally 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 period may fluctuate due to variations in mortality and unlocking of balances under the ASC Financial Services-Insurance Topic.

52

For The Three Months Ended September 30, 2010 as compared to The Three Months Ended September 30, 2009

The decrease in ceded premiums above for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, was caused primarily by lower ceded traditional life premiums and policy fees of $15.4 million.

Ceded benefits and settlement expenses were higher for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, due to larger increases in ceded reserves and increased ceded claims. Traditional ceded benefits decreased $16.2 million for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, due to a lower increase in ceded reserves, partly offset by slightly higher ceded death benefits. Universal life ceded benefits increased $25.5 million for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, due to larger changes in ceded reserves and higher ceded claims. Ceded universal life claims were $5.2 million higher for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009.

Ceded amortization of deferred policy acquisitions costs decreased for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, primarily due to the differences in unlocking between the two periods.

Total allowances received for the three months ended September 30, 2010, decreased from the three months ended September 30, 2009, due to the change in our traditional life reinsurance strategy, resulting in an increase in our retention level.

For The Nine Months Ended September 30, 2010 as compared to The Nine Months Ended September 30, 2009

The decrease in ceded premiums above for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, was caused primarily by lower ceded traditional life premiums and policy fees of $53.2 million.

Ceded benefits and settlement expenses were lower for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, due to lower increases in ceded reserves partially offset by higher ceded claims. Traditional ceded benefits decreased $58.5 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, due to a lower increase in ceded reserves and lower ceded death benefits. Universal life ceded benefits increased $38.5 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, due to higher ceded claims and a higher change in ceded reserves. Ceded universal life claims were $23.6 million higher for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009.

Ceded amortization of deferred policy acquisitions costs decreased for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, primarily due to the differences in unlocking between the two periods.

Total allowances received for the nine months ended September 30, 2010, decreased from the nine months ended September 30, 2009, due to the change in our traditional life reinsurance strategy, resulting in an increase in our retention level.

53

Acquisitions

Segment results of operations

Segment results were as follows:

	For The								For The
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2010			2009			Change		2010			2009			Change
	(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	167,985		$	175,521		(4.3	)%	$	507,095		$	538,681		(5.9	)%
Reinsurance ceded	(108,296		)	(112,325		)	(3.6	)	(318,922		)	(337,414		)	(5.5	)
Net premiums and policy fees	59,689			63,196			(5.5	)	188,173			201,267			(6.5	)
Net investment income	114,045			118,202			(3.5	)	346,194			361,258			(4.2	)
Other income	2,011			1,519			32.4		4,659			4,514			3.2
Total operating revenues	175,745			182,917			(3.9	)	539,026			567,039			(4.9	)
Realized gains (losses) - investments	97,784			163,529					203,455			268,937
Realized gains (losses) - derivatives	(85,352		)	(156,504		)			(178,008		)	(245,282		)
Total revenues	188,177			189,942					564,473			590,694
BENEFITS AND EXPENSES
Benefits and settlement expenses	125,234			131,786			(5.0	)	386,262			406,290			(4.9	)
Amortization of deferred policy acquisition costs and value of business acquired	17,558			15,547			12.9		46,621			47,942			(2.8	)
Other operating expenses	5,087			2,523			n/m		16,718			11,084			50.8
Operating benefits and expenses	147,879			149,856			(1.3	)	449,601			465,316			(3.4	)
Amortization of DAC / VOBA related to realized gains (losses) - investments	993			(3,120		)			870			(3,214		)
Total benefits and expenses	148,872			146,736			1.5		450,471			462,102			(2.5	)
INCOME BEFORE INCOME TAX	39,305			43,206			(9.0	)	114,002			128,592			(11.3	)
Less: realized gains (losses)	12,432			7,025					25,447			23,655
Less: related amortization of DAC	(993		)	3,120					(870		)	3,214
OPERATING INCOME	$	27,866		$	33,061		(15.7	)	$	89,425		$	101,723		(12.1	)

54

The following table summarizes key data for the Acquisitions segment:

	For The								For The
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2010			2009			Change		2010			2009			Change
	(Dollars In Thousands)
Average Life Insurance In-Force(1)
Traditional	$	183,168,231		$	195,874,655		(6.5	)%	$	186,246,146		$	199,239,104		(6.5	)%
Universal life	26,560,573			28,071,127			(5.4	)	26,946,023			28,505,293			(5.5	)
	$	209,728,804		$	223,945,782		(6.3	)	$	213,192,169		$	227,744,397		(6.4	)
Average Account Values
Universal life	$	2,677,935		$	2,813,434		(4.8	)	$	2,714,247		$	2,837,554		(4.3	)
Fixed annuity(2)	3,347,013			3,535,209		(4)	(5.3	)	3,386,229			3,638,618		(4)	(6.9	)
Variable annuity	129,953			134,911			(3.7	)	134,640			128,336			4.9
	$	6,154,901		$	6,483,554		(5.1	)	$	6,235,116		$	6,604,508		(5.6	)
Interest Spread - UL & Fixed Annuities
Net investment income yield(3)	5.91		%	5.91		%			5.94		%	5.94		%
Interest credited to policyholders	4.10			4.16					4.16			4.16
Interest spread	1.81		%	1.75		%			1.78		%	1.78		%

(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)Includes available-for-sale and trading portfolios. Available-for-sale portfolio yields were 6.28% and 6.32% for the three and nine months endedSeptember 30, 2010, respectively, compared to 6.28% and 6.32%, respectively, for the three and nine months ended September 30, 2009.

(4) Certain changes in methodology were made in the current year. Prior years have been adjusted to make amounts comparable to current year.

For The Three Months Ended September 30, 2010 as compared to The Three Months Ended September 30, 2009

Segment operating income

Operating income was $27.9 million for the three months ended September 30, 2010, a decrease of $5.2 million, or 15.7%, as compared to the three months ended September 30, 2009, primarily due to unfavorable DAC unlocking of $2.0 million in the current quarter, as compared to favorable DAC unlocking of $1.7 million in the year-ago quarter.

Operating Revenues

Net premiums and policy fees decreased $3.5 million, or 5.5%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, primarily due to runoff of the in-force business. Net investment income decreased $4.2 million, or 3.5%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, due to runoff of the segment’s in-force business, resulting in a reduction of invested assets and lower investment income.

Total Benefits and expenses

Total benefits and expenses increased $2.1 million, or 1.5%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. The increase was primarily due to higher amortization of DAC/VOBA related to realized gains on investments for the three months ended September 30, 2010, as compared to lower amortization of DAC/VOBA related to realized losses for the three months September 30, 2009, partially offset by the expected runoff of the in-force business and fluctuations in mortality. In the third quarter of 2010, we had unfavorable DAC unlocking of $2.0 million in the current quarter, as compared to favorable DAC unlocking of $1.7 million in the year-ago quarter.

For The Nine Months Ended September 30, 2010 as compared to The Nine Months Ended September 30, 2009

Segment operating income

Operating income was $89.4 million for the nine months ended September 30, 2010, a decrease of $12.3 million, or 12.1%, as compared to the nine months ended September 30, 2009, primarily due to unfavorable DAC unlocking of $2.0 million in the current quarter, as compared to favorable DAC unlocking of $1.7 million in the year-ago quarter, and expected runoff of the business.

55

Operating Revenues

Net premiums and policy fees decreased $13.1 million, or 6.5%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, primarily due to runoff of the in-force business. Net investment income decreased $15.1 million, or 4.2%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, due to runoff of the segment’s in-force business, resulting in a reduction of invested assets and lower investment income.

Total Benefits and expenses

Total benefits and expenses decreased $11.6 million, or 2.5%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The decrease related primarily to the expected runoff of the in-force business and fluctuations in mortality, partially offset by higher operating expenses and amortization related to realized gains on investments. In the third quarter of 2010, we had unfavorable DAC unlocking of $2.0 million in the current quarter, as compared to favorable DAC unlocking of $1.7 million in the year-ago quarter.

Reinsurance

The Acquisitions segment currently reinsures portions of both its life and annuity in-force. The cost of reinsurance to the segment is reflected in the chart shown below.

Impact of reinsurance

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

Acquisitions Segment

Line Item Impact of Reinsurance

	For The						For The
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(108,296	)	$	(112,325	)	$	(318,922	)	$	(337,414	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(94,287		)	(100,107		)	(273,257		)	(289,436		)
Amortization of deferred policy acquisition costs	(6,583		)	(3,343		)	(14,236		)	(12,620		)
Other operating expenses	(13,317		)	(15,835		)	(41,212		)	(46,541		)
Total benefits and expenses	(114,187		)	(119,285		)	(328,705		)	(348,597		)
NET IMPACT OF REINSURANCE(1)	$	5,891		$	6,960		$	9,783		$	11,183

(1) Assumes no investment income on reinsurance. Forgone investment income would substantially reduce the favorable impact of reinsurance.

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, 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 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 us and the assuming companies has not been quantified as it is not fully reflected in our consolidated condensed financial statements.

56

The net impact of reinsurance was less favorable by $1.1 million for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, as decreases in total benefits and expenses more than offset decreases in ceded premiums.

The net impact of reinsurance decreased $1.4 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, as decreases in total benefits and expenses more than offset decreases in ceded premiums.

57

Annuities

Segment results of operations

Segment results were as follows:

	For The								For The
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2010			2009			Change		2010			2009			Change
	(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	11,086		$	7,416		49.5	%	$	29,661		$	25,807		14.9	%
Reinsurance ceded	(41		)	(29		)	41.4		(116		)	(113		)	2.7
Net premiums and policy fees	11,045			7,387			49.5		29,545			25,694			15.0
Net investment income	122,662			113,272			8.3		357,578			324,842			10.1
Realized gains (losses) - derivatives	(4,248		)	(28,864		)	(85.3	)	(44,116		)	3,617			n/m
Other income	7,857			4,295			82.9		19,683			11,275			74.6
Total operating revenues	137,316			96,090			42.9		362,690			365,428			(0.7	)
Realized gains (losses) - investments	3,610			(482		)			3,188			(6,005		)
Total revenues	140,926			95,608			47.4		365,878			359,423			1.8
BENEFITS AND EXPENSES
Benefits and settlement expenses	98,023			96,118			2.0		306,798			260,685			17.7
Amortization of deferred policy acquisition costs and value of business acquired	8,003			(22,516		)	n/m		(10,540		)	49,237			n/m
Other operating expenses	9,818			7,164			37.0		28,797			19,886			44.8
Operating benefits and expenses	115,844			80,766			43.4		325,055			329,808			(1.4	)
Amortization of DAC / VOBA related to realized gains (losses) - investments	613			2,340					1,278			2,240
Total benefits and expenses	116,457			83,106			40.1		326,333			332,048			(1.7	)
INCOME BEFORE INCOME TAX	24,469			12,502			95.7		39,545			27,375			44.5
Less: realized gains (losses)	3,610			(482		)			3,188			(6,005		)
Less: related amortization of DAC	(613		)	(2,340		)			(1,278		)	(1,570		)
OPERATING INCOME	$	21,472		$	15,324		40.1		$	37,635		$	34,950		7.7

58

The following table summarizes key data for the Annuities segment:

	For The								For The
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2010			2009			Change		2010			2009			Change
	(Dollars In Thousands)
Sales
Fixed annuity	$	240,885		$	258,146		(6.7	)%	$	784,213		$	988,199		(20.6	)%
Variable annuity	436,350			194,430			n/m		1,199,075			510,792			n/m
	$	677,235		$	452,576		49.6		$	1,983,288		$	1,498,991		32.3
Average Account Values
Fixed annuity(1)	$	8,095,491		$	7,218,458		12.1		$	7,838,909		$	6,948,829		12.8
Variable annuity	3,451,344			2,355,044			46.6		3,191,138			2,039,788			56.4
	$	11,546,835		$	9,573,502		20.6		$	11,030,047		$	8,988,617		22.7
Interest Spread - Fixed Annuities(2)
Net investment income yield	6.04		%	6.21		%			6.07		%	6.19		%
Interest credited to policyholders	4.50			4.68					4.58			4.80
Interest spread	1.54		%	1.53		%			1.49		%	1.39		%

	As of September 30,
	2010		2009		Change
GMDB - Net amount at risk(3)	$	318,280	$	457,887	(30.5	)%
GMDB Reserves	6,970		—		n/m
GMWB Reserves	73,179		31,958		n/m
Account value subject to GMWB rider	2,164,771		857,192		n/m
S&P 500® Index	1,141		1,057		7.9

(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.

For The Three Months Ended September 30, 2010 as compared to The Three Months Ended September 30, 2009

Segment operating income

Segment operating income was $21.5 million for the three months ended September 30, 2010, as compared to $15.3 million for the three months ended September 30, 2009, an increase of $6.1 million. This change included a favorable $1.2 million variance related to fair value changes, made up of a $1.4 million unfavorable variance related to the EIA product and a $2.6 million favorable variance related to derivatives associated with the VA GMWB rider. The remaining favorable $4.9 million variance in operating income was driven by a $5.2 million increase in VA operating income (excluding the fair value change previously mentioned), largely due to increased policy fees and other income.

Operating revenues

Segment operating revenues increased $41.2 million, or 42.9%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, primarily due to favorable fair value changes on the derivatives associated with the VA GMWB rider. In addition, there were increases in net investment income, policy fees, and other income. Average fixed account balances grew 12.1% and average variable account balances grew 46.6% for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, resulting in higher investment income, policy fees, and other income.

Benefits and settlement expenses

Benefits and settlement expenses increased $1.9 million, or 2.0%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. This increase was primarily the result of higher credited interest, higher bonus interest amortization, and an unfavorable change of $6.8 million related to unlocking. Partially offsetting this increase was a favorable change of $17.2 million in unearned premium reserve amortization caused primarily by fair value changes associated with the VA GMWB rider. In addition, there was a favorable change of $2.0 million in the fair value component of the EIA reserve.

59

Amortization of DAC

The increase in DAC amortization for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, was primarily due to fair value changes on the derivatives associated with the VA GMWB rider. Fair value changes on the VA GMWB rider caused an increase in amortization of $9.3 million. Unfavorable DAC unlocking of $3.7 million was recorded by the segment during the three months ended September 30, 2010, as compared to favorable unlocking of $11.3 million during the three months ended September 30, 2009.

Sales

Total sales increased $224.7 million, or 49.6%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. Sales of fixed annuities decreased $17.3 million, or 6.7%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. The decrease in fixed annuity sales was driven by reduced sales in the market value adjusted (“MVA”) annuity line, primarily attributable to a lower interest rate environment. MVA sales decreased $46.5 million, or 65.1%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. Sales of variable annuities increased $241.9 million for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, primarily due to a more competitive product and more focus on the VA line of business.

For The Nine Months Ended September 30, 2010 as compared to The Nine Months Ended September 30, 2009

Segment operating income

Segment operating income was $37.6 million for the nine months ended September 30, 2010, as compared to $35.0 million for the nine months ended September 30, 2009, an increase of $2.7 million. This change included an unfavorable $27.1 million variance related to fair value changes, of which $3.2 million was related to the EIA product and $23.9 million was related to derivatives associated with the VA GMWB rider, caused primarily by changes in equity markets and lower interest rates. The remaining favorable $29.8 million variance in operating income was primarily driven by a $19.3 million unlocking charge recorded within the VA line during the nine months ended September 30, 2009. Other items accounted for the remainder of the variance, including a $6.1 million reduction in death benefit payments on the VA line and a $7.4 million increase in earnings related to wider spreads and average account value growth of 46.8% in the SPDA line.

Operating revenues

Segment operating revenues decreased $2.7 million, or 0.7%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, primarily due to unfavorable fair value changes on the derivatives associated with the VA GMWB rider and the EIA product. These losses were partially offset by increases in net investment income, policy fees, and other income. Average fixed account balances grew 12.8% and average variable account balances grew 56.4% for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, resulting in higher investment income, policy fees, and other income.

Benefits and settlement expenses

Benefits and settlement expenses increased $46.1 million, or 17.7%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. This increase was primarily the result of higher credited interest and an unfavorable change of $25.8 million in unearned premium reserve amortization. The change in unearned premium amortization was primarily a result of fair value changes associated with the VA GMWB rider. Offsetting this increase was a favorable variance of $4.7 million in EIA fair value changes and a favorable change of $1.6 million in unlocking for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. Favorable unlocking of $6.2 million was recorded in the nine months ended September 30, 2010, as compared to $4.6 million during the nine months ended September 30, 2009.

Amortization of DAC

The decrease in DAC amortization for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, was primarily due to fair value changes on the VA GMWB rider. Fair value

60

changes on the VA GMWB rider caused a decrease in amortization of $32.1 million. Offsetting this was an unfavorable variance in DAC unlocking of $3.6 million for the nine months ended September 30, 2010, as compared to favorable unlocking of $1.5 million for the nine months ended September 30, 2009.

Sales

Total sales increased $484.3 million, or 32.3%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. Sales of fixed annuities decreased $204.0 million, or 20.6%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The decrease in fixed annuity sales was driven by reduced sales in the MVA and immediate annuity lines and was primarily attributable to a lower interest rate environment. MVA sales decreased $239.2 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. SPDA sales increased by $59.1 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, primarily due to expansion of our distribution channels. Sales of variable annuities increased $688.3 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, primarily due to a more competitive product and more focus on the VA line of business.

61

Stable Value Products

Segment results of operations

Segment results were as follows:

	For The							For The
	Three Months Ended							Nine Months Ended
	September 30,							September 30,
	2010		2009			Change		2010			2009			Change
	(Dollars In Thousands)
REVENUES
Net investment income	$	41,100	$	54,024		(23.9	)%	$	133,244		$	174,750		(23.8	)%
Other income	—		—			n/m		—			1,866			(100.0	)
Realized gains (losses)	937		(4,949		)	n/m		(5,740		)	(3,487		)	64.6
Total revenues	42,037		49,075			(14.3	)	127,504			173,129			(26.4	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	30,442		37,972			(19.8	)	97,145			119,763			(18.9	)
Amortization of deferred policy acquisition costs	1,398		893			56.6		3,259			2,664			22.3
Other operating expenses	921		820			12.3		2,495			2,667			(6.4	)
Total benefits and expenses	32,761		39,685			(17.4	)	102,899			125,094			(17.7	)
INCOME BEFORE INCOME TAX	9,276		9,390			(1.2	)	24,605			48,035			(48.8	)
Less: realized gains (losses)	937		(4,949		)			(5,740		)	(3,487		)
OPERATING INCOME	$	8,339	$	14,339		(41.8	)	$	30,345		$	51,522		(41.1	)

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

	For The								For The
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2010			2009			Change		2010			2009			Change
	(Dollars In Thousands)
Sales
GIC	$	66,477		$	—		n/m	%	$	73,977		$	—		n/m	%
GFA - Direct Institutional	—			—			n/m		400,000			—			n/m
GFA - Registered Notes - Institutional	—			—			n/m		—			—			n/m
GFA - Registered Notes - Retail	—			—			n/m		—			—			n/m
	$	66,477		$	—		n/m		$	473,977		$	—		n/m
Average Account Values	$	3,331,250		$	4,025,344		(17.2	)	$	3,440,299		$	4,256,179		(19.2	)
Ending Account Values	$	3,105,822		$	3,863,612		(19.6	)	$	3,105,822		$	3,863,612		(19.6	)
Operating Spread
Net investment income yield	4.93		%	5.36		%			5.16		%	5.47		%
Interest credited	3.65			3.77					3.76			3.75
Operating expenses	0.28			0.17					0.23			0.17
Operating spread	1.00		%	1.42		%			1.17		%	1.55		%(1)

(1) Excludes one-time funding agreement retirement gains.

62

For The Three Months Ended September 30, 2010 as compared to The Three Months Ended September 30, 2009

Segment operating income

Operating income was $8.3 million and decreased $6.0 million, or 41.8%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. The decrease in operating earnings resulted from a decline in average account values and lower operating spreads. Additionally, we called certain retail notes, which has accelerated DAC amortization on those called contracts. The operating spread decreased 42 basis points to 100 basis points for the three months ended September 30, 2010, as compared to an operating spread of 142 basis points during the three months ended September 30, 2009.

Sales

Total sales were $66.5 million for the three months ended September 30, 2010.

For The Nine Months Ended September 30, 2010 as compared to The Nine Months Ended September 30, 2009

Segment operating income

Operating income was $30.3 million and decreased $21.2 million, or 41.1%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The decrease in operating earnings resulted from a decline in average account values and lower operating spreads. In addition, no income was generated from the early retirement of funding agreements backing medium-term notes for the nine months ended September 30, 2010, compared with $1.9 million for the nine months ended September 30, 2009. We also called certain retail notes, which has accelerated DAC amortization on those called contracts. The operating spread decreased 38 basis points to 117 basis points for the nine months ended September 30, 2010, as compared to an operating spread of 155 basis points during the nine months ended September 30, 2009.

Sales

Total sales were $474.0 million for the nine months ended September 30, 2010.

63

Asset Protection

Segment results of operations

Segment results were as follows:

	For The									For The
	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2010			2009			Change			2010			2009			Change
	(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	71,575		$	79,183		(9.6	)%	$		220,101		$	243,030		(9.4	)%
Reinsurance ceded	(27,502		)	(32,198		)	(14.6	)	(85,343			)	(103,078		)	(17.2	)
Net premiums and policy fees	44,073			46,985			(6.2	)	134,758				139,952			(3.7	)
Net investment income	5,808			6,956			(16.5	)	18,243				21,855			(16.5	)
Other income	18,591			13,961			33.2		49,854				37,932			31.4
Total operating revenues	68,472			67,902			0.8		202,855				199,739			1.6
BENEFITS AND EXPENSES
Benefits and settlement expenses	25,192			25,822			(2.4	)	64,591				80,071			(19.3	)
Amortization of deferred policy acquisition costs	7,371			7,858			(6.2	)	21,973				22,210			(1.1	)
Other operating expenses	32,651			30,207			8.1		97,095				85,917			13.0
Total benefits and expenses	65,214			63,887			2.1		183,659				188,198			(2.4	)
INCOME BEFORE INCOME TAX	3,258			4,015			(18.9	)	19,196				11,541			66.3
OPERATING INCOME	$	3,258		$	4,015		(18.9	)	$		19,196		$	11,541		66.3

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

	For The								For The
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2010			2009			Change		2010			2009			Change
	(Dollars In Thousands)
Sales
Credit insurance	$	10,099		$	10,345		(2.4	)%	$	27,484		$	27,549		(0.2	)%
Service contracts	66,417			61,014			8.9		176,634			159,891			10.5
Other products	15,861			11,038			43.7		40,683			33,920			19.9
	$	92,377		$	82,397		12.1		$	244,801		$	221,360		10.6
Loss Ratios (1)
Credit insurance	38.6		%	35.6		%			37.2		%	33.9		%
Service contracts	62.4			57.6					57.6			54.4
Other products	32.1			60.4					(25.5		)	116.6

(1) Incurred claims as a percentage of earned premiums

For The Three Months Ended September 30, 2010 as compared to The Three Months Ended September 30, 2009

Segment operating income

Operating income was $3.3 million, representing a decrease of $0.8 million for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. Credit insurance earnings decreased $1.1 million as compared to the prior year, primarily due to lower volume. Service contract earnings decreased $1.2 million as compared to the prior year, primarily due to higher loss ratios and higher expenses in certain product lines. Earnings from other products increased $1.5 million for the three months ended September 30, 2010, as compared to the prior year due to favorable loss experience in the GAP product line.

64

Net premiums and policy fees

Net premiums and policy fees decreased $2.9 million, or 6.2%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. Credit insurance premiums decreased $1.5 million, or 24.3%, due to the impact of decreasing sales in prior years and the related impact on earned premiums. Service contract premiums decreased $1.0 million, or 2.7%. Within the other product lines, net premiums decreased $0.4 million, or 9.5%, as compared to the prior year due to decreasing GAP sales in prior years and the related impact on earned premiums.

Other income

Other income increased $4.6 million, or 33.2%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, primarily due to the impact of taking over the administration of a block of service contract business in the fourth quarter of 2009 and an increase in auto sales in 2010.

Benefits and settlement expenses

Benefits and settlement expenses decreased $0.6 million, or 2.4%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. Credit insurance claims for the three months ended September 30, 2010, as compared to the prior year, decreased $0.4 million, or 17.9%, due to lower volume. Service contract claims increased $1.1 million, or 5.3%, due to higher loss ratios in some product lines. Other products claims decreased $1.3 million, or 52.0%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. The decrease was due to improved loss ratios in the GAP product line.

Amortization of DAC and Other operating expenses

Amortization of DAC decreased $0.5 million, or 6.2%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, primarily due to lower earned premiums in the GAP product line. Other operating expenses increased $2.4 million, or 8.1%, for the three months ended September 30, 2010, primarily due to higher commission expense resulting from an increase in sales and higher retrospective commissions resulting from lower loss ratios in the GAP product line.

Sales

Total segment sales increased $10.0 million, or 12.1%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. Credit insurance sales decreased $0.2 million, or 2.4%. Service contract sales increased $5.4 million, or 8.9%, as compared to the prior year. Sales from other products increased $4.8 million, or 43.7%. Increases in the service contract and GAP lines are primarily attributable to the improvement in auto sales over the prior year.

For The Nine Months Ended September 30, 2010 as compared to The Nine Months Ended September 30, 2009

Segment operating income

Operating income was $19.2 million, representing an increase of $7.7 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. Income for the nine months ended September 30, 2010, was comprised of $11.7 million of income from core operations and $7.5 million of income from runoff lines. Credit insurance earnings decreased $3.1 million as compared to the prior year, primarily due to unfavorable loss experience and lower investment income. Service contract earnings increased $0.6 million, or 8.7%, as compared to the prior year. Earnings from other products increased $10.1 million for the nine months ended September 30, 2010, as compared to the prior year. The increase resulted primarily from a $7.8 million excess reserve release in the first quarter of 2010 related to the final settlement in the runoff Lender’s Indemnity line of business. Favorable loss experience in the GAP product line also contributed to the increase.

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Net premiums and policy fees

Net premiums and policy fees decreased $5.2 million, or 3.7%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The decrease was due to the impact of decreasing sales in prior years and the related impact on earned premiums.

Other income

Other income increased $11.9 million, or 31.4%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, primarily due to the impact of taking over the administration of a block of service contract business in the fourth quarter of 2009 and an increase in sales in 2010.

Benefits and settlement expenses

Benefits and settlement expenses decreased $15.5 million, or 19.3%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. Credit insurance claims decreased $0.5 million, or 7.2%, as compared to the prior year. Service contract claims increased $2.6 million, or 4.4%, due to higher loss ratios in some product lines. Other products claims decreased $17.6 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The decrease included a $7.8 million decrease in reserves related to the final settlement in the runoff Lender’s Indemnity line of business. In addition, the first quarter of 2009 included a $6.3 million increase in the runoff Lender’s indemnity product line’s loss reserve related to the commutation of a reinsurance agreement which was offset by a reduction in other expenses. Improved loss ratios in the GAP product line contributed 4.0 million to the decrease.

Amortization of DAC and Other operating expenses

Amortization of DAC was $0.2 million, or 1.1%, lower for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. Other operating expenses increased $11.2 million, or 13.0%, for the nine months ended September 30, 2010, partially due to a $6.3 million bad debt recovery in the runoff Lender’s Indemnity product line due to the commutation of a reinsurance agreement in the first quarter of 2009, which was offset by an increase in benefits and settlement expenses. Higher commission expense resulting from an increase in sales and higher retrospective commissions resulting from lower loss ratios in certain service product lines also contributed to the increase.

Sales

Total segment sales increased $23.4 million, or 10.6%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. Credit insurance sales remained consistent as compared to the prior year. Service contract sales increased $16.7 million, or 10.5%, as compared to the prior year. Sales in other products increased $6.8 million, or 19.9% primarily in the GAP product line. Increases in the service contract and GAP lines are primarily attributable to the improvement in auto sales over the prior year.

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.

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

Asset Protection Segment

Line Item Impact of Reinsurance

	For The						For The
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(27,502	)	$	(32,198	)	$	(85,343	)	$	(103,078	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(19,057		)	(24,439		)	(60,146		)	(73,513		)
Amortization of deferred policy acquisition costs	(7,608		)	(10,249		)	(24,906		)	(34,065		)
Other operating expenses	(3,377		)	(1,841		)	(7,901		)	(11,867		)
Total benefits and expenses	(30,042		)	(36,529		)	(92,953		)	(119,445		)
NET IMPACT OF REINSURANCE(1)	$	2,540		$	4,331		$	7,610		$	16,367

(1) Assumes no investment income on reinsurance. Forgone investment income would substantially reduce the favorable impact of reinsurance.

For The Three Months Ended September 30, 2010 as compared to The Three Months Ended September 30, 2009

Reinsurance premiums ceded decreased $4.7 million, or 14.6%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. The decrease was primarily due to a decline in ceded service contract and GAP premiums due to the impact of decreasing sales in prior years and the related impact on earned premiums. Ceded unearned premium reserves and claim reserves with PARC’s are generally secured by trust accounts, letters of credit, or on a funds withheld basis.

Benefits and settlement expenses ceded decreased $5.4 million, or 22.0%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. The decrease was primarily due to lower losses in the service contract and GAP lines.

Amortization of DAC ceded decreased $2.6 million for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, primarily as the result of the decreases in the ceded dealer credit and GAP product lines. Other operating expenses ceded increased $1.5 million for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009.

Net investment income has no direct impact on reinsurance cost. However, 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 business we cede. The net investment income impact to us and the assuming companies has not been quantified as it is not reflected in our consolidated condensed financial statements.

For The Nine Months Ended September 30, 2010 as compared to The Nine Months Ended September 30, 2009

Reinsurance premiums ceded decreased $17.7 million, or 17.2%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The decrease was primarily due to a decline in ceded dealer credit insurance premiums and GAP premiums due to the impact of decreasing sales over the past several years and the related impact on earned premiums. Ceded unearned premium reserves and claim reserves with PARC’s are generally secured by trust accounts, letters of credit, or on a funds withheld basis.

Benefits and settlement expenses ceded decreased $13.4 million, or 18.2%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The decrease was primarily due to lower losses in the service contract and GAP lines.

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Amortization of DAC ceded decreased $9.2 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, primarily as the result of the decreases in the ceded dealer credit and GAP product lines. Other operating expenses ceded decreased $4.0 million for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The fluctuation was primarily attributable to a $6.3 million bad debt recovery in the runoff Lender’s Indemnity product line as a result of the commutation of a reinsurance agreement in the first quarter of 2009 partially offset by increases in the GAP product line in 2010.

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Corporate and Other

Segment results of operations

Segment results were as follows:

	For The								For The
	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2010			2009			Change		2010			2009			Change
	(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	5,848		$	6,717		(12.9	)%	$	18,387		$	20,279		(9.3	)%
Reinsurance ceded	—			(2		)	(100.0	)	(2		)	(4		)	(50.0	)
Net premiums and policy fees	5,848			6,715			(12.9	)	18,385			20,275			(9.3	)
Net investment income	32,822			14,245			n/m		82,063			58,406			40.5
Realized gains (losses) - derivatives	42			42					126			1,247
Other income	1,025			65			n/m		1,031			117			n/m
Total operating revenues	39,737			21,067			88.6		101,605			80,045			26.9
Realized gains (losses) - investments	1,833			(23,195		)			(7,347		)	(127,563		)
Realized gains (losses) - derivatives	(5,942		)	(10,732		)			(16,989		)	38,071
Total revenues	35,628			(12,860		)	n/m		77,269			(9,447		)	n/m
BENEFITS AND EXPENSES
Benefits and settlement expenses	6,749			8,766			(23.0	)	19,728			22,427			(12.0	)
Amortization of deferred policy acquisition costs	399			508			(21.5	)	1,299			1,461			(11.1	)
Other operating expenses	33,637			30,950			8.7		86,122			75,857			13.5
Total benefits and expenses	40,785			40,224			1.4		107,149			99,745			7.4
INCOME (LOSS) BEFORE INCOME TAX	(5,157		)	(53,084		)	(90.3	)	(29,880		)	(109,192		)	(72.6	)
Less: realized gains (losses) - investments	1,833			(23,195		)			(7,347		)	(127,563		)
Less: realized gains (losses) - derivatives	(5,942		)	(10,732		)			(16,989		)	38,071
OPERATING INCOME (LOSS)	$	(1,048	)	$	(19,157	)	(94.5	)	$	(5,544	)	$	(19,700	)	(71.9	)

For The Three Months Ended September 30, 2010 as compared to The Three Months Ended September 30, 2009

Segment operating income (loss)

Corporate and Other segment operating loss was $1.0 million for the three months ended September 30, 2010, as compared to an operating loss of $19.2 million for the three months ended September 30, 2009. This improvement was primarily due to an increase in net investment income of $18.6 million, which includes a decrease of $5.9 million related to a portfolio of securities designated for trading. In addition, the segment experienced a $1.0 million pre-tax gain on the repurchase of non-recourse funding obligations.

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 the segment increased $18.6 million and other income increased $1.0 million related to the repurchase of non-recourse funding obligations for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. The increase in net investment income was due primarily to deploying liquidity and yield improvements, which was partially offset by the trading portfolio impact.

Total benefits and expenses

Total benefits and expenses increased $0.6 million, or 1.4%, for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, primarily due to an increase in interest expense of $8.3 million, partially offset by a decrease in policy benefits on non-core lines of business.

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For The Nine Months Ended September 30, 2010 as compared to The Nine Months Ended September 30, 2009

Segment operating income (loss)

Corporate and Other segment operating loss decreased $14.2 million for the nine months ended September 30, 2010, as compared the nine months ended September 30, 2009. This variance was primarily due to growth in the segment’s investment income due to deploying liquidity and yield improvements. In addition, during the nine months ended September 30, 2010, a $1.0 million pre-tax gain was recognized on the repurchase of non-recourse funding obligations. Offsetting this increase was a negative variance related to mark-to-market adjustments on a portfolio of securities designated for trading. The trading portfolio accounted for a decrease of $33.0 million as compared to the prior year.

Operating revenues

Net investment income for the segment increased $23.7 million, or 40.5%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, and net premiums and policy fees decreased $1.9 million, or 9.3%. The increase in net investment income was primarily the result of deploying liquidity and yield improvements. Offsetting this was a decrease in investment income related to mark-to-market adjustments on a portfolio of securities designated for trading.

Total benefits and expenses

Total benefits and expenses increased $7.4 million, or 7.4%, for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, primarily due to an increase in interest expense of $14.0 million, offset by a decrease in policy benefits on non-core lines of business.

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CONSOLIDATED INVESTMENTS

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

Portfolio Description

As of September 30, 2010, our investment portfolio was approximately $31.5 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 and capital 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 includes the reported values of our invested assets:

	As of
	September 30, 2010				December 31, 2009
	(Dollars In Thousands)
Publicly issued bonds (amortized cost: 2010 - $19,483,864; 2009 - $18,371,924)	$	20,514,966	65.2	%	$	18,097,314	62.5	%
Privately issued bonds (amortized cost: 2010 - $4,084,179; 2009 - $4,819,025)	4,288,751		13.6		4,697,946		16.2
Fixed maturities	24,803,717		78.8		22,795,260		78.7
Equity securities (cost: 2010 - $290,118; 2009 - $240,764)	295,223		0.9		235,124		0.8
Mortgage loans	4,870,905		15.5		3,870,587		13.4
Investment real estate	7,219		0.0		7,347		0.0
Policy loans	767,214		2.4		794,276		2.7
Other long-term investments	265,659		0.8		216,189		0.7
Short-term investments	477,543		1.6		1,039,947		3.7
Total investments	$	31,487,480	100.0	%	$	28,958,730	100.0	%

Included in the preceding table are $3.1 billion and $2.9 billion of fixed maturities and $71.5 million and $250.8 million of short-term investments classified as trading securities as of September 30, 2010 and December 31, 2009, respectively. The trading portfolio includes invested assets of $3.0 billion and $2.7 billion as of September 30, 2010 and December 31, 2009, respectively, held pursuant to modified coinsurance (“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, 2010, our fixed maturity investment holdings were approximately $24.8 billion. The approximate percentage distribution of our fixed maturity investments by quality rating is as follows:

	As of
Rating	September 30, 2010		December 31, 2009
AAA	13.3	%	19.9	%
AA	4.7		4.9
A	21.8		18.7
BBB	46.6		42.9
Below investment grade	13.6		13.6
	100.0	%	100.0	%

The increase in BBB securities reflected in the table above is primarily a result of negative ratings migration on securities owned by us and security purchases. During the nine months ended September 30, 2010 and the year ended December 31, 2009, we did not actively purchase securities below the BBB level.

We do not have material exposure to financial guarantee insurance companies with respect to our investment portfolio. As of September 30, 2010, based upon amortized cost, $79.0 million of our securities were guaranteed either directly or indirectly by third parties out of a total of $23.3 billion fixed maturity securities held by us (0.3% of total fixed maturity securities).

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Declines in fair value for our available-for-sale portfolio, net of related DAC and VOBA, are charged or credited directly to shareowners’ equity. Declines in fair value that are other-than-temporary are recorded as realized losses in the consolidated condensed statements of income, net of any applicable non-credit component of the loss, which is recorded as an adjustment to other comprehensive income.

The distribution of our fixed maturity investments by type is as follows:

	As of
Type	September 30, 2010		December 31, 2009
	(Dollars In Millions)
Residential mortgage-backed securities	$	3,352.3	$	3,904.7
Commercial mortgage-backed securities	311.1		1,123.3
Other asset-backed securities	877.2		1,120.8
U.S. government-related bonds	1,718.3		808.7
Other government-related bonds	362.0		608.5
States, municipals and political subdivisions	950.0		400.1
Corporate bonds	17,232.8		14,829.1
Total fixed income portfolio	$	24,803.7	$	22,795.2

Within our fixed maturity securities, we maintain portfolios classified as “available-for-sale” and “trading”. We 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 $21.7 billion or 87.3% of our fixed maturities as “available-for-sale” as of September 30, 2010. These securities are carried at fair value on our consolidated condensed balance sheets.

Trading securities are carried at fair value and changes in fair value are recorded on the income statement as they occur. Our trading portfolio accounts for $3.1 billion, or 12.7%, of our fixed maturities as of September 30, 2010. Fixed maturities with a market value of $3.0 billion and short-term investments with a market value of $71.5 million in the trading portfolio, including gains and losses from sales, are passed to the reinsurers through the contractual terms of the reinsurance arrangements. Partially offsetting these amounts are corresponding changes in the fair value of the embedded derivative associated with the underlying reinsurance arrangement. The total Modco trading portfolio fixed maturities by rating is as follows:

	As of
Rating	September 30, 2010		December 31, 2009
	(Dollars In Thousands)
AAA	$	729,694	$	834,733
AA	181,955		73,210
A	805,211		544,135
BBB	996,264		950,252
Below investment grade	292,746		281,487
Total Modco trading fixed maturities	$	3,005,870	$	2,683,817

A portion of our bond portfolio is invested in RMBS, commercial mortgage-backed securities (“CMBS”), and other asset-backed securities. These holdings as of September 30, 2010, were approximately $4.5 billion. Mortgage-backed securities (“MBS”) 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. Excluding limitations on access to lending and other extraordinary economic conditions, 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 include a breakdown of our RMBS portfolio by type and rating as of September 30, 2010. As of September 30, 2010, these holdings were approximately $3.4 billion. Sequential securities receive payments in order until each class is paid off. Planned amortization class securities (“PACs”) pay down according to a schedule. Pass through securities receive principal as principal of the underlying mortgages is received.

	Percentage of
	Residential
	Mortgage-Backed
Type	Securities
Sequential	63.4	%
PAC	16.6
Pass Through	4.7
Other	15.3
	100.0	%

	Percentage of
	Residential
	Mortgage-Backed
Rating	Securities
AAA	34.9	%
AA	5.1
A	0.6
BBB	5.5
Below investment grade	53.9
	100.0	%

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As of September 30, 2010, we held $412.5 million, or 1.3% of invested assets, of securities supported by collateral classified as Alt-A. As of December 31, 2009, we held securities with a fair value of $466.1 million of securities supported by collateral classified as Alt-A.

The following table includes the percentage of our collateral classified as Alt-A grouped by rating category as of September 30, 2010:

	Percentage of
	Alt-A
Rating	Securities
AAA	1.5	%
A	1.0
BBB	0.2
Below investment grade	97.3
	100.0	%

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, 2010:

Alt-A Collateralized Holdings

	Estimated Fair Value of Security by Year of Security Origination
	2006 and
Rating	Prior		2007		2008		2009		2010		Total
	(Dollars In Millions)
AAA	$	6.2	$	—	$	—	$	—	$	—	$	6.2
A	4.3		—		—		—		—		4.3
BBB	1.0		—		—		—		—		1.0
Below investment grade	255.5		145.5		—		—		—		401.0
Total mortgage-backed securities collateralized by Alt-A mortgage loans	$	267.0	$	145.5	$	—	$	—	$	—	$	412.5

	Estimated Unrealized Gain (Loss) of Security by Year of Security  Origination
	2006 and
Rating	Prior			2007			2008		2009		2010		Total
	(Dollars In Millions)
AAA	$	(0.1	)	$	—		$	—	$	—	$	—	$	(0.1	)
A	0.7			—			—		—		—		0.7
BBB	(1.0		)	—			—		—		—		(1.0		)
Below investment grade	(31.1		)	(13.3		)	—		—		—		(44.4		)
Total mortgage-backed securities collateralized by Alt-A mortgage loans	$	(31.5	)	$	(13.3	)	$	—	$	—	$	—	$	(44.8	)

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The following table includes the percentage of our collateral classified as sub-prime grouped by rating category as of September 30, 2010:

	Percentage of
	Sub-prime
Rating	Securities
AAA	0.7	%
AA	5.8
BBB	5.9
Below investment grade	87.6
	100.0	%

As of September 30, 2010, we had RMBS with a total fair value of $36.8 million, or 0.1% of total invested assets, that were supported by collateral classified as sub-prime. As of December 31, 2009, we held securities with a fair value of $35.2 million 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, 2010:

Sub-prime Collateralized Holdings

	Estimated Fair Value of Security by Year of Security Origination
	2006 and
Rating	Prior		2007		2008		2009		2010		Total
	(Dollars In Millions)
AAA	$	0.3	$	—	$	—	$	—	$	—	$	0.3
AA	2.1		—		—		—		—		2.1
BBB	2.2		—		—		—		—		2.2
Below investment grade	17.0		15.2		—		—		—		32.2
Total mortgage-backed securities collateralized by sub-prime mortgage loans	$	21.6	$	15.2	$	—	$	—	$	—	$	36.8

	Estimated Unrealized Gain (Loss) of Security by Year of Security  Origination
	2006 and
Rating	Prior			2007			2008		2009		2010		Total
	(Dollars In Millions)
AAA	$	—		$	—		$	—	$	—	$	—	$	—
AA	(0.2		)	—			—		—		—		(0.2		)
BBB	(0.5		)	—			—		—		—		(0.5		)
Below investment grade	(6.4		)	(19.4		)	—		—		—		(25.8		)
Total mortgage-backed securities collateralized by sub-prime mortgage loans	$	(7.1	)	$	(19.4	)	$	—	$	—	$	—	$	(26.5	)

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The following table includes the percentage of our collateral classified as prime, grouped by rating category, as of September 30, 2010:

	Percentage of
	Prime
Rating	Securities
AAA	40.1	%
AA	5.8
A	0.5
BBB	6.2
Below investment grade	47.4
	100.0	%

As of September 30, 2010, we had RMBS collateralized by prime mortgage loans (including agency mortgages) with a total fair value of $2.9 billion, or 9.2%, of total invested assets. As of December 31, 2009, we held securities with a fair value of $3.4 billion of RMBS collateralized by prime mortgage loans (including agency mortgages).

The following tables categorize the estimated fair value and unrealized gain/(loss) of our mortgage-backed securities collateralized by prime mortgage loans (including agency mortgages) by rating as of September 30, 2010:

Prime Collateralized Holdings

	Estimated Fair Value of Security by Year of Security Origination
	2006 and
Rating	Prior		2007		2008		2009		2010		Total
	(Dollars In Millions)
AAA	$	1,062.6	$	7.4	$	—	$	4.0	$	89.0	$	1,163.0
AA	169.8		—		—		—		—		169.8
A	10.0		5.8		—		—		—		15.8
BBB	181.3		—		—		—		—		181.3
Below investment grade	1,119.5		253.6		—		—		—		1,373.1
Total mortgage-backed securities collateralized by prime mortgage loans	$	2,543.2	$	266.8	$	—	$	4.0	$	89.0	$	2,903.0

	Estimated Unrealized Gain (Loss) of Security by Year of Security  Origination
	2006 and
Rating	Prior			2007			2008		2009		2010		Total
	(Dollars In Millions)
AAA	$	64.0		$	0.5		$	—	$	0.1	$	0.5	$	65.1
AA	2.1			—			—		—		—		2.1
A	0.5			0.3			—		—		—		0.8
BBB	0.5			—			—		—		—		0.5
Below investment grade	(95.0		)	(25.0		)	—		—		—		(120.0		)
Total mortgage-backed securities collateralized by prime mortgage loans	$	(27.9	)	$	(24.2	)	$	—	$	0.1	$	0.5	$	(51.5	)

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Commercial mortgage-backed securities - Our CMBS portfolio consists of CMBS issued in securitization transactions. As of September 30, 2010, the CMBS holdings were approximately $311.1 million.

The following table includes the percentages of our CMBS holdings grouped by rating category as of September 30, 2010:

	Percentage of
	Commercial
	Mortgage-Backed
Rating	Securities
AAA	98.1	%
AA	1.9
	100.0	%

The following tables categorize the estimated fair value and unrealized gain/(loss) of our CMBS as of September 30, 2010:

Commercial Mortgage-Backed Securities

	Estimated Fair Value of Security by Year of Security Origination
	2006 and
Rating	Prior		2007		2008		2009		2010		Total
	(Dollars In Millions)
AAA	$	200.5	$	—	$	46.5	$	—	$	58.2	$	305.2
AA	2.8		—		—		—		3.1		5.9
Total commercial mortgage-backed securities	$	203.3	$	—	$	46.5	$	—	$	61.3	$	311.1

	Estimated Unrealized Gain (Loss) of Security by Year of Security  Origination
	2006 and
Rating	Prior		2007		2008		2009		2010		Total
	(Dollars In Millions)
AAA	$	8.5	$	—	$	3.4	$	—	$	2.4	$	14.3
AA	—		—		—		—		0.1		0.1
Total commercial mortgage-backed securities	$	8.5	$	—	$	3.4	$	—	$	2.5	$	14.4

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Other asset-backed securities — Other asset-backed securities 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, 2010, these holdings were approximately $877.2 million.

The following table includes the percentages of our other asset-backed security holdings grouped by rating category as of September 30, 2010:

	Percentage of
	Other Asset-Backed
Rating	Securities
AAA	93.9	%
AA	3.7
A	0.7
BBB	0.7
Below investment grade	1.0
	100.0	%

The following tables categorize the estimated fair value and unrealized gain/(loss) of our other asset-backed securities as of September 30, 2010:

Other Asset-Backed Securities

	Estimated Fair Value of Security by Year of Security Origination
	2006 and
Rating	Prior		2007		2008		2009		2010		Total
	(Dollars In Millions)
AAA	$	638.8	$	154.3	$	5.5	$	—	$	25.0	$	823.6
AA	32.4		—		—		—		—		32.4
A	6.3		—		—		—		—		6.3
BBB	5.9		0.4		—		—		—		6.3
Below investment grade	0.5		8.1		—		—		—		8.6
Total asset-backed securities	$	683.9	$	162.8	$	5.5	$	—	$	25.0	$	877.2

	Estimated Unrealized Gain (Loss) of Security by Year of Security  Origination
	2006 and
Rating	Prior			2007			2008		2009		2010		Total
	(Dollars In Millions)
AAA	$	(32.6	)	$	(20.9	)	$	—	$	—	$	—	$	(53.5	)
AA	2.8			—			—		—		—		2.8
A	0.3			—			—		—		—		0.3
BBB	(1.1		)	—			—		—		—		(1.1		)
Below investment grade	(0.2		)	(13.8		)	—		—		—		(14.0		)
Total asset-backed securities	$	(30.8	)	$	(34.7	)	$	—	$	—	$	—	$	(65.5	)

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We obtained ratings of our fixed maturities from Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Corporation (“S&P”) and/or Fitch Ratings (“Fitch”). If a bond is not rated by Moody’s, S&P, or Fitch, we use ratings from 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, 2010, over 99.0% of our bonds were rated by Moody’s, S&P, Fitch, and/or the NAIC.

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

	As of		% Fair		As of		% Fair
	September 30, 2010		Value		December 31, 2009		Value
	(Dollars In Thousands)
Banking	$	2,172,422	8.8	%	$	1,954,801	8.6	%
Other finance	124,915		0.5		82,694		0.4
Electric	3,168,261		12.8		2,647,171		11.6
Natural gas	2,135,517		8.6		1,784,380		7.8
Insurance	1,788,520		7.2		1,529,027		6.7
Energy	1,394,311		5.6		1,367,288		6.0
Communications	1,256,150		5.1		1,078,797		4.7
Basic industrial	1,044,935		4.2		934,521		4.1
Consumer noncyclical	1,103,643		4.4		958,416		4.2
Consumer cyclical	529,054		2.1		490,334		2.2
Finance companies	232,603		0.9		230,376		1.0
Capital goods	657,802		2.7		531,477		2.3
Transportation	537,463		2.2		426,265		1.9
Other industrial	144,033		0.6		90,364		0.4
Brokerage	490,232		2.0		375,601		1.6
Technology	374,153		1.5		289,029		1.3
Real estate	51,193		0.2		53,517		0.2
Other utility	27,602		0.1		5,049		0.0
Commercial mortgage-backed securities	311,079		1.3		1,123,321		4.9
Other asset-backed securities	877,230		3.5		1,120,761		4.9
Residential mortgage-backed non-agency securities	2,464,922		9.9		2,987,406		13.1
Residential mortgage-backed agency securities	887,353		3.6		917,312		4.0
U.S. government-related securities	1,718,347		6.9		808,683		3.5
Other government-related securities	362,021		1.5		608,530		2.7
States, municipals, and political divisions	949,956		3.8		400,140		1.9
Total	$	24,803,717	100.0	%	$	22,795,260	100.0	%

Our investments in debt and equity securities are reported at fair value, and investments in mortgage loans are reported at amortized cost. As of September 30, 2010, our fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $24.8 billion, which was 6.4% above amortized cost of $23.3 billion. 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. 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, 2010, our mortgage loan holdings were approximately $4.9 billion. We 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, in our view, on a conservative and disciplined approach. We concentrate 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, 2010 and 2009, our allowance for mortgage loan credit losses was $9.4 million and $5.3 million, respectively. While our mortgage loans do not have quoted market values, as of September 30, 2010, we estimated the fair value of our mortgage loans to be $5.5 billion (using discounted cash flows from the next call date), which was 13.6% greater than the amortized cost, less any related loan loss reserve.

At the time of origination, our mortgage lending criteria targets that the loan-to-value ratio on each mortgage is 75% or less. We target projected rental payments from credit anchors (i.e., excluding rental payments from smaller local tenants) of 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. As of September 30, 2010, approximately $907.4 million of our mortgage loans had this participation feature. Exceptions to these loan-to-value measures may be made if we believe the mortgage has an acceptable risk profile.

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

As of September 30, 2010, delinquent mortgage loans, foreclosed properties, and restructured loans pursuant to a pooling and servicing agreement were less than 0.2% of invested assets. We do not expect these investments to adversely affect our liquidity or ability to maintain proper matching of assets and liabilities. Our mortgage loan portfolio consists of two categories of loans: 1) those not subject to a pooling and servicing agreement and 2) those previously a part of variable interest entity securitizations and thus subject to a contractual pooling and servicing agreement. The loans subject to a pooling and servicing agreement have been included on our consolidated condensed balance sheet (“balance sheet”) beginning in the first quarter of 2010 in accordance with ASU 2009-17. For loans not subject to a pooling and servicing agreement, as of September 30, 2010, $13.2 million of the mortgage loan portfolio was nonperforming. In addition, as of September 30, 2010, $35.7 million of the mortgage loan portfolio that is subject to a pooling and servicing agreement has being restructured under the terms and conditions of the pooling and service agreement.

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. For loans subject to a pooling and servicing agreement, there are certain additional restrictions and/or requirements related to workout proceedings, and as such, these loans may have different attributes and/or circumstances affecting the status of delinquency or categorization of those in nonperforming status.

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, 2010, securities with a market value of $96.3 million were loaned under this program. As collateral for the loaned securities, we receive short-term investments, which are recorded in “short-term investments” with a corresponding liability recorded in “other liabilities” to account for our obligation to

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return the collateral. As of September 30, 2010, the fair value of the collateral related to this program was $96.0 million and we have an obligation to return $99.0 million of collateral to the securities borrowers.

Risk Management and Impairment Review

We monitor the overall credit quality of our portfolio within established guidelines. The following table includes our available-for-sale fixed maturities by credit rating as of September 30, 2010:

			Percent of
S&P or Equivalent Designation	Market Value		Market Value
	(Dollars In Thousands)
AAA	$	2,555,262	11.8	%
AA	984,032		4.5
A	4,610,924		21.3
BBB	10,508,707		48.5
Investment grade	18,658,925		86.1
BB	1,268,589		5.9
B	682,803		3.2
CCC or lower	1,054,658		4.8
Below investment grade	3,006,050		13.9
Total	$	21,664,975	100.0	%

Not included in the table above are $2.8 billion of investment grade and $362.0 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, 2010:

Creditor	Market Value
	(Dollars In Millions)
Berkshire Hathaway Inc.	$	160.4
Verizon Communications Inc.	149.7
Bank of America Corp	145.0
Rio Tinto	125.6
Enterprise Products Partners	125.3
Nextera Energy Inc.	123.6
Federal Farm Credit Bank	120.2
MetLife Inc.	120.0
AT&T Inc.	119.7
Progress Energy	119.4

Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value is both objective and subjective, and 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. Since 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 RMBS, CMBS, and other asset-backed securities (collectively referred to as asset-backed securities “ABS”), GAAP 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 expected 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

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information regarding the performance of the underlying collateral. In addition, we consider our intent and ability to retain a temporarily depressed security until recovery.

In April of 2009, the FASB issued guidance to amend the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments of debt and equity securities in the financial statements. This guidance addresses the timing of impairment recognition and provides greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. Impairments will continue to be measured at fair value with credit losses recognized in earnings and non-credit losses recognized in other comprehensive income. This guidance also requires increased and more frequent disclosures regarding measurement techniques, credit losses, and an aging of securities with unrealized losses. For the three and nine months ended September 30, 2010, we recorded total other-than-temporary impairments of approximately $12.7 million and $71.1 million, respectively, with $5.2 million and $35.0 million, respectively, of this amount recorded in other comprehensive income (loss).

Securities 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) an assessment of the Company’s intent to sell the security (including a more likely than not assessment of whether the Company will be required to sell the security) before recovering the security’s amortized cost, 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, along with an analysis regarding the Company’s expectations for recovery of the security’s entire amortized cost basis through the receipt of future cash flows. Based on our analysis, for the three and nine months ended September 30, 2010, we concluded that approximately $7.5 million and $36.1 million, respectively, of investment securities in an unrealized loss position was other-than-temporarily impaired, due to credit-related factors, resulting in a charge to earnings. Additionally, we recognized $5.2 million and $35.0 million, respectively, of non-credit losses in other comprehensive income for the securities where an other-than-temporary impairment was recorded for the three and nine months ended September 30, 2010.

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.

We have deposits with certain financial institutions which exceed federally insured limits. We have reviewed the creditworthiness of these financial institutions and believe there is minimum risk of a material loss.

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Realized Gains and Losses

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

	For The									For The
	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2010			2009			Change			2010			2009			Change
	(Dollars In Thousands)
Fixed maturity gains - sales	$	18,459		$	8,981		$	9,478		$	63,667		$	19,426		$	44,241
Fixed maturity losses - sales	(600		)	(4,745		)	4,145			(31,458		)	(5,676		)	(25,782		)
Equity gains - sales	—			59			(59		)	13			9,562			(9,549		)
Impairments on fixed maturity securities	(7,505		)	(30,968		)	23,463			(36,143		)	(142,058		)	105,915
Impairments on equity securities	—			—			—			—			(19,563		)	19,563
Modco trading portfolio	96,689			164,732			(68,043		)	204,749			273,639			(68,890		)
Other	(2,905		)	(3,243		)	338			(6,962		)	(4,490		)	(2,472		)
Total realized gains (losses) - investments	$	104,138		$	134,816		$	(30,678	)	$	193,866		$	130,840		$	63,026
Derivatives related to interest rate futures	$	23,047		$	—		$	23,047		$	23,047		$	6,889		$	16,158
Derivatives related to equity futures	(8,444		)	—			(8,444		)	(8,444		)	—			(8,444		)
Embedded derivatives related to reinsurance	(85,496		)	(158,937		)	73,441			(179,654		)	(244,726		)	65,072
Interest rate swaps	(4,676		)	(8,008		)	3,332			(13,450		)	28,351			(41,801		)
Interest rate floors/YRT(1) premium support arrangements	(400		)	(250		)	(150		)	(1,899		)	2,400			(4,299		)
GMWB embedded derivatives	(19,105		)	(31,210		)	12,105			(59,307		)	1,132			(60,439		)
Other derivatives	(400		)	2,434			(2,834		)	410			4,649			(4,239		)
Total realized gains (losses) - derivatives	$	(95,474	)	$	(195,971	)	$	100,497		$	(239,297	)	$	(201,305	)	$	(37,992	)

(1) YRT - yearly renewable term

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, Modco trading portfolio activity, and related embedded derivatives related to corporate debt, during the three and nine months ended September 30, 2010, primarily reflects the normal operation of our asset/liability program within the context of the changing interest rate and spread environment, as well as tax planning strategies designed to utilize capital loss carryforwards.

Realized losses are comprised of both write-downs on other-than-temporary impairments and actual sales of investments. For the three and nine months ended September 30, 2010, we recognized pre-tax other-than-temporary impairments of $7.5 million and $36.1 million, respectively, due to credit-related factors, resulting in a charge to earnings. Additionally, we recognized $5.2 million and $35.0 million, respectively, of non-credit losses in other comprehensive income (loss) for the securities where an other-than-temporary impairment was recorded. For the three and nine months ended September 30, 2009, we recognized pre-tax other-than-temporary impairments of $31.0 million and $161.6 million, respectively. 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 recoveries, are presented in the chart below:

	For The		For The
	Three Months Ended		Nine Months Ended
	September 30, 2010		September 30, 2010
	(Dollars In Millions)
Alt-A MBS	$	2.3	$	23.7
Other MBS	5.1		9.0
Other corporate bonds	—		2.6
Sub-prime bonds	0.1		0.8
Total	$	7.5	$	36.1

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As previously discussed, management considers several factors when determining other-than-temporary impairments. Although we purchase securities with the intent 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, 2010, we sold securities in an unrealized loss position with a market value of $446.3 million. 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	$	237,158	53.1	%	$	(14,331	)	45.6	%
>90 days but <= 180 days	131,179		29.4		(2,527		)	8.0
>180 days but <= 270 days	26,744		6.0		(230		)	0.7
>270 days but <= 1 year	234		0.1		(10		)	0.0
>1 year	50,970		11.4		(14,360		)	45.7
Total	$	446,285	100.0	%	$	(31,458	)	100.0	%

For the three and nine months ended September 30, 2010, we sold securities in an unrealized loss position with a fair value (proceeds) of $207.5 million and $446.3 million, respectively. The loss realized on the sale of these securities was $0.6 million and $31.5 million, respectively. The $31.5 million loss recognized on available-for-sale securities for the nine months ended September 30, 2010, includes $12.2 million of loss on the sale of certain oil industry holdings. We made the decision to exit these holdings pursuant to circumstances surrounding the oil spill in the Gulf of Mexico. In addition, a $3.8 million loss was recognized on the sale of securities in which the issuer was a European financial institution. Also included in the $31.5 million loss is a $10.4 million loss due to the exchange of certain holdings as the issuer exited bankruptcy proceedings.

For the nine months ended September 30, 2010, we sold securities in an unrealized gain position with a fair value of $2.4 billion. The gain realized on the sale of these securities was $63.7 million.

The $7.0 million of other realized losses recognized for the nine months ended September 30, 2010, consists of the change in mortgage loan loss reserves of $6.6 million and other losses of $0.4 million.

For the three and nine months ended September 30, 2010, net gains of $96.7 million and $204.7 million, respectively, 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 $10.3 million and $28.4 million, respectively, of gains were realized through the sale of certain securities, which will be reimbursed to our reinsurance partners 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.

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 also have in place various modified coinsurance and funds withheld arrangements that contain embedded derivatives. The $85.5 million and $179.7 million of pre-tax losses on these embedded derivatives for the three and nine months ended September 30, 2010, respectively, was the result of spread tightening and a decline in treasury yields. For the three and nine months ended September 30, 2010, the investment portfolios that support the related modified coinsurance reserves and funds withheld arrangements had mark-to-market gains that substantially offset the losses on these embedded derivatives.

We use certain interest rate swaps to mitigate the price volatility of fixed maturities. These positions resulted in net pre-tax losses of $4.7 million and $13.5 million for the three and nine months ended September 30, 2010, respectively. The net losses were primarily the result of $3.7 million and $10.6 million in mark-to-market losses during the period.

Interest rate floor agreements with PLC generated unrealized losses of $0.4 million and $1.9 million for the three and nine months ended September 30, 2010, respectively. There are no YRT premium support arrangement realized gains or losses for the three and nine months ended September 30, 2010.

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The GMWB rider embedded derivatives on certain variable deferred annuities had net unrealized losses of $19.1 million and $59.3 million for the three and nine months ended September 30, 2010, respectively.

At the beginning of the third quarter of 2010, we began a program of transacting in equity and interest rate futures to mitigate the risk related to certain guaranteed minimum benefits, including guaranteed minimum withdrawal benefits, within our variable annuity products. In general, the cost of such benefits varies with the level of equity and interest rate markets and overall volatility. The equity futures resulted in a net pre-tax loss of $8.4 million for the three and nine months ended September 30, 2010 and interest rate futures resulted in a pre-tax gain of $23.0 million for the three and nine months ended September 30, 2010. Such positions were not held in the year-ago periods.

The interest rate futures that were held during 2009 mitigated interest rate risk associated with our commitment to fund pending commercial mortgage loans. These positions were closed in 2009.

We also use various swaps and options to mitigate risk related to other exposures. These contracts generated net pre-tax losses of $0.4 million for the three months ended September 30, 2010 and net pre-tax gains of $0.4 million for the nine months ended September 30, 2010.

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, 2010, 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. Management considers a number of factors in determining if an unrealized loss is other-than-temporary, including the expected cash to be collected and the intent, likelihood, and/or ability to hold the security until recovery. Consistent with our long-standing practice, we do not utilize a “bright line test” to determine other-than-temporary impairments. On a quarterly basis, we perform an analysis on every security with an unrealized loss to determine if an other-than-temporary impairment has occurred. This analysis includes reviewing several metrics including collateral, expected cash flows, ratings, and liquidity. 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, 2010, we had an overall net unrealized gain of $1.2 billion, prior to tax and DAC offsets, as compared to a $401.3 million loss as of December 31, 2009.

Credit and RMBS markets have experienced volatility across numerous asset classes over the past two years, 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 ratings, 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 other 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.

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For fixed maturity and equity securities held that are in an unrealized loss position as of September 30, 2010, 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	$	367,004	9.3	%	$	400,349	9.2	%	$	(33,345	)	8.0	%
>90 days but <= 180 days	264,846		6.7		280,947		6.5		(16,101		)	3.9
>180 days but <= 270 days	28,464		0.7		29,584		0.7		(1,120		)	0.3
>270 days but <= 1 year	24,214		0.6		24,417		0.6		(203		)	0.0
>1 year but <= 2 years	151,490		3.9		166,818		3.8		(15,328		)	3.7
>2 years but <= 3 years	2,195,019		55.9		2,448,959		56.4		(253,940		)	61.3
>3 years but <= 4 years	601,103		15.3		663,565		15.3		(62,462		)	15.1
>4 years but <= 5 years	95,659		2.4		106,462		2.5		(10,803		)	2.6
>5 years	199,277		5.2		220,256		5.0		(20,979		)	5.1
Total	$	3,927,076	100.0	%	$	4,341,357	100.0	%	$	(414,281	)	100.0	%

The majority of the unrealized loss as of September 30, 2010, for both investment grade and below investment grade securities, is attributable to a widening in credit and mortgage spreads for certain securities. The negative impact of spread levels for certain securities was partially offset by lower treasury yield levels and their associated positive effect on security prices. Spread levels have improved since December 31, 2009. However, certain types of securities, including tranches of RMBS and ABS continue to be priced at a level which has caused the unrealized losses noted above. We believe spread levels on these RMBS and ABS are largely due to the continued effects of the economic recession and the economic and market uncertainties regarding future performance of the underlying mortgage loans and/or assets. For further discussion concerning our other-than-temporary impairment review process, see the “Risk Management and Impairment Review” section on page 81.

As of September 30, 2010, the Barclays Investment Grade Index was priced at 160 bps versus a 10 year average of 171 bps. Similarly, the Barclays High Yield Index was priced at 656 bps versus a 10 year average of 666 bps. As of September 30, 2010, the five, ten, and thirty-year U.S. Treasury obligations were trading at levels of 1.265%, 2.512%, and 3.686%, as compared to 10 year averages of 3.570%, 4.229%, and 4.799%, respectively.

As of September 30, 2010, 27.1% of the unrealized loss was associated with securities that were rated investment grade. We have examined the performance of the underlying collateral and cash flows and expect that our investments will continue to perform in accordance with their contractual terms. Factors such as credit enhancements within the deal structures and the underlying collateral performance/characteristics support the recoverability of the investments. Based on the factors discussed, we do not consider these unrealized loss positions to be other-than-temporary. However, from time to time, we may sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield enhancement, asset-liability management, and liquidity requirements.

Expectations that investments in mortgage-backed and asset-backed securities will continue to perform in accordance with their contractual terms are based on assumptions a market participant would use in determining the current fair value. It is reasonably possible that the underlying collateral of these investments will perform worse than current market expectations and that such event may lead to adverse changes in the cash flows on our holdings of these types of securities. This could lead to potential future write-downs within our portfolio of mortgage-backed and asset-backed securities. Expectations that our investments in corporate securities and/or debt obligations will continue to perform in accordance with their contractual terms are based on evidence gathered through our normal credit surveillance process. Although we do not anticipate such events, it is reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate securities. It is also possible that such unanticipated events would lead us to dispose of those certain holdings and recognize the effects of any market movements in our financial statements.

As of September 30, 2010, there were estimated gross unrealized losses of $52.3 million and $24.8 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, 2010, were primarily the result of continued widening spreads, representing marketplace

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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 three and nine months ended September 30, 2010, we recorded $7.5 million and $36.1 million, respectively, of pre-tax other-than-temporary impairments related to estimated credit losses. 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.

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, 2010, is presented in the following table:

	Estimated		% Market		Amortized		% Amortized		Unrealized			% Unrealized
	Market Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)
Banking	$	545,470	13.9	%	$	589,805	13.6	%	$	(44,335	)	10.7	%
Other finance	—		0.0		—		0.0		—			0.0
Electric	128,275		3.3		144,666		3.3		(16,391		)	4.0
Natural gas	74,127		1.9		82,244		1.9		(8,117		)	2.0
Insurance	347,818		8.9		379,776		8.7		(31,958		)	7.7
Energy	806		0.0		833		0.0		(27		)	0.0
Communications	61,384		1.6		73,098		1.7		(11,714		)	2.8
Basic industrial	54,799		1.4		56,531		1.3		(1,732		)	0.4
Consumer noncyclical	16,730		0.4		17,395		0.4		(665		)	0.2
Consumer cyclical	91,529		2.3		99,927		2.3		(8,398		)	2.0
Finance companies	106,940		2.7		115,298		2.7		(8,358		)	2.0
Capital goods	24,582		0.6		29,796		0.7		(5,214		)	1.3
Transportation	46,427		1.2		47,657		1.1		(1,230		)	0.3
Other industrial	14,770		0.4		14,906		0.3		(136		)	0.0
Brokerage	39,215		1.0		44,836		1.0		(5,621		)	1.4
Technology	44,479		1.1		47,984		1.1		(3,505		)	0.8
Real estate	388		0.0		491		0.0		(103		)	0.0
Other utility	21		0.0		44		0.0		(23		)	0.0
Commercial mortgage-backed securities	—		0.0		—		0.0		—			0.0
Other asset-backed securities	680,033		17.3		750,961		17.3		(70,928		)	17.1
Residential mortgage-backed non-agency securities	1,494,435		38.1		1,687,482		38.9		(193,047		)	46.6
Residential mortgage-backed agency securities	16,726		0.4		16,777		0.4		(51		)	0.0
U.S. government-related securities	44,807		1.1		46,890		1.1		(2,083		)	0.5
Other government-related securities	68,892		1.8		68,960		1.6		(68		)	0.0
States, municipals, and political divisions	24,423		0.6		25,000		0.6		(577		)	0.2
Total	$	3,927,076	100.0	%	$	4,341,357	100.0	%	$	(414,281	)	100.0	%

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The percentage of our unrealized loss positions, segregated by industry segment, is presented in the following table:

	As of
	September 30, 2010		December 31, 2009
Banking	10.7	%	14.1	%
Other finance	0.0		0.0
Electric	4.0		3.9
Natural gas	2.0		2.0
Insurance	7.7		8.2
Energy	0.0		0.4
Communications	2.8		1.9
Basic industrial	0.4		1.6
Consumer noncyclical	0.2		0.8
Consumer cyclical	2.0		1.7
Finance companies	2.0		1.7
Capital goods	1.3		1.2
Transportation	0.3		0.8
Other industrial	0.0		0.4
Brokerage	1.4		1.6
Technology	0.8		0.4
Real estate	0.0		0.1
Other utility	0.0		0.0
Commercial mortgage-backed securities	0.0		8.8
Other asset-backed securities	17.1		8.3
Residential mortgage-backed non-agency securities	46.6		40.6
Residential mortgage-backed agency securities	0.0		0.3
U.S. government-related securities	0.5		0.4
Other government-related securities	0.0		0.1
States, municipals, and political divisions	0.2		0.7
Total	100.0	%	100.0	%

The range of maturity dates for securities in an unrealized loss position as of September 30, 2010, varies, with 28.1% maturing in less than 5 years, 10.4% maturing between 5 and 10 years, and 61.5% maturing after 10 years. The following table shows the credit rating of securities in an unrealized loss position as of September 30, 2010:

S&P or Equivalent	Estimated		% Market		Amortized		% Amortized		Unrealized			% Unrealized
Designation	Market Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)
AAA/AA/A	$	1,108,760	28.2	%	$	1,178,132	27.1	%	$	(69,372	)	16.7	%
BBB	668,397		17.0		711,283		16.4		(42,886		)	10.4
Investment grade	1,777,157		45.2		1,889,415		43.5		(112,258		)	27.1
BB	550,155		14.0		590,699		13.6		(40,544		)	9.8
B	583,356		14.9		659,390		15.2		(76,034		)	18.4
CCC or lower	1,016,408		25.9		1,201,853		27.7		(185,445		)	44.7
Below investment grade	2,149,919		54.8		2,451,942		56.5		(302,023		)	72.9
Total	$	3,927,076	100.0	%	$	4,341,357	100.0	%	$	(414,281	)	100.0	%

As of September 30, 2010, we held 151 positions of below investment grade securities totaling $1.9 billion that were in an unrealized loss position. Total unrealized losses related to below investment grade securities were $112.3 million, of which $268.6 million had been in an unrealized loss position for more than twelve months. Below investment grade securities in an unrealized loss position were 6.8% of invested assets. As of September 30, 2010, securities in an unrealized loss position that were rated as below investment grade represented 54.8% of the total market value and 72.9% of the total unrealized loss. We have the ability and intent to hold these securities to maturity. After a review of each security and its expected cash flows, we believe the decline in market value to be

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temporary. Total unrealized losses for all securities in an unrealized loss position for more than twelve months were $363.5 million. A widening of credit spreads is estimated to account for unrealized losses of $643.3 million, with changes in treasury rates offsetting this loss by an estimated $321.1 million.

In addition, market disruptions in the RMBS market negatively affected the market values of our non-agency RMBS securities. The majority of our RMBS holdings as of September 30, 2010, were super senior or senior bonds in the capital structure. Our non-agency portfolio has a weighted-average life of 2.01 years.

The following table includes the fair 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 as of September 30, 2010:

	Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized
	Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)
<= 90 days	$	110,506	5.1	%	$	130,661	5.3	%	$	(20,155	)	6.7	%
>90 days but <= 180 days	113,137		5.3		126,207		5.1		(13,070		)	4.3
>180 days but <= 270 days	6		0.0		24		0.0		(18		)	0.0
>270 days but <= 1 year	4,079		0.2		4,245		0.2		(166		)	0.1
>1 year but <= 2 years	99,650		4.6		114,786		4.7		(15,136		)	5.0
>2 years but <= 3 years	1,386,276		64.5		1,574,904		64.2		(188,628		)	62.5
>3 years but <= 4 years	236,317		11.0		276,067		11.3		(39,750		)	13.2
>4 years but <= 5 years	35,531		1.7		42,024		1.7		(6,493		)	2.1
>5 years	164,417		7.6		183,024		7.5		(18,607		)	6.1
Total	$	2,149,919	100.0	%	$	2,451,942	100.0	%	$	(302,023	)	100.0	%

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity refers to a company’s ability to generate adequate amounts of cash to meet its needs. We meet our liquidity requirements primarily through positive cash flows from our operating activities. Primary sources of cash are 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. We believe that we have sufficient liquidity to fund our cash needs under normal operating scenarios.

In the event of significant unanticipated cash requirements beyond our normal liquidity requirements, we have additional sources of liquidity available depending on market conditions and the amount and timing of the liquidity need. These additional sources of liquidity include cash flows from operations, the sale of liquid assets, accessing our credit facility, and other sources described herein.

Our decision to sell investment assets could be impacted by accounting rules, including rules relating to the likelihood of a requirement to sell securities before recovery of our cost basis. Under stressful market and economic conditions, liquidity may broadly deteriorate which could negatively impact our ability to sell investment assets. If we require on short notice significant amounts of cash in excess of normal requirements, we may have difficulty selling investment assets in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both.

While we anticipate that the cash flows of our operations 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 for certain of our insurance subsidiaries 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, 2010, we had no outstanding balance related to such borrowings. During the nine months ended September 30, 2010, we had a maximum balance outstanding of $300.0 million related to these programs. The average daily balance was $76.3 million, during the nine months ended September 30, 2010.

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.

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During the quarter ended September 30, 2010, we signed a stock purchase agreement that, upon closing, will require a cash outlay of approximately $316 million of cash related to the acquisition of United Investors Life Insurance Company. We anticipate that this transaction will close on December 31, 2010. In addition, subsequent to the quarter ended September 30, 2010, we have entered into an agreement to reinsure a life insurance block from Liberty Life Insurance Company. We anticipate this transaction to close in the first quarter of 2011, and believe that the cash flows of our operations and operating subsidiaries will be sufficient to satisfy these commitments.

Credit Facility

Under a revolving line of credit arrangement, we have the ability to borrow on an unsecured basis up to an aggregate principal amount of $500 million (the “Credit Facility”). We 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. 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, excluding those of PLC, under the Credit Facility. The maturity date on the Credit Facility is April 16, 2013. We did not have an outstanding balance under the Credit Facility as of September 30, 2010. PLC had an outstanding balance of $126.0 million at an interest rate of LIBOR plus 0.40% under the Credit Facility as of September 30, 2010. We were not aware of any non-compliance with the financial debt covenants of the Credit Facility as of September 30, 2010.

Sources and Use 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 based in part on the prior year’s statutory income and surplus. Generally, these restrictions pose no short-term liquidity concerns.

We are a member of the Federal Home Loan Bank (“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. Our borrowing capacity is determined by the following factors: 1) total advance capacity is limited to the lower of 50% of total assets or 100% of mortgage-related assets of Protective Life Insurance Company, 2) ownership of appropriate capital and activity stock to support continued membership in the FHLB and current and future advances, and 3) the availability of adequate eligible mortgage or treasury/agency collateral to back current and future advances.

We held $60.7 million of common stock as of September 30, 2010, 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, 2010, we had $901.0 million of funding agreement-related advances and accrued interest outstanding under the FHLB program.

As of September 30, 2010, we reported approximately $602.2 million (fair value) of non-affiliate Auction Rate Securities (“ARS”) in non-Modco portfolios. All of these non-affiliate ARS were rated AAA. 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.

All of the auction rate securities held in non-Modco portfolios as of September 30, 2010, were student loan-backed auction rate securities, for which the underlying collateral is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). As there is no current active market for these auction rate securities, we believe the best available source for current valuation information is from actively-traded asset-backed securities with comparable underlying assets (i.e. FFELP-backed student loans) and vintage.

We use an internal valuation model to determine the fair value of our student loan-backed auction rate securities held in non-Modco portfolios. The model uses the discount margin and projected average life of a comparable actively-traded FFELP student loan-backed floating-rate asset-backed security, along with a discount

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related to the current illiquidity of the auction rate securities. This comparable security is selected based on its underlying assets (i.e. FFELP-backed student loans) and vintage.

The non-affiliate auction rate securities held in non-Modco portfolios are classified as a Level 3 valuation. An unrealized loss of $55.2 million was recorded as of September 30, 2010, and an unrealized loss of $16.0 million was recorded as of September 30, 2009, and we have not recorded any other-than-temporary impairment because the underlying collateral for each of the auction rate securities is at least 97% guaranteed by the FFELP and there are subordinate tranches within each of these auction rate security issuances that would support the senior tranches in the event of default. In the event of a complete and total default by all underlying student loans, the principal shortfall, in excess of the 97% FFELP guarantee, would be absorbed by the subordinate tranches. Our non-performance exposure is to the FFELP guarantee, not the underlying student loans. At this time, we have no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary. In addition, we have the ability and intent to hold these securities until their values recover or maturity. Therefore, we believe that no other-than-temporary impairment has been experienced.

Our liquidity requirements primarily relate to the liabilities associated with their 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.

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. As of September 30, 2010, we held cash and short-term investments of $584.7 million.

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The following chart includes the cash flows provided by or used in operating, investing, and financing activities for the following periods:

	For The
	Nine Months Ended
	September 30,
	2010			2009
	(Dollars In Thousands)
Net cash provided by operating activities	$	532,972		$	726,775
Net cash (used in) provided by investing activities	(597,076		)	104,919
Net cash provided by (used in) financing activities	8,431			(778,895		)
Total	$	(55,673	)	$	52,799

For the Nine Months Ended September 30, 2010 as compared to The Nine Months Ended September 30, 2009

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) provided by investing activities- Changes in cash from investing activities primarily related to the activity in our investment portfolio. The change in net cash (used in) provided by investing activities was primarily due to an increase in net purchases of fixed maturity securities, partially offset by an increase of sales of fixed maturity securities.

Net cash provided by (used in) financing activities - Changes in cash from financing activities primarily relate to the issuance and repayment of non-recourse funding obligations, as well as the issuance of, and redemptions and benefit payments on, investment contracts. The variance for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009, was primarily the result of investment product and universal life net withdrawal activity, which was approximately $1.1 billion higher than activity in the nine months ended September 30, 2010.

Capital Resources

To give us flexibility in connection with future acquisitions and other funding needs, PLC has debt securities, preferred and common stock, and additional preferred securities of special purpose finance subsidiaries registered under the Securities Act of 1933 on a delayed (or shelf) basis.

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 had an outstanding balance of $126.0 million as of September 30, 2010, under the Credit Facility at an interest rate of LIBOR plus 0.40%.

Golden Gate Captive Insurance Company (“Golden Gate”), a South Carolina special purpose financial captive insurance company and wholly owned subsidiary, had three series of Surplus Notes with a total outstanding balance of $800 million as of September 30, 2010. PLC holds the entire outstanding balance of Surplus Notes. The Series A1 Surplus Notes have a balance of $400 million and accrue interest at 7.35%, the Series A2 Surplus Notes have a balance of $100 million and accrue interest at 8%, and the Series A3 Surplus Notes have a balance of $300 million and accrue interest at 8.45%.

Golden Gate II Captive Insurance Company (“Golden Gate II”), a wholly owned special purpose financial captive insurance company, had $575.0 million of non-recourse funding obligations outstanding as of September 30, 2010. Of this amount, $548.0 million was held by external parties, $24.5 million was held by a nonconsolidated affiliate, and $2.5 million was held by a consolidated subsidiary of the Company. 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 the total $575.0 million is currently accruing interest at a rate of LIBOR plus 30 basis points. We have experienced

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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 spread component 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 non-recourse funding obligations are direct financial obligations of Golden Gate and Golden Gate II, respectively, and are not guaranteed by us or PLC. These non-recourse obligations are represented by surplus notes that were issued to fund a portion of the statutory reserves required by Regulation XXX. Under the terms of the surplus notes, the holders of the surplus notes cannot require repayment from PLC, us, or any of our subsidiaries, other than Golden Gate and Golden Gate II, the direct issuers of the surplus notes, although PLC has agreed to indemnify Golden Gate II for certain costs and obligations (which obligations do not include payment of principal and interest on the surplus notes). In addition, PLC has entered into certain support agreements with Golden Gate and Golden Gate II obligating it to make capital contributions to Golden Gate and Golden Gate II or provide support related to certain of Golden Gate’s and Golden Gate II’s expenses and in certain circumstances, to collateralize certain of PLC’s obligations to Golden Gate and Golden Gate II.

Golden Gate III Vermont Captive Insurance Company (“Golden Gate III”), a Vermont special purpose financial captive insurance company and wholly owned subsidiary, has an outstanding Letter of Credit (“LOC”) issued under a Reimbursement Agreement with UBS AG, Stamford Branch, with a total outstanding balance of $505 million as of September 30, 2010. The LOC was issued to a trust for the benefit of our wholly owned subsidiary, West Coast Life Insurance Company (“WCL”). Subject to certain conditions, the amount of the LOC will be periodically increased up to a maximum of $610 million in 2013. The term of the LOC is expected to be eight years, subject to certain conditions including capital contributions made to Golden Gate III by us or one of our affiliates. The LOC was issued to support certain obligations of Golden Gate III to WCL under an indemnity reinsurance agreement effective April 1, 2010. The estimated average annual expense of the LOC under GAAP is approximately $11 million, after tax.

Pursuant to the terms of the Reimbursement Agreement, in the event amounts are drawn under the LOC by the trustee on behalf of WCL, Golden Gate III will be obligated, subject to certain conditions, to reimburse UBS for the amount of any draw and any interest thereon. The Reimbursement Agreement is non-recourse to us, PLC, and WCL. Pursuant to the terms of a letter agreement, PLC has agreed to guarantee the payment of fees to UBS under the Reimbursement Agreement. Pursuant to the Reimbursement Agreement, Golden Gate III has collateralized its obligations to UBS by granting UBS a security interest in its assets.

During and subsequent to the quarter ended September 30, 2010, we have signed agreements that, upon closing, will allow us to deploy an estimated $570 million of capital through the acquisition of United Investors Life Insurance Company and the reinsurance of a life insurance block from Liberty Life Insurance Company.

A life insurance company’s statutory capital is computed according to rules prescribed by 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 regulations. Statutory accounting rules are different from 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 the statutory capital of us and our insurance subsidiaries. We and our subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or equity contributions. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner.

State insurance regulators and the NAIC have adopted risk-based capital (“RBC”) requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus appropriate for an insurance company to support its overall business operations based on its size and risk profile.

A company’s risk-based statutory surplus is calculated by applying factors and performing calculations relating to various asset, premium, claim, expense, and reserve items. Regulators can then measure the adequacy of

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a company’s statutory surplus by comparing it to the RBC. Under RBC requirements, regulatory compliance is determined by the ratio of a company’s total adjusted capital, as defined by the insurance regulators, to its company action level of RBC (known as the RBC ratio), also as defined by insurance regulators.

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 associated concentration of credit risk. For the three and nine months ended September 30, 2010, we ceded premiums to third party reinsurers amounting to $326.7 million and $999.6 million, respectively. In addition, we had receivables from reinsurers amounting to $5.5 billion as of September 30, 2010. We review reinsurance receivable amounts for collectability and establish bad debt reserves if deemed appropriate.

During 2008, Scottish Re US (“SRUS”) received a statutory accounting permitted practice from the Delaware Department of Insurance (“the Department”) that, in light of decreases in the fair value of the securities in SRUS’s qualifying reserve credit trust accounts on business ceded to certain securitization companies, relieved SRUS of the need to receive additional capital contributions. On January 5, 2009, the Department issued an order of supervision (the “Order of Supervision”) against SRUS, in accordance with Delaware law, which, among other things, requires the Department’s consent to any transaction outside the ordinary course of business, and which, in large part, formalized certain reporting and processes already informally in place between SRUS and the Department. On April 3, 2009, the Department issued an Extended and Amended Order of Supervision against SRUS which, among other things, clarified that payments made by SRUS to its ceding insurers in satisfaction of claims or other obligations are not subject to the Department’s approval, but that any amendments to its reinsurance agreements must be disclosed to and approved by the Department. SRUS continues to promptly pay claims and satisfy its other obligations to our insurance subsidiaries. We cannot predict what these or other changes in the status of SRUS’s financial condition may have on our ability to take reserve credit for the business ceded to SRUS. If we were unable to take reserve credit for the business ceded to SRUS, it could have a material adverse impact on both our GAAP and statutory financial condition and results of operations. As of September 30, 2010, we had approximately $198.3 million of GAAP recoverables from SRUS, and $530.3 million of ceded statutory reserves related to SRUS.

Ratings

Various Nationally Recognized Statistical Rating Organizations (“rating organizations”) review the financial performance and condition of insurers, including us and our insurance subsidiaries, 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 the financial strength ratings of us and our significant member companies from the major independent rating organizations as of September 30, 2010:

			Standard &
Ratings	A.M. Best	Fitch	Poor’s	Moody’s
Insurance companies financial strength ratings:
Protective Life Insurance Company	A+	A	AA-	A2
West Coast Life Insurance Company	A+	A	AA-	A2
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 or those of our insurance subsidiaries 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. A downgrade or other negative action by a ratings organization with respect to our credit rating could limit our access to capital markets, increase the cost of issuing debt, and a downgrade of sufficient magnitude, combined with other negative factors, could require us to post collateral.

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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 are designed to 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, 2010, we had policy liabilities and accruals of approximately $19.1 billion. Our interest-sensitive life insurance policies have a weighted-average minimum credited interest rate of approximately 3.69%.

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, 2010, we carried a $14.3 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)	$	3,451,376	$	71,104	$	142,207	$	142,207	$	3,095,858
Stable value products(2)	3,470,975		1,135,311		1,194,412		610,175		531,077
Operating leases(3)	30,793		7,036		11,112		8,810		3,835
Home office lease(4)	77,567		782		1,571		75,214		—
Mortgage loan commitments	237,481		237,481		—		—		—
Policyholder obligations(5)	21,811,780		2,077,123		2,820,290		2,444,341		14,470,026
Total	$	29,079,972	$	3,528,837	$	4,169,592	$	3,280,747	$	18,100,796

(1)	Non-recourse funding obligations include all principal amounts owed on note agreements and expected interest payments due over the termof 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 paymentsdue 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 historicalexperience, modified for recent observed trends.  These obligations are based on current balance sheet values and include expectedinterest crediting, but do not incorporate an expectation of future market growth, or future deposits.  Due to the significance of theassumptions used, the amounts presented could materially differ from actual results.  As variable separate account obligations are legallyinsulated from general account obligations, the variable separate account obligations will be fully funded by cash flows from variableseparate account assets.  We expect to fully fund the general account obligations from cash flows from general account investments.

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FAIR VALUE OF FINANCIAL INSTRUMENTS

On January 1, 2008, we adopted FASB guidance on fair value measurements and disclosures. This guidance defines fair value for GAAP and establishes a framework for measuring fair value as well as 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” in this document is defined in accordance with GAAP. 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 Note 12, Fair Value of Financial Instruments.

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, 2010, $919.8 million of available-for-sale and trading account assets, excluding other long-term investments, were classified as Level 3 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, 2010, the Level 3 fair values of derivative assets and liabilities determined by these quantitative models were $20.9 million and $339.6 million, respectively.

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, our credit rating and other market conditions. As of September 30, 2010, the Level 3 fair value of these liabilities was $144.2 million.

For securities that are priced via non-binding independent broker quotations, we assess whether prices received from independent brokers represent a reasonable estimate of fair value through an analysis using internal and external cash flow models developed based on spreads and, when available, market indices. We use a market-based cash flow analysis to validate the reasonableness prices received from independent brokers. These analytics, which are updated daily, incorporate various metrics (yield curves, credit spreads, prepayment rates, etc.) to determine the valuation of such holdings. As a result of this analysis, if we determine there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly.

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Of our $940.7 million of total assets (measured at fair value on a recurring basis) classified as Level 3 assets, $685.2 million were ABS. Of this amount, $628.7 million were student loan related ABS, $36.3 million were non-student loan related ABS, and $20.2 million were commercial mortgage-backed securitizations. The years of issuance of the ABS are as follows:

Year of Issuance	Amount
	(In Millions)
2002	$	315
2003	110
2004	115
2005	17
2006	25
2007	83
2010	20
Total	$	685

The ABS was rated as follows: $651.6 million were AAA rated, $27.3 million were AA rated, and $6.3 million were A rated. We do not expect any downgrade in the ratings of the securities related to student loans since the underlying collateral of the student loan asset-backed securities is guaranteed by the U.S. Department of Education.

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, and equity price risks and issuer defaults. We analyze and manage the 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 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, (A-rated or higher at the time we enter into the contract) and we typically maintain collateral support agreements with those counterparties.

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”). No foreign currency swaps remain outstanding. We also use S&P 500® options and equity securities to mitigate our exposure to the value of equity indexed annuity contracts and guaranteed benefits related to variable 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

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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, 2010, we had outstanding mortgage loan commitments of $237.5 million at an average rate of 6.17%.

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 2, Summary of Significant Accounting Policies, to the consolidated condensed financial statements for information regarding recently issued accounting standards.

RECENT DEVELOPMENTS

During the third quarter of 2010, we announced we had signed an agreement to acquire United Investors Life Insurance Company from Liberty National Life Insurance Company (“Liberty National”) for a purchase price of approximately $316 million, including statutory capital and surplus of approximately $130 million at closing. The acquisition and related transactions, including pre-closing distributions and reinsurance agreements, are subject to the final negotiation of related agreements and receipt of various regulatory approvals and other customary conditions to closing. The expected closing date is December 31, 2010.

In 2009, the NAIC approved regulatory changes that impacted our insurance subsidiaries and their competitors. The NAIC approved changes to the measurements used to determine the amount of deferred tax assets (“DTAs”) an insurance company may claim as admitted assets on its statutory financial statements. These changes had the effect of increasing the amount of DTAs an insurance company was permitted to claim as an admitted asset for purposes of insurance company statutory financial statements filed for calendar years 2009, 2010 and 2011. In addition, the NAIC adopted a modification to the Mortgage Experience Adjustment Factor (“MEAF”) for calendar year 2009 that reduced the factor’s volatility. The NAIC has adopted further changes to the MEAF for 2010 that will have the effect of increasing the amount of capital that the Company must hold for its commercial mortgages.

The NAIC is also considering various initiatives to change and modernize its financial and solvency regulations. It is considering changing to a principles-based reserving method for life insurance and annuity reserves, changes to the accounting and risk-based capital regulations, changes to the governance practices of insurers, and other items. Some of these proposed changes would require the approval of state legislatures. We cannot provide any assurance as to what impact these proposed changes, if they occur, will have on our reserve and capital requirements.

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

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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 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, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on their evaluation as of the end of the period covered by this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective. 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 during the period ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s 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.

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PART II

Item 1A. Risk Factors and Cautionary Factors that may Affect Future Results

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 known trends and uncertainties. In addition to 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, 2009, which could materially affect the Company’s business, financial condition, or future results of operations.

The Company’s results and financial condition 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 mortality, persistency, expenses, interest rates, equity market volatility, tax liability, business mix, frequency of claims, contingent liabilities, investment performance, and 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 experiences, as well as changes in estimates, are 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.

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

Volatility in equity markets may discourage purchasers of variable separate account products, such as variable annuities, that have returns linked to the performance of equity markets and may cause some existing customers to withdraw cash values or reduce investments in those products. 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 incorporates various assumptions about the overall performance of equity markets over certain time periods. Periods of significant and sustained downturns in equity markets, increased equity volatility, or reduced interest rates could result in an increase in the

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valuation of the future policy benefit or policyholder account balance liabilities associated with such products, resulting in a reduction to net income. The Company has implemented hedging strategies to mitigate these risks, but the strategies may prove to be insufficient or ineffective.

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 incorporates various assumptions about interest rates and 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, or interest rate assumptions are different, than assumed.

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

The Company’s acquisitions of companies and acquisitions or coinsurance of blocks of insurance business have increased its earnings in part by allowing the Company to position itself to realize certain operating efficiencies and to enter new markets. However, there can be no assurance that the Company will have future suitable opportunities for, or sufficient capital available to fund, such transactions. In addition, there can be no assurance that the Company will realize the anticipated financial results from such transactions.  Moreover, the financial distress experienced by certain financial services industry participants as a result of continued challenging economic conditions may lead to favorable acquisition opportunities, although the Company’s ability to pursue such opportunities may be limited due to lower earnings, reserve increases, and/or a lack of access to sources of financing.

The Company may be unable to complete an acquisition transaction, or completion of an acquisition transaction may be more costly or take longer than expected or may have a different or more costly financing structure than initially contemplated. In addition, the Company may not be able to complete or manage multiple acquisition transactions at the same time, or the completion of such transactions may be delayed or be more costly than initially contemplated. The Company may be unable to obtain regulatory approvals required to complete an acquisition transaction. There may also be unforeseen liabilities that arise in connection with businesses or blocks of insurance business that the Company acquires.

Additionally, in connection with its acquisition transactions, 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 affect on the Company.

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, underwriting practices, product design, product disclosure, administration, denial or delay of benefits, charging excessive or impermissible fees, recommending unsuitable products to customers, breaching fiduciary or other duties to customers, refund or claims practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or other persons with whom the insurer does business, payment of sales or other contingent commissions, 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 publicity 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.

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A number of lawsuits and investigations regarding the method of paying claims have been initiated against life insurers. The Company offers payment methods that may be similar to those that have been the subject of such lawsuits and investigations.

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.

The Company is exposed to the risks of natural and man-made catastrophes, pandemics, malicious acts, terrorist acts and climate change, which could adversely affect the Company’s operations and results.

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 or man-made catastrophe, pandemic, malicious act, terrorist act, or climate change, could adversely affect the mortality, morbidity, or other experience of the Company or its reinsurers and have a significant negative impact on the Company. In addition, claims arising from the occurrence of such events or conditions could have a material adverse effect on the Company’s financial condition and results of operations. Such events or conditions could also have an adverse effect on lapses and surrenders of existing policies, as well as sales of new policies.

In addition, such events or conditions could result in a decrease or halt in economic activity in large geographic areas, adversely affecting the marketing or administration of the Company’s business within such geographic areas and/or the general economic climate, which in turn could have an adverse affect on the Company. Such events or conditions could also result in additional regulation or restrictions on the Company in the conduct of its business. The possible macroeconomic effects of such events or conditions could also adversely affect the Company’s asset portfolio, as well as many other variables.

The Company’s strategies for mitigating risks arising from its day-to-day operations may prove ineffective resulting in a material adverse effect on its results of operations and financial condition.

The Company’s performance is highly dependent on its ability to manage risks that arise from a large number of its day-to-day business activities, including underwriting, claims processing, policy administration and servicing, execution of its investment strategy, financial and tax reporting and other activities, many of which are very complex. The Company also may rely on third parties for such activities. The Company seeks to monitor and control its exposure to risks arising out of or related to these activities through a variety of internal controls, management review processes, and other mechanisms. However, the occurrence of unforeseen or un-contemplated risks, or the occurrence of risks of a greater magnitude than expected, including those arising from a failure in processes, procedures or systems implemented by the Company or a failure on the part of employees or third parties upon which the Company relies in this regard, may have a material adverse effect on the Company’s financial condition or results of operations.

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, underwriting practices, 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 rather than shareowners. In addition, some state insurance departments may enact rules or regulations with extra-territorial application, effectively extending their jurisdiction to areas such as permitted insurance company investments that are normally the province of an insurance company’s domiciliary state regulator. At any given time, a number of financial and/or market conduct examinations of the Company’s subsidiaries may be ongoing. From time to time, regulators raise issues during examinations or audits of the Company’s subsidiaries that could, if determined adversely, have a material impact on the Company. The Company’s insurance subsidiaries are 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.

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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 cannot predict the amount or timing of any future assessments.

The purchase of life insurance products is limited by state insurable interest laws, which in most jurisdictions 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.

Although the Company and its subsidiaries are subject to state regulation, in many instances the state regulatory models emanate from the National Association of Insurance Commissioners (“NAIC”). State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, are often made for the benefit of the consumer and at the expense of the insurer and, thus, could have a material adverse effect on the Company’s financial condition and results of operations. The NAIC may also be influenced by the initiatives and regulatory structures or schemes of international regulatory bodies, and those initiatives or regulatory structures or schemes may not translate readily into the regulatory structures or schemes or the legal system (including the interpretation or application of standards by juries) under which U.S. insurers must operate.  Application of such initiatives or regulatory structures or schemes to the Company could have a material adverse effect on the Company’s financial condition and results of operations.

The Company is also subject to the risk that compliance with any particular regulator’s interpretation of a legal or accounting issue may not result in compliance with another regulator’s interpretation of the same issue, particularly when compliance is judged in hindsight. There is an additional risk that any particular regulator’s interpretation of a legal or accounting issue may change over time to the Company’s detriment, or that changes to the overall legal or market environment may cause the Company to change its practices in ways that may, in some cases, limit its growth or profitability.

Some of the NAIC pronouncements, particularly as they affect accounting issues, take effect automatically in the various states without affirmative action by the states. Statutes, regulations, and interpretations may be applied with retroactive impact, particularly in areas such as accounting and reserve requirements. 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 (“AG38”), 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 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 have had the effect of modestly decreasing the reserves required for certain traditional and universal life policies that were 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 credits on ceded business, if applied retroactively, would have a negative impact on the statutory capital of the Company. The NAIC continues to work to reform state regulation in various areas, including comprehensive reforms relating to life insurance reserves.

At the federal level, bills are routinely introduced in both chambers of the United States Congress which could affect life insurers. In the past, Congress has considered legislation that would impact insurance companies in numerous ways, such as providing for an optional federal charter. 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 or whether any effects will be material. On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act of 2010 (the “Healthcare Act”) into law. The Healthcare Act makes sweeping changes to the regulation of health insurance, imposing various conditions and requirements on the Company. The Healthcare Act may affect the small blocks of business the Company has offered or acquired over the years that is, or is deemed to be health insurance. The Healthcare Act may also affect the benefit plans the Company sponsors for employees or retirees and their dependents, the Company’s expense to provide such benefits, the tax liabilities of the Company in connection with the provision of such benefits, the deductibility of certain compensation, and the Company’s ability to attract or retain employees. In addition, the Company may be subject to regulations, guidance or determinations emanating from the various regulatory authorities authorized under the Healthcare Act. The

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Company cannot predict the effect that the Healthcare Act, or any regulatory pronouncement made thereunder, will have on its results of operations or financial condition.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) was signed into law. The Reform Act makes sweeping changes to the regulation of financial services entities, products and markets. Certain provisions of the Reform Act are or may become applicable to the Company, its competitors or those entities with which the Company does business, including but not limited to: the establishment of federal regulatory authority over derivatives, the establishment of consolidated federal regulation and resolution authority over systemically important financial services firms, the establishment of the Federal Insurance Office, changes to the regulation of broker dealers and investment advisors, changes to the regulation of reinsurance, changes to regulations affecting the rights of shareholders, the imposition of additional regulation over credit rating agencies, and the imposition of concentration limits on financial institutions that restrict the amount of credit that may be extended to a single person or entity. The Reform Act also creates the Consumer Financial Protection Bureau (“CFPB”), an independent division of the Department of Treasury with jurisdiction over credit, savings, payment, and other consumer financial products and services, other than investment products already regulated by the United States Securities and Exchange Commission (the “SEC”) or the U.S. Commodity Futures Trading Commission. Certain of the Company’s subsidiaries sell products that may be regulated by the CFPB.  Numerous provisions of the Reform Act require the adoption of implementing rules and/or regulations.  In addition, the Reform Act mandates multiple studies, which could result in additional legislation or regulation applicable to the insurance industry, the Company, its competitors or the entities with which the Company does business. Legislative or regulatory requirements imposed by or promulgated in connection with the Reform Act may place the Company at a competitive disadvantage relative to its competition or other financial services entities, change the competitive landscape of the financial services sector and/or the insurance industry, make it more expensive for the Company to conduct its business or have a material adverse effect on the overall business climate as well as the Company’s financial condition and results of operations.

The Company’s subsidiaries may also 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.

The Company may be subject to regulation by governments of the countries in which it currently, or may in the future, do business, as well as regulation by the U.S. Government with respect to its operations in foreign countries, such as the Foreign Corrupt Practices Act.

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

Other types of regulation that could affect the Company and its subsidiaries 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 to laws and/or regulations affecting participants in the financial services sector and/or insurance industry, including the Company and its competitors or those entities with which it does business, may take, or what effect, if any, such changes may have.

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’s insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations. While ratings are not a recommendation to buy the Company’s securities, 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’s insurance subsidiaries 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

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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, its insurance subsidiaries, or both 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 also publish credit ratings for the Company. Credit ratings are indicators of a debt issuer’s ability to meet the terms of debt obligations in a timely manner. These ratings are important to the Company’s overall ability to access certain types of liquidity. Downgrades of the Company’s credit ratings, or an announced potential downgrade, could have a material adverse affect on the Company’s financial conditions and results of operations in many ways, including the following: limiting the Company’s access to capital markets; increasing the cost of debt; impairing its ability to raise capital to refinance maturing debt obligations; limiting its capacity to support growth of its insurance subsidiaries; requiring it to pay higher amounts in connection with certain existing or future financing arrangements or transactions; and making it more difficult to maintain or improve the current financial strength ratings of its insurance subsidiaries. A downgrade of sufficient magnitude, in combination with other factors, could require the Company to post collateral pursuant to certain contractual obligations.

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.

New accounting rules, changes to existing accounting rules, or the grant of permitted accounting practices to competitors could negatively impact the Company.

Like all publicly traded companies, the Company is required to comply with accounting principles generally accepted in the United States (“GAAP”). A number of organizations are instrumental in the development and interpretation of GAAP such as the SEC, the Financial Accounting Standards Board (“FASB”), and the American Institute of Certified Public Accountants (“AICPA”). 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 GAAP will not have a negative impact on the Company. 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.

The SEC has proposed that certain issuers be required to report financial results in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board rather than GAAP.  As currently proposed, the earliest report for which this would be effective as to the Company would be its fiscal year 2016 Annual Report on Form 10-K.  The earliest report for which this would be effective as to the Company’s holding company, PLC, would be its fiscal year 2014 Annual Report on Form 10-K.  The SEC proposal further requires an issuer to file audited financial statements for the two preceding fiscal years.  Thus, the Company would need to file audited financial statements for fiscal years 2014, 2015 and 2016 in its Form 10-K for fiscal year 2016 and PLC would need to file audited financial statements for fiscal years 2012, 2013 and 2014 in its Form 10-K for fiscal year 2014.  The Company is the principal operating subsidiary of PLC. Despite the movement toward convergence of GAAP and IFRS, IFRS will be a complete change to the Company’s accounting and reporting, and converting to IFRS will impose special demands on issuers in the areas of governance, employee training, internal controls, contract fulfillment and disclosure. As convergence of GAAP and IFRS continues, it could result in significant changes in GAAP that would be implemented whether or not a transition to IFRS actually occurs. The changes to GAAP and ultimate conversion to IFRS will likely affect how the Company manages its business, as it will likely affect other business processes such as design of compensation plans, product design, etc.

In addition, the Company’s insurance subsidiaries are 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

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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. In addition, the NAIC Accounting Practices and Procedures manual provides that state insurance departments may permit insurance companies domiciled therein to depart from SAP by granting them permitted accounting practices. The Company cannot predict whether or when the insurance departments of the states of domicile of its competitors may permit them to utilize advantageous accounting practices that depart from SAP, the use of which is not permitted by the insurance departments of the states of domicile of the Company’s insurance subsidiaries. With respect to 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 can give no assurance that future changes to SAP or components of SAP or the grant of permitted accounting practices to its competitors will not have a negative impact on 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.

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) 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 12, 2010	By:	/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.

	For The
	Nine Months Ended
	September 30,		For The Year Ended December 31,
	2010	2009	2009	2008(3)		2007	2006	2005
Ratio of Consolidated Earnings to Fixed Charges(1)	1.4	1.3	1.4	0.9		1.4	1.5	1.5
Ratio of Consolidated Earnings (Losses) to Fixed Charges Before Interest Credited on Investment Products(2)	6.4	8.1	11.3	(0.2	)	6.9	20.1	38.5

(1)	The Company calculates the ratio of “Consolidated Earnings to Fixed Charges” by dividing the sum of income (loss) from continuing operations before incometax (BT), interest expense (which includes an estimate of the interest component of operating lease expense) (I) and interest credited on investment products (IP)by the sum of interest expense (I) and interest credited on investment products (IP). The formula for this ratio is: (BT+I+IP)(I+IP). The Company continues tosell investment products that credit interest to the contract holder. Investment products include products such as guaranteed investment contracts, annuities,and variable universal life interest credited insurance policies. The inclusion of interest credited on investment products results in a negative impact on the ratio ofearnings 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 (Losses) to Fixed Charges Before Interest Credited on Investment Products” by dividing the sum ofincome (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.
(3)	For the year ended December 31, 2008, additional income required to achieve a 1:1 ratio coverage was $86.4 million.

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Exhibit 12

(continued)

Computation of Consolidated Earnings Ratios

	For The				For The Year Ended December 31,
	Nine Months Ended
	September 30,
	2010		2009		2009		2008(1)			2007		2006		2005
	(Dollars In Thousands, Except Ratio Data)
Computation of Ratio of Consolidated Earnings (Losses) to Fixed Charges
Income (Loss) from Continuing Operations before Income Tax	$	275,847	$	213,651	$	425,034	$	(86,373	)	$	395,956	$	419,748	$	361,215
Add Interest Expense(2)	51,110		29,988		41,411		72,154			66,707		22,012		9,632
Add Interest Credited on Investment Products	658,488		749,552		993,245		1,043,676			1,010,944		891,627		726,301
Earnings before Interest, Interest Credited on Investment Products and Taxes	$	985,445	$	993,191	$	1,459,690	$	1,029,457		$	1,473,607	$	1,333,387	$	1,097,148
Earnings before Interest, Interest Credited on Investment Products and Taxes Divided by Interest expense and Interest Credited on Investment Products	1.4		1.3		1.4		0.9			1.4		1.5		1.5
Computation of Ratio of Consolidated Earnings (Losses) to Fixed Charges Before Interest Credited on Investment Products
Income (Loss) from Continuing Operations before Income Tax	$	275,847	$	213,651	$	425,034	$	(86,373	)	$	395,956	$	419,748	$	361,215
Add Interest Expense(2)	51,110		29,988		41,411		72,154			66,707		22,012		9,632
Earnings (Losses) before Interest and Taxes	$	326,957	$	243,639	$	466,445	$	(14,219	)	$	462,663	$	441,760	$	370,847
Earnings (Losses) before Interest and Taxes Divided by Interest Expense	6.4		8.1		11.3		(0.2		)	6.9		20.1		38.5

(1)	For the year ended December 31, 2008, additional income required to achieve a 1:1 ratio coverage was $86.4 million.
(2)	Interest expense primarily relates to interest on our non-recourse funding obligations.

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EX-31.(A)

Exhibit 31(a)

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

I, John D. Johns, certify that:

1.I have reviewed the Quarterly Report on Form 10-Q for the period ended September 30, 2010 of Protective Life Insurance Company;

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 12, 2010
	/s/ 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 Section 302 of the Sarbanes-Oxley Act of 2002

I, Richard J. Bielen, certify that:

1.I have reviewed the Quarterly Report on Form 10-Q for the period ended September 30, 2010 of Protective Life Insurance Company;

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 12, 2010
	/s/ 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 of Protective Life Insurance Company (the “Company”) on Form 10-Q for the period ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (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 results of operations of the Company.

/s/ John D. Johns

Chairman of the Board,

President and Chief Executive Officer

November 12, 2010

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 of Protective Life Insurance Company (the “Company”) on Form 10-Q for the period ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (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 results of operations of the Company.

/s/ Richard J. Bielen

Vice Chairman and

Chief Financial Officer

November 12, 2010

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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