FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2011

FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

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. The Company has 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.

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, 2011:

	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	2,527,314	$	7	$	2,527,321
Commercial mortgage-backed securities	—		453,968		9,434		463,402
Other asset-backed securities	—		201,918		598,841		800,759
U.S. government-related securities	873,752		447,825		15,000		1,336,577
States, municipals, and political subdivisions	—		1,324,529		—		1,324,529
Other government-related securities	15,011		117,956		—		132,967
Corporate bonds	200		18,123,721		120,602		18,244,523
Total fixed maturity securities - available-for-sale	888,963		23,197,231		743,884		24,830,078
Fixed maturity securities - trading
Residential mortgage-backed securities	—		359,700		—		359,700
Commercial mortgage-backed securities	—		180,820		—		180,820
Other asset-backed securities	—		24,815		26,263		51,078
U.S. government-related securities	469,399		10,512		3,450		483,361
States, municipals, and political subdivisions	—		230,812		—		230,812
Other government-related securities	—		78,644		—		78,644
Corporate bonds	—		1,572,634		41,226		1,613,860
Total fixed maturity securities - trading	469,399		2,457,937		70,939		2,998,275
Total fixed maturity securities	1,358,362		25,655,168		814,823		27,828,353
Equity securities	205,300		11,553		69,971		286,824
Other long-term investments (1)	91,843		8,696		14,787		115,326
Short-term investments	80,374		—		—		80,374
Total investments	1,735,879		25,675,417		899,581		28,310,877
Cash	257,064		—		—		257,064
Other assets	—		—		—		—
Assets related to separate accounts
Variable annuity	5,947,391		—		—		5,947,391
Variable universal life	470,283		—		—		470,283
Total assets measured at fair value on a recurring basis	$	8,410,617	$	25,675,417	$	899,581	$	34,985,615
Liabilities:
Annuity account balances (2)	$	—	$	—	$	139,145	$	139,145
Other liabilities (1)	50,773		17,959		449,984		518,716
Total liabilities measured at fair value on a recurring basis	$	50,773	$	17,959	$	589,129	$	657,861

(1)  Includes certain freestanding and embedded derivatives.

(2)  Represents liabilities related to equity indexed annuities.

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, 2010:

	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	2,538,253	$	20	$	2,538,273
Commercial mortgage-backed securities	—		154,058		19,901		173,959
Other asset-backed securities	—		207,638		641,129		848,767
U.S. government-related securities	1,054,203		104,419		15,109		1,173,731
States, municipals, and political subdivisions	—		963,226		—		963,226
Other government-related securities	14,993		186,214		—		201,207
Corporate bonds	100		15,703,977		64,996		15,769,073
Total fixed maturity securities - available-for-sale	1,069,296		19,857,785		741,155		21,668,236
Fixed maturity securities - trading
Residential mortgage-backed securities	—		432,015		—		432,015
Commercial mortgage-backed securities	—		137,606		—		137,606
Other asset-backed securities	—		18,415		59,925		78,340
U.S. government-related securities	383,423		11,369		3,442		398,234
States, municipals, and political subdivisions	—		160,539		—		160,539
Other government-related securities	—		126,553		—		126,553
Corporate bonds	—		1,642,664		—		1,642,664
Total fixed maturity securities - trading	383,423		2,529,161		63,367		2,975,951
Total fixed maturity securities	1,452,719		22,386,946		804,522		24,644,187
Equity securities	239,832		10,831		66,592		317,255
Other long-term investments (1)	6,794		3,808		31,765		42,367
Short-term investments	341,217		8,028		—		349,245
Total investments	2,040,562		22,409,613		902,879		25,353,054
Cash	236,998		—		—		236,998
Other assets	—		—		—		—
Assets related to separate accounts
Variable annuity	5,170,193		—		—		5,170,193
Variable universal life	534,219		—		—		534,219
Total assets measured at fair value on a recurring basis	$	7,981,972	$	22,409,613	$	902,879	$	31,294,464
Liabilities:
Annuity account balances (2)	$	—	$	—	$	143,264	$	143,264
Other liabilities (1)	23,995		27,888		190,529		242,412
Total liabilities measured at fair value on a recurring basis	$	23,995	$	27,888	$	333,793	$	385,676

(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.

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, 2011.

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 residential mortgage-backed securities, commercial mortgage-backed securities, and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”). As of September 30, 2011, the Company held $3.7 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 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, 2011, the Company held $634.5 million of Level 3 ABS, which included $26.3 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. As a result of the ARS market collapse during 2008, the Company prices its ARS using an income approach valuation model. 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.

The fair value calculation of 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%
Par Value	$667.7 million
Weighted-average life	12.0 years

Corporate bonds, U.S. Government-related securities, States, municipals, and political subdivisions, and Other government related securities

As of September 30, 2011, the Company classified approximately $21.9 billion of corporate bonds, U.S. government-related securities, states, municipals, and political subdivisions, 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 utilize 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, 2011, the Company classified approximately $180.3 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 rate, 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.

The fair value calculation of bonds and securities classified as Level 3 had, but were not limited to, the following weighted-average inputs:

Investment grade credit rating	69.8%
Weighted-average market yield	4.4%
Weighted-average coupon	4.6%
Par Value	$193.3 million
Weighted-average stated maturity	5.7 years

Equities

As of September 30, 2011, the Company held approximately $81.5 million of equity securities classified as Level 2 and Level 3. Of this total, $64.6 million represents Federal Home Loan Bank (“FHLB”) stock. The Company believes that the cost of the FHLB 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 14, 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, 2011, 82.1% 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 analyses.

Derivative instruments classified as Level 1 include futures, credit default swaps, 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 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 benefits (“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 14, 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 multiple risk neutral stochastic 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.

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 using multiple risk neutral stochastic 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. If an event were to occur within a quarter that would make the assumptions unreasonable, the assumptions would be reviewed within the quarter.

Included in the chart below, are current key assumptions which include risk margins for the Company.

Asset Earned Rate	5.89%
Admin Expense per Policy	$78 to $93 per policy
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	2.2% to 55% 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, 2011, ranged from a one month rate of 1.86%, a 5 year rate of 3.65%, and a 30 year rate of 5.15%.

Separate Accounts

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

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended September 30, 2011, for which the Company has used significant unobservable inputs (Level 3):

Total Realized and Unrealized Gains

Total Realized and Unrealized Losses

Total Gains (losses) included in Earnings related to

Included in

Included in

Instruments

Other

Other

Transfers

still held at

Beginning

Included in

Comprehensive

Included in

Comprehensive

in/out of

Ending

the Reporting

Balance

Earnings

Income

Earnings

Income

Purchases

Sales

Issuances

Settlements

Level 3

Other

Balance

Date

(Dollars In Thousands)

Assets:

Fixed maturity securities available-for-sale

Residential mortgage-backed securities	$	7	$	—	$	—	$	—		$	—		$	—	$	—		$	—	$	—	$	—	$	—		$	7	$	—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		9,434		—			9,434		—
Other asset-backed securities	637,746		—		1,478		—			(40,295		)	—		—			—		—		—		(88		)	598,841		—
U.S. government-related securities	15,000		—		—		—			(3		)	—		—			—		—		—		3			15,000		—
States, municipals, and political subdivisions	—		—		—		—			—			—		—			—		—		—		—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	117,989		—		3,388		—			(100		)	—		(675		)	—		—		—		—			120,602		—
Total fixed maturity securities - available-for-sale	770,742		—		4,866		—			(40,398		)	—		(675		)	—		—		9,434		(85		)	743,884		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	41,093		28		—		(918		)	—			—		(14,590		)	—		—		—		650			26,263		(734		)
U.S. government-related securities	3,512		—		—		(60		)	—			—		—			—		—		—		(2		)	3,450		(60		)
States, municipals and political subdivisions	—		—		—		—			—			—		—			—		—		—		—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	42,041		—		—		(825		)	—			—		(71		)	—		—		—		81			41,226		(825		)
Total fixed maturity securities - trading	86,646		28		—		(1,803		)	—			—		(14,661		)	—		—		—		729			70,939		(1,619		)
Total fixed maturity securities	857,388		28		4,866		(1,803		)	(40,398		)	—		(15,336		)	—		—		9,434		644			814,823		(1,619		)
Equity securities	70,276		—		—		—			(305		)	—		—			—		—		—		—			69,971		—
Other long-term investments (1)	33,781		—		—		(18,994		)	—			—		—			—		—		—		—			14,787		(18,994		)
Short-term investments	—		—		—		—			—			—		—			—		—		—		—			—		—
Total investments	961,445		28		4,866		(20,797		)	(40,703		)	—		(15,336		)	—		—		9,434		644			899,581		(20,613		)
Total assets measured at fair value on a recurring basis	$	961,445	$	28	$	4,866	$	(20,797	)	$	(40,703	)	$	—	$	(15,336	)	$	—	$	—	$	9,434	$	644		$	899,581	$	(20,613	)
Liabilities:
Annuity account balances (2)	$	142,470	$	—	$	—	$	22		$	—		$	—	$	—		$	161	$	3,508	$	—	$	—		$	139,145	$	—
Other liabilities (1)	213,659		—		—		237,130			—			—		805			—		—		—		—			449,984		(237,130		)
Total liabilities measured at fair value on a recurring basis	$	356,129	$	—	$	—	$	237,152		$	—		$	—	$	805		$	161	$	3,508	$	—	$	—		$	589,129	$	(237,130	)

(1)  Represents certain freestanding and embedded derivatives.

(2)  Represents liabilities related to equity indexed annuities.

For the three months ended September 30, 2011, $9.4 million of securities were transferred into Level 3. This amount was transferred 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, 2011.

For the three months ended September 30, 2011, there were no securities transferred out of Level 3.

For the three months ended September 30, 2011, there were no transfers from Level 2 to Level 1.

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 Realized and Unrealized Gains (losses)														Total Gains (losses) included in Earnings 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.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the nine months ended September 30, 2011, for which the Company has used significant unobservable inputs (Level 3):

Total Realized and Unrealized Gains

Total Realized and Unrealized Losses

Total Gains (losses) included in Earnings related to

Included in

Included in

Instruments

Other

Other

Transfers

still held at

Beginning

Included in

Comprehensive

Included in

Comprehensive

in/out of

Ending

the Reporting

Balance

Earnings

Income

Earnings

Income

Purchases

Sales

Issuances

Settlements

Level 3

Other

Balance

Date

(Dollars In Thousands)

Assets:

Fixed maturity securitiesavailable-for-sale

Residential mortgage-backed securities	$	20	$	—	$	12	$	(4	)	$	—		$	—	$	(12	)	$	—	$	—	$	(9	)	—			$	7	$	—
Commercial mortgage-backed securities	19,901		—		147		—			—			—		(103		)	—		—		(10,511		)	—			9,434		—
Other asset-backed securities	641,129		1,786		3,637		(2,133		)	(45,441		)	118,598		(118,598		)	—		—		—			(137		)	598,841		—
U.S. government-related securities	15,109		—		—		—			(119		)	—		—			—		—		—			10			15,000		—
States, municipals, and political subdivisions	—		—		—		—			—			—		—			—		—		—			—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Corporate bonds	64,996		—		4,873		—			(1,055		)	40,000		(2,797		)	—		—		14,585			—			120,602		—
Total fixed maturity securities - available-for-sale	741,155		1,786		8,669		(2,137		)	(46,615		)	158,598		(121,510		)	—		—		4,065			(127		)	743,884		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Other asset-backed securities	59,925		1,180		—		(2,230		)	—			3,793		(38,543		)	—		—		—			2,138			26,263		(656		)
U.S. government-related securities	3,442		130		—		(117		)	—			—		—			—		—		—			(5		)	3,450		14
States, municipals and political subdivisions	—		—		—		—			—			—		—			—		—		—			—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Corporate bonds	—		—		—		(825		)	—			—		(71		)	—		—		42,041			81			41,226		(451		)
Total fixed maturity securities - trading	63,367		1,310		—		(3,172		)	—			3,793		(38,614		)	—		—		42,041			2,214			70,939		(1,093		)
Total fixed maturity securities	804,522		3,096		8,669		(5,309		)	(46,615		)	162,391		(160,124		)	—		—		46,106			2,087			814,823		(1,093		)
Equity securities	66,592		49		445		—			(1,049		)	3,962		(49		)	—		—		21			—			69,971		—
Other long-term investments (1)	31,765		—		—		(16,978		)	—			—		—			—		—		—			—			14,787		(16,978		)
Short-term investments	—		—		—		—			—			—		—			—		—		—			—			—		—
Total investments	902,879		3,145		9,114		(22,287		)	(47,664		)	166,353		(160,173		)	—		—		46,127			2,087			899,581		(18,071		)
Total assets measured at fair value on a recurring basis	$	902,879	$	3,145	$	9,114	$	(22,287	)	$	(47,664	)	$	166,353	$	(160,173	)	$	—	$	—	$	46,127		$	2,087		$	899,581	$	(18,071	)
Liabilities:
Annuity account balances (2)	$	143,264	$	—	$	—	$	4,257		$	—		$	—	$	—		$	475	$	8,851	$	—		$	—		$	139,145	$	—
Other liabilities (1)	190,529		—		—		262,128			—			—		2,673			—		—		—			—			449,984		(262,128		)
Total liabilities measured at fair value on a recurring basis	$	333,793	$	—	$	—	$	266,385		$	—		$	—	$	2,673		$	475	$	8,851	$	—		$	—		$	589,129	$	(262,128	)

(1)  Represents certain freestanding and embedded derivatives.

(2)  Represents liabilities related to equity indexed annuities.

For the nine months ended September 30, 2011, $66.1 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, 2011.

                For the nine months ended September 30, 2011, $20.0 million of securities were transferred out of Level 3. This amount was transferred almost 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, 2011. All transfers are recognized as of the end of the reporting period.

For the nine months ended September 30, 2011, there were no transfers from Level 2 to Level 1.

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 Realized and Unrealized Gains (losses)													Total Gains (losses) included in Earnings related to
						Included in		Purchases,								Instruments
	Beginning		Included in			Other Comprehensive		Issuances, and Settlements			Transfers in and/or out of			Ending		still held at 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.

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

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, 2011				December 31, 2010
	Carrying				Carrying
	Amounts		Fair Values		Amounts		Fair Values
	(Dollars In Thousands)
Assets:
Mortgage loans on real estate	$	5,375,604	$	6,265,811	$	4,883,400	$	5,326,037
Policy loans	880,203		880,203		793,448		793,448
Liabilities:
Stable value product account balances	$	2,827,862	$	2,923,560	$	3,076,233	$	3,163,902
Annuity account balances	10,975,016		10,836,441		10,591,605		10,451,526
Mortgage loan backed certificates	32,471		32,877		61,678		63,127
Non-recourse funding obligations	1,248,600		1,076,456		1,360,800		1,210,894

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 policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. 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, 2011, 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.