INVESTMENT OPERATIONS

9 Months Ended

Sep. 30, 2011

INVESTMENT OPERATIONS

INVESTMENT OPERATIONS

4. INVESTMENT OPERATIONS

Net realized investment gains (losses) for invested assets are summarized as follows:

	For The			For The
	Three Months Ended			Nine Months Ended
	September 30, 2011			September 30, 2011
	(Dollars In Thousands)
Fixed maturities	$	20,396		$	56,076
Equity securities	—			9,121
Impairments on fixed maturity securities	(9,777		)	(24,875		)
Impairments on equity securities	—			—
Modco trading portfolio	123,760			151,714
Other investments	(5,054		)	(2,814		)
Total realized gains (losses) - investments	$	129,325		$	189,222

For the three and nine months ended September 30, 2011, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $22.9 million and $69.4 million and gross realized losses were $12.3 million and $28.8 million, including $9.8 million and $24.6 million of impairment losses, respectively. The $24.6 million excludes $0.3 million of impairment losses in the trading portfolio for the nine months ended September 30, 2011.

The $9.1 million of gains included in equity securities for the nine months ended September 30, 2011, primarily relates to gains of $6.9 million on securities that have recovered in value as the issuer exited bankruptcy and $1.2 million that relates to gains recognized on the sale of Federal National Mortgage Association preferreds.

For the three and nine months ended September 30, 2011, the Company sold securities in an unrealized gain position with a fair value (proceeds) of $348.0 million and $1.8 billion, respectively. The gain realized on the sale of these securities was $22.9 million and $69.4 million, respectively.

For the three and nine months ended September 30, 2011, the Company sold securities in an unrealized loss position with a fair value (proceeds) of $48.5 million and $210.5 million, respectively. The loss realized on the sale of these securities was $2.5 million and $4.2 million, respectively.

The amortized cost and fair value of the Company’s investments classified as available-for-sale as of September 30, 2011, are as follows:

			Gross		Gross					Total OTTI
	Amortized		Unrealized		Unrealized			Fair		Recognized
	Cost		Gains		Losses			Value		in OCI(1)
	(Dollars In Thousands)
Fixed maturities:
Bonds
Residential mortgage-backed securities	$	2,537,409	$	100,416	$	(110,504	)	$	2,527,321	$	(43,800	)
Commercial mortgage-backed securities	462,074		9,288		(7,960		)	463,402		—
Other asset-backed securities	870,801		2,769		(72,811		)	800,759		—
U.S. government-related securities	1,244,622		92,094		(139		)	1,336,577		—
Other government-related securities	127,260		6,507		(800		)	132,967		—
States, municipals, and political subdivisions	1,148,242		176,287		—			1,324,529		—
Corporate bonds	16,724,617		1,791,939		(272,033		)	18,244,523		1,739
	23,115,025		2,179,300		(464,247		)	24,830,078		(42,061		)
Equity securities	286,532		4,488		(13,931		)	277,089		(73		)
Short-term investments	12,732		—		—			12,732		—
	$	23,414,289	$	2,183,788	$	(478,178	)	$	25,119,899	$	(42,134	)

(1) These amounts are included in the gross unrealized gains and gross unrealized losses column above.

As of September 30, 2011, the Company had an additional $3.0 billion of fixed maturities, $9.7 million of equity securities, and $67.6 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, 2011, 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	$	585,867	$	594,453
Due after one year through five years	4,586,294		4,763,847
Due after five years through ten years	5,849,313		6,257,401
Due after ten years	12,093,551		13,214,377
	$	23,115,025	$	24,830,078

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 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, 2011, the Company recorded other-than-temporary impairments on investments of $6.2 million and $37.8 million, respectively, related to debt securities. Of the $6.2 million of impairments for the three months ended September 30, 2011, $9.8 million was recorded in earnings and $3.6 million of non-credit gains was recorded in other comprehensive income (loss). The $3.6 million of non-credit gains includes $1.3 million of losses related to newly impaired securities and a net gain of $4.9 million related to previously impaired securities that are now in a gain position. Of the $37.8 million of impairments for the nine months ended September 30, 2011, $24.9 million was recorded in earnings and $12.9 million was recorded in other comprehensive income (loss). During this period, 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, except with respect to certain debt securities that were part of the Company’s collateral in its securities lending program.

For the three and nine months ended September 30, 2011, there were no other-than-temporary impairments related to equity securities.

The following chart is a rollforward of available-for-sale 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,
	2011		2010			2011			2010
	(Dollars In Thousands)
Beginning balance	$	49,643	$	31,541		$	39,275		$	25,066
Additions for newly impaired securities	744		6,100			10,118			25,525
Additions for previously impaired securities	6,627		1,179			10,710			2,930
Reductions for previously impaired securities due to a change in expected cash flows	—		—			—			—
Reductions for previously impaired securities that were sold in the current period	—		(2,947		)	(3,089		)	(17,648		)
Ending balance	$	57,014	$	35,873		$	57,014		$	35,873

The following table includes the 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, 2011:

	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	$	269,766	$	(14,070	)	$	622,192	$	(96,434	)	$	891,958	$	(110,504	)
Commercial mortgage-backed securities	155,685		(7,960		)	—		—			155,685		(7,960		)
Other asset-backed securities	145,067		(8,864		)	445,913		(63,947		)	590,980		(72,811		)
U.S. government-related securities	94,559		(139		)	—		—			94,559		(139		)
Other government-related securities	19,633		(800		)	—		—			19,633		(800		)
States, municipals, and political subdivisions	—		—			—		—			—		—
Corporate bonds	2,155,713		(146,071		)	475,384		(125,962		)	2,631,097		(272,033		)
Equities	53,549		(5,607		)	21,929		(8,324		)	75,478		(13,931		)
	$	2,893,972	$	(183,511	)	$	1,565,418	$	(294,667	)	$	4,459,390	$	(478,178	)

The RMBS have a gross unrealized loss greater than twelve months of $96.4 million as of September 30, 2011. 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 these investments.

The other asset-backed securities have a gross unrealized loss greater than twelve months of $63.9 million as of September 30, 2011. This category predominately includes student-loan backed auction rate securities, the underlying collateral of which is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). These unrealized losses have occurred within the Company’s auction rate securities (“ARS”) portfolio since the 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 until maturity.

The corporate bonds category has gross unrealized losses greater than twelve months of $126.0 million as of September 30, 2011. 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 equities category has a gross unrealized loss greater than twelve months of $8.3 million as of September 30, 2011. These losses primarily relate to a widening in credit spreads on perpetual preferred stock holdings. The aggregate decline in market value of these securities was deemed temporary due to factors supporting the recoverability of the respective investments. Positive factors include credit ratings, the financial health of the issuer, the continued access of the issuer to the capital markets, and other pertinent information including the Company’s ability and intent to hold these securities to recovery.

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.

The following table includes the 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 December 31, 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	$	236,615	$	(17,773	)	$	1,167,747	$	(126,304	)	$	1,404,362	$	(144,077	)
Commercial mortgage-backed securities	25,679		(933		)	—		—			25,679		(933		)
Other asset-backed securities	167,089		(2,452		)	594,756		(27,212		)	761,845		(29,664		)
U.S. government-related securities	144,807		(3,071		)	—		—			144,807		(3,071		)
Other government-related securities	33,936		(8		)	14,993		(7		)	48,929		(15		)
States, municipals, and political subdivisions	563,352		(22,345		)	—		—			563,352		(22,345		)
Corporate bonds	2,262,224		(82,409		)	830,351		(94,408		)	3,092,575		(176,817		)
Equities	11,950		(3,321		)	13,344		(1,921		)	25,294		(5,242		)
	$	3,445,652	$	(132,312	)	$	2,621,191	$	(249,852	)	$	6,066,843	$	(382,164	)

The RMBS have a gross unrealized loss greater than twelve months of $126.3 million as of December 31, 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.

The other asset-backed securities have a gross unrealized loss greater than twelve months of $27.2 million as of December 31, 2010. This category predominately includes student-loan backed auction rate securities, the underlying collateral of which is at least 97% FFELP guaranteed. These losses relate to the 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 corporate bonds category has gross unrealized losses greater than twelve months of $94.4 million as of December 31, 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 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, 2011, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $2.3 billion and had an amortized cost of $2.5 billion. In addition, included in the Company’s trading portfolio, the Company held $265.2 million of securities which were rated below investment grade. Approximately $467.7 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, 2011			September 30, 2011
	(Dollars In Thousands)
Fixed maturities	$	477,641		$	675,040
Equity securities	(8,380		)	(12,173		)