PROTECTIVE LIFE INSURANCE CO – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations

   General   

† exposure to the risks of natural and man-made catastrophes, pandemics, malicious acts, terrorist acts and climate change, which could adversely affect our operations and results;

  †          the occurrence of computer viruses, information security breaches, disasters, or other unanticipated events could affect our data processing systems or those of our business partners or service providers and could damage our business and adversely affect our financial condition and results of operations;  

† our results and financial condition may be negatively affected should actual experience differ from management's assumptions and estimates;

† we may not realize our anticipated financial results from our acquisitions strategy;

† we are dependent on the performance of others;

  †          our risk management policies, practices, and procedures could leave us exposed to unidentified or unanticipated risks, which could negatively affect our business or result in losses;  †          our strategies for mitigating risks arising from our day-to-day operations may prove ineffective resulting in a material adverse effect on our results of operations and financial condition;    Financial environment   

† interest rate fluctuations or significant and sustained periods of low interest rates could negatively affect our interest earnings and spread income, or otherwise impact our business;

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

† equity market volatility could negatively impact our business;

† our use of derivative financial instruments within our risk management strategy may not be effective or sufficient;

† credit market volatility or disruption could adversely impact our financial condition or results from operations;

† our ability to grow depends in large part upon the continued availability of capital;

† we could be adversely affected by a ratings downgrade or other negative action by a ratings organization;

† we could be forced to sell investments at a loss to cover policyholder withdrawals;

† disruption of the capital and credit markets could negatively affect our ability to meet our liquidity and financing needs;

† difficult general economic conditions could materially adversely affect our business and results of operations;

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

 †          we could be adversely affected by an inability to access our credit facility;                                           41 

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

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

   Industry   

† we are highly regulated and subject to numerous legal restrictions and regulations;

  †          changes to tax law or interpretations of existing tax law could adversely affect our ability to compete with non-insurance products or reduce the demand for certain insurance products;  

† financial services companies are frequently the targets of legal proceedings, including class action litigation, which could result in substantial judgments;

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

  †          new accounting rules, changes to existing accounting rules, or the grant of permitted accounting practices to competitors could negatively impact us;  †          use of reinsurance introduces variability in our statements of income; 

† our reinsurers could fail to meet assumed obligations, increase rates, or be subject to adverse developments that could affect us;

† our policy claims fluctuate from period to period resulting in earnings volatility;

   Competition   

† we operate in a mature, highly competitive industry, which could limit our ability to gain or maintain our position in the industry and negatively affect profitability;

† our ability to maintain competitive unit costs is dependent upon the level of new sales and persistency of existing business; and

† we may not be able to protect our intellectual property and may be subject to infringement claims.

For more information about the risks, uncertainties, and other factors that could affect our future results, please see Part I, Item 1A of this report.

   CRITICAL ACCOUNTING POLICIES    Our accounting policies inherently require the use of judgments relating to a variety of assumptions and estimates, in particular expectations of current and future mortality, morbidity, persistency, expenses, and interest rates, as well as expectations around the valuations of securities. Because of the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could be materially different from those reported in the consolidated financial statements. A discussion of our various critical accounting policies is presented below.    Evaluation of Other-Than-Temporary Impairments - One of the significant estimates related to available-for-sale securities is the evaluation of investments for other-than-temporary impairments. If a decline in the fair value of an available-for-sale security is judged to be other-than-temporary, the security's basis is adjusted and an other-than-temporary impairment is recognized through a charge in the statement of income. The portion of this other-than-temporary impairment related to credit losses on a security is recognized in earnings, while the non-credit portion, representing the difference between fair value and the discounted expected future cash flows of the security, is recognized within other comprehensive income (loss). The fair value of the other-than-temporarily impaired investment becomes its new cost basis. For fixed maturities, we accrete the new cost basis to par or to the estimated future value over the expected remaining life of the security by adjusting the security's future yields, assuming that future expected cash flows on the securities can be properly estimated.    Determining whether a decline in the current fair value of invested assets is other-than-temporary is both objective and subjective, and can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets. For example, assessing the value of certain investments requires that we                                           42 

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    perform an analysis of expected future cash flows including rates of prepayments. Other investments, such as collateralized mortgage or bond obligations, represent selected tranches of a structured transaction, supported in the aggregate by underlying investments in a wide variety of issuers. Management considers a number of factors when determining the impairment status of individual securities. These include the economic condition of various industry segments and geographic locations and other areas of identified risks. Although it is possible for the impairment of one investment to affect other investments, we engage in ongoing risk management to safeguard against and limit any further risk to our investment portfolio. Special attention is given to correlative risks within specific industries, related parties, and business markets.    For certain securitized financial assets with contractual cash flows, including other asset-backed securities, the ASC Investments-Other Topic requires us to periodically update our best estimate of cash flows over the life of the security. If the fair value of a securitized financial asset is less than its cost or amortized cost and there has been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both timing and amount, an other-than-temporary impairment charge is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. Projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral. In addition, we consider our intent and ability to retain a temporarily depressed security until recovery.    Each quarter we review investments with unrealized losses and test for other-than-temporary impairments. We analyze 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 our intent to sell the security (including a more likely than not assessment of whether we 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 our 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 we do not intend to sell and do 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"), we consider all known market data related to cash flows to estimate future cash flows. When calculating the post impairment cost for corporate debt securities, we consider 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 we intend to sell or expect to be required to sell before recovery are written down to fair value with the change recognized in earnings.    During the years ended December 31, 2011, 2010, and 2009, we recorded pre-tax other-than-temporary impairments of investments of $62.2 million, $75.0 million, and $227.6 million, respectively. Of the $62.2 million of impairments for the year ended December 31, 2011, $47.3 million was recorded in earnings and $14.9 million was recorded in other comprehensive income. Of the $75.0 million of impairments for the year ended December 31, 2010, $41.4 million was recorded in earnings and $33.6 million was recorded in other comprehensive income. Of the $227.6 million of impairment for the year ended December 31, 2009, $179.9 million was recorded in earnings and $47.7 million was recorded in other comprehensive income (loss).    For the year ended December 31, 2011, there were no other-than-temporary impairments related to equity securities and there were $2.5 million and $19.6 million of other-than-temporary impairments related to equity securities for the years ended December 31, 2010 and 2009, respectively. For the years ended December 31, 2011,                                           43 

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2010, and 2009, there were $62.2 million, $72.5 million, and $208.0 million of other-than-temporary impairments related to debt securities, respectively.

    For the year ended December 31, 2011, other-than-temporary impairments related to debt securities that we do not intend to sell and do not expect to be required to sell prior to recovering amortized cost were $52.7 million, with $37.8 million of credit losses recorded on debt securities in earnings and $14.9 million of non-credit losses recorded in other comprehensive income. During the same period, other-than-temporary impairments related to debt securities that we intend to sell or expect to be required to sell were $9.5 million and were recorded in earnings. For the year ended December 31, 2010, there were no other-than-temporary impairments related to debt securities or equity securities that we intend to sell or expect to be required to sell. For the year ended December 31, 2009, there were $30.4 million of other-than-temporary impairments related to debt securities that we intend to sell or expect to be required to sell.    Our specific accounting policies related to our invested assets are discussed in Note 2, Summary of Significant Accounting Policies, and Note 4, Investment Operations, to the consolidated financial statements. As of December 31, 2011, we held $25.0 billion of available-for-sale investments, including $4.1 billion in investments with a gross unrealized loss of $447.4 million.    Derivatives - We utilize a risk management strategy that incorporates the use of derivative financial instruments to reduce exposure to interest rate risk, inflation risk, currency exchange risk, volatility risk, foreign exchange, and equity market risk. Assessing the effectiveness of the hedging programs and evaluating the carrying values of the related derivatives often involve a variety of assumptions and estimates. We employ a variety of methods for determining the fair value of our derivative instruments. The fair values of interest rate related derivatives are based upon industry standard models which calculate the present-value of the projected cash flows of the derivatives using current and implied future market conditions. These models include market-observable estimates of volatility and interest rates in the determination of fair value. The use of different assumptions may have a material effect on the estimated fair value amounts, as well as the amount of reported net income. In addition, measurements of ineffectiveness of hedging relationships are subject to interpretations and estimations, and any differences may result in material changes to our results of operations. As of December 31, 2011, the fair value of derivatives reported on our balance sheet in "other long-term investments" and "other liabilities" was $54.6 million and $455.7 million, respectively.    Reinsurance - For each of our reinsurance contracts, we must determine if the contract provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. We must review all contractual features, particularly those that may limit the amount of insurance risk to which we are subject or features that delay the timely reimbursement of claims. If we determine that the possibility of a significant loss from insurance risk will occur only under remote circumstances, we record the contract under a deposit method of accounting with the net amount payable/receivable reflected in other reinsurance assets or liabilities on our consolidated balance sheets. Fees earned on the contracts are reflected as other revenues, as opposed to premiums, in our consolidated statements of income.    Our reinsurance is ceded to a diverse group of reinsurers. The collectability of reinsurance is largely a function of the solvency of the individual reinsurers. We perform periodic credit reviews on our reinsurers, focusing on, among other things, financial capacity, stability, trends, and commitment to the reinsurance business. We also require assets in trust, letters of credit, or other acceptable collateral to support balances due from reinsurers not authorized to transact business in the applicable jurisdictions. Despite these measures, a reinsurer's insolvency, inability, or unwillingness to make payments under the terms of a reinsurance contract could have a material adverse effect on our results of operations and financial condition. As of December 31, 2011, our third party reinsurance receivables amounted to $5.5 billion. These amounts include ceded reserve balances and ceded benefit payments.    We account for reinsurance as required by Financial Accounting Standards Board ("FASB") guidance under the ASC Financial Services Topic as applicable. In accordance with this guidance, costs for reinsurance are amortized as a level percentage of premiums for traditional life products and a level percentage of estimated gross profits for universal life products. Accordingly, ceded reserve and deferred acquisition cost balances are established using methodologies consistent with those used in establishing direct policyholder reserves and deferred acquisition costs. Establishing these balances requires the use of various assumptions including investment returns, mortality, persistency,                                           44  --------------------------------------------------------------------------------

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and expenses. The assumptions made for establishing ceded reserves and ceded deferred acquisition costs are consistent with those used for establishing direct policyholder reserves and deferred acquisition costs.

    Assumptions are also made regarding future reinsurance premium rates and allowance rates. Assumptions made for mortality, persistency, and expenses are consistent with those used for establishing direct policyholder reserves and deferred acquisition costs. Assumptions made for future reinsurance premium and allowance rates are consistent with rates provided for in our various reinsurance agreements. For certain of our reinsurance agreements, premium and allowance rates may be changed by reinsurers on a prospective basis, assuming certain contractual conditions are met (primarily that rates are changed for all companies with which the reinsurer has similar agreements).  We do not anticipate any changes to these rates and, therefore, have assumed continuation of these non-guaranteed rates. To the extent that future rates are modified, these assumptions would be revised and both current and future results would be affected. For traditional life products, assumptions are not changed unless projected future revenues are expected to be less than future expenses. For universal life products, assumptions are periodically updated whenever actual experience and/or expectations for the future differ from that assumed. When assumptions are updated, changes are reflected in the income statement as part of an "unlocking" process. For the year ended December 31, 2011, there were no significant changes to reinsurance premium and allowance rates that would require an update of assumptions and subsequent unlocking of balances.    Deferred acquisition costs and value of business acquired - We incur significant costs in connection with acquiring new insurance business. These costs, which vary with and are primarily related to the production of new business and coinsurance of blocks of policies, are deferred and amortized over future periods. The recovery of such costs is dependent on the future profitability of the related policies. The amount of future profit is dependent principally on investment returns, mortality, morbidity, persistency, and expenses to administer the business and certain economic variables, such as inflation. These costs are amortized over the expected lives of the contracts, based on the level and timing of either gross profits or gross premiums, depending on the type of contract. Revisions to estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in the impairment of the asset and a charge to income if estimated future profits are less than the unamortized deferred amounts. As of December 31, 2011, we had deferred acquisition costs ("DAC")/value of business acquired ("VOBA") of $4.0 billion.    We had a DAC/VOBA asset of approximately $471.0 million related to our variable annuity product line with an account balance of $9.0 billion as of December 31, 2011. These amounts include $44.0 million and $2.3 billion, respectively, of VOBA asset and account balances associated with the variable annuity business of the Chase Insurance Group, which consisted of five insurance companies that manufactured and administered traditional life insurance and annuity products and four related non-insurance companies (which collectively are referred to as the "Chase Insurance Group"), which has been 100% reinsured to Commonwealth Annuity and Life Insurance Company (formerly known as Allmerica Financial Life Insurance and Annuity Company) ("CALIC"), under a modified coinsurance agreement. We monitor the rate of amortization of DAC asset related to our variable annuity product line. Our monitoring methodologies employ varying assumptions about how much and how quickly the stock markets will appreciate. The primary assumptions used to project future profits as part of the analysis include: a long-term equity market growth rate of 8%, reversion to the mean methodology with no cap, reversion to the mean period of 10 years, and an amortization period of 30 years.    We periodically review and update as appropriate our key assumptions on products using the ASC Financial Services-Insurance Topic, including future mortality, expenses, lapses, premium persistency, investment yields, and interest spreads. Changes to these assumptions result in adjustments which increase or decrease DAC amortization and/or benefits and expenses. The periodic review and updating of assumptions is referred to as "unlocking".    In conjunction with the acquisition of a block of insurance policies or investment contracts, a portion of the purchase price is assigned to the right to receive future gross profits from the acquired insurance policies or investment contracts. This intangible asset, called VOBA, represents the actuarially estimated present value of future cash flows from the acquired policies. The estimated present value of future cash flows is based on certain assumptions, including mortality, persistency, expenses, and interest rates that the Company expects to experience in future years. These assumptions are to be best estimates and are periodically updated whenever actual experience and/or expectations for the future change from that assumed. We amortize VOBA in proportion to gross premiums for traditional life products                                           45  --------------------------------------------------------------------------------

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    and in proportion to expected gross profits for interest sensitive products, including accrued interest credited to account balances of up to approximately 6.65%. VOBA is subject to annual recoverability testing.    Goodwill - Accounting for goodwill requires an estimate of the future profitability of the associated lines of business to assess the recoverability of the capitalized acquisition goodwill. We evaluate the carrying value of goodwill at the segment (or reporting unit) level at least annually and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: 1) a significant adverse change in legal factors or in business climate, 2) unanticipated competition, or 3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, we first determine through qualitative analysis whether relevant events and circumstances indicate that it is more likely than not that segment goodwill balances are impaired as of the testing date. If it is determined that it is more likely than not that impairment exists, we compare our estimate of the fair value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. We utilize a fair value measurement (which includes a discounted cash flows analysis) to assess the carrying value of the reporting units in consideration of the recoverability of the goodwill balance assigned to each reporting unit as of the measurement date. Our material goodwill balances are attributable to certain of our operating segments (which are each considered to be reporting units). The cash flows used to determine the fair value of our reporting units are dependent on a number of significant assumptions. Our estimates, which consider a market participant view of fair value, are subject to change given the inherent uncertainty in predicting future results and cash flows, which are impacted by such things as policyholder behavior, competitor pricing, capital limitations, new product introductions, and specific industry and market conditions. Additionally, the discount rate used is based on our judgment of the appropriate rate for each reporting unit based on the relative risk associated with the projected cash flows. As of December 31, 2011 and 2010, we performed our annual evaluation of goodwill and determined that no adjustment to impair goodwill was necessary. As of December 31, 2011, we had goodwill of $86.9 million.   

While continued deterioration of or adverse market conditions for certain businesses may have a significant impact on the fair value of our reporting units, in our view, the key assumptions used in our estimates of fair value of our reporting units continue to be adequate.

    Insurance liabilities and reserves - Establishing an adequate liability for our obligations to policyholders requires the use of assumptions. Estimating liabilities for future policy benefits on life and health insurance products requires the use of assumptions relative to future investment yields, mortality, morbidity, persistency, and other assumptions based on our historical experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation. Determining liabilities for our property and casualty insurance products also requires the use of assumptions, including the frequency and severity of claims, and the effectiveness of internal processes designed to reduce the level of claims. Our results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. Our reserve assumptions and estimates require significant judgment and, therefore, are inherently uncertain. We cannot determine with precision the ultimate amounts that we will pay for actual claims or the timing of those payments. In addition, effective January 1, 2007, we adopted FASB guidance related to our equity indexed annuity product. FASB guidance under the ASC Derivatives and Hedging Topic requires that we fair value the liability related to this block of business at each balance sheet date, with changes in the fair value recorded through earnings. Changes in this liability may be significantly affected by interest rate fluctuations. As a result of the adoption of this guidance, we made certain modifications to the method used to determine fair value for our liability related to equity indexed annuities to take into consideration factors such as policyholder behavior, credit spreads, and other market considerations. As of December 31, 2011, we had total policy liabilities and accruals of $22.1 billion.    Guaranteed minimum death benefits - We establish liabilities for guaranteed minimum death benefits ("GMDB") on our variable annuity products. The methods used to estimate the liabilities employ assumptions about mortality and the performance of equity markets. We assume age-based mortality that is consistent with 61% of the National Association of Insurance Commissioners 1994 Variable Annuity GMDB Mortality Table. Future declines in the equity market would increase our GMDB liability. Differences between the actual experience and the assumptions used result in variances in profit and could result in losses. Our GMDB as of December 31, 2011, is subject to a dollar-for-dollar reduction upon withdrawal of related annuity deposits on contracts issued prior to January 1, 2003. As of December 31, 2011, the GMDB liability was $9.8 million.                                           46  --------------------------------------------------------------------------------

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    Guaranteed minimum withdrawal benefits - We establish liabilities for guaranteed minimum withdrawal benefits ("GMWB") on our variable annuity products. The GMWB is valued in accordance with FASB guidance under the ASC Derivatives and Hedging Topic which utilizes the valuation technique prescribed by the ASC Fair Value Measurements and Disclosures Topic, which requires the liability to be marked-to-market using current implied volatilities for the equity indices. The methods used to estimate the liabilities employ assumptions about mortality, lapses, policyholder behavior, equity market returns, interest rates, and market volatility. We assume age-based mortality that is consistent with 61% of the National Association of Insurance Commissioners 1994 Variable Annuity GMDB Mortality Table. Differences between the actual experience and the assumptions used result in variances in profit and could result in losses. As of December 31, 2011, our net GMWB liability held was $147.1 million.    Pension and Other Postretirement Benefits - Determining PLC's obligations to employees under its pension plans and other postretirement benefit plans requires the use of assumptions. The calculation of the liability and expense related to PLC's benefit plans incorporates the following significant assumptions:    †          appropriate weighted average discount rate;  †          estimated rate of increase in the compensation of employees;  †          expected long-term rate of return on the plan's assets.   

PLC allocates the costs of the plan based on a percentage of payroll. We incurred total benefit costs of $12.4 million during 2011 for pension and other postretirement benefits plans.

See Note 14, Employee Benefit Plans, to the consolidated financial statements for further information.

    Stock-Based Payments - Accounting for stock-based compensation plans may require the use of option pricing models to estimate PLC's obligations. Assumptions used in such models relate to equity market movements and volatility, the risk-free interest rate at the date of grant, expected dividend rates, and expected exercise dates. The cost of the plans to us from PLC is not material to our overall financial position. See Note 13, Stock-Based Compensation, to the consolidated financial statements for further information.    Deferred taxes and uncertain tax positions - Deferred federal income taxes arise from the recognition of temporary differences between the basis of assets and liabilities determined for financial reporting purposes and the basis determined for income tax purposes. Such temporary differences are principally related to the marking to market value of investment assets, the deferral of policy acquisition costs, and the provision for future policy benefits and expenses. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when such differences reverse. We test the value of deferred tax assets for impairment on a quarterly basis at the taxpaying- component level within each tax jurisdiction. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized as future reductions of current taxes. In determining the need for a valuation allowance we consider carryback capacity, reversal of existing temporary differences, future taxable income, and tax planning strategies. The determination of any valuation allowance requires management to make certain judgments and assumptions regarding future operations that are based on our historical experience and our expectations of future performance.    The ASC Income Taxes Topic prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an expected or actual uncertain income tax return position and provides guidance on disclosure. Additionally, this interpretation requires, in order for us to recognize a benefit in our financial statements from such a position, that there must be a greater than 50 percent chance of success with the relevant taxing authority with regard to that position. In making this analysis, we assume that the taxing authority is fully informed of all of the facts regarding any issue. Our judgments and assumptions regarding uncertain tax positions are subject to change over time due to the enactment of new legislation, the issuance of revised or new regulations by the various tax authorities, and the issuance of new rulings by the courts.    Contingent liabilities - The assessment of potential obligations for tax, regulatory, and litigation matters inherently involves a variety of estimates of potential future outcomes. We make such estimates after consultation with our advisors and a review of available facts. However, there can be no assurance that future outcomes will not differ from management's assessments.                                           47  --------------------------------------------------------------------------------

   Table of Contents    RESULTS OF OPERATIONS    In the following discussion, segment operating income (loss) is defined as income before income tax excluding net realized investment gains and losses (net of the related DAC and VOBA and participating income from real estate ventures), and the cumulative effect of change in accounting principle. Periodic settlements of derivatives associated with corporate debt and certain investments and annuity products are included in realized gains and losses but are considered part of segment operating income (loss) because the derivatives are used to mitigate risk in items affecting segment operating income (loss). Management believes that segment operating income (loss) provides relevant and useful information to investors, as it represents the basis on which the performance of our business is internally assessed. Although the items excluded from segment operating income (loss) may be significant components in understanding and assessing our overall financial performance, management believes that segment operating income (loss) enhances an investor's understanding of our results of operations by highlighting the operating income (loss) usually attributable to the normal, recurring operations of our business. However, segment operating income (loss) should not be viewed as a substitute for accounting principles generally accepted in the United States of America ("GAAP") net income. In addition, our segment operating income (loss) measures may not be comparable to similarly titled measures reported by other companies.    We periodically review and update as appropriate our key assumptions on products using the ASC Financial Services-Insurance Topic, including future mortality, expenses, lapses, premium persistency, investment yields, interest spreads, and equity market returns. Changes to these assumptions result in adjustments which increase or decrease DAC amortization and/or benefits and expenses. The periodic review and updating of assumptions is referred to as "unlocking".                                           48  --------------------------------------------------------------------------------

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

                                             For The Year Ended December 31,             Change                                           2011           2010          2009       2011     2010                                                (Dollars In Thousands) Segment Operating Income (Loss) Life Marketing                        $    116,261    $  147,101    $  139,385    (21.0 )%   5.5 % Acquisitions                               157,393       111,143       133,760     41.6    (16.9 ) Annuities                                  109,875        49,847        53,258      n/m     (6.4 ) Stable Value Products                       56,780        39,207        61,963     44.8    (36.7 ) Asset Protection                            16,147        22,673        16,114    (28.8 )   40.7 Corporate and Other                          6,985       (13,458 )      92,238      n/m      n/m Total segment operating income             463,441       356,513       496,718     30.0    (28.2 ) Realized investment gains (losses) - investments(1)(3)                        197,692       111,915       

129,021

 Realized investment gains (losses) - derivatives(2)                          (149,182 )     (81,161 )    (200,705 ) Income tax expense                        (164,517 )    (129,029 )    (147,563 ) Net income                            $    347,434    $  258,238    $  277,471     34.5     (6.9 )  (1) Realized investment gains (losses) - investments(3)             $    200,432    $  117,056    $  

123,818

 Less: related amortization of DAC            2,740         5,141        

(5,203 )

                                       $    197,692    $  111,915    $  

129,021

  (2) Realized investment gains (losses) - derivatives                $   (155,005 )  $ (144,438 )  $ (176,880 ) Less: settlements on certain interest rate swaps                              -           168         

1,205

 Less: derivative activity related to certain annuities                        (5,823 )     (63,445 )      22,620                                       $   (149,182 )  $  (81,161 )  $ (200,705 )    

(3) Includes other-than-temporary impairments of $47.3 million, $41.4 million, and $179.9 million for the years ended December 31, 2011, 2010, and 2009, respectively.

For The Year Ended December 31, 2011 as compared to The Year Ended December 31, 2010

    Net income for the year ended December 31, 2011, included a $106.9 million, or 30.0%, increase in segment operating income. The increase was primarily related to a $46.3 million increase in the Acquisitions segment, a $60.0 million increase in the Annuities segment, a $17.6 million increase in the Stable Value Products segment, and a $20.4 million improvement in the Corporate and Other segment. These increases were partially offset by a $30.8 million decrease in the Life Marketing segment and a $6.5 million decrease in the Asset Protection segment.    We experienced net realized gains of $45.4 million for the year ended December 31, 2011, as compared to net realized losses of $27.4 million for the year ended December 31, 2010. The gains realized for the year ended December 31, 2011, were primarily related to $89.2 million of gains related to investment securities sale activity and $29.9 million of gains related to the net activity of the modified coinsurance portfolio. Partially offsetting these gains were losses of $47.3 million for other-than-temporary impairment credit-related losses, a $14.1 million loss on interest rate caps and swaps, net losses of $5.8 million of derivatives related to variable annuity contracts, and a $6.4 million loss related to other investment and derivative activity.    †          Life Marketing segment operating income was $116.3 million for the year ended December 31, 2011, representing a decrease of $30.8 million, or 21.0%, from the year ended December 31, 2010. The decrease was primarily due to a negative change in unlocking of $22.0 million and higher operating expenses, including interest expense associated with programs designed to fund traditional life statutory reserves. These decreases were partially offset by higher investment income associated with growth in reserve balances.    †          Acquisitions segment operating income was $157.4 million for the year ended December 31, 2011, an increase of $46.3 million, or 41.6%, as compared to the year ended December 31, 2010, primarily due to the addition of                                           49  --------------------------------------------------------------------------------

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    the United Investors Life Insurance Company ("United Investors") acquisition and the Liberty Life Insurance Company ("Liberty Life") coinsurance transaction. The United Investors and Liberty Life transactions added $24.0 million and $35.1 million, respectively, to segment operating income. This was partly offset by less favorable mortality and the expected runoff in the older acquired blocks.    †          Annuities segment operating income was $109.9 million for the year ended December 31, 2011, as compared to $49.8 million for the year ended December 31, 2010, an increase of $60.0 million. This variance included a favorable change of $32.7 million related to derivatives associated with certain variable annuity ("VA") benefits and a favorable change of $6.9 million in single premium immediate annuities ("SPIA") mortality results. The remainder of the increase is attributable to higher VA fees, higher spreads, and growth in the single premium deferred annuity ("SPDA") line, partially offset by increased DAC amortization, higher operating expenses, and unfavorable changes in unlocking.    †          Stable Value Products segment operating income was $56.8 million and increased $17.6 million, or 44.8%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. The increase in operating earnings resulted from higher operating spreads and lower expenses offset by a decline in average account values. We also called certain retail notes, which has accelerated DAC amortization of $3.4 million on those called contracts for the year ended December 31, 2011 as compared to $2.7 million for the year ended December 31, 2010. The operating spread increased 97 basis points to 214 basis points during the year ended December 31, 2011, as compared to an operating spread of 117 basis points for the year ended December 31, 2010.    †          Asset Protection segment operating income was $16.1 million, representing a decrease of $6.5 million, or 28.8%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. Service contract earnings decreased $6.5 million, or 58.5%, primarily related to higher commissions and reduced investment income due to lower balances and yields. Earnings from other products, including the GAP product and non-core lines, decreased $3.2 million, or 21.9%, primarily due to a $7.8 million excess reserve release in the first quarter of 2010 related to the runoff Lender's Indemnity line of business. Credit insurance earnings increased $3.2 million primarily due to lower loss ratios and lower expenses.    †          Corporate and Other segment operating income was $7.0 million for the year ended December 31, 2011, as compared to an operating loss of $13.5 million for the year ended December 31, 2010. The increase was primarily due to a $30.1 million favorable variance related to gains on the repurchase of non-recourse funding obligations. For the year ended December 31, 2011, $35.5 million of pre-tax gains were generated by repurchases as compared to $5.4 million of pre-tax gains generated during the year ended December 31, 2010. In addition, during 2011, we recorded $8.5 million of pre-tax earnings in the segment relating to the settlement of a dispute with respect to certain investments. Partially offsetting these favorable variances was a $9.2 million increase in interest expense related to non-recourse funding obligations.    

For The Year Ended December 31, 2010 as compared to The Year Ended December 31, 2009

    Net income for the year ended December 31, 2010, included a $140.2 million, or 28.2%, decrease in segment operating income. The decrease was primarily related to a $105.7 million decrease in the Corporate and Other segment, a $22.8 million decrease in the Stable Value Products segment, a $22.6 million decrease in the Acquisition segment, and a $3.4 million decrease in the Annuities segment. These decreases were partially offset by a $7.7 million increase in the Life Marketing segment and a $6.6 million increase in the Asset Protection segment. In addition, the Corporate and Other segment had a decrease in other income due to a gain of $126.3 million for the repurchase of surplus notes, net of deferred issue costs for the year ended December 31, 2009.    We experienced net realized losses of $27.4 million for the year ended December 31, 2010, as compared to net realized losses of $53.1 million for the year ended December 31, 2009. The losses realized for the year ended December 31, 2010, were primarily caused by a loss of $54.0 million related to equity and interest rate futures that were entered into to mitigate risk related to certain guaranteed minimum variable annuity benefits, a loss of $5.8 million related to GMWB embedded derivative valuation changes, $41.4 million of other-than-temporary impairment credit-                                           50  --------------------------------------------------------------------------------

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    related losses, and mark-to-market losses of $8.4 million on interest rate swaps. Offsetting these losses were $41.4 million of gains related to the net activity related to modified coinsurance portfolio and derivative activity and $58.3 million of gains related to investment securities sales activity.    †          Life Marketing segment operating income was $147.1 million for the year ended December 31, 2010, representing an increase of $7.7 million, or 5.5%, from the year ended December 31, 2009. The increase was primarily due to more favorable mortality results and higher investment income associated with growth in reserves, partially offset by higher operating expenses.    †          Acquisitions segment operating income was $111.1 million for the year ended December 31, 2010, a decrease of $22.6 million, or 16.9%, as compared to the year ended December 31, 2009, primarily due to the expected runoff in the blocks of business, higher operating expenses, and a planned one-time payment of $5.2 million in the fourth quarter of 2010 to complete insourcing the administration of a block of business.    †          Annuities segment operating income was $49.8 million for the year ended December 31, 2010, as compared to $53.3 million for the year ended December 31, 2009, a decrease of $3.4 million. This change included an unfavorable $42.5 million variance related to fair value changes, of which $3.0 million was related to the EIA product and $39.5 million was related to derivatives associated with the VA GMWB rider caused primarily by changes in equity markets and lower interest rates. The remaining favorable $45.9 million variance in operating income was partly driven by a $19.3 million unlocking charge recorded within the VA line during the year ended December 31, 2009. Other items accounted for the remainder of the variance, including a $7.0 million reduction in death benefit payments on the VA line, a $9.6 million increase in earnings related to wider spreads and average account value growth of 47.6% in the SPDA line, and a $4.4 million increase in EIA earnings excluding fair value.    †          Stable Value Products segment operating income was $39.2 million and decreased $22.8 million, or 36.7%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The decrease in operating earnings resulted from a decline in average account values and lower operating spreads. In addition, no income was generated from the early retirement of funding agreements backing medium-term notes for the year ended December 31, 2010, as compared with $1.9 million for the year ended December 31, 2009. We also called certain retail notes, which have accelerated DAC amortization of $2.7 million on those called contracts. The operating spread decreased 30 basis points to 117 basis points during the year ended December 31, 2010, as compared to an operating spread of 147 basis points for the year ended December 31, 2009.    †          Asset Protection segment operating income was $22.7 million, representing an increase of $6.6 million, or 40.7%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. Credit insurance earnings decreased $4.8 million as compared to the prior year, primarily due to unfavorable loss experience, lower investment income, and a $0.9 million litigation settlement expense. Service contract earnings decreased $0.1 million, or 0.6% as compared to the prior year end. Earnings from other products increased $11.4 million for the year ended December 31, 2010, as compared to the prior year end. The increase resulted primarily from a $7.8 million excess reserve release in the first quarter of 2010 related to the final settlement in the runoff Lender's Indemnity line of business. Favorable loss experience in the GAP product line also contributed to the increase.    †          Corporate and Other segment operating loss was $13.5 million for the year ended December 31, 2010, as compared to income of $92.2 million for the year ended December 31, 2009. The variance was primarily due to a decrease in other income from a $126.3 million pre-tax gain on the repurchase of surplus notes, net of deferred issue costs that occurred in 2009, which was partially offset by a $5.4 million pre-tax gain on the repurchase of non-recourse funding obligations that was recognized during the year ended December 31, 2010. The segment experienced a negative variance related to mark-to-market adjustments on a portfolio of securities designated for trading. The trading portfolio accounted for a decrease of $36.5 million as compared to the prior year. Partially offsetting the decrease was growth in the segment's investment income due to deploying liquidity and yield improvements.                                           51  --------------------------------------------------------------------------------

   Table of Contents    Life Marketing    Segment results of operations   

Segment results were as follows:

                                         For The Year Ended December 31,                Change                                     2011           2010           2009          2011        2010                                           (Dollars In Thousands) REVENUES Gross premiums and policy fees                             $ 1,591,581    $ 1,575,764    $ 1,565,144         1.0 %       0.7 % Reinsurance ceded                   (846,762 )     (839,512 )     (911,703 )       0.9        (7.9 ) Net premiums and policy fees         744,819        736,252        653,441         1.2        12.7 Net investment income                446,014        387,953        361,921        15.0         7.2 Other income                           3,094          3,719            959       (16.8 )       n/m Total operating revenues           1,193,927      1,127,924      1,016,321         5.9        11.0 BENEFITS AND EXPENSES Benefits and settlement expenses                             978,098        921,765        782,372         6.1        17.8 Amortization of deferred policy acquisition costs             120,884         91,363        144,125        32.3       (36.6 ) Other operating expenses             (21,316 )      (32,305 )      (49,561 )     (34.0 )     (34.8 ) Total benefits and expenses        1,077,666        980,823        876,936         9.9        11.8 INCOME BEFORE INCOME TAX             116,261        147,101        139,385       (21.0 )       5.5 OPERATING INCOME                 $   116,261    $   147,101    $   139,385       (21.0 )       5.5                                            52 

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

                                          For The Year Ended December 31,                Change                                    2011             2010             2009          2011     2010                                            (Dollars In Thousands) Sales By Product Traditional                    $       3,846    $      50,101    $      96,932     (92.3 )% (48.3 )% Universal life                       117,947          113,168           62,492       4.2     81.1 BOLI                                  11,363            8,098            3,176      40.3      n/m                                $     133,156    $     171,367    $     162,600     (22.3 )    5.4 Sales By Distribution Channel Brokerage general agents       $      70,952    $     101,588    $     101,381     (30.2 )    0.2 Independent agents                    16,147           24,838           27,765     (35.0 )  (10.5 ) Stockbrokers / banks                  31,677           36,633           30,131     (13.5 )   21.6 BOLI / other                          14,380            8,308            3,323      73.1      n/m                                $     133,156    $     171,367    $     162,600     (22.3 )    5.4 Average Life Insurance In-force(1) Traditional                    $ 476,813,161    $ 494,700,220    $ 489,818,145      (3.6 )    1.0 Universal life                    67,823,606       55,831,192       53,164,320      21.5      5.0                                $ 544,636,767    $ 550,531,412    $ 542,982,465      (1.1 )    1.4 Average Account Values Universal life                 $   6,037,896    $   5,563,162    $   5,352,068       8.5      3.9 Variable universal life              364,803          331,183          269,460      10.2     22.9                                $   6,402,699    $   5,894,345    $   5,621,528       8.6      4.9  Traditional Life Mortality Experience(2)                             91 %             89 %             95 %    

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(1) Amounts are not adjusted for reinsurance ceded.

(2) Represents the incurred claims as a percentage of original pricing expected.

    Operating expenses detail    

Other operating expenses for the segment were as follows:

                                        For The Year Ended December 31,               Change                                      2011           2010         2009         2011        2010                                          (Dollars In Thousands)  First year commissions           $    159,430    $  207,899    $ 187,549       (23.3 )%     10.9 % Renewal commissions                    35,898        36,509       37,492        (1.7 )      (2.6 ) Marketing Companies                         -             -            -         n/m         n/m First year ceding allowances           (8,294 )      (9,418 )    (13,994 )     (11.9 )     (32.7 ) Renewal ceding allowances            (172,493 )    (188,956 )   (225,880 )      (8.7 )     (16.3 ) General & administrative              155,282       162,442      155,705        (4.4 )       4.3 Taxes, licenses, and fees              35,480        34,218       32,096         3.7         6.6 Other operating expenses incurred                              205,303       242,694      172,968       (15.4 )      40.3 Less: commissions, allowances & expenses capitalized                          (226,619 )    (274,999 )   (222,529 )     (17.6 )      23.6 Other operating expenses         $    (21,316 )  $  (32,305 )  $ (49,561 )     (34.0 )     (34.8 )                                            53 

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For The Year Ended December 31, 2011 as compared to The Year Ended December 31, 2010

    Segment operating income    Operating income was $116.3 million for the year ended December 31, 2011, representing a decrease of $30.8 million, or 21.0%, from the year ended December 31, 2010. The decrease was primarily due to a negative change in unlocking of $22.0 million and higher operating expenses, including interest expense associated with programs designed to fund traditional life statutory reserves. These decreases were partially offset by higher investment income associated with growth in reserve balances.    Operating revenues    Total revenues for the year ended December 31, 2011, increased $66.0 million, or 5.9%, as compared to the year ended December 31, 2010. This increase was the result of higher premiums and policy fees and higher investment income due to increases in net in-force reserves.    Net premiums and policy fees    Net premiums and policy fees increased by $8.6 million, or 1.2%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily due to continued growth in universal life in-force business policy fees, offset by decreases in traditional life premium.    Net investment income    Net investment income in the segment increased $58.1 million, or 15.0%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. Increased retained universal life reserves led to increased investment income of $31.0 million for the year ended December 31, 2011, as compared to the year ended December 31, 2010. Increases in BOLI reserves led to higher BOLI investment income of $4.8 million in the same period. Traditional life investment income increased $21.3 million caused by growth in retained reserves and more favorable yields.    Other income   

Other income decreased $0.6 million, or 16.8%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. The decrease relates primarily to fees on variable universal life funds.

Benefits and settlement expenses

    Benefits and settlement expenses increased by $56.3 million, or 6.1%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010, due to growth in retained universal life insurance in-force, higher credited interest on universal life and BOLI products resulting from increases in account values, and higher claims from growth in the universal life block and continued maturing of the traditional life block. In 2011, universal life and BOLI unlocking was largely driven by assumption changes regarding lapses, mortality, expenses, investment yield, credited interest on fund value, and other items. The impact of these changes increased benefits and settlement expenses $25.2 million. In 2010, universal life and BOLI unlocking increased benefit expenses $27.5 million.    Amortization of DAC    DAC amortization increased $29.5 million, or 32.3%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily due to differing impacts of unlocking. In 2011, universal life and BOLI unlocking decreased amortization $7.0 million, as compared to a decrease of $31.2 million in 2010. The net increase to amortization for 2011 as compared to 2010 was $24.2 million.                                           54 

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   Table of Contents    Other operating expenses    Other operating expenses increased $11.0 million for the year ended December 31, 2011, as compared to the year ended December 31, 2010. This increase reflect a reduction in reinsurance allowances and a $10.3 million increase in interest expense associated with a letter of credit facility designed to fund traditional life statutory reserves. This was partly offset by lower general administrative expenses.    Sales    Sales for the segment decreased $38.2 million, or 22.3%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. Traditional life sales decreased $46.3 million, or 92.3%, as we focused sales efforts on other lines. A new universal life product was introduced in 2010 which has substantially replaced traditional life sales for new products. Universal life sales increased $4.8 million, or 4.2%, due to increased focus on the product line, including the introduction of new products.    

For The Year Ended December 31, 2010 as compared to The Year Ended December 31, 2009

    Segment operating income    

Operating income was $147.1 million for the year ended December 31, 2010, representing an increase of $7.7 million, or 5.5%, from the year ended December 31, 2009. The increase was primarily due to more favorable mortality results and higher investment income associated with growth in reserves, partially offset by higher operating expenses.

   Operating revenues    Total revenues for the year ended December 31, 2010, increased $111.6 million, or 11.0%, as compared to the year ended December 31, 2009. This increase was the result of higher premiums and policy fees and higher investment income due to increases in net in-force reserves.    Net premiums and policy fees    Net premiums and policy fees increased by $82.8 million, or 12.7%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009, primarily due to an increase in retention levels on certain traditional life products and continued growth in universal life in-force business. Our maximum retention level for newly issued traditional life and universal life products is generally $2,000,000.    Net investment income    Net investment income in the segment increased $26.0 million, or 7.2%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. Increased retained universal life reserves led to increased investment income of $20.7 million for the year ended December 31, 2010, as compared to the year ended December 31, 2009. Decreases in BOLI reserves in some quarters and generally lower yields led to lower BOLI investment income of $4.0 million in the same periods. In addition, traditional life investment income increased $7.9 million between 2009 and 2010. Growth in retained reserves explained most of the traditional life increase. Also, the impact of our traditional and universal life capital markets programs on investment income allocated to the segment caused an increase of $1.0 million between 2009 and 2010.    Other income    Other income increased $2.8 million for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The increase relates primarily to fees on variable universal life funds.                                           55  --------------------------------------------------------------------------------

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Benefits and settlement expenses

    Benefits and settlement expenses increased by $139.4 million, or 17.8%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009, due to growth in retained life insurance in-force, increased retention levels on certain newly written traditional life products, and higher credited interest on UL products resulting from increases in account values, partially offset by more favorable mortality. The estimated mortality impact to earnings related to traditional and universal life products, for the year ended December 31, 2010, was favorable by $32.8 million and was approximately $16.9 million more favorable than the estimated mortality impact on earnings for the year ended December 31, 2009. Additionally, the annual prospective unlocking process increased this line by $33.6 million during the year ended December 31, 2010 as compared to the year ended December 31, 2009, primarily due to the impact of changes in lapse and mortality assumptions. Unlocking increased 2010 benefits and settlements expenses $29.4 million, as compared to a decrease of $4.2 million during 2009.    Amortization of DAC    DAC amortization decreased $52.8 million, or 36.6%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The decrease was primarily driven by a $34.8 million impact related to more favorable annual prospective unlocking on universal life and BOLI amortization and lower traditional life sales, partially offset by growth in retained universal life insurance in-force as compared to 2009. The effect of the annual prospective unlocking was primarily driven by lower lapses and mortality experience and their impact on the unlocking process. Unlocking increased 2010 amortization $32.1 million, as compared to decreasing 2009 amortization by $2.7 million.    Other operating expenses    Other operating expenses increased $17.3 million for the year ended December 31, 2010, as compared to the year ended December 31, 2009. This increase reflects higher general administrative insurance company expenses, a reduction in reinsurance allowances, and interest expense of $10.4 million associated with a letter of credit facility designed to fund traditional life statutory reserves.    Sales    Sales for the segment increased $8.8 million, or 5.4%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. Lower sales levels of traditional products were primarily the result of pricing increases implemented on certain of our products. Additionally, a new universal life product, which supplemented and will eventually substantially replace traditional life products for new sales, was introduced during 2010. Universal life sales increased $53.6 million, or 86.5%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009, primarily due to our increased focus on the product line, including the introduction of new products.    Reinsurance    Currently, the Life Marketing segment reinsures significant amounts of its life insurance in-force. Pursuant to the underlying reinsurance contracts, reinsurers pay allowances to the segment as a percentage of both first year and renewal premiums. Reinsurance allowances represent the amount the reinsurer is willing to pay for reimbursement of acquisition costs incurred by the direct writer of the business. A portion of reinsurance allowances received is deferred as part of DAC and a portion is recognized immediately as a reduction of other operating expenses. As the non-deferred portion of allowances reduces operating expenses in the period received, these amounts represent a net increase to operating income during that period.    Reinsurance allowances do not affect the methodology used to amortize DAC or the period over which such DAC is amortized. However, they do affect the amounts recognized as DAC amortization. DAC on universal life-type, limited-payment long duration, and investment contracts business is amortized based on the estimated gross profits of the policies in-force. Reinsurance allowances are considered in the determination of estimated gross profits, and therefore, impact DAC amortization on these lines of business. Deferred reinsurance allowances on level term business as required by the ASC Financial Services-Insurance Topic are recorded as ceded DAC, which is amortized over                                           56  --------------------------------------------------------------------------------

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    estimated ceded premiums of the policies in force. Thus, deferred reinsurance allowances on policies as required under the Financial Services-Insurance Topic may impact DAC amortization. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies to our consolidated financial statements.    Impact of reinsurance    Reinsurance impacted the Life Marketing segment line items as shown in the following table:                                 Life Marketing Segment                          Line Item Impact of Reinsurance                                                        For The Year Ended December 31,                                                    2011           2010           2009                                                          (Dollars In Thousands) REVENUES Reinsurance ceded                              $   (846,762 )  $  (839,512 )  $  (911,703 ) BENEFITS AND EXPENSES Benefits and settlement expenses                   (757,225 )     (825,951 )     (932,903 ) Amortization of deferred policy acquisition costs                                               (51,219 )     (121,266 )      (52,186 ) Other operating expenses (1)                       (142,905 )     (142,700 )     (141,282 ) Total benefits and expenses                        (951,349 )   (1,089,917 )   (1,126,371 )  NET IMPACT OF REINSURANCE (2)                  $    104,587    $   250,405    $   214,668  Allowances received                            $   (180,787 )  $  (198,374 )  $  (239,874 ) Less: Amount deferred                                37,882         55,674         98,593 Allowances recognized (ceded other operating expenses) (1)                        $   (142,905 )  $  (142,700 )  $  (141,281 )    

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(1) Other operating expenses ceded per the income statement are equal to reinsurance allowances recognized after capitalization.

(2) Assumes no investment income on reinsurance. Foregone investment income would substantially reduce the favorable impact of reinsurance. The Company estimates that the impact of foregone investment income would reduce the net impact of reinsurance by 90% to 160%.

    The table above does not reflect the impact of reinsurance on our net investment income. By ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed, which will increase the assuming companies' profitability on the business we cede. The net investment income impact to us and the assuming companies has not been quantified. The impact of including foregone investment income would be to substantially reduce the favorable net impact of reinsurance reflected above. We estimate that the impact of foregone investment income would be to reduce the net impact of reinsurance presented in the table above by 90% to 160%. The Life Marketing segment's reinsurance programs do not materially impact the "other income" line of our income statement.    As shown above, reinsurance had a favorable impact on the Life Marketing segment's operating income for the periods presented above. The impact of reinsurance is largely due to our quota share coinsurance program in place prior to mid-2005. Under that program, generally 90% of the segment's traditional new business was ceded to reinsurers. Since mid-2005, a much smaller percentage of overall term business has been ceded due to a change in reinsurance strategy on traditional business. As a result of that change, the relative impact of reinsurance on the Life Marketing segment's overall results is expected to decrease over time. While the significance of reinsurance is expected to decline over time, the overall impact of reinsurance for a given period may fluctuate due to variations in mortality and unlocking of balances under the ASC Financial Services-Insurance Topic.                                           57 

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For The Year Ended December 31, 2011 as compared to The Year Ended December 31, 2010

    The increase in ceded premiums for 2011 as compared to 2010 was caused primarily by higher ceded universal life premiums of $9.4 million. This more than offset lower ceded traditional life premiums of $3.2 million.    Ceded benefits and settlement expenses were lower for the year ended December 31, 2011, as compared to the year ended December 31, 2010, due to lower increases in ceded reserves partially offset by higher ceded claims. Traditional ceded benefits decreased $16.2 million for the year ended December 31, 2011, as compared to the year ended December 31, 2010, due to a lower increase in ceded reserves and lower ceded death benefits. Universal life ceded benefits decreased $52.4 million for the year ended December 31, 2011, as compared to the year ended December 31, 2010, due to a lower change in ceded reserves more than offsetting higher ceded claims. Ceded universal life claims were $20.9 million higher for the year ended December 31, 2011, as compared to the year ended December 31, 2010.    

Ceded amortization of deferred policy acquisitions costs decreased for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily due to the differences in unlocking between the two periods.

Total allowances recognized for the year ended December 31, 2011, increased slightly from the year ended December 31, 2010, as the impact of growth in universal life sales more than offset the impact of the continued reduction in our traditional life reinsurance allowances.

For The Year Ended December 31, 2010 as compared to The Year Ended December 31, 2009

The decrease in ceded premiums above for the year ended December 31, 2010, as compared to the year ended December 31, 2009, was caused primarily by lower ceded traditional life premiums and policy fees of $70.4 million.

    Ceded benefits and settlement expenses were lower for the year ended December 31, 2010, as compared to the year ended December 31, 2009, due to lower increases in ceded reserves partially offset by higher ceded claims. Traditional ceded benefits decreased $65.7 million for the year ended December 31, 2010, as compared to the year ended December 31, 2009, due to a lower increase in ceded reserves partly offset by higher ceded death benefits. Universal life ceded benefits decreased $41.8 million for the year ended December 31, 2010, as compared to the year ended December 31, 2009, due to a lower change in ceded reserves more than offsetting higher ceded claims. Ceded universal life claims were $29.8 million higher for the year ended December 31, 2010, as compared to the year ended December 31, 2009.    

Ceded amortization of deferred policy acquisitions costs increased for the year ended December 31, 2010, as compared to the year ended December 31, 2009, primarily due to the differences in unlocking between the two periods.

    Total allowances recognized for the year ended December 31, 2010, increased from the year ended December 31, 2009, as the impact of growth in universal life sales more than offset the impact of the continued reduction in our traditional life reinsurance allowances.                                           58 

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   Table of Contents    Acquisitions    Segment results of operations   

Segment results were as follows:

                                            For The Year Ended December 31,          Change                                           2011           2010        2009      2011    2010                                               (Dollars In Thousands) REVENUES Gross premiums and policy fees        $    834,499    $  676,849   $ 724,488    23.3 %  (6.6 )% Reinsurance ceded                         (419,676 )    (430,151 )  (462,972 )  (2.4 )  (7.1 ) Net premiums and policy fees               414,823       246,698     261,516    68.2    (5.7 ) Net investment income                      529,261       458,703     479,743    15.4    (4.4 ) Other income                                 5,561         5,886       6,059    (5.5 )  (2.9 ) Total operating revenues                   949,645       711,287     747,318    33.5    (4.8 ) Realized gains (losses) - investments                                167,107       116,044     281,963 Realized gains (losses) - derivatives                               (133,931 )     (65,987 )  (252,100 ) Total revenues                             982,821       761,344     777,181 BENEFITS AND EXPENSES Benefits and settlement expenses           662,293       512,433     532,992    29.2    (3.9 ) Amortization of DAC/VOBA                    74,167        62,152      65,798    19.3    (5.5 ) Other operating expenses                    55,792        25,559      14,768     n/m    73.1 Operating benefits and expenses            792,252       600,144     613,558    32.0    (2.2 ) Amortization of DAC/VOBA related to realized gains (losses) - investments                                    874         2,258      (6,773 ) Total benefits and expenses                793,126       602,402     606,785    31.7    (0.7 ) INCOME BEFORE INCOME TAX                   189,695       158,942     170,396    19.3    (6.7 ) Less: realized gains (losses)               33,176        50,057      29,863 Less: related amortization of DAC/VOBA                                      (874 )      (2,258 )     6,773 OPERATING INCOME                      $    157,393    $  111,143   $ 133,760    41.6   (16.9 )                                            59 

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The following table summarizes key data for the Acquisitions segment:

                                            For The Year Ended December 31,                  Change                                     2011              2010              2009          2011     2010                                              (Dollars In Thousands) Average Life Insurance In-Force(1) Traditional                     $ 188,439,000     $ 186,005,583     $ 197,565,150       1.3 %   (5.9 )% Universal life                     30,670,689        27,033,770        

28,305,677 13.5 (4.5 )

                                 $ 219,109,689     $ 213,039,353     $ 225,870,827       2.8     (5.7 ) Average Account Values Universal life                  $   3,304,966     $   2,764,614     $   2,826,982      19.5     (2.2 ) Fixed annuity(2)                    3,329,680 (4)     3,378,176 (4)     3,597,163 (4)  (1.4 )   (6.1 ) Variable annuity                      665,742           209,034           

131,195 n/m 59.3

                                 $   7,300,388     $   6,351,824     $   6,555,340      14.9     (3.1 ) Interest Spread - UL & Fixed Annuities Net investment income yield(3)                                 5.86 %            5.92 %            5.95 % Interest credited to policyholders                            3.98              4.15              4.16 Interest spread                          1.88 %            1.77 %            1.79 %    

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(1) Amounts are not adjusted for reinsurance ceded.

(2) Includes general account balances held within variable annuity products and is net of coinsurance ceded.

  (3)     Includes available-for-sale and trading portfolio. Available-for-sale portfolio yields were 6.09%, 6.30%, and 6.32% for the year ended December 31, 2011, 2010, and 2009, respectively.  

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

For The Year Ended December 31, 2011 as compared to The Year Ended December 31, 2010

    Segment operating income    Operating income was $157.4 million for the year ended December 31, 2011, an increase of $46.3 million, or 41.6%, as compared to the year ended December 31, 2010, primarily due to the addition of the United Investors acquisition and the Liberty Life coinsurance transaction. The United Investors and Liberty Life transactions added $24.0 million and $35.1 million, respectively, to segment operating income. This was partly offset by less favorable mortality and the expected runoff in the older acquired blocks.    Operating revenues    Net premiums and policy fees increased $168.1 million, or 68.2%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily due the addition of the United Investors and Liberty Life blocks of business more than offsetting expected runoff related to other blocks of business. Net investment income increased $70.6 million, or 15.4%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010, due to the addition of the United Investors and Liberty Life blocks of business. This was offset by expected runoff related to other blocks of business.    

Total benefits and expenses

    Total benefits and expenses increased $190.7 million, or 31.7%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. The increase was due to the addition of the United Investors and Liberty Life blocks and was offset by the expected runoff of the in-force business.                                           60  --------------------------------------------------------------------------------

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For The Year Ended December 31, 2010 as compared to The Year Ended December 31, 2009

    Segment operating income    Operating income was $111.1 million for the year ended December 31, 2010, a decrease of $22.6 million, or 16.9%, as compared to the year ended December 31, 2009, primarily due to the expected runoff in the blocks of business, higher operating expenses, and a planned one-time payment of $5.2 million in the fourth quarter of 2010 to complete insourcing the administration of a block of business.    Operating revenues   

Net premiums and policy fees decreased $14.8 million, or 5.7%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009, primarily due to runoff of the in-force business. Net investment income decreased $21.0 million, or 4.4%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009, due to runoff of the segment's in-force business, resulting in a reduction of invested assets and lower investment income.

    Total benefits and expenses    Total benefits and expenses decreased $4.4 million, or 0.7%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The decrease related primarily to the expected runoff of the in-force business and fluctuations in mortality, partially offset by higher operating expenses and amortization of VOBA related to realized gains on investments. The variance in the amortization of VOBA related to realized gains (losses) - investments is due to the size of the gains or losses relative to the gross profits used to amortize VOBA in a given year.    Reinsurance    The Acquisitions segment currently reinsures portions of both its life and annuity in-force. The cost of reinsurance to the segment is reflected in the chart shown below. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies to our consolidated financial statements.                                           61  --------------------------------------------------------------------------------

   Table of Contents    Impact of reinsurance    Reinsurance impacted the Acquisitions segment line items as shown in the following table:                                  Acquisitions Segment                          Line Item Impact of Reinsurance                                          For The Year Ended December 31,                                        2011          2010         2009                                            (Dollars In Thousands) REVENUES Reinsurance ceded                  $   (419,676 ) $ (430,151 ) $ (462,972 ) BENEFITS AND EXPENSES Benefits and settlement expenses       (383,439 )   (368,647 )   (391,493 ) Amortization of DAC/VOBA                (19,062 )    (19,216 )    (11,151 ) Other operating expenses                (54,894 )    (56,487 )    (61,689 ) Total benefits and expenses            (457,395 )   (444,350 )   (464,333 )  NET IMPACT OF REINSURANCE (1)      $     37,719   $   14,199   $    1,361    

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

    The segment's reinsurance programs do not materially impact the other income line of the income statement. In addition, net investment income generally has no direct impact on reinsurance cost. However, by ceding business to the assuming companies, we forgo investment income on the reserves ceded to the assuming companies. Conversely, the assuming companies will receive investment income on the reserves assumed which will increase the assuming companies' profitability on business assumed from the Company. For business ceded under modified coinsurance arrangements, the amount of investment income attributable to the assuming company is included as part of the overall change in policy reserves and, as such, is reflected in benefit and settlement expenses. The net investment income impact to us and the assuming companies has not been quantified as it is not fully reflected in our consolidated financial statements.    

The net impact of reinsurance increased $23.5 million for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily due to a decrease in ceded premiums and an increase in ceded benefits and settlement expenses primarily due to an increase in ceded death claims.

    The net impact of reinsurance increased $12.8 million for the year ended December 31, 2010, as compared to the year ended December 31, 2009, as decreases in ceded premiums more than offset decreases in ceded benefits and expenses, primarily due to a significant decrease in ceded claims expense.                                           62  --------------------------------------------------------------------------------

   Table of Contents    Annuities    Segment results of operations   

Segment results were as follows:

                                                For The Year Ended December 31,          Change                                              2011            2010         2009     2011    2010                                                  (Dollars In Thousands) REVENUES Gross premiums and policy fees           $      68,385    $    42,786   $ 33,983    59.8 %  25.9 % Reinsurance ceded                                  (66 )         (136 )     (152 ) (51.5 ) (10.5 ) Net premiums and policy fees                    68,319         42,650     33,831    60.2    26.1 Net investment income                          507,229        482,264    440,096     5.2     9.6 Realized gains (losses) - derivatives           (5,823 )      (63,445 )   22,620   (90.8 )   n/m Other income                                    53,999         29,053     16,008    85.9    81.5 Total operating revenues                       623,724        490,522    512,555    27.2    (4.3 ) Realized gains (losses) - investments            9,461         10,175     (5,288 ) Total revenues                                 633,185        500,697    507,267    26.5    (1.3 ) BENEFITS AND EXPENSES Benefits and settlement expenses               390,553        407,455    350,850    (4.1 )  16.1 Amortization of deferred policy acquisition costs and value of business acquired                               69,429         (6,065 )   79,688     n/m     n/m Other operating expenses                        53,867         39,285     28,089    37.1    39.9 Operating benefits and expenses                513,849        440,675    458,627    16.6    (3.9 ) Amortization related to benefits and settlement expenses                                235              -          -     n/m     n/m Amortization of DAC related to realized gains (losses) - investments            1,631          2,883      2,240 Total benefits and expenses                    515,715        443,558    460,867    16.3    (3.8 ) INCOME BEFORE INCOME TAX                       117,470         57,139     46,400     n/m    23.1 Less: realized gains (losses)                    9,461         10,175     (5,288 ) Less: amortization related to benefits and settlement expense                            (235 )            -       

-

 Less: related amortization of DAC               (1,631 )       (2,883 )   (1,570 ) OPERATING INCOME                         $     109,875    $    49,847   $ 53,258     n/m    (6.4 )                                            63 

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The following table summarizes key data for the Annuities segment:

                                               For The Year Ended December 31,             Change                                            2011           2010          2009        2011      2010                                                 (Dollars In Thousands) Sales Fixed annuity                          $  1,032,582   $    930,294   $ 1,225,211      11.0 %   (24.1 )% Variable annuity                          2,348,599      1,714,753       

796,245 37.0 115.4

                                        $  3,381,181   $  2,645,047   $ 2,021,456      27.8      30.8 Average Account Values Fixed annuity(1)                       $  8,538,007   $  7,920,539   $ 7,073,464       7.8      12.0 Variable annuity                          5,397,720      3,409,506     2,190,564      58.3      55.6                                        $ 13,935,727   $ 11,330,045   $ 9,264,028      23.0      22.3 Interest Spread - Fixed Annuities(2) Net investment income yield                    5.93 %         6.04 %        6.18 % Interest credited to policyholders             4.33           4.55          4.79 Interest spread                                1.60 %         1.49 %        1.39 %                                            For The Year Ended December 31,              Change                                        2011            2010         2009       2011        2010                                            (Dollars In Thousands) Realized gains (losses) related to variable annuity contracts Interest rate futures - VA         $    164,221    $    (11,778 ) $      -   $ 175,999   $ (11,778 ) Equity futures - VA                     (30,061 )       (42,258 )        -      12,197     (42,258 ) Currency futures - VA                     2,977               -          -       2,977           - Volatility swaps - VA                      (239 )        (2,433 )        -       2,194      (2,433 ) Equity options - VA                     (15,051 )        (1,824 )        -     (13,227 )    (1,824 ) Interest rate swaps - VA                  7,718               -          -       7,718           - Credit default swaps - VA                (7,851 )             -          -      (7,851 )         - Embedded derivative - GMWB             (127,537 )        (5,728 )   19,722    (121,809 )   (25,450 ) Total realized gains (losses) related to variable annuity contracts                          $     (5,823 )  $    (64,021 ) $ 19,722   $  58,198   $ (83,743 )                                                   As of December 31,        Change                                               2011            2010       2011                                             (Dollars In Thousands) GMDB - Net amount at risk(3)              $     317,671    $  221,907     43.2 % GMDB Reserves                                     9,498         6,107     55.5 GMWB and GMAB Reserves                          146,954        19,611      n/m Account value subject to GMWB rider           4,406,041     2,686,125     64.0 S&P 500® Index                                    1,258         1,258      0.0    

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(1) Includes general account balances held within variable annuity products.

(2) Interest spread on average general account values.

(3) Guaranteed death benefits in excess of contract holder account balance.

For The Year Ended December 31, 2011 as compared to The Year Ended December 31, 2010

    Segment operating income    Segment operating income was $109.9 million for the year ended December 31, 2011, as compared to $49.8 million for the year ended December 31, 2010, an increase of $60.0 million. This variance included a favorable change of $32.7 million related to derivatives associated with certain VA benefits and a favorable change of $6.9 million in SPIA mortality results. The remainder of the increase is attributable to higher VA fees, higher spreads, and growth in the SPDA line, partially offset by increased DAC amortization, higher other operating expenses, and unfavorable changes in unlocking.    Operating revenues   

Segment operating revenues increased $133.2 million, or 27.2%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily due to a favorable impact of $58.2 million related to guaranteed benefits of certain VA contracts. There were also increases in net investment income, policy fees, and other

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    income. Average fixed account balances grew 7.8% and average variable account balances grew 58.3% for the year ended December 31, 2011, as compared to the year ended December 31, 2010, resulting in higher investment income, policy fees, and other income.    

Benefits and settlement expenses

    Benefits and settlement expenses decreased $16.9 million, or 4.1%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. This decrease was primarily the result of a favorable change of $9.0 million in unearned premium amortization and bonus interest amortization related to guaranteed benefits of certain VA contracts. There was also a $6.9 million favorable change in SPIA mortality results and a $2.5 million favorable change in VA guaranteed benefit reserves. These favorable changes were partially offset by a $1.2 million unfavorable change in the EIA fair value adjustments, higher credited interest, and higher bonus interest amortization. Favorable unlocking of $3.6 million was recorded in the year ended December 31, 2011, as compared to $6.0 million during the year ended December 31, 2010.    Amortization of DAC    The increase in DAC amortization for the year ended December 31, 2011, as compared to the year ended December 31, 2010, was primarily related to an increase of $46.4 million in DAC amortization related to guaranteed benefits of certain VA contracts. There was also unfavorable DAC unlocking of $15.0 million for the year ended December 31, 2011, as compared to unfavorable unlocking of $0.4 million for the year ended December 31, 2010.    Sales    Total sales increased $736.1 million, or 27.8%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. Sales of variable annuities increased $633.8 million, or 37.0% for the year ended December 31, 2011, as compared to the year ended <chron>December 31, 2010, primarily due to product positioning and more focus on the VA line of business. Sales of fixed annuities increased by $102.3 million, or 11.0% for the year ended December 31, 2011, as compared to the year ended December 31, 2010, driven by an increase in SPDA sales.    

For The Year Ended December 31, 2010 as compared to The Year Ended December 31, 2009

    Segment operating income    Segment operating income was $49.8 million for the year ended December 31, 2010, as compared to $53.3 million for the year ended December 31, 2009, a decrease of $3.4 million. This change included an unfavorable $42.5 million variance related to fair value changes, of which $3.0 million was related to the EIA product and $39.5 million was related to derivatives associated with the VA GMWB rider caused primarily by changes in equity markets and lower interest rates. The remaining favorable $45.9 million variance in operating income was partly driven by a $19.3 million unlocking charge recorded within the VA line during the year ended December 31, 2009. Other items accounted for the remainder of the variance, including a $7.0 million reduction in death benefit payments on the VA line, a $9.6 million increase in earnings related to wider spreads and average account value growth of 47.6% in the SPDA line, and a $4.4 million increase in EIA earnings excluding fair value.                                           65  --------------------------------------------------------------------------------

   Table of Contents    Operating revenues    Segment operating revenues decreased $22.0 million, or 4.3%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009, primarily due to unfavorable fair value changes on derivatives associated with the VA GMWB rider and the EIA product of $39.5 million and $7.6 million, respectively. These losses were partially offset by increases in net investment income, policy fees, and other income. Average fixed account balances grew 12.0% and average variable account balances grew 55.6% for the year ended December 31, 2010, as compared to the year ended December 31, 2009, resulting in higher investment income, policy fees, and other income.   

Benefits and settlement expenses

    Benefits and settlement expenses increased $56.6 million, or 16.1%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. This increase was primarily the result of higher credited interest, an unfavorable change in unearned premium reserve amortization, and an unfavorable change in unlocking. The change in unearned premium amortization was primarily a result of fair value changes associated with the VA GMWB rider was $21.6 million. Offsetting these increases was a favorable change of $4.6 million related to EIA fair value adjustments. Favorable unlocking of $6.0 million was recorded in the year ended December 31, 2010, as compared to $8.5 million during the year ended December 31, 2009.    Amortization of DAC    The decrease in DAC amortization for the year ended December 31, 2010, as compared to the year ended December 31, 2009, was primarily due to fair value changes on the VA GMWB rider. Fair value changes on the VA GMWB rider caused a decrease in amortization of $73.4 million. There was also a favorable variance in DAC unlocking of $5.2 million for the year ended December 31, 2010, as compared to unfavorable unlocking of $5.6 million for the year ended December 31, 2009.    Sales    Total sales increased $623.6 million, or 30.8%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. Sales of variable annuities increased $918.5 million for the year ended December 31, 2010, as compared to the year ended December 31, 2009, primarily due to a more competitive product and more focus on the VA line of business. Sales of fixed annuities decreased $294.9 million, or 24.1%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The decrease in fixed annuity sales was driven by reduced sales in all the fixed annuity product lines and was primarily attributable to a lower interest rate environment. MVA sales decreased $256.5 million for the year ended December 31, 2010, as compared to the year ended December 31, 2009. SPDA sales decreased by $23.3 million for the year ended December 31, 2010, as compared to the year ended December 31, 2009.                                           66 

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   Table of Contents    Stable Value Products    Segment results of operations   

Segment results were as follows:

                                         For The Year Ended December 31,             Change                                        2011           2010        2009       2011       2010                                            (Dollars In Thousands) REVENUES Net investment income              $    145,150    $  171,327   $ 221,688     (15.3 )%   (22.7 )% Other income                                 (1 )           -       1,866       n/m     (100.0 ) Total operating revenues                145,149       171,327     223,554     (15.3 )    (23.4 ) Realized gains (losses)                  25,306        (3,200 )    (2,697 )     n/m       18.7 Total revenues                          170,455       168,127     220,857       1.4      (23.9 ) BENEFITS AND EXPENSES Benefits and settlement expenses         81,256       123,365     154,555     (34.1 )    (20.2 ) Amortization of deferred policy acquisition costs                         4,556         5,430       3,471     (16.1 )     56.4 Other operating expenses                  2,557         3,325       3,565     (23.1 )     (6.7 ) Total benefits and expenses              88,369       132,120     161,591     (33.1 )    (18.2 ) INCOME BEFORE INCOME TAX                 82,086        36,007      59,266       n/m      (39.2 ) Less: realized gains (losses)            25,306        (3,200 )    (2,697 ) OPERATING INCOME                   $     56,780    $   39,207   $  61,963      44.8      (36.7 )     The following table summarizes key data for the Stable Value Products segment:                                       For The Year Ended December 31,             Change                                   2011          2010          2009          2011    2010                                        (Dollars In Thousands) Sales GIC                            $   498,695   $   132,612   $         -        n/m %   n/m % GFA - Direct Institutional         300,000       625,000             -      (52.0 )   n/m                                    798,695       757,612             -        5.4     n/m  Average Account Values         $ 2,685,194   $ 3,329,510   $ 4,091,199      (19.4 ) (18.6 ) Ending Account Values          $ 2,769,510   $ 3,076,233   $ 3,581,150      (10.0 ) (14.1 )  Operating Spread Net investment income yield           5.43 %        5.13 %        5.41 % Interest credited                     3.03          3.69          3.77 Operating expenses                    0.26          0.27          0.17 Operating spread                      2.14 %        1.17 %        1.47 %(1)  Adjusted operating spread(2)          1.80 %        1.11 %        1.34 %    

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(1) Excludes one-time funding agreement retirement gains

(2) Excludes participating mortgage loan income and bank loan participation fee income.

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For The Year Ended December 31, 2011 as compared to The Year Ended December 31, 2010

    Segment operating income    Operating income was $56.8 million and increased $17.6 million, or 44.8%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. The increase in operating earnings resulted from higher operating spreads and lower expenses offset by a decline in average account values. We also called certain retail notes, which has accelerated DAC amortization of $3.4 million on those called contracts for the year ended December 31, 2011 as compared to $2.7 million for the year ended December 31, 2010. The operating spread increased 97 basis points to 214 basis points for the year ended December 31, 2011, as compared to an operating spread of 117 basis points for the year ended December 31, 2010.    Sales   

Total sales were $798.7 million for the year ended December 31, 2011.

For The Year Ended December 31, 2010 as compared to The Year Ended December 31, 2009

    Segment operating income    Operating income was $39.2 million and decreased $22.8 million, or 36.7%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The decrease in operating earnings resulted from a decline in average account values and lower operating spreads. In addition, no income was generated from the early retirement of funding agreements backing medium-term notes for the year ended December 31, 2010, as compared with $1.9 million for the year ended December 31, 2009. We also called certain retail notes, which has accelerated DAC amortization of $2.7 million on those called contracts. The operating spread decreased 30 basis points to 117 basis points for the year ended December 31, 2010, as compared to an operating spread of 147 basis points for the year ended December 31, 2009.    Sales   

Total sales were $757.6 million for the year ended December 31, 2010.

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   Table of Contents    Asset Protection    Segment results of operations   

Segment results were as follows:

                                         For The Year Ended December 31,            Change                                        2011           2010        2009       2011      2010                                            (Dollars In Thousands) REVENUES

Gross premiums and policy fees $ 268,200$ 289,794$ 324,497

  (7.5 )%  (10.7 )% Reinsurance ceded                       (97,302 )    (110,911 )  (134,205 )  (12.3 )   (17.4 ) Net premiums and policy fees            170,898       178,883     190,292     (4.5 )    (6.0 ) Net investment income                    21,650        23,959      28,448     (9.6 )   (15.8 ) Other income                             90,039        66,755      53,009     34.9      25.9 Total operating revenues                282,587       269,597     271,749      4.8      (0.8 ) BENEFITS AND EXPENSES Benefits and settlement expenses         88,257        86,799     109,381      1.7     (20.6 ) Amortization of deferred policy acquisition costs                        26,255        29,540      29,908    (11.1 )    (1.2 ) Other operating expenses                151,928       130,585     116,346     16.3      12.2 Total benefits and expenses             266,440       246,924     255,635      7.9      (3.4 ) INCOME BEFORE INCOME TAX                 16,147        22,673      16,114    (28.8 )    40.7 OPERATING INCOME                   $     16,147    $   22,673   $  16,114    (28.8 )    40.7    

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

                          For The Year Ended December 31,          Change                         2011           2010        2009      2011    2010                             (Dollars In Thousands) Sales Credit insurance    $     35,767    $   36,216   $  35,361   (1.2 )%  2.4 % Service contracts        286,485       235,585     215,324   21.6     9.4 Other products            72,908        54,489      42,831   33.8    27.2                     $    395,160    $  326,290   $ 293,516   21.1    11.2 Loss Ratios (1) Credit insurance            33.8 %        37.8 %      33.7 % Service contracts           56.5          56.7        56.5 Other products              33.8         (11.3 )     101.0    

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(1) Incurred claims as a percentage of earned premiums

For The Year Ended December 31, 2011 as compared to The Year Ended December 31, 2010

    Segment operating income    Operating income was $16.1 million, representing a decrease of $6.5 million, or 28.8%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. Service contract earnings decreased $6.5 million, or 58.5%, primarily related to higher commissions and reduced investment income due to lower balances and yields. Earnings from other products, including the GAP product and non-core lines, decreased $3.2 million, or 21.9%, primarily due to a $7.8 million excess reserve release in the first quarter of 2010 related to the runoff Lender's Indemnity line of business. Credit insurance earnings increased $3.2 million primarily due to lower loss ratios and lower expenses.                                           69  --------------------------------------------------------------------------------

   Table of Contents    Net premiums and policy fees    Net premiums and policy fees decreased $8.0 million, or 4.5%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. Service contract premiums decreased $8.1 million, or 5.7%. Credit insurance premiums decreased $2.1 million, or 10.0%. The decrease was primarily the result of decreasing sales in prior years and the related impact on earned premiums. Within the other product lines, primarily GAP, net premiums increased $2.2 million, or 13.7%.    Other income    Other income increased $23.3 million, or 34.9%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily due to an increase in 2011 sales reflecting improvement in the U.S. automobile market and increased market share.   

Benefits and settlement expenses

    Benefits and settlement expenses increased $1.5 million, or 1.7%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. Service contract claims decreased $4.8 million, or 6.0% and credit insurance claims decreased $1.5 million, or 19.6%, as compared to the year ended December 31, 2010. Other products claims increased $7.8 million due to a $7.8 million excess reserve release related to the final settlement in the runoff Lender's Indemnity line of business that was recorded in the first quarter of 2010.    

Amortization of DAC and Other operating expenses

    Amortization of DAC was $3.3 million, or 11.1%, lower for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily due to reduced amortization in the credit insurance product line. Other operating expenses increased $21.3 million, or 16.3%, for the year ended December 31, 2011, primarily due to higher commission expense resulting from an increase in sales.    Sales    Total segment sales increased $68.9 million, or 21.1%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. Service contract sales increased $50.9 million, or 21.6%. Sales in other products increased $18.4 million, or 33.8%, primarily in the GAP product line. Increases in the service contract and GAP lines are attributable to the improvement in auto sales over the prior year and increased market share. Credit insurance sales decreased $0.4 million, or 1.2%, as compared to the prior year.    

For The Year Ended December 31, 2010 as compared to The Year Ended December 31, 2009

    Segment operating income    Operating income was $22.7 million, representing an increase of $6.6 million, or 40.7%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. Credit insurance earnings decreased $4.8 million as compared to the prior year, primarily due to unfavorable loss experience, lower investment income, and a $0.9 million litigation settlement expense. Service contract earnings decreased $0.1 million, or 0.6% as compared to the prior year end. Earnings from other products increased $11.4 million for the year ended December 31, 2010, as compared to the prior year end. The increase resulted primarily from a $7.8 million excess reserve release in the first quarter of 2010 related to the final settlement in the runoff Lender's Indemnity line of business. Favorable loss experience in the GAP product line also contributed to the increase.    Net premiums and policy fees    Net premiums and policy fees decreased $11.4 million, or 6.0%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. Credit insurance premiums decreased $3.7 million, or 15.3%, as compared to the prior year end. Service contract premiums decreased $6.9 million, or 4.6%, as compared to the prior                                           70 

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    year end. Within the other product lines, net premiums decreased $0.8 million, or 4.9%, as compared to the prior year end. The decrease was due to the impact of decreasing sales in prior years and the related impact on earned premiums.    Other income    Other income increased $13.7 million, or 25.9%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009, primarily due to the impact of taking over the administration of a block of service contract business in the fourth quarter of 2009 and an increase in sales in 2010 due to improvement in the U.S. auto market.    

Benefits and settlement expenses

    Benefits and settlement expenses decreased $22.6 million, or 20.6%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. Credit insurance claims decreased $0.4 million, or 4.8%, for the year ended December 31, 2010, as compared to the prior year. Service contract claims decreased $3.7 million, or 4.4. Other products claims decreased $18.5 million for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The decrease included a $7.8 million decrease in reserves related to the final settlement in the runoff Lender's Indemnity line of business. In addition, the first quarter of 2009 included a $6.3 million increase in the runoff Lender's indemnity product line's loss reserve related to the commutation of a reinsurance agreement which was offset by a reduction in other expenses. A reduction in claims in the GAP product line contributed $4.9 million to the decrease, mainly resulting from improved loss ratios.    

Amortization of DAC and Other operating expenses

    Amortization of DAC was $0.4 million, or 1.2%, lower for the year ended December 31, 2010, as compared to the year ended December 31, 2009, primarily in the GAP product line partly offset by an increase in the service contract product line. Other operating expenses increased $14.2 million, or 12.2%, for the year ended December 31, 2010, partially due to a $6.3 million bad debt recovery in the runoff Lender's Indemnity product line due to the commutation of a reinsurance agreement in the first quarter of 2009, which was offset by an increase in benefits and settlement expenses. Higher commission expense resulting from an increase in sales and higher retrospective commissions resulting from lower loss ratios in certain service contract product lines also contributed to the increase.    Sales    Total segment sales increased $32.8 million, or 11.2%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. Credit insurance sales increased $0.9 million, or 2.4%, as compared to the prior year. Service contract sales increased $20.3 million, or 9.4%, as compared to the prior year. Sales in other products increased $11.7 million, or 27.2% primarily in the GAP product line. Increases in the service contract and GAP lines are primarily attributable to the improvement in auto sales over the prior year.                                           71 

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   Table of Contents    Reinsurance    The majority of the Asset Protection segment's reinsurance activity relates to the cession of single premium credit life and credit accident and health insurance, credit property, vehicle service contracts, and guaranteed asset protection insurance to producer affiliated reinsurance companies ("PARC's"). These arrangements are coinsurance contracts ceding the business on a first dollar quota share basis at levels ranging from 50% to 100% to limit our exposure and allow the PARC's to share in the underwriting income of the product. Reinsurance contracts do not relieve us from our obligations to our policyholders. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies to our consolidated financial statements.    Reinsurance impacted the Asset Protection segment line items as shown in the following table:                                Asset Protection Segment                          Line Item Impact of Reinsurance                                                     For The Year Ended December 31,                                                 2011           2010          2009                                                      (Dollars In Thousands) REVENUES Reinsurance ceded                            $   (97,302 )  $ (110,911 )  $ (134,205 ) BENEFITS AND EXPENSES Benefits and settlement expenses                 (63,406 )     (77,188 )     (94,696 ) Amortization of deferred policy acquisition costs                                (24,614 )     (31,970 )     (43,948 ) Other operating expenses                         (11,759 )     (11,046 )     (14,169 ) Total benefits and expenses                      (99,779 )    (120,204 )    (152,813 )  NET IMPACT OF REINSURANCE (1)                $     2,477    $    9,293    $   18,608    

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(1) Assumes no investment income on reinsurance. Foregone investment income would substantially change the impact of reinsurance.

For The Year Ended December 31, 2011 as compared to The Year Ended December 31, 2010

    Reinsurance premiums ceded decreased $13.6 million, or 12.3%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. The decrease was primarily due to a decline in ceded dealer credit insurance premiums and GAP premiums due to lower sales in prior years.    Benefits and settlement expenses ceded decreased $13.8 million, or 17.9%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. The decrease was primarily due to lower losses in the service contract and GAP lines.    Amortization of DAC ceded decreased $7.4 million, or 23.0%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010</chron>, primarily as the result of the decreases in the ceded dealer credit and GAP product lines. Other operating expenses ceded increased $0.7 million, or 6.5%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily as a result of increases in the GAP product line.    Net investment income has no direct impact on reinsurance cost. However, by ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed which will increase the assuming companies' profitability on business we cede. The net investment income impact to us and the assuming companies has not been quantified as it is not reflected in our consolidated financial statements.                                           72  --------------------------------------------------------------------------------

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For The Year Ended December 31, 2010 as compared to The Year Ended December 31, 2009

    Reinsurance premiums ceded decreased $23.3 million, or 17.4%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The decrease was primarily due to a decline in ceded dealer credit insurance premiums and GAP premiums due to lower sales in prior years.    Benefits and settlement expenses ceded decreased $17.5 million, or 18.5%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The decrease was primarily due to lower losses in the service contract and GAP lines.    Amortization of DAC ceded decreased $12.0 million, or 27.3%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009, primarily as the result of the decreases in the ceded dealer credit and GAP product lines. Other operating expenses ceded decreased $3.1 million, or 22.0%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009. The fluctuation was primarily attributable to a $6.3 million bad debt recovery in the runoff Lender's Indemnity product line as a result of the commutation of a reinsurance agreement in the first quarter of 2009 partially offset by an increase in the GAP product line.    Net investment income has no direct impact on reinsurance cost. However, by ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed which will increase the assuming companies' profitability on business we cede. The net investment income impact to us and the assuming companies has not been quantified as it is not reflected in our consolidated financial statements.                                           73  --------------------------------------------------------------------------------

   Table of Contents    Corporate and Other    Segment results of operations   

Segment results were as follows:

                                        For The Year Ended December 31,               Change                                    2011            2010           2009        2011       2010                                          (Dollars In Thousands) REVENUES Gross premiums and policy fees                            $    21,469    $      24,164    $  26,568      (11.2 )%    (9.0 )% Reinsurance ceded                      (108 )             (2 )         (4 )      n/m      (50.0 ) Net premiums and policy fees         21,361           24,162       26,564      (11.6 )     (9.0 ) Net investment income               104,140          100,639       71,167        3.5       41.4 Realized gains (losses) - derivatives                               -              168        1,205 Other income                         36,802            5,463      134,542        n/m      (95.9 ) Total operating revenues            162,303          130,432      233,478       24.4      (44.1 ) Realized gains (losses) - investments                          (1,801 )         (5,846 )   (148,590 ) Realized gains (losses) - derivatives                         (14,892 )        (15,291 )     49,825 Total revenues                      145,610          109,295      134,713       33.2      (18.9 ) BENEFITS AND EXPENSES Benefits and settlement expenses                             21,528           24,575       29,896      (12.4 )    (17.8 ) Amortization of deferred policy acquisition costs              2,654            1,694        1,900       56.7      (10.8 ) Other operating expenses            131,136          117,621      109,444       11.5        7.5 Total benefits and expenses         155,318          143,890      141,240        7.9        1.9 INCOME (LOSS) BEFORE INCOME TAX                                  (9,708 )        (34,595 )     (6,527 )    (71.9 )      n/m Less: realized gains (losses) - investments               (1,801 )         (5,846 )   (148,590 ) Less: realized gains (losses) - derivatives              (14,892 )        (15,291 )     49,825 OPERATING INCOME (LOSS)         $     6,985    $     (13,458 )  $  92,238        n/m        n/m    

For The Year Ended December 31, 2011 as compared to The Year Ended December 31, 2010

Segment operating income (loss)

    Corporate and Other segment operating income was $7.0 million for the year ended December 31, 2011, as compared to an operating loss of $13.5 million for the year ended December 31, 2010. The increase was primarily due to a $30.1 million favorable variance related to gains on the repurchase of non-recourse funding obligations. For the year ended December 31, 2011, $35.5 million of pre-tax gains were generated by repurchases as compared to $5.4 million of pre-tax gains generated during the year ended December 31, 2010. In addition, during 2011, we recorded $8.5 million of pre-tax earnings in the segment relating to the settlement of a dispute with respect to certain investments. Partially offsetting these favorable variances was a $9.2 million increase in interest expense related to non-recourse funding obligations.    Operating revenues    Net investment income for the segment increased $3.5 million, or 3.5%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010, and net premiums and policy fees decreased $2.8 million, or 11.6%. The increase in net investment income was primarily the result of $8.5 million of pre-tax earnings relating to the settlement of a dispute with respect to certain investments and growth in core investment income. Partially offsetting this variance was a decrease of $12.4 million related to a portfolio of securities designated for trading compared to the year ended December 31, 2010. Other income increased $31.3 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010, primarily due to a $30.1 million favorable variance related to gains generated on the repurchase of non-recourse funding obligations.                                           74 

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   Table of Contents    Total benefits and expenses    Total benefits and expenses increased $11.4 million for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily due to an increase in other operating expenses of $13.5 million which includes a $9.2 million increase in interest expense related to non-recourse funding obligations. This increase was partially offset by a $3.0 million decrease in policy benefits on non-core lines of business.    

For The Year Ended December 31, 2010 as compared to The Year Ended December 31, 2009

Segment operating income (loss)

    Corporate and Other segment operating loss was $13.5 million for the year ended December 31, 2010, as compared to income of $92.2 million for the year ended December 31, 2009. The variance was primarily due to a decrease in other income from a $126.3 million pre-tax gain on the repurchase of surplus notes, net of deferred issue costs that occurred in 2009, which was partially offset by a $5.4 million pre-tax gain on the repurchase of non-recourse funding obligations that was recognized during the year ended December 31, 2010. The segment experienced a negative variance related to mark-to-market adjustments on a portfolio of securities designated for trading. The trading portfolio accounted for a decrease of $36.5 million as compared to the prior year. Partially offsetting the decrease was growth in the segment's investment income due to deploying liquidity and yield improvements.    Operating revenues    Net investment income for the segment increased $29.5 million, or 41.4%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009, and net premiums and policy fees decreased $2.4 million, or 9.0%. The increase in net investment income was primarily the result of deploying liquidity and yield improvements, partially offset by a decrease related to mark-to-market adjustments on a portfolio of securities designated for trading. Other income decreased due to a $126.3 million pre-tax gain that was recognized during the year ended 2009 on the repurchase of surplus notes, as compared to a $5.4 million pre-tax gain that was recognized on the repurchase of non-recourse funding obligations during the year ended 2010.    Total benefits and expenses    Total benefits and expenses increased $2.7 million, or 1.9%, for the year ended December 31, 2010, as compared to the year ended December 31, 2009, primarily due to an increase in interest expense of $21.4 million, offset by a decrease in policy benefits on non-core lines of business of $5.3 million and a $13.4 million reduction in other administrative expenses.                                           75  --------------------------------------------------------------------------------

   Table of Contents    CONSOLIDATED INVESTMENTS    Certain reclassifications have been made in the previously reported financial statements and accompanying tables to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income, shareowner's equity, or the totals reflected in the accompanying tables.    Portfolio Description    As of December 31, 2011, our investment portfolio was approximately $34.9 billion. The types of assets in which we may invest are influenced by various state insurance laws which prescribe qualified investment assets. Within the parameters of these laws, we invest in assets giving consideration to such factors as liquidity and capital needs, investment quality, investment return, matching of assets and liabilities, and the overall composition of the investment portfolio by asset type and credit exposure.    

The following table presents the reported values of our invested assets:

                                                          As of December 31,                                                 2011                        2010                                                      (Dollars In Thousands) Publicly issued bonds (amortized cost: 2011 - $21,172,568; 2010 - $19,732,704)                          $ 22,829,335        65.5 %  $ 20,314,417        64.9 % Privately issued bonds (amortized cost: 2011 - $4,936,563; 2010 - $4,234,952)                              5,128,230        14.7       4,329,770        13.8 Fixed maturities                        27,957,565        80.2      24,644,187        78.7 Equity securities (cost: 2011 - $303,578; 2010 - $307,971)                 292,413         0.8         317,255         1.0 Mortgage loans                           5,351,902        15.4       4,883,400        15.6 Investment real estate                      10,991         0.0           7,196         0.0 Policy loans                               879,819         2.5         793,448         2.5 Other long-term investments                264,031         0.8         283,002         0.9 Short-term investments                     101,470         0.3         349,245         1.3 Total investments                     $ 34,858,191       100.0 %  $ 31,277,733       100.0 %     Included in the preceding table are $3.0 billion and $3.0 billion of fixed maturities and $85.8 million and $114.3 million of short-term investments classified as trading securities as of December 31, 2011 and 2010, respectively. The trading portfolio includes invested assets of $2.9 billion as of December 31, 2011 and 2010, held pursuant to modified coinsurance ("Modco") arrangements under which the economic risks and benefits of the investments are passed to third party reinsurers.    Fixed Maturity Investments   

As of December 31, 2011, our fixed maturity investment holdings were approximately $28.0 billion. The approximate percentage distribution of our fixed maturity investments by quality rating is as follows:

                              As of December 31, Rating                     2011         2010 AAA                           16.5 %       17.2 % AA                             8.0          6.3 A                             27.6         21.3 BBB                           41.0         44.4 Below investment grade         6.9         10.8                              100.0 %      100.0 %     We use various Nationally Recognized Statistical Rating Organizations' ("NRSRO") ratings when classifying securities by quality ratings. When the various NRSRO ratings are not consistent for a security, we use the second-highest convention in assigning the rating. When there are no such published ratings, we assign a rating based on the statutory accounting rating system.    

During the years ended December 31, 2011 and 2010, we did not actively purchase securities below the BBB level.

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    We do not have material exposure to financial guarantee insurance companies with respect to our investment portfolio. As of December 31, 2011, based upon amortized cost, $53.9 million of our securities were guaranteed either directly or indirectly by third parties out of a total of $26.1 billion fixed maturity securities held by us (0.2% of total fixed maturity securities).    Changes in fair value for our available-for-sale portfolio, net of related DAC and VOBA, are charged or credited directly to shareowner's equity, net of tax. Declines in fair value that are other-than-temporary are recorded as realized losses in the consolidated statements of income, net of any applicable non-credit component of the loss, which is recorded as an adjustment to other comprehensive income (loss).    

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

                                                       As of December 31, Type                                                 2011          2010                                                    (Dollars In Millions) Corporate bonds                                  $   20,128.7   $ 17,411.7 Residential mortgage-backed securities                2,651.0      2,905.7 Commercial mortgage-backed securities                   740.8        311.6 Other asset-backed securities                           971.0        991.7 U.S. government-related bonds                         1,771.5      1,557.3 Other government-related bonds                          137.9        327.8 

States, municipals, and political subdivisions 1,556.7 1,138.4 Total fixed income portfolio

                     $   27,957.6   $ 24,644.2     Within our fixed maturity investments, we maintain portfolios classified as "available-for-sale" and "trading". We purchase our investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, we may sell any of our investments to maintain proper matching of assets and liabilities. Accordingly, we classified $25.0 billion, or 89.4%, of our fixed maturities as "available-for-sale" as of December 31, 2011. These securities are carried at fair value on our consolidated balance sheets.    Trading securities are carried at fair value and changes in fair value are recorded on the income statement as they occur. Our trading portfolio accounts for $3.0 billion, or 10.6%, of our fixed maturities as of December 31, 2011. Fixed maturities with a fair value of $2.9 billion and short-term investments with a fair value of $85.8 million in the trading portfolio, including gains and losses from sales, are passed to the reinsurers through the contractual terms of the reinsurance arrangements. Partially offsetting these amounts are corresponding changes in the fair value of the embedded derivative associated with the underlying reinsurance arrangement. The total Modco trading portfolio fixed maturities by rating is as follows:                                               As of December 31,                                            2011          2010                                          (Dollars In Thousands) AAA                                    $    845,498   $   824,553 AA                                          267,450       276,936 A                                           702,889       576,821 BBB                                         909,296       932,172 Below investment grade                      211,672       246,062

Total Modco trading fixed maturities $ 2,936,805$ 2,856,544

     A portion of our bond portfolio is invested in residential mortgage-backed securities ("RMBS"), commercial mortgage-backed securities ("CMBS"), and other asset-backed securities (collectively referred to as asset-backed securities or "ABS"). ABS are securities that are backed by a pool of assets from the investee. These holdings as of December 31, 2011, were approximately $4.4 billion. Mortgage-backed securities ("MBS") are constructed from pools of mortgages and may have cash flow volatility as a result of changes in the rate at which prepayments of principal occur with respect to the underlying loans. Excluding limitations on access to lending and other extraordinary economic conditions, prepayments of principal on the underlying loans can be expected to accelerate with decreases in market interest rates and diminish with increases in interest rates.                                           77 

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    Residential mortgage-backed securities - The tables below include a breakdown of our RMBS portfolio by type and rating as of December 31, 2011. As of December 31, 2011, these holdings were approximately $2.7 billion. Sequential securities receive payments in order until each class is paid off. Planned amortization class securities ("PACs") pay down according to a schedule. Pass through securities receive principal as principal of the underlying mortgages is received.                    Percentage of                  Residential                Mortgage-Backed Type             Securities Sequential                37.5 % PAC                       29.0 Pass Through              11.1 Other                     22.4                          100.0 %                               Percentage of                            Residential                          Mortgage-Backed Rating                     Securities AAA                                 56.8 % AA                                   0.4 A                                    2.6 BBB                                  1.2 Below investment grade              39.0                                    100.0 %                                            78 

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   Table of Contents    Alt-A Collateralized Holdings    As of December 31, 2011, we held securities with a fair value of $354.4 million, or 1.0% of invested assets, supported by collateral classified as Alt-A. As of December 31, 2010, we held securities with a fair value of $401.0 million supported by collateral classified as Alt-A.    

The following table includes the percentage of our collateral classified as Alt-A, grouped by rating category, as of December 31, 2011:

                            Percentage of                              Alt-A Rating                    Securities A                                  1.0 BBB                                1.9 Below investment grade            97.1                                  100.0 %    

The following tables categorize the estimated fair value and unrealized gain/(loss) of our mortgage-backed securities collateralized by Alt-A mortgage loans by rating as of December 31, 2011:

Alt-A Collateralized Holdings                                                 Estimated Fair Value of

Security by Year of Security Origination

                               2007 and Rating                          Prior              2008            2009            2010            2011               Total                                                                    (Dollars In Millions) A                         $             3.6     $         -     $         -     $         -     $         -     $             3.6 BBB                                     6.8               -               -               -               -                   6.8 Below investment grade                344.0               -               -               -               -                 344.0 Total mortgage-backed securities collateralized by Alt-A mortgage loans            $           354.4     $         -     $         -     $         -     $         -     $           354.4                                                   Estimated Unrealized Gain

(Loss) of Security by Year of Security Origination

                                   2007 and Rating                              Prior                  2008               2009               2010               2011             Total                                                                           (Dollars In Millions) A                           $                   -      $           -      $           -      $           -      $           -      $        - BBB                                           0.6                  -                  -                  -                  -             0.6 Below investment grade                      (66.5 )                -                  -                  -                  -           (66.5 ) Total mortgage-backed securities collateralized by Alt-A mortgage loans     $               (65.9 )    $           -      $           -      $           -      $           -      $    (65.9 )                                            79 

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Sub-prime Collateralized Holdings

    As of December 31, 2011, we had RMBS, all rated AAA, with a total fair value of $0.1 million of total invested assets that were supported by collateral classified as sub-prime. As of December 31, 2010, we held securities with a fair value of $0.1 million that were supported by collateral classified as sub-prime. As of December 31, 2011, we reclassified approximately $38.8 million of our RMBS sub-prime holdings to ABS. The underlying collateral of these securities remain in the sub-prime category.   

Prime Collateralized Holdings

    As of December 31, 2011, we had RMBS collateralized by prime mortgage loans (including agency mortgages) with a total fair value of $2.3 billion, or 6.6%, of total invested assets. As of December 31, 2010, we held securities with a fair value of $2.5 billion of RMBS collateralized by prime mortgage loans (including agency mortgages).    

The following table includes the percentage of our collateral classified as prime, grouped by rating category, as of December 31, 2011:

                            Percentage of                              Prime Rating                    Securities AAA                               65.6 % AA                                 0.4 A                                  2.9 BBB                                1.1 Below investment grade            30.0                                  100.0 %    

The following tables categorize the estimated fair value and unrealized gain/(loss) of our mortgage-backed securities collateralized by prime mortgage loans (including agency mortgages) by rating as of December 31, 2011:

                            Prime Collateralized Holdings                                    Estimated Fair Value of Security by Year of Security Origination                          2007 and Rating                     Prior            2008          2009          2010           2011         Total                                                       (Dollars In Millions) AAA                   $         708.4    $        -    $     85.9    $     406.3    $     306.0   $ 1,506.6 AA                                9.9             -             -              -              -         9.9 A                                66.3             -             -              -              -        66.3 BBB                              24.4             -             -              -              -        24.4 Below investment grade                           689.3             -             -              -              -       689.3 Total mortgage-backed securities collateralized by prime mortgage loans                 $       1,498.3    $        -    $     85.9    $     406.3    $     306.0   $ 2,296.5                                          Estimated Unrealized Gain (Loss) of

Security by Year of Security Origination

                            2007 and Rating                       Prior              2008             2009              2010               2011            Total                                                                  (Dollars In Millions) AAA                      $         45.2     $          -     $        8.0     $         16.6     $         15.3     $     85.1 AA                                  0.3                -                -                  -                  -            0.3 A                                   0.4                -                -                  -                  -            0.4 BBB                                (0.4 )              -                -                  -                  -           (0.4 ) Below investment grade            (31.3 )              -                -                  -                  -          (31.3 ) Total mortgage-backed securities collateralized by prime mortgage loans     $         14.2     $          -     $        8.0     $         16.6     $         15.3     $     54.1                                            80 

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    Commercial mortgage-backed securities - Our CMBS portfolio consists of commercial mortgage-backed securities issued in securitization transactions. As of December 31, 2011, the CMBS holdings were approximately $740.8 million. As of December 31, 2010, the CMBS holdings were approximately $311.6 million.    

The following table includes the percentages of our CMBS holdings, grouped by rating category, as of December 31, 2011:

             Percentage of            Commercial          Mortgage-Backed Rating     Securities AAA                 69.7 % AA                   8.9 A                   21.4                    100.0 %    

The following tables categorize the estimated fair value and unrealized gain/(loss) of our CMBS as of December 31, 2011:

Commercial Mortgage-Backed Securities                                    Estimated Fair Value of Security by Year of

Security Origination

                         2007 and Rating                   Prior           2008          2009           2010            2011         Total                                                      (Dollars In Millions) AAA                   $      156.4    $     44.9    $        -    $       86.6    $      228.4   $   516.3 AA                             7.3             -             -            29.5            29.3        66.1 A                             39.2             -           5.9            34.7            78.6       158.4 Total commercial mortgage- backed securities            $      202.9    $     44.9    $      5.9    $      150.8    $      336.3   $   740.8                                       Estimated Unrealized Gain (Loss) of

Security by Year of Security Origination

                           2007 and Rating                     Prior             2008             2009             2010              2011            Total                                                               (Dollars In Millions) AAA                     $        3.3     $        1.8     $          -     $        5.9     $         12.9     $     23.9 AA                              (0.4 )              -                -             (1.7 )             (0.5 )         (2.6 ) A                                1.7                -              0.2              2.1                  -            4.0 Total commercial mortgage- backed securities              $        4.6     $        1.8     $        0.2     $        6.3     $         12.4     $     25.3                                            81 

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    Other asset-backed securities - Other asset-backed securities pay down based on cash flow received from the underlying pool of assets, such as receivables on auto loans, student loans, credit cards, etc. As of December 31, 2011, these holdings were approximately $971.0 million. As of December 31, 2010, these holdings were approximately $991.7 million.    

The following table includes the percentages of our other asset-backed holdings, grouped by rating category, as of December 31, 2011:

                              Percentage of                          Other Asset-Backed Rating                       Securities AAA                                    72.1 % AA                                     11.8 A                                       9.6 BBB                                     0.6 Below investment grade                  5.9                                       100.0 %    

The following tables categorize the estimated fair value and unrealized gain/(loss) of our asset-backed securities as of December 31, 2011:

                            Other Asset-Backed Securities                                      Estimated Fair Value of Security by Year

of Security Origination

                        2007 and Rating                    Prior           2008          2009           2010           2011            Total                                                         (Dollars In Millions) AAA                   $       633.4    $        -    $      22.7    $      32.0    $      12.2    $       700.3 AA                            114.7             -              -              -              -            114.7 A                               6.8             -              -              -           86.2             93.0 BBB                             5.6             -              -              -              -              5.6 Below investment grade                          57.4             -              -              -              -             57.4 Total other asset-backed securities            $       817.9    $        -    $      22.7    $      32.0    $      98.4    $       971.0                                          Estimated Unrealized Gain (Loss) of Security by Year of Security                                                                 Origination                           2007 and Rating                     Prior              2008            2009            2010             2011           Total                                                            (Dollars In Millions) AAA                   $          (25.4 )   $         -     $         -     $         -     $        0.1     $   (25.3 ) AA                               (10.5 )             -               -               -                -         (10.5 ) A                                 (0.3 )             -               -               -              2.3           2.0 BBB                                  -               -               -               -                -             - Below investment grade                            (50.2 )             -               -               -                -         (50.2 ) Total other asset-backed securities            $          (86.4 )   $         -     $         -     $         -     $        2.4     $   (84.0 )                                            82 

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    We obtained ratings of our fixed maturities from Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), and/or Fitch Ratings ("Fitch"). If a fixed maturity is not rated by Moody's, S&P, or Fitch, we use ratings from the National Association of Insurance Commissioners ("NAIC"), or we rate the fixed maturity based upon a comparison of the unrated issue to rated issues of the same issuer or rated issues of other issuers with similar risk characteristics. As of December 31, 2011, over 99.0% of our fixed maturities were rated by Moody's, S&P, Fitch, and/or the NAIC.    The industry segment composition of our fixed maturity securities is presented in the following table:                                              As of            % Fair             As of            % Fair                                     December 31, 2011       Value       December 31, 2010       Value                                                           (Dollars In Thousands) Banking                            $         2,282,096          8.2 %  $         2,046,515          8.3 % Other finance                                  247,963          0.9                162,157          0.7 Electric                                     3,726,291         13.3              3,145,491         12.8 Natural gas                                  2,261,519          8.1              2,153,935          8.7 Insurance                                    2,127,963          7.6              1,874,015          7.6 Energy                                       1,722,926          6.2              1,408,963          5.7 Communications                               1,239,770          4.4              1,178,727          4.8 Basic industrial                             1,196,626          4.3              1,110,947          4.5 Consumer noncyclical                         1,324,561          4.7              1,146,240          4.7 Consumer cyclical                              737,424          2.6                566,808          2.3 Finance companies                              218,699          0.8                214,102          0.9 Capital goods                                  934,137          3.3                732,975          3.0 Transportation                                 622,729          2.2                551,088          2.2 Other industrial                               175,063          0.6                148,819          0.6 Brokerage                                      520,892          1.9                484,111          2.0 Technology                                     677,844          2.4                405,187          1.6 Real estate                                     83,208          0.3                 55,424          0.2 Other utility                                   28,973          0.1                 26,233          0.1 Commercial mortgage-backed securities                                     740,775          2.6                311,564          1.3 Other asset-backed securities                  970,957          3.5                991,732          4.0 Residential mortgage-backed non-agency securities                        1,215,872          4.3              2,079,795          8.4 Residential mortgage-backed agency securities                            1,435,135          5.1                825,869          3.4 U.S. government-related securities                                   1,771,535          6.3              1,557,295          6.3 Other government-related securities                                     137,862          0.5                327,760          1.3 State, municipals, and political divisions                          1,556,745          5.8              1,138,435          4.6              Total                 $        27,957,565        100.0 %  $        24,644,187        100.0 %     Our investments in debt and equity securities are reported at fair value. As of December 31, 2011, our fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $28.0 billion, which was 7.3% above amortized cost of $26.1 billion. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market fluctuations are not expected to adversely affect liquidity.    Market values for private, non-traded securities are determined as follows: 1) we obtain estimates from independent pricing services and 2) we estimate market value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics. We analyze the independent pricing services valuation methodologies and related inputs, including an assessment of the observability of market inputs. Upon obtaining this information related to market value, management makes a determination as to the appropriate valuation amount.                                           83  --------------------------------------------------------------------------------

   Table of Contents    Mortgage Loans    We invest a portion of our investment portfolio in commercial mortgage loans. As of December 31, 2011, our mortgage loan holdings were approximately $5.4 billion. We have specialized in making loans on either credit-oriented commercial properties or credit-anchored strip shopping centers and apartments. Our underwriting procedures relative to our commercial loan portfolio are based, in our view, on a conservative and disciplined approach. We concentrate on a small number of commercial real estate asset types associated with the necessities of life (retail, multi-family, professional office buildings, and warehouses). We believe these asset types tend to weather economic downturns better than other commercial asset classes in which we have chosen not to participate. We believe this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout our history.    

Our commercial mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan's contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts, and prepayment fees are reported in net investment income.

    We record mortgage loans net of an allowance for credit losses. This allowance is calculated through analysis of specific loans that have indicators of potential impairment based on current information and events. As of December 31, 2011 and December 31, 2010, our allowance for mortgage loan credit losses was $5.0 million$11.7 million, respectively. While our mortgage loans do not have quoted market values, as of December 31, 2011, we estimated the fair value of our mortgage loans to be $6.2 billion (using discounted cash flows from the next call date), which was 14.4% greater than the amortized cost, less any related loan loss reserve.    At the time of origination, our mortgage lending criteria targets that the loan-to-value ratio on each mortgage is 75% or less. We target projected rental payments from credit anchors (i.e., excluding rental payments from smaller local tenants) of 70% of the property's projected operating expenses and debt service.    We also offer a type of commercial mortgage loan under which we will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate. As of December 31, 2011 and December 31, 2010, approximately $876.8 million and $884.7 million, respectively, of our mortgage loans had this participation feature. Cash flows received as a result of this participation feature are recorded as interest income. Exceptions to these loan-to-value measures may be made if we believe the mortgage has an acceptable risk profile.    Many of our mortgage loans have call options or interest rate reset options between 3 and 10 years. However, if interest rates were to significantly increase, we may be unable to exercise the call options or increase the interest rates on our existing mortgage loans commensurate with the significantly increased market rates. Assuming the loans are called at their next call dates, approximately $196.6 million will become due in 2012, $1.4 billion in 2013 through 2017, $772.9 million in 2018 through 2022, and $272.4 million thereafter.    As of December 31, 2011, less than 0.08%, or $28.4 million, of invested assets consisted of nonperforming, restructured or mortgage loans that were foreclosed and were converted to real estate properties. We do not expect these investments to adversely affect our liquidity or ability to maintain proper matching of assets and liabilities. Our mortgage loan portfolio consists of two categories of loans: (1) those not subject to a pooling and servicing agreement and (2) those previously a part of variable interest entity securitizations and thus subject to a contractual pooling and servicing agreement.    As of December 31, 2011, $9.5 million of mortgage loans not subject to a pooling and servicing agreement were nonperforming. None of these nonperforming loans have been restructured during year ended December 31, 2011.    As of December 31, 2011, $18.4 million of loans subject to a pooling and servicing agreement were nonperforming or restructured. None of these nonperforming loans have been restructured during the year ended December 31, 2011. In addition, we foreclosed on some nonperforming loans and converted them to $0.5 million of real estate properties during the year ended December 31, 2011.                                           84 

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We do not expect these investments to adversely affect our liquidity or ability to maintain proper matching of assets and liabilities.

    It is our policy to cease to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. For loans subject to a pooling and servicing agreement, there are certain additional restrictions and/or requirements related to workout proceedings, and as such, these loans may have different attributes and/or circumstances affecting the status of delinquency or categorization of those in nonperforming status.    Securities Lending    In prior periods, we participated in securities lending, primarily as an enhancement to our investment yield. Securities that we held as investments were loaned to third parties for short periods of time. We 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, we discontinued this program. Certain collateral assets, which we previously intended to ultimately dispose of and on which we recorded an other-than-temporary impairment of $1.3 million, were instead retained by us and are included in our fixed maturities as of December 31, 2011. We currently do not have any intent to sell these securities, nor do we anticipate being required to sell them.    

Risk Management and Impairment Review

We monitor the overall credit quality of our portfolio within established guidelines. The following table includes our available-for-sale fixed maturities by credit rating as of December 31, 2011:

                                                      Percent of Rating                         Fair Value          Fair Value                          (Dollars In Thousands) AAA                      $             3,762,741         15.1 % AA                                     1,963,853          7.9 A                                      7,008,724         28.0 BBB                                   10,551,661         42.2 Investment grade                      23,286,979         93.2 BB                                       620,643          2.5 B                                        249,108          1.0 CCC or lower                             840,870          3.3 Below investment grade                 1,710,621          6.8 Total                    $            24,997,600        100.0 %    

Not included in the table above are $2.7 billion of investment grade and $232.7 million of below investment grade fixed maturities classified as trading securities.

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    Limiting bond exposure to any creditor group is another way we manage credit risk. We held no credit default swaps on the positions listed below as of December 31, 2011. The following table includes securities held in our Modco portfolio and summarizes our ten largest maturity exposures to an individual creditor group as of December 31, 2011:                                                 Fair Value of                                           Funded       Unfunded       Total Creditor                                Securities    Exposures     Fair Value                                                  (Dollars In Millions)

Federal National Mortgage Association $ 247.1 $ - $ 247.1 Federal Home Loan Mortgage Corp.

              241.8            -          241.8 Nextera Energy Inc.                           189.0            -          189.0 Berkshire Hathaway Inc.                       177.1            -          177.1 Comcast Corp.                                 170.6            -          170.6 Verizon Communications Inc.                   161.1            -          161.1 First Energy Corp.                            155.6            -          155.6 Rio Tinto                                     151.3            -          151.3 JP Morgan Chase and Company                   145.0          1.0          146.0 AT&T Corporation                              142.8            -          142.8     Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value is both objective and subjective, and can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets. We review our positions on a monthly basis for possible credit concerns and review our current exposure, credit enhancement, and delinquency experience.    Management considers a number of factors when determining the impairment status of individual securities. These include the economic condition of various industry segments and geographic locations and other areas of identified risks. Since it is possible for the impairment of one investment to affect other investments, we engage in ongoing risk management to safeguard against and limit any further risk to our investment portfolio. Special attention is given to correlative risks within specific industries, related parties, and business markets.    For certain securitized financial assets with contractual cash flows, including RMBS, CMBS, and other asset-backed securities (collectively referred to as asset-backed securities or "ABS"), GAAP requires us to periodically update our best estimate of cash flows over the life of the security. If the fair value of a securitized financial asset is less than its cost or amortized cost and there has been a decrease in the present value of the expected cash flows since the last revised estimate, considering both timing and amount, an other-than-temporary impairment charge is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. Projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral. In addition, we consider our intent and ability to retain a temporarily depressed security until recovery.    The FASB has issued guidance related to other-than-temporary impairments for debt securities. This guidance addresses the timing of impairment recognition and provides greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. Impairments will continue to be measured at fair value with credit losses recognized in earnings and non-credit losses recognized in other comprehensive income. This guidance also requires disclosures regarding measurement techniques, credit losses, and an aging of securities with unrealized losses. For the year ended December 31, 2011, we recorded total other-than-temporary impairments of approximately $62.2 million, with $14.9 million of this amount recorded in other comprehensive income (loss).    Securities in an unrealized loss position are reviewed at least quarterly to determine if an other-than-temporary impairment is present based on certain quantitative and qualitative factors. We consider a number of factors in determining whether the impairment is other-than-temporary. These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) an assessment of our intent to sell the security (including a more likely than not assessment of whether we 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.                                           86  --------------------------------------------------------------------------------

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    Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures considered, along with an analysis regarding our expectations for recovery of the security's entire amortized cost basis through the receipt of future cash flows. Based on our analysis, for the year ended December 31, 2011, we concluded that approximately $47.3 million of investment securities in an unrealized loss position was other-than-temporarily impaired, due to credit-related factors, resulting in a charge to earnings. Additionally, we recognized $14.9 million of non-credit losses in other comprehensive income for the securities where an other-than-temporary impairment was recorded for the year ended December 31, 2011.    There are certain risks and uncertainties associated with determining whether declines in market values are other-than-temporary. These include significant changes in general economic conditions and business markets, trends in certain industry segments, interest rate fluctuations, rating agency actions, changes in significant accounting estimates and assumptions, commission of fraud, and legislative actions. We continuously monitor these factors as they relate to the investment portfolio in determining the status of each investment.    

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

    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. For the year ended December 31, 2011, we recorded $28.6 million of impairments and credit related losses related to our European holdings, which resulted in a charge to earnings. The chart shown below includes our non-sovereign fair value exposures in these countries as of December 31, 2011. As of December 31, 2011, we 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                     $    372.1    $         347.2   $       719.3 Switzerland                             131.0              193.6           324.6 France                                  127.4               78.3           205.7 Sweden                                  163.5                  -           163.5 Netherlands                              80.9               66.4           147.3 Spain                                    38.7               79.0           117.7 Belgium                                     -              103.1           103.1 Germany                                  31.8               61.5            93.3 Ireland                                   5.3               82.2            87.5 Luxembourg                                  -               50.1            50.1 Italy                                       -               40.7            40.7 Norway                                      -               13.9            13.9 Total securities                        950.7            1,116.0         2,066.7 Derivatives: Germany                                   3.8                  -             3.8                                    $    954.5    $       1,116.0   $     2,070.5                                            87 

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   Table of Contents    Realized Gains and Losses    The following table sets forth realized investment gains and losses for the periods shown:                                         For The Year Ended December 31,                 Change                                      2011           2010          2009         2011         2010                                                        (Dollars In Thousands)

Fixed maturity gains - sales $ 95,384$ 93,310$ 26,805

  $   2,074    $  66,505 Fixed maturity losses - sales         (15,340 )     (41,494 )     (21,957 )     26,154      (19,537 ) Equity gains - sales                    9,136         6,492        14,367        2,644       (7,875 ) Equity losses - sales                       -            (3 )         (56 )          3           53 Impairments on fixed maturity securities                            (47,321 )     (39,550 )    (160,319 )     (7,771 )    120,769 Impairments on equity securities                                  -        (1,815 )     (19,572 )      1,815       17,757 Modco trading portfolio trading activity                      164,224       109,399       285,178       54,825     (175,779 ) Other                                  (5,651 )      (9,283 )        (628 )      3,632       (8,655 ) Total realized gains (losses) - investments                    $    200,432    $  117,056    $  123,818   

$ 83,376 $ (6,762 )

  Derivatives related to variable annuity contracts: Interest rate futures - VA       $    164,221    $  (11,778 )  $        -    $ 175,999    $ (11,778 ) Equity futures - VA                   (30,061 )     (42,258 )           -       12,197      (42,258 ) Currency futures - VA                   2,977             -             -            -            - Volatility swaps - VA                    (239 )      (2,433 )           -            -            - Equity options - VA                   (15,051 )      (1,824 )           -            -            - Interest rate swaps - VA                7,718             -             -            -            - Credit default swaps - VA              (7,851 )           -             -            -            - Embedded derivative - GMWB           (127,537 )      (5,728 )      19,722     (121,809 )    (25,450 ) Total derivatives related to variable annuity contracts             (5,823 )     (64,021 )      19,722       66,387      (79,486 ) Embedded derivative - Modco reinsurance treaties                 (134,340 )     (67,989 )    (252,698 )    (66,351 )    184,709 Interest rate swaps                   (11,264 )      (8,427 )      39,317       (2,837 )    (47,744 ) Interest rate caps                     (2,801 )           -             -       (2,801 )          - Interest rate futures                       -             -         6,889            -       (6,889 ) Interest rate floors/YRT(1) premium support arrangements                             (300 )      (4,800 )       4,300        4,500       (9,100 ) Other derivatives                        (477 )         799         5,590       (1,276 )     (4,791 ) Total realized gains (losses) - derivatives                    $   (155,005 )  $ (144,438 )  $ (176,880 )  $  64,009    $ (42,787 )    

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(1) YRT - yearly renewtable term

    Realized gains and losses on investments reflect portfolio management activities designed to maintain proper matching of assets and liabilities and to enhance long-term investment portfolio performance. The change in net realized investment gains (losses), excluding impairments and Modco trading portfolio activity during the year ended December 31, 2011, primarily reflects the normal operation of our asset/liability program within the context of the changing interest rate and spread environment, as well as tax planning strategies designed to utilize capital loss carryforwards.    The $9.1 million of gains included in equity securities primarily relates to gains of $6.9 million on the sale of securities that had recovered in value as the issuer exited bankruptcy and $1.2 million that relates to gains recognized on the sale of Federal National Mortgage Association preferreds.                                           88  --------------------------------------------------------------------------------

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    Realized losses are comprised of both write-downs of other-than-temporary impairments and actual sales of investments. For the year ended December 31, 2011, we recognized pre-tax other-than-temporary impairments of $47.3 million due to credit-related factors, resulting in a charge to earnings. Additionally, we recognized $14.9 million of non-credit losses in other comprehensive income (loss) for the securities where an other-than-temporary impairment was recorded. For the year ended December 31, 2010, we recognized pre-tax other-than-temporary impairments of $41.4 million. These other-than-temporary impairments resulted from our analysis of circumstances and our belief that credit events, loss severity, changes in credit enhancement, and/or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to these investments. These other-than-temporary impairments, net of Modco recoveries, are presented in the chart below:                         For the Year Ended December 31,                         2011                 2010                           (Dollars In Millions) Alt-A MBS         $           17.9     $           25.1 Other MBS                     15.0                 11.1 Corporate Bonds               12.4                  4.4 Sub-prime Bonds                2.0                  0.8 Total             $           47.3     $           41.4     As previously discussed, management considers several factors when determining other-than-temporary impairments. Although we purchase securities with the intent to hold them until maturity, we may change our position as a result of a change in circumstances. Any such decision is consistent with our classification of all but a specific portion of our investment portfolio as available-for-sale. For the year ended December 31, 2011, we sold securities in an unrealized loss position with a fair value of $263.1 million. For such securities, the proceeds, realized loss, and total time period that the security had been in an unrealized loss position are presented in the table below:                                Proceeds    % Proceeds    Realized Loss    % Realized Loss                                               (Dollars In Thousands) <= 90 days                  $ 148,457         56.4 % $        (1,508 )             9.8 % >90 days but <= 180 days       37,334         14.2            (2,259 )            14.7 >180 days but <= 270 days           -          0.0                 -               0.0 >270 days but <= 1 year        41,676         15.8            (2,582 )            16.8 >1 year                        35,617         13.6            (8,991 )            58.7 Total                       $ 263,084        100.0 % $       (15,340 )           100.0 %     For the year ended December 31, 2011, we sold securities in an unrealized loss position with a fair value (proceeds) of $263.1 million. The loss realized on the sale of these securities was $15.3 million. The $15.3 million loss recognized on available-for-sale securities for the year ended December 31, 2011, includes an $8.1 million loss on the sale of Societe Generale and a $2.2 million loss on the sale of BNP Paribas. We made the decision to exit these holdings in order to reduce our European financial exposure.    For the year ended December 31, 2011, we sold securities in an unrealized gain position with a fair value of $2.2 billion. The gain realized on the sale of these securities was $104.5 million.    The $5.7 million of other realized losses recognized for the year ended December 31, 2011, consists of the decrease in the mortgage loan reserves of $6.7 million, mortgage loan losses of $9.5 million, an impairment on a partnership of $2.6 million, real estate losses of $0.5 million, and other gains of $0.2 million.    For the year ended December 31, 2011, net gains of $164.2 million primarily related to mark-to-market changes on our Modco trading portfolios associated with the Chase Insurance Group, which consisted of five insurance companies that manufactured and administered traditional life insurance and annuity products and four related non-insurance companies (which collectively are referred to as the "Chase Insurance Group"), acquisition were also included in realized gains and losses. Of this amount, approximately $29.4 million of gains were realized through the sale of certain securities, which will be reimbursed to our reinsurance partners over time through the reinsurance settlement process for this block of business. Additional details on our investment performance and evaluation are provided in the sections below.                                           89  --------------------------------------------------------------------------------

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Realized investment gains and losses related to derivatives represent changes in the fair value of derivative financial instruments and gains/(losses) on derivative contracts closed during the period.

    We use equity, interest rate, and currency futures to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within our variable annuity products. In general, the cost of such benefits varies with the level of equity and interest rate markets, foreign currency levels, and overall volatility. The equity futures resulted in a net pre-tax loss of $30.1 million, interest rate futures resulted in pre-tax gains of $164.2 million, and currency futures resulted in net pre-tax gains of $3.0 million, for the year ended December 31, 2011, respectively.    We also use equity options and volatility swaps to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within our variable annuity products. In general, the cost of such benefits varies with the level of equity markets and overall volatility. The equity options resulted in net pre-tax losses of $15.1 million and volatility swaps resulted in a net pre-tax loss of $0.2 million for the year ended December 31, 2011, respectively.    We use interest rate swaps to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within our variable annuity products. These positions resulted in net pre-tax gains of $7.7 million for the year ended December 31, 2011.    We entered into credit default swaps to partially mitigate our non-performance risk related to certain GMWB within our variable annuity products. We reported net pre-tax losses of $7.9 million for the year ended December 31, 2011. Net settlements received were $2.5 million, offset by termination losses of $10.4 million. As of December 31, 2011, we do not hold any remaining credit default swaps.    The GMWB rider embedded derivative on variable deferred annuities, with the GMWB rider, had net realized losses of $127.5 million for the year ended December 31, 2011.    We also have in place various modified coinsurance and funds withheld arrangements that contain embedded derivatives. The $134.3 million of pre-tax losses on these embedded derivatives for the year ended December 31, 2011, was the result of spread tightening and a decline in treasury yields. For the year ended December 31, 2011, the investment portfolios that support the related modified coinsurance reserves and funds withheld arrangements had mark-to-market gains that substantially offset the losses on these embedded derivatives.    We use certain interest rate swaps to mitigate the price volatility of fixed maturities. These positions resulted in net pre-tax losses of $11.3 million for the year ended December 31, 2011. The net losses were the result of $10.4 million in realized losses due to terminations, $3.1 million in realized losses due to interest settlements, and $2.2 million in unrealized gains during the year ended December 31, 2011.    We purchased interest rate caps during the year ended December 31, 2011, to mitigate our credit risk with respect to our LIBOR exposure and the potential impact of European financial market distress. These caps resulted in net pre-tax losses of $2.8 million for the year ended December 31, 2011.    

We have an interest rate floor agreement and an YRT premium support arrangement with PLC. We recognized a pre-tax loss of $0.3 million for the year ended December 31, 2011, related to the interest rate floor agreement.

We also use various swaps to mitigate risk related to other exposures. These contracts generated net pre-tax losses of $0.5 million for the year ended December 31, 2011.

Unrealized Gains and Losses - Available-for-Sale Securities

    The information presented below relates to investments at a certain point in time and is not necessarily indicative of the status of the portfolio at any time after December 31, 2011, the balance sheet date. Information about unrealized gains and losses is subject to rapidly changing conditions, including volatility of financial markets and changes in interest rates. Management considers a number of factors in determining if an unrealized loss is other-than-temporary, including the expected cash to be collected and the intent, likelihood, and/or ability to hold the security until recovery. Consistent with our long-standing practice, we do not utilize a "bright line test" to determine other-than-temporary impairments. On a quarterly basis, we perform an analysis on every security with an unrealized loss to                                           90  --------------------------------------------------------------------------------

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    determine if an other-than-temporary impairment has occurred. This analysis includes reviewing several metrics including collateral, expected cash flows, ratings, and liquidity. Furthermore, since the timing of recognizing realized gains and losses is largely based on management's decisions as to the timing and selection of investments to be sold, the tables and information provided below should be considered within the context of the overall unrealized gain/(loss) position of the portfolio. As of December 31, 2011, we had an overall net unrealized gain of $1.8 billion, prior to tax and DAC offsets, and an overall net unrealized gain of $685.8 million as of December 31, 2010.    Credit and RMBS markets have experienced volatility across numerous asset classes over the past few years, primarily as a result of marketplace uncertainty arising from the failure or near failure of a number of large financial services companies resulting in intervention by the United States Federal Government, downgrades in ratings, interest rate changes, higher defaults in sub-prime and Alt-A residential mortgage loans, and a weakening of the overall economy. In connection with this uncertainty, we believe investors have departed from many investments in other asset-backed securities, including those associated with sub-prime and Alt-A residential mortgage loans, as well as types of debt investments with fewer lender protections or those with reduced transparency and/or complex features which may hinder investor understanding.    For fixed maturity and equity securities held that are in an unrealized loss position as of December 31, 2011, the fair value, amortized cost, unrealized loss, and total time period that the security has been in an unrealized loss position are presented in the table below:                                   Fair        % Fair     Amortized    % Amortized   Unrealized    % Unrealized                                Value       Value        Cost          Cost          Loss           Loss                                                         (Dollars In Thousands) <= 90 days                  $ 1,424,668       34.8 % $ 1,488,284          32.8 % $   (63,616 )         14.2 % >90 days but <= 180 days        932,180       22.8     1,003,983          22.1       (71,803 )         16.1 >180 days but <= 270 days       367,229        9.0       411,510           9.1       (44,281 )          9.9 >270 days but <= 1 year         104,889        2.6       117,248           2.6       (12,359 )          2.8 >1 year but <= 2 years          221,524        5.4       285,310           6.3       (63,786 )         14.3 >2 years but <= 3 years          21,132        0.5        23,826           0.5        (2,694 )          0.6 >3 years but <= 4 years         654,466       16.0       755,514          16.7      (101,048 )         22.6 >4 years but <= 5 years         171,168        4.2       212,283           4.7       (41,115 )          9.2 >5 years                        192,609        4.7       239,259           5.2       (46,650 )         10.3 Total                       $ 4,089,865      100.0 % $ 4,537,217         100.0 % $  (447,352 )        100.0 %     The majority of the unrealized loss as of December 31, 2011 for both investment grade and below investment grade securities is attributable to a widening in credit and mortgage spreads for certain securities. The negative impact of spread levels for certain securities was partially offset by lower treasury yield levels and the associated positive effect on security prices. Spread levels have improved since December 31, 2010. However, certain types of securities, including tranches of RMBS and ABS, continue to be priced at a level which has caused the unrealized losses noted above. We believe spread levels on these RMBS and ABS are largely due to the continued effects of the economic recession and the economic and market uncertainties regarding future performance of the underlying mortgage loans and/or assets.    As of December 31, 2011, the Barclays Investment Grade Index was priced at 220.53 bps versus a 10 year average of 168.58 bps. Similarly, the Barclays High Yield Index was priced at 750.05 bps versus a 10 year average of 643.51 bps. As of December 31, 2011, the five, ten, and thirty-year U.S. Treasury obligations were trading at levels of 0.833%, 1.877%, and 2.895%, as compared to 10 year averages of 3.171%, 3.938%, and 4.601%, respectively.    As of December 31, 2011, 45.7% of the unrealized loss was associated with securities that were rated investment grade. We have examined the performance of the underlying collateral and cash flows and expect that our investments will continue to perform in accordance with their contractual terms. Factors such as credit enhancements within the deal structures and the underlying collateral performance/characteristics support the recoverability of the investments. Based on the factors discussed, we do not consider these unrealized loss positions to be other-than-temporary. However, from time to time, we may sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield enhancement, asset/liability management, and liquidity requirements.                                           91 

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    Expectations that investments in mortgage-backed and asset-backed securities will continue to perform in accordance with their contractual terms are based on assumptions a market participant would use in determining the current fair value. It is reasonably possible that the underlying collateral of these investments will perform worse than current market expectations and that such an event may lead to adverse changes in the cash flows on our holdings of these types of securities. This could lead to potential future write-downs within our portfolio of mortgage-backed and asset-backed securities. Expectations that our investments in corporate securities and/or debt obligations will continue to perform in accordance with their contractual terms are based on evidence gathered through our normal credit surveillance process. Although we do not anticipate such events, it is reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate securities. It is also possible that such unanticipated events would lead us to dispose of those certain holdings and recognize the effects of any such market movements in our financial statements.    As of December 31, 2011, there were estimated gross unrealized losses of $53.8 million related to our mortgage-backed securities collateralized by Alt-A mortgage loans. Gross unrealized losses in our securities collateralized by Alt-A residential mortgage loans as of December 31, 2011, were primarily the result of continued widening spreads, representing marketplace uncertainty arising from higher defaults in Alt-A residential mortgage loans and rating agency downgrades of securities collateralized by Alt-A residential mortgage loans.    For the year ended December 31, 2011, we recorded $47.3 million of pre-tax other-than-temporary impairments related to estimated credit losses. These other-than-temporary impairments resulted from our analysis of circumstances and our belief that credit events, loss severity, changes in credit enhancement, and/or other adverse conditions of the respective issuers or underlying collateral have caused, or will lead to, a deficiency in the contractual cash flows related to these investments. Excluding the securities on which other-than-temporary impairments were recorded, we expect these investments to continue to perform in accordance with their original contractual terms. We have the ability and intent to hold these investments until maturity or until the fair values of the investments have recovered, which may be at maturity. Additionally, we do not expect these investments to adversely affect our liquidity or ability to maintain proper matching of assets and liabilities.                                           92  --------------------------------------------------------------------------------

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    We have no material concentrations of issuers or guarantors of fixed maturity securities. The industry segment composition of all securities in an unrealized loss position held as of December 31, 2011, is presented in the following table:                                      Fair       % Fair     Amortized    % Amortized    Unrealized    % Unrealized                                   Value      Value        Cost          Cost           Loss           Loss                                                            (Dollars In Thousands) Banking                        $ 1,166,677     28.5 %  $ 1,293,063          28.5 %  $  (126,386 )         28.3 % Other finance                       22,522      0.6         25,382           0.6         (2,860 )          0.6 Electric                           138,291      3.4        165,127           3.6        (26,836 )          6.0 Natural gas                         97,461      2.4        104,568           2.3         (7,107 )          1.6 Insurance                          351,962      8.6        386,996           8.5        (35,034 )          7.8 Energy                              13,373      0.3         18,495           0.4         (5,122 )          1.1 Communications                      47,331      1.2         56,167           1.2         (8,836 )          2.0 Basic industrial                   137,724      3.4        146,533           3.2         (8,809 )          2.0 Consumer noncyclical                13,488      0.3         13,847           0.3           (359 )          0.1 Consumer cyclical                   48,021      1.2         56,211           1.2         (8,190 )          1.8 Finance companies                   62,138      1.5         70,441           1.6         (8,303 )          1.9 Capital goods                      129,861      3.2        138,951           3.1         (9,090 )          2.0 Transportation                           -      0.0              -           0.0              -            0.0 Other industrial                    27,868      0.7         30,717           0.7         (2,849 )          0.6 Brokerage                          139,712      3.4        153,159           3.4        (13,447 )          3.0 Technology                          69,105      1.7         72,275           1.6         (3,170 )          0.7 Real estate                          1,347      0.0          1,391           0.0            (44 )          0.0 Other utility                           21      0.0             44           0.0            (23 )          0.0 Commercial mortgage-backed securities                          78,893      1.9         83,122           1.8         (4,229 )          0.9 Other asset-backed securities                         722,292     17.7        813,190          17.9        (90,898 )         20.3 Residential mortgage-backed non-agency securities              739,392     18.1        824,683          18.1        (85,291 )         19.2 Residential mortgage-backed agency securities                   61,075      1.5         61,486           1.5           (411 )          0.1 U.S. government-related securities                          21,311      0.4         21,369           0.5            (58 )          0.0 Other government-related securities                               -      0.0              -           0.0              -            0.0 States, municipals, and political divisions                      -      0.0              -           0.0              -            0.0 Total                          $ 4,089,865    100.0 %  $ 4,537,217         100.0 %  $  (447,352 )        100.0 %                                            93 

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

                                                         As of December 31,                                                       2011         2010  Banking                                                  28.3 %       14.1 % Other finance                                             0.6          0.4 Electric                                                  6.0          7.5 Natural gas                                               1.6          3.2 Insurance                                                 7.8          7.0 Energy                                                    1.1          0.4 Communications                                            2.0          1.6 Basic industrial                                          2.0          1.3 Consumer noncyclical                                      0.1          1.1 Consumer cyclical                                         1.8          2.1 Finance companies                                         1.9          1.8 Capital goods                                             2.0          1.8 Transportation                                            0.0          0.7 Other industrial                                          0.6          1.0 Brokerage                                                 3.0          2.3 Technology                                                0.7          1.2 Real estate                                               0.0          0.0 Other utility                                             0.0          0.0 Commercial mortgage-backed securities                     0.9          0.2 Other asset-backed securities                            20.3         15.7 

Residential mortgage-backed non-agency securities 19.2 29.3 Residential mortgage-backed agency securities

             0.1          0.5 U.S. government-related securities                        0.0          0.8 Other government-related securities                       0.0          0.0 States, municipals, and political divisions               0.0          6.0 Total                                                   100.0 %      100.0 %    

The range of maturity dates for securities in an unrealized loss position as of December 31, 2011, varies, with 25.4% maturing in less than 5 years, 22.5% maturing between 5 and 10 years, and 52.1% maturing after 10 years. The following table shows the credit rating of securities in an unrealized loss position as of December 31, 2011:

      S&P or Equivalent         Fair        % Fair     Amortized    % Amortized   Unrealized    % Unrealized      Designation            Value       Value        Cost          Cost          Loss           Loss                                                      (Dollars In Thousands) AAA/AA/A                 $ 1,746,837       42.7 % $ 1,857,694          40.9 % $  (110,857 )         24.8 % BBB                        1,013,389       24.8     1,106,811          24.4       (93,422 )         20.9 Investment grade           2,760,226       67.5     2,964,505          65.3      (204,279 )         45.7 BB                           377,313        9.2       420,010           9.3       (42,697 )          9.5 B                            232,043        5.7       282,769           6.2       (50,726 )         11.3 CCC or lower                 720,283       17.6       869,933          19.2      (149,650 )         33.5 Below investment grade     1,329,639       32.5     1,572,712          34.7      (243,073 )         54.3 Total                    $ 4,089,865      100.0 % $ 4,537,217         100.0 % $  (447,352 )        100.0 %     As of December 31, 2011, we held a total of 438 positions that were in an unrealized loss position. Included in that amount were 191 positions of below investment grade securities with a fair value of $1.3 billion that were in an unrealized loss position. Total unrealized losses related to below investment grade securities were $243.1 million, of which $184.5 million had been in an unrealized loss position for more than twelve months. Below investment grade securities in an unrealized loss position were 3.8% of invested assets.    As of December 31, 2011, securities in an unrealized loss position that were rated as below investment grade represented 32.5% of the total fair value and 54.3% of the total unrealized loss. We have the ability and intent to hold                                           94  --------------------------------------------------------------------------------

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    these securities to maturity. After a review of each security and its expected cash flows, we believe the decline in market value to be temporary. As of December 31, 2011, total unrealized losses for all securities in an unrealized loss position for more than twelve months were $255.3 million. A widening of credit spreads is estimated to account for unrealized losses of $503.8 million, with changes in treasury rates offsetting this loss by an estimated $248.5 million.    In addition, market disruptions in the RMBS market negatively affected the market values of our non-agency RMBS securities. The majority of our RMBS holdings as of December 31, 2011, were super senior or senior bonds in the capital structure. Our total non-agency portfolio has a weighted-average life of 2.43 years. The following table categorizes the weighted-average life for our non-agency portfolio, by category of material holdings, as of December 31, 2011:                           Weighted-Average

Non-agency portfolio         Life  Prime                              1.83 Alt-A                              3.84     The following table includes the fair value, amortized cost, unrealized loss, and total time period that the security has been in an unrealized loss position for all below investment grade securities as of December 31, 2011:                                   Fair        % Fair     Amortized    % Amortized   Unrealized    % Unrealized                                Value       Value        Cost          Cost          Loss           Loss                                                         (Dollars In Thousands) <= 90 days                  $   164,213       12.4 % $   179,610          11.4 % $   (15,397 )          6.3 % >90 days but <= 180 days        187,743       14.1       204,298          13.0       (16,555 )          6.8 >180 days but <= 270 days        82,625        6.2        97,543           6.2       (14,918 )          6.1 >270 days but <= 1 year          73,854        5.6        85,592           5.4       (11,738 )          4.8 >1 year but <= 2 years           85,926        6.5       118,784           7.6       (32,858 )         13.5 >2 years but <= 3 years          19,135        1.4        21,822           1.4        (2,687 )          1.1 >3 years but <= 4 years         507,152       38.1       596,888          38.0       (89,736 )         36.9 >4 years but <= 5 years          67,794        5.1        90,072           5.7       (22,278 )          9.2 >5 years                        141,197       10.6       178,103          11.3       (36,906 )         15.3 Total                       $ 1,329,639      100.0 % $ 1,572,712         100.0 % $  (243,073 )        100.0 %    

LIQUIDITY AND CAPITAL RESOURCES

   Liquidity    Liquidity refers to a company's ability to generate adequate amounts of cash to meet its needs. We meet our liquidity requirements primarily through positive cash flows from our operating activities. Primary sources of cash are premiums, deposits for policyholder accounts, investment sales and maturities, and investment income. Primary uses of cash include benefit payments, withdrawals from policyholder accounts, investment purchases, policy acquisition costs, and other operating expenses. We believe that we have sufficient liquidity to fund our cash needs under normal operating scenarios.    In the event of significant unanticipated cash requirements beyond our normal liquidity needs, we have additional sources of liquidity available depending on market conditions and the amount and timing of the liquidity need. These additional sources of liquidity include cash flows from operations, the sale of liquid assets, accessing our credit facility, and other sources described herein.    Our decision to sell investment assets could be impacted by accounting rules, including rules relating to the likelihood of a requirement to sell securities before recovery of our cost basis. Under stressful market and economic conditions, liquidity may broadly deteriorate which could negatively impact our ability to sell investment assets. If we require on short notice significant amounts of cash in excess of normal requirements, we may have difficulty selling                                           95 

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investment assets in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both.

    While we anticipate that our operating cash flows will be sufficient to meet our investment commitments and operating cash needs in a normal credit market environment, we recognize that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, we have established repurchase agreement programs to provide liquidity when needed. We expect that the rate received on our investments will equal or exceed our borrowing rate. Under this program, we may, from time to time, sell an investment security at a specific price and agree to repurchase that security at another specified price at a later date. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities. As of December 31, 2011, we had no outstanding balance related to such borrowings. For the year ended December 31, 2011, we had a maximum balance outstanding of $348.2 million related to these programs. The average daily balance was $147.7 million during the year ended December 31, 2011.    

Additionally, we may, from time to time, sell short-duration stable value products to complement our cash management practices. Depending on market conditions, we may also use securitization transactions involving our commercial mortgage loans to increase liquidity for the operating subsidiaries.

   Credit Facility    Under a revolving line of credit arrangement, we have the ability to borrow on an unsecured basis up to an aggregate principal amount of $500 million (the "Credit Facility"). We have the right in certain circumstances to request that the commitment under the Credit Facility be increased up to a maximum principal amount of $600 million. Balances outstanding under the Credit Facility accrue interest at a rate equal to (i) either the prime rate or the London Interbank Offered Rate ("LIBOR"), plus (ii) a spread based on the ratings of PLC's senior unsecured long-term debt. The Credit Agreement provides that we are liable for the full amount of any obligations for borrowings or letters of credit, excluding those of PLC, under the Credit Facility. The maturity date on the Credit Facility is April 16, 2013. We did not have an outstanding balance under the Credit Facility as of December 31, 2011. PLC had an outstanding balance of $170.0 million at an interest rate of LIBOR plus 0.40% under the Credit Facility as of December 31, 2011. We were not aware of any non-compliance with the financial debt covenants of the Credit Facility as of December 31, 2011.    Sources and Use of Cash    Our primary sources of funding are from our insurance operations and revenues from investments. The states in which we and our insurance subsidiaries are domiciled impose certain restrictions on the ability to pay dividends. These restrictions are based in part on the prior year's statutory income and surplus. Generally, these restrictions pose no short-term liquidity concerns.    We are a member of the FHLB of Cincinnati. FHLB advances provide an attractive funding source for short-term borrowing and for the sale of funding agreements. Membership in the FHLB requires that we purchase FHLB capital stock based on a minimum requirement and a percentage of the dollar amount of advances outstanding. Our borrowing capacity is determined by the following factors: 1) total advance capacity is limited to the lower of 50% of total assets or 100% of mortgage-related assets of Protective Life Insurance Company 2) ownership of appropriate capital and activity stock to support continued membership in the FHLB and current and future advances, and 3) the availability of adequate eligible mortgage or treasury/agency collateral to back current and future advances.    We held $64.6 million of FHLB common stock as of December 31, 2011, which is included in equity securities. In addition, our obligations under the advances must be collateralized. We maintain control over any such pledged assets, including the right of substitution. As of December 31, 2011, we had $1.0 billion of funding agreement-related advances and accrued interest outstanding under the FHLB program.    As of December 31, 2011, we reported approximately $664.8 million (fair value) of Auction Rate Securities ("ARS") in non-Modco portfolios. As of December 31, 2011, 85% of these ARS were rated Aaa/AAA and the remaining 15% were rated Aaa/AA- or better. While the auction rate market has experienced liquidity constraints, we                                           96 

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believe that based on our current liquidity position and our operating cash flows, any lack of liquidity in the ARS market will not have a material impact on our liquidity, financial condition, or cash flows.

    All of the auction rate securities held, on a consolidated basis, in non-Modco portfolios as of December 31, 2011, were student loan-backed auction rate securities, for which the underlying collateral is at least 97% guaranteed by the Federal Family Education Loan Program ("FFELP"). As there is no current active market for these auction rate securities, we use a valuation model, which incorporates, among other inputs, the contractual terms of each indenture and current valuation information from actively-traded asset-backed securities with comparable underlying assets (i.e. FFELP-backed student loans) and vintage.    We use an income approach valuation model to determine the fair value of our student loan-backed auction rate securities. Specifically, a discounted cash flow method is used. The expected yield on the auction rate securities is estimated for each coupon date, based on the contractual terms on each indenture. The estimated market yield is based on comparable securities with observable yields and an additional yield spread for illiquidity of auction rate securities in the current market.    The auction rate securities held in non-Modco portfolios are classified as a Level 2 or Level 3 valuation. An unrealized loss of $42.7 million and $16.7 million was recorded as of December 31, 2011 and December 31, 2010, respectively, and we have not recorded any other-than-temporary impairment because the underlying collateral for each of the auction rate securities is at least 97% guaranteed by the FFELP and there are subordinate tranches within each of these auction rate security issuances that would support the senior tranches in the event of default. In the event of a complete and total default by all underlying student loans, the principal shortfall, in excess of the 97% FFELP guarantee, would be absorbed by the subordinate tranches. Our non-performance exposure is to the FFELP guarantee, not the underlying student loans. At this time, we have no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary. In addition, we have the ability and intent to hold these securities until their values recover or maturity. Therefore, we believe that no other-than-temporary impairment has been experienced.    Our liquidity requirements primarily relate to the liabilities associated with our various insurance and investment products, operating expenses, and income taxes. Liabilities arising from insurance and investment products include the payment of policyholder benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans, and obligations to redeem funding agreements.    We maintain investment strategies intended to provide adequate funds to pay benefits and expected surrenders, withdrawals, loans, and redemption obligations without forced sales of investments. In addition, we hold highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund our expected operating expenses, surrenders, and withdrawals. We were committed as of December 31, 2011, to fund mortgage loans in the amount of $182.4 million.    Our positive cash flows from operations are used to fund an investment portfolio that provides for future benefit payments. We employ a formal asset/liability program to manage the cash flows of our investment portfolio relative to our long-term benefit obligations. As of December 31, 2011, we held cash and short-term investments of $271.2 million.                                           97  --------------------------------------------------------------------------------

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

                                                     For The Year Ended December 31,                                                  2011           2010           2009                                                        (Dollars In Thousands) 

Net cash provided by operating activities $ 632,399$ 689,508$ 1,206,814 Net cash used in investing activities

            (787,744 )     (599,791 )     (386,885 ) Net cash provided by (used in) financing activities                                         88,122        (15,577 )     (784,880 ) Total                                        $    (67,223 )  $    74,140    $    35,049    

For The Year Ended December 31, 2011 as compared to The Year Ended December 31, 2010

    Net cash provided by operating activities - Cash flows from operating activities are affected by the timing of premiums received, fees received, investment income, and expenses paid. Principal sources of cash include sales of our products and services. We typically generate positive cash flows from operating activities, as premiums and deposits collected from our insurance and investment products exceed benefits paid and redemptions, and we invest the excess. Accordingly, in analyzing our cash flows we focus on the change in the amount of cash available and used in investing activities.    Net cash used in investing activities - Changes in cash from investing activities primarily related to the activity in our investment portfolio. In addition, during the year ended December 31, 2011, we completed the reinsurance transaction with Liberty Life and we made a final payment in 2011 for the United Investors acquisition.    Net cash provided by (used in) financing activities - Changes in cash from financing activities included $281.4 million more inflows of investment product and universal life net activity, compared to the prior year. We repurchased $112.2 million of non-recourse funding obligations during 2011, as compared to $194.2 million during 2010. Dividends paid in the form of cash to our parent company in 2011 equaled $215.0 million, as compared to no payment activity in 2010.    Capital Resources    To give us flexibility in connection with future acquisitions and other funding needs, PLC has debt securities, preferred and common stock, and additional preferred securities of special purpose finance subsidiaries registered under the Securities Act of 1933 on a delayed (or shelf) basis.    We have a $500 million revolving line of credit (the "Credit Facility"), under which we could borrow funds with balances due April 16, 2013. PLC had an outstanding balance of $170.0 million as of December 31, 2011, under the Credit Facility at an interest rate of LIBOR plus 0.40%.    Golden Gate Captive Insurance Company ("Golden Gate"), a South Carolina special purpose financial captive insurance company and wholly owned subsidiary, had three series of Surplus Notes with a total outstanding balance of $800 million as of December 31, 2011. PLC holds the entire outstanding balance of Surplus Notes. The Series A1 Surplus Notes have a balance of $400 million and accrue interest at 7.375%, the Series A2 Surplus Notes have a balance of $100 million and accrue interest at 8%, and the Series A3 Surplus Notes have a balance of $300 million and accrue interest at 8.45%.    Golden Gate II Captive Insurance Company ("Golden Gate II"), a wholly owned special purpose financial captive insurance company, had $575.0 million of non-recourse funding obligations outstanding as of December 31, 2011. These outstanding non-recourse funding obligations were issued to special purpose trusts, which in turn issued securities to third parties. Certain of our affiliates purchased a portion of these securities during 2010 and 2011. As a result of these purchases, as of December 31, 2011, securities related to $407.8 million of the outstanding balance of the non-recourse funding obligations was held by external parties, securities related to $40.8 million of the non-recourse funding obligations were held by nonconsolidated affiliates, and $126.4 million were held by consolidated subsidiaries of the Company. These non-recourse funding obligations mature in 2052. $275 million of this amount is currently accruing interest at a rate of LIBOR plus 30 basis points. We have experienced higher borrowing costs than were                                           98  --------------------------------------------------------------------------------

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    originally expected associated with $300 million of our non-recourse funding obligations supporting the business reinsured to Golden Gate II. These higher costs are the result of higher spread component interest costs associated with the illiquidity of the current market for auction rate securities, as well as a rating downgrade of our guarantor by certain rating agencies. The current rate associated with these obligations is LIBOR plus 200 basis points, which is the maximum rate we can be required to pay under these obligations. We have contingent approval to issue an additional $100 million of obligations. Under the terms of the surplus notes, the holders of the surplus notes cannot require repayment from PLC, us, or any of our subsidiaries, other than Golden Gate II, the direct issuers of the surplus notes, although PLC has agreed to indemnify Golden Gate II for certain costs and obligations (which obligations do not include payment of principal and interest on the surplus notes). In addition, PLC has entered into certain support agreements with Golden Gate II obligating it to make capital contributions or provide support related to certain of Golden Gate II's expenses and in certain circumstances, to collateralize certain of PLC's obligations to Golden Gate II.    Golden Gate III Vermont Captive Insurance Company ("Golden Gate III"), a Vermont special purpose financial captive insurance company and wholly owned subsidiary, is party to a Reimbursement Agreement (the "Reimbursement Agreement") with UBS AG, Stamford Branch ("UBS"), as issuing lender. Under the original Reimbursement Agreement, dated April 23, 2010, UBS issued a letter of credit (the "LOC") in the initial amount of $505 million to a trust for the benefit of our wholly-owned subsidiary, West Coast Life Insurance Company ("WCL"). The LOC balance increased during 2011 in accordance with the terms of the Reimbursement Agreement. The Reimbursement Agreement was subsequently amended and restated effective November 21, 2011, to replace the existing LOC with one or more letters of credit from UBS, and to extend the maturity date from April 1, 2018, to April 1, 2022. The LOC balance was $560 million as of December 31, 2011. Subject to certain conditions, the amount of the LOC will be periodically increased up to a maximum of $610 million in 2013. The term of the LOC is expected to be 12 years, subject to certain conditions including capital contributions made to Golden Gate III by us or one of our affiliates. The LOC was issued to support certain obligations of Golden Gate III to WCL under an indemnity reinsurance agreement originally effective April 1, 2010, and subsequently amended and restated as of October 1, 2011.    Golden Gate IV Vermont Captive Insurance Company ("Golden Gate IV"), a Vermont special purpose financial captive insurance company and wholly owned subsidiary, is party to a Reimbursement Agreement with UBS AG, Stamford Branch, as issuing lender. Under the Reimbursement Agreement, dated December 10, 2010, UBS issued an LOC in the initial amount of $270 million to a trust for the benefit of WCL. The LOC balance has increased, in accordance with the terms of the Reimbursement Agreement, each quarter of 2011 and was $455 million as of December 31, 2011. Subject to certain conditions, the amount of the LOC will be periodically increased up to a maximum of $790 million in 2016. The term of the LOC is expected to be 12 years. The LOC was issued to support certain obligations of Golden Gate IV to WCL under an indemnity reinsurance agreement effective October 1, 2010, which was subsequently amended and restated as of July 1, 2011.    On April 29, 2011, in conjunction with Athene Holding Ltd's acquisition of Liberty Life from an affiliate of Royal Bank of Canada, we reinsured a life and health insurance block from Liberty Life. The capital invested by us in the transaction at closing was $321 million, including a $225 million ceding commission. In conjunction with closing, we invested $40 million in a surplus note issued by Athene Life Re.    A life insurance company's statutory capital is computed according to rules prescribed by the NAIC, as modified by state law. Generally speaking, other states in which a company does business defer to the interpretation of the domiciliary state with respect to NAIC rules, unless inconsistent with the other state's regulations. Statutory accounting rules are different from GAAP and are intended to reflect a more conservative view, for example, requiring immediate expensing of policy acquisition costs. The NAIC's risk-based capital ("RBC") requirements require insurance companies to calculate and report information under a risk-based capital formula. The achievement of long-term growth will require growth in our statutory capital and that of our insurance subsidiaries. We may secure additional statutory capital through various sources, such as retained statutory earnings or equity contributions. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner.    State insurance regulators and the NAIC have adopted RBC requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements                                           99  --------------------------------------------------------------------------------

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    provide a means of measuring the minimum amount of statutory surplus appropriate for an insurance company to support its overall business operations based on its size and risk profile. A company's risk-based statutory surplus is calculated by applying factors and performing calculations relating to various asset, premium, claim, expense, and reserve items. Regulators can then measure the adequacy of a company's statutory surplus by comparing it to the RBC. We manage our capital consumption by using the ratio of our total adjusted capital, as defined by the insurance regulators, to our company action level RBC (known as the RBC ratio), also as defined by insurance regulators. As of December 31, 2011, our total adjusted capital and company action level RBC was $2.9 billion and $680.5 million, respectively, providing an RBC ratio of approximately 433%.    Statutory reserves established for variable annuity contracts are sensitive to changes in the equity markets and are affected by the level of account values relative to the level of any guarantees and product design. As a result, the relationship between reserve changes and equity market performance is non-linear during any given reporting period. Market conditions greatly influence the capital required due to its impact on the valuation of reserves and derivative investments mitigating the risk in these reserves. For example, if the level of the S&P 500 had been 10% lower as of December 31, 2011, we estimate that our RBC ratio would have declined by approximately 15 to 20 points. Likewise, if the level of the S&P 500 had been 10% higher as of December 31, 2011, we estimate that our RBC ratio would have increased by an insignificant amount. Risk mitigation activities may result in material and sometimes counterintuitive impacts on statutory surplus and capital margin. Notably, as changes in these market and non-market factors occur, both our potential obligation and the related statutory reserves and/or required capital can vary at a non linear rate.    Our statutory surplus is impacted by credit spreads as a result of accounting for the assets and liabilities on our fixed MVA annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair value. In determining the statutory reserve for the fixed MVA annuities, we are required to use current crediting rates based on U.S. Treasuries. In many capital market scenarios, current crediting rates based on U.S. Treasuries are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in the statutory reserve from period to period will likely substantially offset the change in the fair value of the statutory separate account assets. However, in periods of volatile credit markets, actual credit spreads on investment assets may increase or decrease sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value gains or losses. As actual credit spreads are not fully reflected in current crediting rates based on U.S. Treasuries, the calculation of statutory reserves will not substantially offset the change in fair value of the statutory separate account assets resulting in a change in statutory surplus. The result of this mismatch had an immaterial impact on our statutory surplus for the year ended December 31, 2011, as compared to a positive impact to our statutory surplus of approximately $79 million on a pre-tax basis for the year ended December 31, 2010.    We cede material amounts of insurance and transfer related assets to other insurance companies through reinsurance. However, notwithstanding the transfer of related assets, we remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations that such reinsurer assumed. We evaluate the financial condition of our reinsurers and monitor the associated concentration of credit risk. For the year ended December 31, 2011, we ceded premiums to third party reinsurers amounting to $1.4 billion. In addition, we had receivables from reinsurers amounting to $5.5 billion as of December 31, 2011. We review reinsurance receivable amounts for collectability and establish bad debt reserves if deemed appropriate. For additional information related to our reinsurance exposure, see Note 8, Reinsurance.                                          100  --------------------------------------------------------------------------------

   Table of Contents    Ratings    Various Nationally Recognized Statistical Rating Organizations ("rating organizations") review the financial performance and condition of insurers, including us and our insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer's ability to meet policyholder and contract holder obligations. These ratings are important to maintaining public confidence in an insurer's products, its ability to market its products and its competitive position. The following table summarizes the financial strength ratings of our significant member companies from the major independent rating organizations as of December 31, 2011:                                                                  Standard & Ratings                             A.M. Best      Fitch        Poor's       Moody's  Insurance company financial strength rating: Protective Life Insurance Company                                A+            A           AA-           A2 West Coast Life Insurance Company                                A+            A           AA-           A2 Protective Life and Annuity Insurance Company                      A+            A           AA-            - Lyndon Property Insurance Company                                A-            -            -             -     Our ratings are subject to review and change by the rating organizations at any time and without notice. Rating organizations assign ratings based upon several factors. While most of the factors relate to the rated company, some of the factors relate to the views of the rating organization, general economic conditions, and circumstances outside the rated company's control. In addition, rating organizations use various models and formulas to assess the strength of a rated company, and from time to time rating organizations have, in their discretion, altered the models. Changes to the models could impact the rating organizations' judgment of the rating to be assigned to the rated company.    Liabilities    Many of our products contain surrender charges and other features that are designed to reward persistency and penalize the early withdrawal of funds. Certain stable value and annuity contracts have market-value adjustments that protect us against investment losses if interest rates are higher at the time of surrender than at the time of issue.    

As of December 31, 2011, we had policy liabilities and accruals of approximately $22.1 billion. Our interest-sensitive life insurance policies have a weighted-average minimum credited interest rate of approximately 3.62%.

   Contractual Obligations    The table below sets forth future maturities of non-recourse funding obligations, stable value products, operating lease obligations, other property lease obligations, mortgage loan and investment commitments, and policyholder obligations.    We enter into various obligations to third parties in the ordinary course of our operations. However, we do not believe that our cash flow requirements can be assessed based upon an analysis of these obligations. The most significant factors affecting our future cash flows are our ability to earn and collect cash from our customers, and the cash flows arising from our investment program. Future cash outflows, whether they are contractual obligations or not, will also vary based upon our future needs. Although some outflows are fixed, others depend on future events. Examples of fixed obligations include our obligations to pay principal and interest on fixed-rate borrowings. Examples of obligations that will vary include obligations to pay interest on variable-rate borrowings and insurance liabilities that depend on future interest rates, market performance, or surrender provisions. Many of our obligations are linked to cash-generating contracts. In addition, our operations involve significant expenditures that are not based upon commitments. These include expenditures for income taxes and payroll.                                          101 

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    As of December 31, 2011, we carried a $5.2 million liability for uncertain tax positions, including interest on unrecognized tax benefits. These amounts are not included in the long-term contractual obligations table because of the difficulty in making reasonably reliable estimates of the occurrence or timing of cash settlements with the respective taxing authorities.                                                                  Payments due by period                                               Less than                                    More than                                 Total          1 year        1-3 years      3-5 years       5 years                                                       (Dollars In Thousands) Non-recourse funding obligations(1)               $  3,116,744    $    69,204    $   138,409    $   138,409    $  2,770,722 Stable value products(2)        2,901,535      1,032,884      1,049,287        797,357          22,007 Operating leases(3)                33,092          9,337         14,673          8,088             994 Home office lease(4)               76,542            737         75,805              -               - Mortgage loan and investment commitments            191,165        191,165              -              -               - Policyholder obligations(5)                 25,785,150      2,400,291      3,197,338    

 2,938,259      17,249,262 Total                        $ 32,104,228    $ 3,703,618    $ 4,475,512    $ 3,882,113    $ 20,042,985    

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(1) Non-recourse funding obligations include all principal amounts owed on note agreements and expected interest payments due over the term of the notes.

  (2)     Anticipated stable value products cash flows including interest.  

(3) Includes all lease payments required under operating lease agreements.

  (4)     The lease payments shown assume we exercise our option to purchase the building at the end of the lease term. Additionally, the payments due by the periods above were computed based on the terms of the renegotiated lease agreement, which was entered in January 2007.  (5)     Estimated contractual policyholder obligations are based on mortality, morbidity, and lapse assumptions comparable to our historical experience, modified for recent observed trends. These obligations are based on current balance sheet values and include expected interest crediting, but do not incorporate an expectation of future market growth, or future deposits.  Due to the significance of the assumptions used, the amounts presented could materially differ from actual results.  As variable separate account obligations are legally insulated from general account obligations, the variable separate account obligations will be fully funded by cash flows from variable separate account assets.  We expect to fully fund the general account obligations from cash flows from general account investments.    Employee Benefit Plans   

PLC sponsors a defined benefit pension plan covering substantially all of its employees. In addition, PLC sponsors an unfunded excess benefit plan and provides other postretirement benefits to eligible employees.

PLC reports the net funded status of its pension and other postretirement plans in the consolidated balance sheet. The net funded status represents the differences between the fair value of plan assets and the projected benefit obligation.

    PLC's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act ("ERISA") plus such additional amounts as it may determine to be appropriate from time to time. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. PLC may also make additional contributions in future periods to maintain an adjusted funding target attainment percentage ("AFTAP") of at least 80%. During January of 2012, PLC made a $2.3 million contribution to the defined benefit pension plan. PLC has not yet determined the total amount it will fund for the remainder of 2012, but it estimates that the amount will be between $15 million and $20 million.    For a complete discussion of PLC's benefit plans, additional information related to the funded status of its benefit plans, and its funding policy, see Note 14, Employee Benefit Plans.                                          102 

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FAIR VALUE OF FINANCIAL INSTRUMENTS

    FASB guidance defines fair value for GAAP and establishes a framework for measuring fair value as well as a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. The term "fair value" in this document is defined in accordance with GAAP. The standard describes three levels of inputs that may be used to measure fair value. For more information, see Note 2, Summary of Significant Accounting Policies and Note 19, Fair Value of Financial Instruments.    Available-for-sale securities and trading account securities are recorded at fair value, which is primarily based on actively traded markets where prices are based on either direct market quotes or observed transactions. Liquidity is a significant factor in the determination of the fair value for these securities. Market price quotes may not be readily available for some positions or for some positions within a market sector where trading activity has slowed significantly or ceased. These situations are generally triggered by the market's perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer's financial position, changes in credit ratings, and cash flows on the investments. As of December 31, 2011, $847.8 million of available-for-sale and trading account assets, excluding other long-term investments, were classified as Level 3 fair value assets.    The fair values of derivative assets and liabilities include adjustments for market liquidity, counterparty credit quality, and other deal specific factors, where appropriate. The fair values of derivative assets and liabilities traded in the over-the-counter market are determined using quantitative models that require the use of multiple market inputs including interest rates, prices, and indices to generate continuous yield or pricing curves and volatility factors. The predominance of market inputs are actively quoted and can be validated through external sources. Estimation risk is greater for derivative financial instruments that are either option-based or have longer maturity dates where observable market inputs are less readily available or are unobservable, in which case quantitative based extrapolations of rate, price, or index scenarios are used in determining fair values. As of December 31, 2011, the Level 3 fair values of derivative assets and liabilities determined by these quantitative models were $19.1 million and $437.6 million, respectively.    The liabilities of certain of our annuity account balances are calculated at fair value using actuarial valuation models. These models use various observable and unobservable inputs including projected future cash flows, policyholder behavior, our credit rating, and other market conditions. As of December 31, 2011, the Level 3 fair value of these liabilities was $136.5 million.    For securities that are priced via non-binding independent broker quotations, we assess whether prices received from independent brokers represent a reasonable estimate of fair value through an analysis using internal and external cash flow models developed based on spreads and, when available, market indices. We use a market-based cash flow analysis to validate the reasonableness 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 we determine there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly.                                          103 

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    Of our $866.9 million of total assets (measured at fair value on a recurring basis) classified as Level 3 assets, $643.2 million were ABS. Of this amount, $614.8 million were student loan related ABS and $28.4 million were non-student loan related ABS. The years of issuance of the ABS are as follows:    

Year of Issuance Amount

                    (In Millions)        2002         $           290       2003                      94       2004                     117       2005                       9       2006                      28       2007                     105      Total         $           643     The ABS was rated as follows: $529.7 million were AAA rated, $110.3 million were AA rated, and $3.2 million were A rated. We do not expect any credit losses on these securities related to student loans since the majority of the underlying collateral of the student loan asset-backed securities is guaranteed by the U.S. Department of Education.   

MARKET RISK EXPOSURES AND OFF-BALANCE SHEET ARRANGEMENTS

    Our financial position and earnings are subject to various market risks including changes in interest rates, changes in the yield curve, changes in spreads between risk-adjusted and risk-free interest rates, changes in foreign currency rates, changes in used vehicle prices, and equity price risks and issuer defaults. We analyze and manage the risks arising from market exposures of financial instruments, as well as other risks, through an integrated asset/liability management process. Our asset/liability management programs and procedures involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, credit and market risk, and cash flow characteristics. These programs also incorporate the use of derivative financial instruments primarily to reduce our exposure to interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk. See Note 20, Derivative Financial Instruments for additional information on our financial instruments.    The primary focus of our asset/liability program is the management of interest rate risk within the insurance operations. This includes monitoring the duration of both investments and insurance liabilities to maintain an appropriate balance between risk and profitability for each product category, and for us as a whole. It is our policy to maintain asset and liability durations within one-half year of one another, although, from time to time, a broader interval may be allowed.    We are exposed to credit risk within our investment portfolio and through derivative counterparties. Credit risk relates to the uncertainty of an obligor's continued ability to make timely payments in accordance with the contractual terms of the instrument or contract. We manage credit risk through established investment policies which attempt to address quality of obligors and counterparties, credit concentration limits, diversification requirements, and acceptable risk levels under expected and stressed scenarios. Derivative counterparty credit risk is measured as the amount owed to us based upon current market conditions and potential payment obligations between us, net of collateral held, and our counterparties. We minimize the credit risk in derivative financial instruments by entering into transactions with high quality counterparties, (A-rated or higher at the time we enter into the contract) and we maintain collateral support agreements with certain of those counterparties.    We utilize a risk management strategy that includes the use of derivative financial instruments. Derivative instruments expose us to credit market and basis risk. Such instruments can change materially in value from quarter-to-quarter. We minimize our credit risk by entering into transactions with highly rated counterparties. We manage the market and basis risks by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. We monitor our use of derivatives in connection with our overall asset/liability management programs and procedures. In addition, all derivative programs are monitored by our risk management department.                                          104  --------------------------------------------------------------------------------

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Derivative instruments that are used as part of our interest rate risk management strategy include interest rate swaps, interest rate futures, interest rate caps and interest rate options. Our inflation risk management strategy involves the use of swaps that require us to pay a fixed rate and receive a floating rate that is based on changes in the Consumer Price Index ("CPI").

We may use the following types of derivative contracts to mitigate our exposure to certain guaranteed benefits related to variable annuity contracts:

   †          Foreign Currency Futures  †          Variance Swaps  †          Interest Rate Futures  †          Equity Options  †          Equity Futures  †          Credit Derivatives  †          Interest Rate Swaps    Other Derivatives    

We have an interest rate floor agreement and an YRT premium support arrangement with PLC.

    We believe our asset/liability management programs and procedures and certain product features provide protection against the effects of changes in interest rates under various scenarios. Additionally, we believe our asset/liability management programs and procedures provide sufficient liquidity to enable us to fulfill our obligation to pay benefits under our various insurance and deposit contracts. However, our asset/liability management programs and procedures incorporate assumptions about the relationship between short-term and long-term interest rates (i.e., the slope of the yield curve), relationships between risk-adjusted and risk-free interest rates, market liquidity, spread movements, implied volatility, policyholder behavior, and other factors, and the effectiveness of our asset/liability management programs and procedures may be negatively affected whenever actual results differ from those assumptions.    The following table sets forth the estimated market values of our fixed maturity investments and mortgage loans resulting from a hypothetical immediate 100 basis point increase in interest rates from levels prevailing as of December 31, 2011, and the percent change in fair value the following estimated fair values would represent:                                                   Percent As of December 31,           Amount            Change                       (Dollars In Millions) 2011 Fixed maturities     $              25,975.4      (7.1 )% Mortgage loans                       5,973.7      (4.4 ) 2010 Fixed maturities     $              23,133.8      (6.2 )% Mortgage loans                       5,090.1      (4.4 )     Estimated fair values were derived from the durations of our fixed maturities and mortgage loans.  Duration measures the change in fair value resulting from a change in interest rates. While these estimated fair values provide an indication of how sensitive the fair values of our fixed maturities and mortgage loans are to changes in interest rates, they do not represent management's view of future fair changes or the potential impact of fluctuations in credit spreads. Actual results may differ from these estimates.    In the ordinary course of our commercial mortgage lending operations, we may commit to provide a mortgage loan before the property to be mortgaged has been built or acquired. The mortgage loan commitment is a contractual obligation to fund a mortgage loan when called upon by the borrower. The commitment is not recognized in our financial statements until the commitment is actually funded. The mortgage loan commitment contains terms, including the rate of interest, which may be different than prevailing interest rates.                                          105  --------------------------------------------------------------------------------

     Table of Contents    As of December 31, 2011 and 2010, we had outstanding mortgage loan commitments of $182.4 million at an average rate of 5.58% and $212.5 million at an average rate of 5.94%, respectively, with estimated fair values of $211.9 million and $231.2 million, respectively (using discounted cash flows from the first call date). The following table sets forth the estimated fair value of our mortgage loan commitments resulting from a hypothetical immediate 100 basis point increase in interest rate levels prevailing as of December 31, 2011, and the percent change in fair value the following estimated fair values would represent:                                                   Percent As of December 31,           Amount            Change                       (Dollars In Millions)        2011          $                 202.4      (4.5 )%        2010                            219.0      (5.3 )     The estimated fair values were derived from the durations of our outstanding mortgage loan commitments.  While these estimated fair values provide an indication of how sensitive the fair value of our outstanding commitments are to changes in interest rates, they do not represent management's view of future market changes, and actual market results may differ from these estimates.    As previously discussed, we utilize a risk management strategy that involves the use of derivative financial instruments. Derivative instruments expose us to credit and market risk and could result in material changes from period to period. We minimize our credit risk by entering into transactions with highly rated counterparties. We manage the market risk by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. We monitor our use of derivatives in connection with our overall asset/liability management programs and procedures.    As of December 31, 2011, total derivative contracts with a notional amount of $13.3 billion were in a $435.5 million net loss position. Included in the $13.3 billion, is a notional amount of $2.8 billion in a $277.8 million net loss position that relates to our Modco trading portfolio. Also included in the total, is $4.6 billion in a $147.0 million net loss position that relates to our GMWB derivatives. As of December 31, 2010, total derivative contracts with a notional amount of $8.1 billion were in a $208.7 million net loss position. We recognized losses of $155.0 million, $144.4 million, and $176.9 million related to derivative financial instruments for the years ended December 31, 2011, 2010, and 2009, respectively.                                          106 

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The following table sets forth the notional amount and fair value of our interest rate risk related derivative financial instruments and the estimated fair value resulting from a hypothetical immediate plus and minus 100 basis points change in interest rates from levels prevailing as of December 31:

                                                                          Fair Value Resulting From an                                                                       

Immediate +/- 100 bps Change

                                                                         in the Underlying Reference                                 Notional       Fair Value as of               Interest Rates                                  Amount          December 31,           +100 bps            -100 bps                                                         (Dollars In Millions) 2011 Futures(1)                    $      885.5    $              5.2    $          (35.1 )   $         52.7 Caps                               3,000.0                   2.7                31.3                  - Floating to fixed Swaps(2)           476.5                 (10.3 )             (10.8 )            (10.6 ) Total                         $    4,362.0    $             (2.4 )  $          (14.6 )   $         42.1  2010 Futures                       $      598.4    $            (16.7 )  $          (87.9 )   $         63.5 Floating to fixed Swaps(2)           503.4                 (24.1 )              (7.7 )            (41.9 ) Total                         $    1,101.8    $            (40.8 )  $          (95.6 )   $         21.6    

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(1) Interest rate change scenario subject to floor, based on treasury rates as of December 31, 2011.

(2) Includes an effect for inflation.

    The following table sets forth the notional amount and fair value of our equity futures and options and the estimated fair value resulting from a hypothetical immediate plus and minus ten percentage point change in equity level from levels prevailing as of December 31:                                                   Fair Value Resulting From an                                                  Immediate +/- 10% Change                                                 in the Underlying Reference            Notional     Fair Value as of            Index Equity Level             Amount        December 31,            +10%                -10%                                   (Dollars In Millions) 2011 Futures   $    239.4   $             (0.6 ) $          (24.5 )   $         23.3 Options        440.2                 19.6               11.1               34.2 Total     $    679.6   $             19.0   $          (13.4 )   $         57.5  2010 Futures   $    327.3   $             (7.3 ) $          (40.7 )   $         26.2 Options         95.0                  6.8                3.8               11.4 Total     $    422.3   $             (0.5 ) $          (36.9 )   $         37.6                                           107 

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The following table sets forth the notional amount and fair value of our currency futures and the estimated fair value resulting from a hypothetical immediate plus and minus ten percentage point change in currency level from levels prevailing as of December 31:

                                                          Fair Value Resulting From an                                                          Immediate +/- 10% Change                                                        in the Underlying Reference                     Notional    Fair Value as of           Index Currency Level                      Amount       December 31,            +10%               -10%                                           (Dollars In Millions) 2011 Currency futures   $     72.3   $             0.8   $           (6.3 )   $         8.0    

The following table sets forth the notional amount and fair value of our variance swap and the estimated fair value resulting from a hypothetical immediate plus and minus ten percentage point change in volatility level from levels prevailing as of December 31:

                                                        Fair Value Resulting From an                                                        Immediate +/- 10% Change                  Notional     Fair Value as of            in Volatility Level                   Amount        December 31,           +10%                -10%                                         (Dollars In Millions) 2011 Variance swap   $        -   $                -   $            -     $              -  2010 Variance swap   $    338.4   $             (2.4 ) $         17.4     $          (16.3 )     Estimated gains and losses were derived using pricing models specific to derivative financial instruments.  While these estimated gains and losses provide an indication of how sensitive our derivative financial instruments are to changes in interest rates, volatility, equity levels, and credit spreads, they do not represent management's view of future market changes, and actual market results may differ from these estimates.    Our stable value contract and annuity products tend to be more sensitive to market risks than our other products. As such, many of these products contain surrender charges and other features that reward persistency and penalize the early withdrawal of funds. Certain stable value and annuity contracts have market-value adjustments that protect us against investment losses if interest rates are higher at the time of surrender than at the time of issue. Additionally, approximately $1.9 billion of our stable value contracts have no early termination rights.    As of December 31, 2011, we had $2.8 billion of stable value product account balances with an estimated fair value of $2.9 billion (using discounted cash flows) and $10.9 billion of annuity account balances with an estimated fair value of $10.8 billion (using discounted cash flows). As of December 31, 2010, we had $3.1 billion of stable value product account balances with an estimated fair value of $3.2 billion (using discounted cash flows) and $10.6 billion of annuity account balances with an estimated fair value of $10.5 billion (using discounted cash flows).                                          108 

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    The following table sets forth the estimated fair values of our stable value and annuity account balances resulting from a hypothetical immediate 100 basis point decrease in interest rates from levels prevailing and the percent change in fair value that the following estimated fair values would represent:                                                                      Percent As of December 31,                              Amount            Change                                          (Dollars In Millions) 2011 Stable value product account balances   $               2,791.8       1.3 % Annuity account balances                               10,879.4       1.0  

2010

 Stable value product account balances   $               3,129.1       1.7 % Annuity account balances                               10,577.4       1.0     Estimated fair values were derived from the durations of our stable value and annuity account balances. While these estimated fair values provide an indication of how sensitive the fair values of our stable value and annuity account balances are to changes in interest rates, they do not represent management's view of future market changes, and actual market results may differ from these estimates.    Certain of our liabilities relate to products whose profitability could be significantly affected by changes in interest rates. In addition to traditional whole life and term insurance, many universal life policies with secondary guarantees that insurance coverage will remain in force (subject to the payment of specified premiums) have such characteristics. These products do not allow us to adjust policyholder premiums after a policy is issued, and most of these products do not have significant account values upon which we credit interest. If interest rates fall, these products could have both decreased interest earnings and increased amortization of deferred acquisition costs, and the converse could occur if interest rates rise.    Employee Benefit Plans    Pursuant to the accounting guidance related to our obligations to employees under its pension plan and other postretirement benefit plans, PLC is required to make a number of assumptions to estimate related liabilities and expenses. PLC's most significant assumptions are those for the discount rate and expected long-term rate of return.    Discount Rate Assumption    The assumed discount rates used to determine the benefit obligations were based on an analysis of future benefits expected to be paid under the plans. The assumed discount rate reflects the interest rate at which an amount that is invested in a portfolio of high-quality debt instruments on the measurement date would provide the future cash flows necessary to pay benefits when they come due.                                          109 

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The following presents PLC's estimates of the hypothetical impact to the December 31, 2011 benefit obligation and to the 2011 benefit cost, associated with sensitivities related to the discount rate assumption:

                                                                           Other                                               Defined Benefit      Postretirement                                                Pension Plan       Benefit Plans (1)                                                      (Dollars in Thousands) Increase (Decrease) in Benefit Obligation: 100 basis point increase                     $         (24,249 ) $            (3,840 ) 100 basis point decrease                                30,373                 4,575  Increase (Decrease) in Benefit Cost: 100 basis point increase                                (3,172 )                (234 ) 100 basis point decrease                                 3,953                   292    

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(1) Includes excess pension plan, retiree medical plan, and postretirement life insurance plan

Long-term Rate of Return Assumption

    In assessing the reasonableness of PLC's long-term rate of return assumption for its defined benefit pension plan, PLC obtained 25 year annualized returns for each of the represented asset classes. In addition, PLC received evaluations of market performance based on its asset allocation as provided by external consultants. A combination of these statistical analytics provided results that PLC utilized to determine an appropriate long-term rate of return assumption. In assessing the reasonableness of PLC's long-term rate of return assumption for its postretirement life insurance plan, PLC utilized a 20 year annualized return and a 20 year average return on Barclay's short treasury index. PLC's long-term rate of return assumption was determined based on analytics related to these 20 year return results.    The following presents PLC's estimates of the hypothetical impact to the 2011 benefit cost, associated with sensitivities related to the long-term rate of return assumption:                                                                      Other                                         Defined Benefit      Postretirement                                          Pension Plan       Benefit Plans (1)                                                (Dollars in Thousands) Increase (Decrease) in Benefit Cost: 100 basis point increase               $          (1,293 ) $               (62 ) 100 basis point decrease                           1,293                    62    

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(1) Includes excess pension plan, retiree medical plan, and postretirement life insurance plan

For additional information on PLC's benefit plan assumptions, see Note 14, Employee Benefit Plans.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 2, Summary of Significant Accounting Policies, to the consolidated condensed financial statements for information regarding recently issued accounting standards. Included below, is accounting pronouncement ASU No. 2010-26 that we will adopt as of January 1, 2012 and the estimated effect on our statements.

    ASU No. 2010-26 - Financial Services - Insurance - Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The objective of this Update is to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. This Update prescribes that certain incremental direct costs of successful initial or renewal contract acquisitions may be deferred. It defines incremental direct costs as those costs that result directly from and are essential to the contract transaction and would not have been incurred by the insurance entity had the contract transaction not occurred. This Update also clarifies the definition of the types of incurred costs that may be capitalized and the accounting and recognition treatment of advertising, research, and other administrative costs related to the acquisition of insurance contracts. This Update is effective for periods beginning after December 15, 2011 and is to be applied                                          110 

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    prospectively. Early adoption and retrospective application are optional. Our expected retrospective adoption of this Update will result in a reduction in our deferred acquisition cost asset as well as a decrease in the future amortization associated with those previously deferred costs. There will also be a reduction in the level of costs we defer subsequent to adoption. We are evaluating the full effects of implementing this Update, but we currently estimate that its retrospective adoption will result in a cumulative effect adjustment to reduce the opening balance of shareowner's equity (including accumulated other comprehensive income (loss)) of between 9% and 11% as of January 1, 2012, including a reduction of between approximately 27% and 29% of its existing deferred acquisition cost asset balance as of January 1, 2012. We currently estimate that if the change were in effect at December 31, 2011, the adoption of this Update would have resulted in a decrease to net income in 2011 of between 6% and 8%.    RECENT DEVELOPMENTS    The NAIC approved regulatory changes in 2011 that impacted us and our insurance subsidiaries and our competitors in 2011 and will continue to do so in 2012. With regard to the amount of admitted deferred tax asset that an insurance company may report on its statutory financial statements, the NAIC implemented temporary rules that were first effective in 2009; these rules generally increased the amount of such assets during the three-year period ending December 31, 2011. During 2011, the NAIC issued Statement of Statutory Accounting Principles No. 101-Income Taxes, which replaces this previous set of rules regarding an insurance company's statutory accounting for income taxes, beginning in 2012. At this time, we believe that the amount of admitted deferred tax assets that we will report in our 2012 statutory financial statements will not be materially different from what it would have reported had the aforementioned, previous set of rules stayed in effect.    In 2011, the NAIC announced more focused inquiries on certain matters that could have an impact on our financial condition and results of operations. Such inquiries concern, for example, examination of statutory accounting disclosures for separate accounts, insurer use of captive reinsurance companies, certain aspects of insurance holding company reporting and disclosure, and reinsurance. In addition, the NAIC has been studying the reserving for universal life policies with secondary guarantees ("ULSG"), as defined in Actuarial Guideline XXXVIII ("AG38"). In January 2012, a subgroup of the NAIC approved a Draft Bifurcated Approach to AG38 ("Draft Bifurcated Approach") that proposes revisions to reserving for ULSG products, applicable to both existing business and new business. The Company cannot predict whether the Draft Bifurcated Approach will be adopted, nor what form the final Draft Bifurcated Approach will take if it is adopted. The NAIC also continues to consider various initiatives to change and modernize its financial and solvency regulations. It is considering changing to a principles-based reserving method for life insurance and annuity reserves, changes to the accounting and risk-based capital regulations, changes to the governance practices of insurers, and other items. Some of these proposed changes would require the approval of state legislatures. We cannot provide any estimate as to what impact these more focused inquires or proposed changes, if they occur, will have on our reserve and capital requirements.    During the fourth quarter of 2010, the Federal Housing Finance Agency issued an Announced Notice of Proposed Rulemaking ("ANPR"). The purpose of the ANPR is to seek comment on several possible changes to the requirements applicable to members of the FHLB. Any changes to such requirements that eliminate our eligibility for continued FHLB membership or limit our borrowing capacity pursuant to our FHLB membership could have a material adverse effect on the Company. We can give no assurance as to the outcome of the ANPR.    IMPACT OF INFLATION   

Inflation increases the need for life insurance. Many policyholders who once had adequate insurance programs may increase their life insurance coverage to provide the same relative financial benefit and protection. Higher interest rates may result in higher sales of certain of our investment products.

    The higher interest rates that have traditionally accompanied inflation could also affect our operations. Policy loans increase as policy loan interest rates become relatively more attractive. As interest rates increase, disintermediation of stable value and annuity account balances and individual life policy cash values may increase. The market value of our fixed-rate, long-term investments may decrease, we may be unable to implement fully the interest rate reset and call provisions of our mortgage loans, and our ability to make attractive mortgage loans, including participating mortgage loans, may decrease. In addition, participating mortgage loan income may decrease. The                                          111  --------------------------------------------------------------------------------

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difference between the interest rate earned on investments and the interest rate credited to life insurance and investment products may also be adversely affected by rising interest rates.

   Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   

The information required by this item is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data.