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INVESTMENT OPERATIONS

6 Months Ended

Jun. 30, 2012

4. INVESTMENT OPERATIONS

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

	For The						For The
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(Dollars In Thousands)						(Dollars In Thousands)
Fixed maturities	$	16,417		$	30,418		$	36,095		$	35,680
Equity securities	148			21			148			9,121
Impairments on fixed maturity securities	(13,442		)	(9,435		)	(32,038		)	(15,098		)
Impairments on equity securities	—			—			—			—
Modco trading portfolio	56,063			33,603			74,162			27,954
Other investments	(4,749		)	412			(7,043		)	2,240
Total realized gains (losses) - investments	$	54,437		$	55,019		$	71,324		$	59,897

For the three and six months ended June 30, 2012, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $16.7 million and $39.5 million and gross realized losses were $13.4 million and $35.1 million, including $13.4 million and $31.9 million of impairment losses, respectively.

For the three and six months ended June 30, 2011, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $31.9 million and $46.5 million and gross realized losses were $10.7 million and $16.5 million, including $9.1 million and $14.7 million of impairment losses, respectively.

For the three and six months ended June 30, 2012, the Company sold securities in an unrealized gain position with a fair value (proceeds) of $411.8 million and $906.9 million, respectively. The gain realized on the sale of these securities was $16.7 million and $39.5 million, respectively.

For the three and six months ended June 30, 2011, the Company sold securities in an unrealized gain position with a fair value (proceeds) of $1.3 billion and $1.5 billion, respectively. The gain realized on the sale of these securities was $31.9 million and $46.5 million, respectively.

For the three and six months ended June 30, 2012, the Company sold securities in an unrealized loss position with a fair value (proceeds) of $0.3 million and $17.5 million, respectively. The losses realized on the sale of these securities was $0.1 million and $3.2 million, respectively.

For the three and six months ended June 30, 2011, the Company sold securities in an unrealized loss position with a fair value (proceeds) of $141.9 million and $161.9 million respectively. The losses realized on the sale of these securities were $1.5 million and $1.7 million, respectively.

Certain European countries have experienced varying degrees of financial stress. Risks from the continued debt crisis in Europe could continue to disrupt the financial markets which could have a detrimental impact on global economic conditions and on sovereign and non-sovereign obligations. Although the financial relief plan announced by European leaders on October 27, 2011, initially drew favorable responses from the financial markets, details remain to be negotiated and implementation is subject to certain contingencies and risks. There remains considerable uncertainty as to future developments in the European debt crisis and the impact on financial markets. The chart shown below includes the Company’s non-sovereign fair value exposures in these countries as of June 30, 2012. As of June 30, 2012, the Company had no unfunded exposure and had no direct sovereign fair value exposure.

					Total Gross
	Non-sovereign Debt				Funded
Financial Instrument and Country	Financial		Non-financial		Exposure
	(Dollars In Millions)
Securities:
United Kingdom	$	320.9	$	391.2	$	712.1
Switzerland	124.0		205.2		329.2
France	99.2		86.8		186.0
Sweden	158.3		—		158.3
Netherlands	93.5		87.2		180.7
Spain	39.2		90.7		129.9
Belgium	—		89.6		89.6
Germany	25.7		57.7		83.4
Ireland	5.6		83.7		89.3
Luxembourg	—		56.9		56.9
Italy	—		41.3		41.3
Norway	—		14.1		14.1
Total securities	866.4		1,204.4		2,070.8
Derivatives:
Germany	17.0		—		17.0
Switzerland	0.2		—		0.2
Total derivatives	17.2		—		17.2
	$	883.6	$	1,204.4	$	2,088.0

The amortized cost and fair value of the Company’s investments classified as available-for-sale as of June 30, 2012 and December 31, 2011, are as follows:

			Gross		Gross					Total OTTI
	Amortized		Unrealized		Unrealized			Fair		Recognized
	Cost		Gains		Losses			Value		in OCI(1)
	(Dollars In Thousands)
2012
Fixed maturities:
Bonds
Residential mortgage-backed securities	$	2,089,252	$	94,902	$	(56,910	)	$	2,127,244	$	(30,802	)
Commercial mortgage-backed securities	710,465		36,681		(1,315		)	745,831		—
Other asset-backed securities	1,008,490		6,817		(93,563		)	921,744		(8,307		)
U.S. government-related securities	1,239,475		77,738		—			1,317,213		—
Other government-related securities	101,521		6,792		(137		)	108,176		—
States, municipals, and political subdivisions	1,158,642		237,453		(9		)	1,396,086		—
Corporate bonds	17,098,772		2,214,470		(120,855		)	19,192,387		(5,004		)
	23,406,617		2,674,853		(272,789		)	25,808,681		(44,113		)
Equity securities	301,329		7,169		(12,649		)	295,849		—
Short-term investments	44,946		—		—			44,946		—
	$	23,752,892	$	2,682,022	$	(285,438	)	$	26,149,476	$	(44,113	)
2011
Fixed maturities:
Bonds
Residential mortgage-backed securities	$	2,340,172	$	82,574	$	(85,702	)	$	2,337,044	$	(47,652	)
Commercial mortgage-backed securities	530,283		24,473		(4,229		)	550,527		—
Other asset-backed securities	997,398		6,529		(90,898		)	913,029		(6,559		)
U.S. government-related securities	1,150,525		65,212		(58		)	1,215,679		—
Other government-related securities	88,058		4,959		—			93,017		—
States, municipals, and political subdivisions	1,154,307		173,406		—			1,327,713		—
Corporate bonds	16,888,423		1,922,038		(249,870		)	18,560,591		1,787
	23,149,166		2,279,191		(430,757		)	24,997,600		(52,424		)
Equity securities	286,537		5,430		(16,595		)	275,372		(74		)
Short-term investments	15,629		—		—			15,629		—
	$	23,451,332	$	2,284,621	$	(447,352	)	$	25,288,601	$	(52,498	)

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

As of June 30, 2012 and December 31, 2011, the Company had an additional $3.0 billion and $3.0 billion of fixed maturities, $18.2 million and $17.0 million of equity securities, and $43.4 million and $85.8 million of short-term investments classified as trading securities, respectively.

The amortized cost and fair value of available-for-sale fixed maturities as of June 30, 2012, 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	$	469,467	$	474,255
Due after one year through five years	4,754,021		5,072,983
Due after five years through ten years	5,726,983		6,250,795
Due after ten years	12,456,146		14,010,648
	$	23,406,617	$	25,808,681

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 (collectively referred to as asset-backed securities or “ABS”), 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 six months ended June 30, 2012, the Company recorded pre-tax other-than-temporary impairments of investments of $13.6 million and $47.7 million, respectively. Of the $13.6 million of impairments for the three months ended June 30, 2012, $13.4 million was recorded in earnings and $0.2 million was recorded in other comprehensive income (loss). Of the $47.7 million of impairments for the six months ended June 30, 2012, $32.0 million was recorded in earnings and $15.7 million was recorded in other comprehensive income (loss).

For the three and six months ended June 30, 2012, there was $13.6 million and $47.7 million of pre-tax other-than-temporary impairments related to debt securities, respectively, and no impairments related to equity securities. For the three and six months ended June 30, 2012, there were no other-than-temporary impairments related to debt securities or equity securities that the Company intended to sell or expected to be required to sell.

During the three and six months ended June 30, 2011, the Company recorded other-than-temporary impairments on investments of $15.6 million and $31.6 million, respectively, related to debt securities. Of the $15.6 million of impairments for the three months ended June 30, 2011, $9.4 million was recorded in earnings and $6.2 million was recorded in other comprehensive income (loss). Of the $31.6 million of impairments for the six months ended June 30, 2011, $15.1 million was recorded in earnings and $16.5 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 intended to sell or expected to be required to sell.

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				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
	(Dollars In Thousands)
Beginning balance	$	87,942	$	40,463	$	69,476	$	39,275
Additions for newly impaired securities	3,619		5,765		19,307		9,374
Additions for previously impaired securities	9,333		3,415		12,111		4,083
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	—		—		—		(3,089		)
Ending balance	$	100,894	$	49,643	$	100,894	$	49,643

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 June 30, 2012:

	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	$	210,561	$	(13,386	)	$	360,891	$	(43,524	)	$	571,452	$	(56,910	)
Commercial mortgage-backed securities	86,770		(1,315		)	—		—			86,770		(1,315		)
Other asset-backed securities	478,279		(41,230		)	207,480		(52,333		)	685,759		(93,563		)
U.S. government-related securities	—		—			—		—			—		—
Other government-related securities	14,863		(137		)	—		—			14,863		(137		)
States, municipals, and political subdivisions	509		(9		)	—		—			509		(9		)
Corporate bonds	1,012,629		(46,999		)	559,922		(73,856		)	1,572,551		(120,855		)
Equities	13,496		(7,779		)	27,847		(4,870		)	41,343		(12,649		)
	$	1,817,107	$	(110,855	)	$	1,156,140	$	(174,583	)	$	2,973,247	$	(285,438	)

The RMBS have a gross unrealized loss greater than twelve months of $43.5 million as of June 30, 2012. 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 $52.3 million as of June 30, 2012. 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 does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of these securities.

The corporate bonds category has gross unrealized losses greater than twelve months of $73.9 million as of June 30, 2012. 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 does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of these securities.

The equities category has a gross unrealized loss greater than twelve months of $4.9 million as of June 30, 2012. 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 does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of these securities.

The Company does not consider these unrealized loss positions to be other-than-temporary, based on the factors discussed 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.

	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	$	276,216	$	(15,308	)	$	524,251	$	(70,394	)	$	800,467	$	(85,702	)
Commercial mortgage-backed securities	78,893		(4,229		)	—		—			78,893		(4,229		)
Other asset-backed securities	531,653		(32,074		)	190,639		(58,824		)	722,292		(90,898		)
U.S. government-related securities	21,311		(58		)	—		—			21,311		(58		)
Other government-related securities	—		—			—		—			—		—
States, municipals, and political subdivisions	—		—			—		—			—		—
Corporate bonds	1,870,256		(131,953		)	523,913		(117,917		)	2,394,169		(249,870		)
Equities	50,638		(8,436		)	22,095		(8,159		)	72,733		(16,595		)
	$	2,828,967	$	(192,058	)	$	1,260,898	$	(255,294	)	$	4,089,865	$	(447,352	)

The RMBS have a gross unrealized loss greater than twelve months of $70.4 million as of December 31, 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 $58.8 million as of December 31, 2011. This category predominately includes student-loan backed auction rate securities, the underlying collateral, of which is at least 97% guaranteed by the FFELP. These unrealized losses have occurred within the Company’s 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 does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of these securities.

The corporate bonds category has gross unrealized losses greater than twelve months of $117.9 million as of December 31, 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 does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of these securities.

The equities category has a gross unrealized loss greater than twelve months of $8.2 million as of December 31, 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 does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of these securities.

As of June 30, 2012, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.7 billion and had an amortized cost of $1.9 billion. In addition, included in the Company’s trading portfolio, the Company held $334.1 million of securities which were rated below investment grade. Approximately $413.4 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						Six Months Ended
	June 30,						June 30,
	2012			2011			2012		2011
	(Dollars In Thousands)						(Dollars In Thousands)
Fixed maturities	$	340,397		$	169,167		$	359,860	$	197,399
Equity securities	(1,411		)	(3,377		)	3,695		(3,793		)

Securities Lending

In prior periods, the Company participated in securities lending, primarily as an enhancement to its investment yield. Securities that the Company held as investments were loaned to third parties for short periods of time. The Company required initial collateral, in the form of short-term investments, which equaled 102 % of the market value of the loaned securities.

During the second quarter of 2011, the Company discontinued this program. Certain collateral assets, which the Company previously intended to ultimately dispose of and on which the Company recorded an other-than-temporary impairment of $1.3 million, were instead retained by the Company and are included in its fixed maturities as of June 30, 2012. The Company currently does not have any intent to sell these securities, and does not anticipate being required to sell them.