FAIR VALUE OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2012

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.

In the first quarter of 2012, the Company adopted ASU No. 2011-04 — Fair Value Measurement - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update resulted in modification of certain disclosures regarding fair value measurements, but did not result in a material change to the Company’s fair value methodology or measurements and had no impact to the Company’s financial position or results of operations.

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 June 30, 2012:

	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	2,127,240	$	4	$	2,127,244
Commercial mortgage-backed securities	—		745,831		—		745,831
Other asset-backed securities	—		337,103		584,641		921,744
U.S. government-related securities	784,615		532,598		—		1,317,213
States, municipals, and political subdivisions	—		1,391,811		4,275		1,396,086
Other government-related securities	—		88,156		20,020		108,176
Corporate bonds	204		19,020,038		172,145		19,192,387
Total fixed maturity securities - available-for-sale	784,819		24,242,777		781,085		25,808,681
Fixed maturity securities - trading
Residential mortgage-backed securities	—		374,068		—		374,068
Commercial mortgage-backed securities	—		192,125		—		192,125
Other asset-backed securities	—		69,543		65,059		134,602
U.S. government-related securities	310,197		252		—		310,449
States, municipals, and political subdivisions	—		259,486		—		259,486
Other government-related securities	—		58,125		—		58,125
Corporate bonds	—		1,694,650		114		1,694,764
Total fixed maturity securities - trading	310,197		2,648,249		65,173		3,023,619
Total fixed maturity securities	1,095,016		26,891,026		846,258		28,832,300
Equity securities	222,303		21,930		69,795		314,028
Other long-term investments (1)	23,615		56,744		25,315		105,674
Short-term investments	88,348		—		—		88,348
Total investments	1,429,282		26,969,700		941,368		29,340,350
Cash	118,785		—		—		118,785
Other assets	—		—		—		—
Assets related to separate accounts
Variable annuity	7,949,926		—		—		7,949,926
Variable universal life	530,630		—		—		530,630
Total assets measured at fair value on a recurring basis	$	10,028,623	$	26,969,700	$	941,368	$	37,939,691
Liabilities:
Annuity account balances (2)	$	—	$	—	$	134,597	$	134,597
Other liabilities (1)	17,424		15,817		516,587		549,828
Total liabilities measured at fair value on a recurring basis	$	17,424	$	15,817	$	651,184	$	684,425

(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, 2011:

	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	2,337,037	$	7	$	2,337,044
Commercial mortgage-backed securities	—		550,527		—		550,527
Other asset-backed securities	—		298,216		614,813		913,029
U.S. government-related securities	664,506		536,173		15,000		1,215,679
States, municipals, and political subdivisions	—		1,327,713		—		1,327,713
Other government-related securities	—		93,017		—		93,017
Corporate bonds	204		18,440,822		119,565		18,560,591
Total fixed maturity securities - available-for-sale	664,710		23,583,505		749,385		24,997,600
Fixed maturity securities - trading
Residential mortgage-backed securities	—		313,963		—		313,963
Commercial mortgage-backed securities	—		190,247		—		190,247
Other asset-backed securities	—		29,585		28,343		57,928
U.S. government-related securities	555,601		255		—		555,856
States, municipals, and political subdivisions	—		229,032		—		229,032
Other government-related securities	—		44,845		—		44,845
Corporate bonds	—		1,568,094		—		1,568,094
Total fixed maturity securities - trading	555,601		2,376,021		28,343		2,959,965
Total fixed maturity securities	1,220,311		25,959,526		777,728		27,957,565
Equity securities	211,023		11,310		70,080		292,413
Other long-term investments (1)	27,757		7,785		19,103		54,645
Short-term investments	101,470		—		—		101,470
Total investments	1,560,561		25,978,621		866,911		28,406,093
Cash	169,775		—		—		169,775
Other assets	—		—		—		—
Assets related to separate accounts
Variable annuity	6,741,959		—		—		6,741,959
Variable universal life	502,617		—		—		502,617
Total assets measured at fair value on a recurring basis	$	8,974,912	$	25,978,621	$	866,911	$	35,820,444
Liabilities:
Annuity account balances (2)	$	—	$	—	$	136,462	$	136,462
Other liabilities (1)	2,727		15,370		437,613		455,710
Total liabilities measured at fair value on a recurring basis	$	2,727	$	15,370	$	574,075	$	592,172

(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 six months ended June 30, 2012.

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 June 30, 2012, the Company held $3.8 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 June 30, 2012, the Company held $649.7 million of Level 3 ABS, which included $65.1 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	1.1%
Par Value	$643.8 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 June 30, 2012, the Company classified approximately $23.0 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 valuation models that consist 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 June 30, 2012, the Company classified approximately $196.6 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 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	66.7%
Weighted-average market yield	4.4%
Weighted-average coupon	5.4%
Par Value	$265.4 million
Weighted-average stated maturity	6.1 years

Equities

As of June 30, 2012, the Company held approximately $91.7 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 financial instruments. Refer to Note 14, Derivative Financial Instruments for additional information related to derivatives. Derivative financial instruments are valued using exchange prices, independent broker quotations, or pricing valuation models, which utilize market data inputs. Excluding embedded derivatives, as of June 30, 2012, 85.3% 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 rate and equity market volatility indices, equity index levels, and treasury rates. The Company performs monthly analysis on derivative valuations that includes both quantitative and qualitative analyses.

Derivative instruments classified as Level 1 generally include futures, credit default swaps, and puts, which are traded on active exchange markets.

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

Derivative instruments classified as Level 3 were embedded derivatives and include at least one significant non-observable 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 long-term investments” and “other liabilities” on the Company’s consolidated 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 age-based mortality that is consistent with 58% of the National Association of Insurance Commissioners 1994 Variable Annuity GMDB Mortality Table. The present value of the cash flows is determined using the discount rate curve, which is based upon 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 assumed and ceded certain blocks of policies under modified coinsurance agreements in which the investment results of the underlying portfolios inure directly to the reinsurers. As a result, these agreements contain embedded derivatives that are reported at fair value. Changes in their fair value are reported in earnings. The investments supporting these agreements are designated as “trading securities”; therefore changes in their fair value are also reported in earnings. The fair value of the embedded derivative is the difference between the policy liabilities (net of policy loans) of $2.7 billion and the fair value of the trading securities of $3.1 billion. As a result, changes in the fair value of the embedded derivatives are largely offset by the changes in fair value of the related investments and each are reported in earnings. The fair value of the embedded derivative is considered a Level 3 valuation due to the unobservable nature of the policy liabilities..

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 at least 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.

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 June 30, 2012, ranged from a one month rate of 0.96%, a 5 year rate of 2.75%, and a 30 year rate of 4.44%. A credit spread component is also included in the calculation to accommodate non-performance risk.

Separate Accounts

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

Valuation of Level 3 Financial Instruments

The following table presents the valuation method for material financial instruments included in Level 3, as well as the unobservable inputs used in the valuation of those financial instruments:

	Fair Value
	As of		Valuation	Unobservable	Range
	June 30, 2012		Technique	Input	(Weighted Average)
	(Dollars In Thousands)
Assets:
Asset-backed securities(1)	$	584,641	Discounted cash flow	Liquidity premium	0.55 - 1.67% (1.15%)
				Paydown rate	7.22 - 12.46% (9.52%)
Other government securities	20,020		Discounted cash flow	Spread over treasury	0.05%
Corporate bonds	107,254		Discounted cash flow	Spread over treasury	0.20 - 4.35% (0.92%)
Liabilities:
Embedded derivatives - GMWB(1)	$	182,262	Actuarial cash flow model	Mortality	58% of 1994 GMDB table
				Lapse	0% - 16%, depending on product/duration/fundedness of guarantee
				Utilization	92% - 100%
				Nonperformance risk	0.71% - 1.93%
Annuity account balances(2)	134,597		Actuarial cash flow model	Asset earned rate	5.89%
				Expenses	$78 - $93 per policy
				Withdrawal rate	2.20%
				Mortality	65% of 1994 GMDB table
				Lapse	2.2% - 55.0%, depending on duration/surrender charge period
				Return on assets	1.50% - 1.85 % depending on surrender charge period
				Nonperformance risk	0.71% - 1.93%

(1)The fair value for the GMWB embedded derivative is presented as a net liability. Excludes modified coinsurance arrangements.

(2)Represents liabilities related to equity indexed annuities.

The chart above excludes Level 3 financial instruments that are valued using broker quotes and those which book value approximates fair value.

The valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company which resulted in $70.3 million of financial instruments being classified as Level 3 as of June 30, 2012. Of the $70.3 million, $65.1 million are other asset backed securities and $5.2 million are equity securities.

In certain cases the Company has determined that book value materially approximates fair value. As of June 30, 2012, the Company held $134.7 million of financial instruments where book value approximates fair value.  Of the $134.7 million, $65.4 million represents equity securities, which are predominantly FHLB stock, and $65.0 million of corporate bonds and $4.3 million of other fixed maturity securities. The $65.0 million of corporate bonds consists of a $40 million surplus note that the Company acquired as part of the reinsurance transaction with Liberty Life and $25.0 million of other corporate bonds.

The asset-backed securities classified as Level 3 are predominantly ARS. A change in the paydown rate (the projected annual rate of principal reduction) of the ARS can significantly impact the fair value of these securities. A decrease in the paydown rate would increase the projected weighted average life of the ARS and increase the sensitivity of the ARS’ fair value to changes in interest rates. An increase in the liquidity premium would result in a decrease in the fair value of the securities, while a decrease in the liquidity premium would increase the fair value of these securities.

The fair value of corporate bonds classified as Level 3 is sensitive to changes in the interest rate spread over the corresponding U.S. Treasury rate. This spread represents a risk premium that is impacted by company specific and market factors. An increase in the spread can be caused by a perceived increase in credit risk of a specific issuer and/or an increase in the overall market risk premium associated with similar securities. The fair values of corporate bonds are sensitive to changes in spread. When holding the treasury rate constant, the fair value of corporate bonds increases when spreads decrease, and increase when spreads decrease.

The GMWB liability is sensitive to changes in the discount rate which includes the Company’s nonperformance risk, volatility, lapse, and mortality assumptions. The volatility assumption is an observable input as it is based on market inputs. The Company’s nonperformance risk, lapse, and mortality are unobservable. An increase in the three unobservable assumptions would result in a decrease in the liability and conversely, if there is a decrease in the assumptions the liability would increase. The liability is also dependent on the assumed policyholder utilization of the GMWB where an increase in assumed utilization would result in an increase in the liability and conversely, if there is a decrease in the assumption, the liability would decrease.

The fair value of the EIA account balance liability is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the EIA account balance liability is sensitive to the asset earned rate and required return on assets. The value of the liability increases with an increase in required return on assets and decreases with an increase in the asset earned rate and conversely, the value of the liability decreases with a decrease in required return on assets and an increase in the asset earned rate.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended June 30, 2012, for which the Company has used significant unobservable inputs (Level 3):

																													Total
																													Gains (losses)
			Total				Total																						included in
			Realized and Unrealized				Realized and Unrealized																						Earnings
			Gains				Losses																						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	$	4	$	—	$	—	$	—		$	—		$	—	$	—		$	—	$	—	$	—	$	—		$	4	$	—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	587,613		—		4,026		—			(6,969		)	—		—			—		—		—		(29		)	584,641		—
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
States, municipals, and political subdivisions	4,275		—		—		—			—			—		—			—		—		—		—			4,275		—
Other government-related securities	20,006		—		18		—			—			—		—			—		—		—		(4		)	20,020		—
Corporate bonds	137,940		—		1,666		—			(683		)	—		(1,956		)	—		—		35,058		120			172,145		—
Total fixed maturity securities - available-for-sale	749,838		—		5,710		—			(7,652		)	—		(1,956		)	—		—		35,058		87			781,085		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	54,961		32		—		(588		)	—			13,342		(3,266		)	—		—		—		578			65,059		(555		)
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
States, municipals and political subdivisions	—		—		—		—			—			—		—			—		—		—		—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	1		—		—		—			—			—		—			—		—		113		—			114		—
Total fixed maturity securities - trading	54,962		32		—		(588		)	—			13,342		(3,266		)	—		—		113		578			65,173		(555		)
Total fixed maturity securities	804,800		32		5,710		(588		)	(7,652		)	13,342		(5,222		)	—		—		35,171		665			846,258		(555		)
Equity securities	70,719		—		25		—			(949		)	—		—			—		—		—		—			69,795		—
Other long-term investments (1)	32,176		600		—		(7,461		)	—			—		—			—		—		—		—			25,315		(6,861		)
Short-term investments	—		—		—		—			—			—		—			—		—		—		—			—		—
Total investments	907,695		632		5,735		(8,049		)	(8,601		)	13,342		(5,222		)	—		—		35,171		665			941,368		(7,416		)
Total assets measured at fair value on a recurring basis	$	907,695	$	632	$	5,735	$	(8,049	)	$	(8,601	)	$	13,342	$	(5,222	)	$	—	$	—	$	35,171	$	665		$	941,368	$	(7,416	)
Liabilities:
Annuity account balances (2)	$	137,238	$	—	$	—	$	1,143		$	—		$	—	$	—		$	103	$	3,887	$	—	$	—		$	134,597	$	—
Other liabilities (1)	389,812		8,748		—		135,523			—			—		—			—		—		—		—			516,587		(126,775		)
Total liabilities measured at fair value on a recurring basis	$	527,050	$	8,748	$	—	$	136,666		$	—		$	—	$	—		$	103	$	3,887	$	—	$	—		$	651,184	$	(126,775	)

(1)Represents certain freestanding and embedded derivatives.

(2)Represents liabilities related to equity indexed annuities.

For the three months ended June 30, 2012, $35.2 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 periods, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of June 30, 2012.

For the three months ended June 30, 2012, there were no transfers out of Level 3.

For the three months ended June 30, 2012, there were no transfers from Level 2 to Level 1.

For the three months ended June 30, 2012, there were no transfers out of Level 1. .

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

																													Total
																													Gains (losses)
			Total				Total																						included in
			Realized and Unrealized				Realized and Unrealized																						Earnings
			Gains				Losses																						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	$	19	$	—	$	—	$	—		$	—		$	—	$	(12	)	$	—	$	—	$	—	$	—		$	7	$	—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	639,407		1,786		1,751		(2,133		)	(3,050		)	109,148		(109,148		)	—		—		—		(15		)	637,746		—
U.S. government-related securities	15,084		—		—		—			(87		)	—		—			—		—		—		3			15,000		—
States, municipals, and political subdivisions	—		—		—		—			—			—		—			—		—		—		—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	64,871		—		1,471		—			(287		)	40,000		(764		)	—		—		12,698		—			117,989		—
Total fixed maturity securities - available-for-sale	719,381		1,786		3,222		(2,133		)	(3,424		)	149,148		(109,924		)	—		—		12,698		(12		)	770,742		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	41,713		329		—		(457		)	—			3,792		(5,060		)	—		—		—		776			41,093		(128		)
U.S. government-related securities	3,384		130		—		—			—			—		—			—		—		—		(2		)	3,512		130
States, municipals and political subdivisions	—		—		—		—			—			—		—			—		—		—		—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	—		—		—		—			—			—		—			—		—		42,041		—			42,041		374
Total fixed maturity securities - trading	45,097		459		—		(457		)	—			3,792		(5,060		)	—		—		42,041		774			86,646		376
Total fixed maturity securities	764,478		2,245		3,222		(2,590		)	(3,424		)	152,940		(114,984		)	—		—		54,739		762			857,388		376
Equity securities	69,038		49		—		—			(745		)	1,962		(49		)	—		—		21		—			70,276		—
Other long-term investments (1)	32,372		1,781		—		(372		)	—			—		—			—		—		—		—			33,781		1,409
Short-term investments	—		—		—		—			—			—		—			—		—		—		—			—		—
Total investments	865,888		4,075		3,222		(2,962		)	(4,169		)	154,902		(115,033		)	—		—		54,760		762			961,445		1,785
Total assets measured at fair value on a recurring basis	$	865,888	$	4,075	$	3,222	$	(2,962	)	$	(4,169	)	$	154,902	$	(115,033	)	$	—	$	—	$	54,760	$	762		$	961,445	$	1,785
Liabilities:
Annuity account balances (2)	$	143,020	$	—	$	—	$	2,104		$	—		$	—	$	—		$	135	$	2,789	$	—	$	—		$	142,470	$	—
Other liabilities (1)	178,386		960		—		38,101			—			—		1,868			—		—		—		—			213,659		(37,141		)
Total liabilities measured at fair value on a recurring basis	$	321,406	$	960	$	—	$	40,205		$	—		$	—	$	1,868		$	135	$	2,789	$	—	$	—		$	356,129	$	(37,141	)

(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 six months ended June 30, 2012, for which the Company has used significant unobservable inputs (Level 3):

																													Total
																													Gains (losses)
			Total				Total																						included in
			Realized and Unrealized				Realized and Unrealized																						Earnings
			Gains				Losses																						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	$	—	$	—	$	—		$	—		$	—	$	(3	)	$	—	$	—	$	—	$	—		$	4	$	—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	614,813		294		4,519		—			(20,898		)	—		(13,850		)	—		—		—		(237		)	584,641		—
U.S. government-related securities	15,000		—		—		—			(1		)	—		(15,000		)	—		—		—		1			—		—
States, municipals, and political subdivisions	—		—		—		—			—			4,275		—			—		—		—		—			4,275		—
Other government-related securities	—		—		18		—			(16		)	20,023		—			—		—		—		(5		)	20,020		—
Corporate bonds	119,565		—		1,849		—			(1,910		)	4		(2,095		)	—		—		54,612		120			172,145		—
Total fixed maturity securities - available-for-sale	749,385		294		6,386		—			(22,825		)	24,302		(30,948		)	—		—		54,612		(121		)	781,085		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	28,343		478		—		(757		)	—			41,047		(5,074		)	—		—		—		1,022			65,059		(278		)
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
States, municipals and political subdivisions	—		—		—		—			—			—		—			—		—		—		—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	—		—		—		—			—			1		—			—		—		113		—			114		—
Total fixed maturity securities - trading	28,343		478		—		(757		)	—			41,048		(5,074		)	—		—		113		1,022			65,173		(278		)
Total fixed maturity securities	777,728		772		6,386		(757		)	(22,825		)	65,350		(36,022		)	—		—		54,725		901			846,258		(278		)
Equity securities	70,080		—		661		—			(950		)	4		—			—		—		—		—			69,795		—
Other long-term investments (1)	19,103		13,673		—		(7,461		)	—			—		—			—		—		—		—			25,315		6,212
Short-term investments	—		—		—		—			—			—		—			—		—		—		—			—		—
Total investments	866,911		14,445		7,047		(8,218		)	(23,775		)	65,354		(36,022		)	—		—		54,725		901			941,368		5,934
Total assets measured at fair value on a recurring basis	$	866,911	$	14,445	$	7,047	$	(8,218	)	$	(23,775	)	$	65,354	$	(36,022	)	$	—	$	—	$	54,725	$	901		$	941,368	$	5,934
Liabilities:
Annuity account balances (2)	$	136,462	$	—	$	—	$	4,217		$	—		$	—	$	—		$	428	$	6,510	$	—	$	—		$	134,597	$	—
Other liabilities (1)	437,613		56,549		—		135,523			—			—		—			—		—		—		—			516,587		(78,974		)
Total liabilities measured at fair value on a recurring basis	$	574,075	$	56,549	$	—	$	139,740		$	—		$	—	$	—		$	428	$	6,510	$	—	$	—		$	651,184	$	(78,974	)

(1)Represents certain freestanding and embedded derivatives.

(2)Represents liabilities related to equity indexed annuities.

For the six months ended June 30, 2012, $54.7 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 periods, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of June 30, 2012.

For the six months ended June 30, 2012, there were no transfers out of Level 3.

For the six months ended June 30, 2012, there were no transfers from Level 2 to Level 1.

For the six months ended June 30, 2012, there were no transfers out of Level 1.

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

																														Total
																														Gains (losses)
			Total				Total																							included in
			Realized and Unrealized				Realized and Unrealized																							Earnings
			Gains				Losses																							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	$	20	$	—	$	12	$	(4	)	$	—		$	—	$	(12	)	$	—	$	—	$	(9	)	$	—		$	7	$	—
Commercial mortgage-backed securities	19,901		—		147		—			—			—		(102		)	—		—		(19,946		)	—			—		—
Other asset-backed securities	641,129		1,786		2,158		(2,133		)	(5,146		)	118,598		(118,598		)	—		—		—			(48		)	637,746		—
U.S. government-related securities	15,109		—		—		—			(115		)	—		—			—		—		—			6			15,000		—
States, municipals, and political subdivisions	—		—		—		—			—			—		—			—		—		—			—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Corporate bonds	64,996		—		1,485		—			(956		)	40,000		(2,121		)	—		—		14,585			—			117,989		—
Total fixed maturity securities - available-for-sale	741,155		1,786		3,802		(2,137		)	(6,217		)	158,598		(120,833		)	—		—		(5,370		)	(42		)	770,742		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Other asset-backed securities	59,925		1,152		—		(1,313		)	—			3,792		(23,952		)	—		—		—			1,489			41,093		71
U.S. government-related securities	3,442		130		—		(56		)	—			—		—			—		—		—			(4		)	3,512		74
States, municipals and political subdivisions	—		—		—		—			—			—		—			—		—		—			—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Corporate bonds	—		—		—		—			—			—		—			—		—		42,041			—			42,041		374
Total fixed maturity securities - trading	63,367		1,282		—		(1,369		)	—			3,792		(23,952		)	—		—		42,041			1,485			86,646		519
Total fixed maturity securities	804,522		3,068		3,802		(3,506		)	(6,217		)	162,390		(144,785		)	—		—		36,671			1,443			857,388		519
Equity securities	66,592		49		445		—			(745		)	3,963		(49		)	—		—		21			—			70,276		—
Other long-term investments (1)	31,765		3,195		—		(1,179		)	—			—		—			—		—		—			—			33,781		2,016
Short-term investments	—		—		—		—			—			—		—			—		—		—			—			—		—
Total investments	902,879		6,312		4,247		(4,685		)	(6,962		)	166,353		(144,834		)	—		—		36,692			1,443			961,445		2,535
Total assets measured at fair value on a recurring basis	$	902,879	$	6,312	$	4,247	$	(4,685	)	$	(6,962	)	$	166,353	$	(144,834	)	$	—	$	—	$	36,692		$	1,443		$	961,445	$	2,535
Liabilities:
Annuity account balances (2)	$	143,264	$	—	$	—	$	4,235		$	—		$	—	$	—		$	314	$	5,343	$	—		$	—		$	142,470	$	—
Other liabilities (1)	190,529		20,308		—		45,306			—			—		1,868			—		—		—			—			213,659		(24,998		)
Total liabilities measured at fair value on a recurring basis	$	333,793	$	20,308	$	—	$	49,541		$	—		$	—	$	1,868		$	314	$	5,343	$	—		$	—		$	356,129	$	(24,998	)

(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 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
		June 30, 2012				December 31, 2011
	Carrying	Carrying				Carrying
	Amounts	Amounts		Fair Values		Amounts		Fair Values
		(Dollars In Thousands)
Assets:
Mortgage loans on real estate	3	$	5,203,999	$	6,116,756	$	5,351,902	$	6,247,959
Policy loans	3	870,775		870,775		879,819		879,819
Liabilities:
Stable value product account balances	3	$	2,676,312	$	2,716,435	$	2,769,510	$	2,855,614
Annuity account balances	3	10,774,666		10,467,208		10,946,848		10,767,892
Mortgage loan backed certificates	3	—		—		19,755		19,893
Non-recourse funding obligations	3	1,156,900		1,078,664		1,248,600		1,060,275

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 June 30, 2012, 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.