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

Edgar Online, Inc.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with our consolidated audited financial statements and related notes included herein.

    Certain reclassifications and revisions have been made in the previously reported financial statements and accompanying notes to make the prior period amounts comparable to those of the current period. Such reclassifications and revisions had no effect on previously reported net income or shareowner's equity.    In January of 2012, we adopted Accounting Standard Update ("ASU" or "Update") No. 2010-26 - Financial Services - Insurance - Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts which changed certain previously reported items within our financial statements and accompanying notes and the MD&A. The changes affected previously reported amounts in Note 3, Significant Acquisitions, Note 6, Deferred Acquisition Costs and Value of Business Acquired, Note 15, Income Taxes, Note 21, Operating Segments, Note 22, Consolidated Quarterly Results-Unaudited, and within our Life Marketing, Annuities, and Asset Protection segments.    In January of 2012, we also adopted ASU No. 2011-05 - Comprehensive Income - Presentation of Comprehensive Income which resulted in the inclusion of consolidated statements of comprehensive income within our consolidated financial statements and the presentation of statements of comprehensive income within our condensed financial information of registrant.    

FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE

    This report reviews our financial condition and results of operations including our liquidity and capital resources. Historical information is presented and discussed, and where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate, or imply future results, performance, or achievements instead of historical facts and may contain words like "believe," "expect," "estimate," "project," "budget," "forecast," "anticipate," "plan," "will," "shall," "may," and other words, phrases, or expressions with similar meaning. Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from the results contained in the forward-looking statements, and we cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. For more information about the risks, uncertainties, and other factors that could affect our future results, please refer to Item 1A, Risk Factors and Cautionary Factors that may Affect Future Results included herein.    OVERVIEW    Our business    We are a wholly owned subsidiary of Protective Life Corporation ("PLC"), an insurance holding company whose common stock is traded on the New York Stock Exchange under the symbol "PL". Founded in 1907, we are the largest operating subsidiary of PLC. We provide financial services through the production, distribution, and administration of insurance and investment products. Unless the context otherwise requires, "Company," "we," "us," or "our" refers to the consolidated group of Protective Life Insurance Company and our subsidiaries.    We have several operating segments, each having a strategic focus. An operating segment is distinguished by products, channels of distribution, and/or other strategic distinctions. We periodically evaluate our operating segments as prescribed in the Accounting Standards Codification ("ASC") Segment Reporting Topic, and make adjustments to our segment reporting as needed.                                           38  --------------------------------------------------------------------------------

Table of Contents

Our operating segments are Life Marketing, Acquisitions, Annuities, Stable Value Products, Asset Protection, and Corporate and Other.

† Life Marketing - We market universal life ("UL"), variable universal life, bank-owned life insurance ("BOLI"), and level premium term insurance ("traditional") products on a national basis primarily through networks of independent insurance agents and brokers, stockbrokers, and independent marketing organizations.

    †          Acquisitions - We focus on acquiring, converting, and servicing policies acquired from other companies. The segment's primary focus is on life insurance policies and annuity products that were sold to individuals. The level of the segment's acquisition activity is predicated upon many factors, including available capital, operating capacity, potential return on capital, and market dynamics. Policies acquired through the Acquisition segment are typically "closed" blocks of business (no new policies are being marketed). Therefore earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made.    †          Annuities - We market fixed and variable annuity products. These products are primarily sold through broker-dealers, financial institutions, and independent agents and brokers.    †          Stable Value Products - We sell fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, money market funds, bank trust departments, and other institutional investors. The segment also issues funding agreements to the Federal Home Loan Bank ("FHLB"), and markets guaranteed investment contracts ("GICs") to 401(k) and other qualified retirement savings plans.    †          Asset Protection - We market extended service contracts and credit life and disability insurance to protect consumers' investments in automobiles and recreational vehicles. In addition, the segment markets a guaranteed asset protection ("GAP") product. GAP coverage covers the difference between the loan pay-off amount and an asset's actual cash value in the case of a total loss.    †          Corporate and Other - This segment primarily consists of net investment income not assigned to the segments above (including the impact of carrying liquidity) and expenses not attributable to the segments above. This segment includes earnings from several non-strategic or runoff lines of business, various investment-related transactions, the operations of several small subsidiaries, and the repurchase of non-recourse funding obligations.    Reinsurance Ceded    For approximately 10 years prior to mid-2005, we entered into reinsurance contracts in which we ceded a significant percentage, generally 90%, of our newly written life insurance business on a first dollar quota share basis. Our traditional life insurance was ceded under coinsurance contracts and universal life insurance was ceded under yearly renewable term ("YRT") contracts. During this time, we obtained coinsurance on our traditional life business, while reducing the amount of capital deployed and increasing overall returns. In mid-2005, we substantially discontinued coinsuring our newly written traditional life insurance and moved to YRT reinsurance as discussed below. Through 2012, we reinsured 90% of the mortality risk on the majority of our newly written universal life insurance. During 2012, we moved to reinsure only amounts in excess of our $2,000,000 retention for the majority of our newly written universal life insurance.    We currently enter into reinsurance contracts with reinsurers under YRT contracts to provide coverage for insurance issued in excess of the amount it retains on any one life. The amount of insurance retained on any one life was $500,000 in years prior to mid-2005. In 2005, this retention was increased to amounts up to $1,000,000 for certain policies, and during 2008, was increased to $2,000,000 for certain policies.                                           39  --------------------------------------------------------------------------------

   Table of Contents    RISKS AND UNCERTAINTIES   

The factors which could affect our future results include, but are not limited to, general economic conditions and the following risks and uncertainties:

   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;  †          we could be adversely affected by an inability to access FHLB lending;  †          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 financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors outside of our control;

                                       40  --------------------------------------------------------------------------------

   Table of Contents    Industry   

† we are highly regulated, are subject to numerous legal restrictions and regulations and are subject to audits, examinations and actions by regulators and law enforcement agencies;

  †          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;

† publicly held companies in general and the financial services industry in particular 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 require the use of judgments relating to a variety of assumptions and estimates, including, but not limited to 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 and held-to-maturity securities is the evaluation of investments for other-than-temporary impairments. If a decline in the fair value of an available-for-sale or held-to-maturity 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 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                                           41  --------------------------------------------------------------------------------

Table of Contents

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, 2012, 2011, and 2010, we recorded pre-tax other-than-temporary impairments of investments of $67.1 million, $62.2 million, and $75.0 million, respectively. Of the $67.1 million of impairments for the year ended December 31, 2012, $58.1 million was recorded in earnings and $9.0 million was recorded in other comprehensive income. 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.    For the year ended December 31, 2012 and 2011, there were no other-than-temporary impairments related to equity securities. For the year ended December 31, 2010, there were $2.5 million of other-than-temporary impairments related to equity securities. For the years ended December 31, 2012, 2011, and 2010, there were $67.1 million, $62.2 million, and $72.5 million of other-than-temporary impairments related to debt securities, respectively.    For the year ended December 31, 2012, 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, 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 were $52.7 million, with $37.8 million of credit losses recorded on debt securities in earnings and $14.9                                           42 

--------------------------------------------------------------------------------

Table of Contents

    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.    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, 2012, we held $27.1 billion of available-for-sale investments, including $2.4 billion in investments with a gross unrealized loss of $140.7 million, and $300 million of held-to-maturity investments, none of which were in an unrealized loss position.    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. Derivative financial instruments are valued using exchange prices, independent broker quotations, or pricing valuation models, which utilize market data inputs. The fair values of most of our derivatives are determined using exchange prices or independent broker quotes, but certain derivatives are valued 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, 2012, the fair value of derivatives reported on our balance sheet in "other long-term investments" and "other liabilities" was $130.4 million and $657.9 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, 2012, our third party reinsurance receivables amounted to $5.7 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, 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                                           43 

--------------------------------------------------------------------------------

Table of Contents

    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, 2012, 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. Portions of these costs, which are determined to be incremental direct costs associated with successfully acquired policies 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, 2012, we had deferred acquisition costs ("DAC")/value of business acquired ("VOBA") of $3.2 billion.    We periodically review and update as appropriate our key assumptions on certain life and annuity products 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. When we refer to DAC amortization or unlocking, we are referring to changes in balance sheet components amortized over estimated gross profits.    In conjunction with the acquisition of a block of insurance policies or investment contracts, a portion of the purchase price is allocated 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 and in proportion to expected gross profits ("EGPs") for interest sensitive products, including accrued interest credited to account balances of up to approximately 8.75%. 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. The Company evaluates 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, the Company first determines 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, the Company compares its estimate of the fair value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. The Company utilizes 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. The Company's material goodwill balances are attributable to certain of its operating segments (which are each considered to be reporting units). The cash flows used to determine the fair value of the Company's reporting units are dependent on a number of significant assumptions. The Company's estimates, which consider a market participant view of fair value, are subject to change given the inherent uncertainty in predicting future                                           44  --------------------------------------------------------------------------------

Table of Contents

    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 the Company's judgment of the appropriate rate for each reporting unit based on the relative risk associated with the projected cash flows. As of December 31, 2012, we performed our annual evaluation of goodwill and determined that no adjustment to impair goodwill was necessary. As of December 31, 2012, we had goodwill of $83.8 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, and PLC's market capitalization being below book value did not result in a triggering or impairment event.    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, we fair value the liability related to our equity indexed annuity product 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 of December 31, 2012, we had total policy liabilities and accruals of $23.0 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 57% 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, 2012, 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, 2012, the GMDB liability was $19.6 million.    Guaranteed minimum withdrawal benefits - We establish liabilities for guaranteed minimum withdrawal benefits ("GMWB") on our variable annuity products. The GMWB is carried at fair value and is impacted by 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 57% 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, 2012, our net GMWB liability held was $169.0 million.                                           45  --------------------------------------------------------------------------------

Table of Contents

    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.   

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

    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. 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, in order for us to recognize a benefit in our financial statements from such a position, 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.    RESULTS OF OPERATIONS    We use the same accounting policies and procedures to measure segment operating income (loss) and assets as we use to measure consolidated net income and assets. Segment operating income (loss) is income before income tax, excluding net realized investment gains and losses (excluding periodic settlements of derivatives associated with debt and certain investments) net of the related amortization of DAC and VOBA. Operating earnings exclude changes in the GMWB embedded derivatives (excluding the portion attributed to economic cost), realized and unrealized gains (losses) on derivatives used to hedge the VA product, actual GMWB incurred claims and net of the related amortization of DAC attributed to each of these items.    In the first quarter of 2012, management revised the definition of operating income (loss) as it relates to certain features of our variable annuity contracts and related hedging activities, to better reflect the basis on which the                                           46 

--------------------------------------------------------------------------------

Table of Contents

performance of our business is internally assessed. Under the revised definition, the following items have been excluded from operating income for the historical periods presented within the document:

    †          Changes in GMWB embedded derivatives related to this rider feature of certain variable annuity products (excluding the portion attributed to economic costs). Economic cost is the long-term expected average cost of providing the product benefit over the life of the policy based on product pricing assumptions. These include assumptions about the economic/market environment, and elective and non-elective policy owner behavior (e.g. lapses, withdrawal timing, mortality, etc.).  

† Changes in value of certain derivative instruments used to mitigate the risk related to variable annuity contracts.

  †          That portion of the change in balance sheet components amortized over estimated gross profit that is attributed to the embedded GMWB derivative and related economic hedges (e.g. DAC amortization).    

Prior periods have been revised to conform to the current period presentation for these changes.

    Segment operating income (loss) represents the basis on which the performance of our business is internally assessed by management. Premiums and policy fees, other income, benefits and settlement expenses, and amortization of DAC/VOBA are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner that most appropriately reflects the operations of that segment. Investments and other assets are allocated based on statutory policy liabilities net of associated statutory policy assets, while DAC/VOBA and goodwill are shown in the segments to which they are attributable.    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". When referring to DAC amortization or unlocking on products covered under the ASC Financial Services-Insurance Topic, the reference is to changes in all balance sheet components amortized over estimated gross profits.                                           47  --------------------------------------------------------------------------------

Table of Contents

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                                         2012           2011          2010       2012     2011                                              (Dollars In Thousands) Segment Operating Income (Loss) Life Marketing                      $    102,114    $   96,110    $  123,495      6.2 %  (22.2 )% Acquisitions                             171,060       157,393       111,143      8.7     41.6 Annuities                                117,778        79,373        48,109     48.4     65.0 Stable Value Products                     60,329        56,780        39,207      6.3     44.8 Asset Protection                           9,765        16,892        24,267    (42.2 )  (30.4 ) Corporate and Other                        1,119         6,985       (13,458 )  (84.0 )    n/m Total segment operating income           462,165       413,533       332,763     11.8     24.3 Realized investment gains (losses) - investments(1)                188,729       194,866       134,559 Realized investment gains (losses) - derivatives                  (191,315 )    (133,124 )    (134,146 ) Income tax expense                      (151,043 )    (151,519 )    (109,865 ) Net Income                          $    308,536    $  323,756    $  223,311     (4.7 )   45.0  Investment gains (losses)(2)        $    174,692    $  200,432    $  117,056 Less: related amortization of DAC/VOBA                                 (14,037 )       5,566       (17,503 ) Realized investment gains (losses) - investments              $    188,729    $  194,866    $  134,559  Derivative gains (losses) (3)       $   (227,816 )  $ (155,005 )  $ (144,438 ) Less: settlements on certain interest rate swaps                            -             -           

168

 Less: VA GMWB economic cost              (36,501 )     (21,881 )     (10,460 ) Realized investment gains (losses) - derivatives              $   (191,315 )  $ (133,124 )  $ (134,146 )    

-------------------------------------------------------------------------------- (1)   Includes credit related other-than-temporary impairments of $58.1 million, $47.3 million, and $41.4 million for the years ended December 31, 2012, 2011, and 2010, respectively.  

(2) Includes realized investment gains (losses) before related amortization

(3) Includes realized gains (losses) on derivatives before settlements on interest rate swaps and the VA GMWB economic cost

For The Year Ended December 31, 2012 as compared to The Year Ended December 31, 2011

    Net income for the year ended December 31, 2012, included a $48.6 million, or 11.8%, increase in segment operating income. The increase was primarily related to a $6.0 million increase in the Life Marketing segment, a $13.7 million increase in the Acquisitions segment, a $38.4 million increase in the Annuities segment, and a $3.5 million increase in the Stable Value Products segment. These increases were partially offset by a $7.1 million decrease in the Asset Protection segment and a $5.9 million decrease in the Corporate and Other segment.    We experienced net realized losses of $53.1 million for the year ended December 31, 2012, as compared to net realized gains of $45.4 million for the year ended December 31, 2011. The losses realized for the year ended December 31, 2012, were primarily related to $58.1 million for other-than-temporary impairment credit-related losses, net losses of $102.8 million of derivatives related to variable annuity contracts, a $2.8 million loss on interest rate caps and swaps, and a $2.2 million loss related to other investment and derivative activity.  Partially offsetting these losses were gains of $67.6 million of gains related to investment securities sale activity and $45.2 million of gains related to the net activity of the modified coinsurance portfolio.    †          Life Marketing segment operating income was $102.1 million for the year ended December 31, 2012, representing an increase of $6.0 million, or 6.2%, from the year ended December 31, 2011. The increase was primarily due to higher investment income, more favorable traditional life claims, and a less unfavorable change in unlocking. These increases were partially offset by unfavorable universal life and BOLI claims, an increase in reserves resulting from changes in universal life interest rate assumptions, and higher operating expenses.                                           48 

--------------------------------------------------------------------------------

Table of Contents

    †          Acquisitions segment operating income was $171.1 million for the year ended December 31, 2012, an increase of $13.7 million, or 8.7%, as compared to the year ended December 31, 2011, primarily due to the Liberty Life Insurance Company ("Liberty Life") coinsurance transaction. The Liberty Life transaction added $50.2 million to segment operating income for the year ended December 31, 2012, an increase of $15.1 million as compared to the year ended December 31, 2011. The Liberty Life transaction was effective April 30, 2011, therefore, the 2012 results include twelve months of Liberty Life activity as compared to eight months included in the 2011 results. This was partly offset by the expected runoff in the older acquired blocks.    †          Annuities segment operating income was $117.8 million for the year ended December 31, 2012, as compared to $79.4 million for the year ended December 31, 2011, an increase of $38.4 million. This variance included a favorable change of $41.2 million in operating revenue driven by higher policy fees and other income in the VA line and lower benefits and settlement expenses. Partially offsetting these favorable changes was an unfavorable change of $14.7 million in unlocking and an increase in DAC amortization and non-deferred expenses.    †          Stable Value Products segment operating income was $60.3 million and increased $3.5 million, or 6.3%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. 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 accelerated DAC amortization of $3.4 million for the year ended December 31, 2011. We did not accelerate DAC amortization during the year ended December 31, 2012 as no contracts were called. The operating spread increased 17 basis points to 231 basis points for the year ended December 31, 2012, as compared to an operating spread of 214 basis points for the year ended December 31, 2011. The adjusted operating spread, which excludes participating income, increased by 29 basis points for the year ended December 31, 2012 over the prior year.    †          Asset Protection segment operating income was $9.8 million, representing a decrease of $7.1 million, or 42.2%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. Service contract earnings decreased $3.2 million, or 61.6%, primarily due to $4.1 million of expense to impair and dispose of previously capitalized costs associated with developing internal-use software.  Credit insurance earnings decreased $4.1 million primarily due to $3.1 million in legal settlement and related costs.  Earnings from the GAP product line increased $0.2 million, or 1.8%.    †          Corporate and Other segment operating income was $1.1 million for the year ended December 31, 2012, as compared to an operating income of $7.0 million for the year ended December 31, 2011. The decrease was primarily due to $8.5 million of pre-tax earnings recorded during 2011 relating to the settlement of a dispute with respect to certain investments and a $3.5 million unfavorable variance related to gains on the repurchase of non-recourse funding obligations. For the year ended December 31, 2012, $32.0 million of pre-tax gains were generated by repurchases as compared to $35.5 million of pre-tax gains generated during the year ended December 31, 2011.  Partially offsetting this variance was an $8.6 million favorable variance related to mortgage loan prepayment fee income as compared to the year ended December 31, 2011.    

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

    Net income for the year ended December 31, 2012, included a $80.8 million, or 24.3%, increase in segment operating income. The increase was primarily related to a $46.3 million increase in the Acquisitions segment, a $31.3 million increase in the Annuities segment, a $17.6 million increase in the Stable Value Products segment, and a $20.4 increase in the Corporate and Other segment. These increases were partially offset by a $27.4 million decrease in the Life Marketing segment and a $7.4 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                                           49  --------------------------------------------------------------------------------

Table of Contents

    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 $96.1 million for the year ended December 31, 2011, representing a decrease of $27.4 million, or 22.2%, from the year ended December 31, 2010. The decrease was primarily due to a negative change in unlocking of $18.3 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 the United Investors Life Insurance Company ("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.    †          Annuities segment operating income was $79.4 million for the year ended December 31, 2011, as compared to $48.1 million for the year ended December 31, 2010, an increase of $31.3 million. This variance included favorable changes in operating revenue and benefit and settlement expenses. Partially offsetting these favorable changes were increases in DAC amortization and other operating expenses.    †          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 <chron>December 31, 2010.    †          Asset Protection segment operating income was $16.9 million, representing a decrease of $7.4 million, or 30.4%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. Service contract earnings decreased $6.9 million 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 $3.5 million 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 partially offset by an increase in GAP earnings resulting from higher volume and favorable loss experience. Credit insurance earnings increased $3.0 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.                                           50  --------------------------------------------------------------------------------

   Table of Contents    Life Marketing    Segment results of operations   

Segment results were as follows:

                                       For The Year Ended December 31,             Change                                   2012           2011           2010        2012     2011                                         (Dollars In Thousands) REVENUES Gross premiums and policy fees                           $ 1,575,074    $ 1,591,581    $ 1,575,764     (1.0 )%   1.0 % Reinsurance ceded                 (831,713 )     (846,762 )     (839,512 )    1.8     (0.9 ) Net premiums and policy fees                               743,361        744,819        736,252     (0.2 )    1.2 Net investment income              486,374        446,014        387,953      9.0     15.0 Other income                         3,919          3,094          3,719     26.7    (16.8 ) Total operating revenues         1,233,654      1,193,927      1,127,924      3.3      5.9 BENEFITS AND EXPENSES Benefits and settlement expenses                         1,054,645        978,098        921,765      7.8      6.1 Amortization of deferred policy acquisition costs            45,079         87,461         47,809    (48.5 )   82.9 Other operating expenses            31,816         32,258         34,855     (1.4 )   (7.5 ) Total benefits and expenses      1,131,540      1,097,817      1,004,429      3.1      9.3 INCOME BEFORE INCOME TAX           102,114         96,110        123,495      6.2    (22.2 ) OPERATING INCOME               $   102,114    $    96,110    $   123,495      6.2    (22.2 )    

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

                                         For The Year Ended December 31,                 Change                                   2012             2011             2010          2012      2011                                           (Dollars In Thousands) Sales By Product Traditional                   $       1,115    $       3,846    $      50,101     (71.0 )%  (92.3 )% Universal life                      117,099          117,947          113,168      (0.7 )     4.2 BOLI                                  3,253           11,363            

8,098 (71.4 ) 40.3

                               $     121,467    $     133,156    $     171,367      (8.8 )   (22.3 ) Sales By Distribution Channel Independent agents            $      73,692    $      89,398    $     126,426     (17.6 )   (29.3 ) Stockbrokers / banks                 42,973           31,677           36,633      35.7     (13.5 ) BOLI / other                          4,802           12,081            

8,308 (60.3 ) 45.4

                               $     121,467    $     133,156    $     171,367      (8.8 )   (22.3 ) Average Life Insurance In-force(1) Traditional                   $ 449,462,487    $ 476,813,161    $ 494,700,220      (5.7 )    (3.6 ) Universal life                   80,331,839       67,823,606       55,831,192      18.4      21.5                               $ 529,794,326    $ 544,636,767    $ 550,531,412      (2.7 )    (1.1 ) Average Account Values Universal life                $   6,501,025    $   6,037,896    $   5,563,162       7.7       8.5 Variable universal life             387,424          364,803         

331,183 6.2 10.2

                               $   6,888,449    $   6,402,699    $   

5,894,345 7.6 8.6

 Traditional Life Mortality Experience(2)                            85 %             91 %             89 %    

--------------------------------------------------------------------------------

(1) Amounts are not adjusted for reinsurance ceded.

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

                                           51  --------------------------------------------------------------------------------

   Table of Contents    Operating expenses detail   

Other operating expenses for the segment were as follows:

                                         For The Year Ended December 31,             Change                                       2012           2011         2010        2012      2011                                           (Dollars In Thousands) First year commissions            $    124,030    $  159,430    $ 207,899     (22.2 )%  (23.3 )% Renewal commissions                     35,231        35,898       36,509      (1.9 )    (1.7 ) First year ceding allowances            (4,538 )      (8,294 )     (9,418 )    45.3      11.9 Renewal ceding allowances             (166,445 )    (172,493 )   (188,956 )     3.5       8.7 General & administrative               147,582       155,282      162,442      (5.0 )    (4.4 ) Taxes, licenses, and fees               35,439        35,480       34,218      (0.1 )     3.7 Other operating expenses incurred                               171,299       205,303      242,694     (16.6 )   (15.4 ) Less: commissions, allowances & expenses capitalized                           (139,483 )    (173,045 )   (207,839 )    19.4      16.7 Other operating expenses          $     31,816    $   32,258    $  34,855      (1.4 )    (7.5 )    

For The Year Ended December 31, 2012 as compared to The Year Ended December 31, 2011

    Segment operating income    Operating income was $102.1 million for the year ended December 31, 2012, representing an increase of $6.0 million, or 6.2%, from the year ended December 31, 2011. The increase was primarily due to higher investment income, more favorable traditional life claims, and a less unfavorable change in unlocking. These increases were partially offset by unfavorable universal life and BOLI claims, an increase in reserves resulting from changes in universal life interest rate assumptions, and higher operating expenses.    Operating revenues    Total revenues for the year ended December 31, 2012, increased $39.7 million, or 3.3%, as compared to the year ended December 31, 2011. This increase was driven by higher investment income due to increases in net in-force reserves, partially offset by lower premiums and policy fees.    Net premiums and policy fees   

Net premiums and policy fees decreased by $1.5 million, or 0.2%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily due to decreases in traditional life premiums, largely offset by continued growth in universal life in-force business policy fees.

   Net investment income    Net investment income in the segment increased $40.4 million, or 9.0%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. Increased retained universal life reserves more than offset the loss of investment income due to the securitization of excess reserves leading to increased investment income of $20.8 million for the year ended December 31, 2012, as compared to the year ended December 31, 2011. Increases in BOLI reserves led to higher BOLI investment income of $2.3 million in the same period. Traditional life investment income increased $17.4 million caused by growth in retained reserves and lower reserve financing costs.                                           52  --------------------------------------------------------------------------------

   Table of Contents    Other income   

Other income increased $0.8 million, or 26.7%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. The increase relates primarily to fees on variable universal life funds.

Benefits and settlement expenses

    Benefits and settlement expenses increased by $76.5 million, or 7.8%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011, due to growth in retained universal life insurance in-force, an increase in reserves resulting from changes in universal life interest rate assumptions, higher credited interest on universal life 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 2012, universal life and BOLI unlocking was largely driven by assumption changes regarding lapses, investment yield and credited interest on fund value. The impact of these changes increased benefits and settlement expenses $51.0 million. In 2011, universal life and BOLI unlocking increased benefit expenses $25.2 million.    Amortization of DAC    DAC amortization decreased $42.4 million, or 48.5%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily due to differing impacts of unlocking. In 2012, universal life and BOLI unlocking decreased amortization $39.3 million, as compared to a decrease of $7.0 million in 2011.    Other operating expenses    Other operating expenses decreased $0.4 million for the year ended December 31, 2012, as compared to the year ended December 31, 2011. This decrease reflects lower commissions and general administrative expenses, partly offset by a reduction in reinsurance allowances and a $0.6 million increase in interest expense associated with the securitization of excess universal life reserves.    Sales    Sales for the segment decreased $11.7 million, or 8.8%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. Traditional life sales decreased $2.7 million, or 71.0%, as we focused sales efforts on other lines. Universal life sales decreased $0.8 million, or 0.7%, due to price increases on certain products. BOLI sales, which tend to be subject to large variations, decreased by $8.1 million, or 71.4%.    

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

    Segment operating income    Operating income was $96.1 million for the year ended December 31, 2011, representing a decrease of $27.4 million, or 22.2%, from the year ended December 31, 2010. The decrease was primarily due to a negative change in unlocking of $18.3 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.                                           53  --------------------------------------------------------------------------------

   Table of Contents    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 $39.7 million, or 82.9%, 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.    Other operating expenses    Other operating expenses decreased $2.6 million for the year ended December 31, 2011, as compared to the year ended December 31, 2010. This decrease reflects lower commissions and general administrative expenses partly offset by 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.    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.                                           54  --------------------------------------------------------------------------------

   Table of Contents    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 are recorded as ceded DAC, which is amortized over estimated ceded premiums of the policies in-force. Thus, deferred reinsurance allowances 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,                                                 2012           2011            2010                                                       (Dollars In Thousands) REVENUES Reinsurance ceded                           $   (831,713 )  $  (846,762 )  $   (839,512 ) BENEFITS AND EXPENSES Benefits and settlement expenses                (823,510 )     (757,225 )      (825,951 ) Amortization of deferred policy acquisition costs                                (41,734 )      (51,219 )      (121,266 ) Other operating expenses (1)                    (142,169 )     (142,905 )      (142,700 ) Total benefits and expenses                   (1,007,413 )     (951,349 )    (1,089,917 )  NET IMPACT OF REINSURANCE (2)               $    175,700    $   104,587    $    250,405  Allowances received                         $   (170,982 )  $  (180,787 )  $   (198,374 ) Less: Amount deferred                             28,813         37,882          55,674 Allowances recognized (ceded other operating expenses) (1)                     $   (142,169 )  $  (142,905 )  $   (142,700 )    

--------------------------------------------------------------------------------

(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%.                                           55  --------------------------------------------------------------------------------

Table of Contents

    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.    

For The Year Ended December 31, 2012 as compared to The Year Ended December 31, 2011

    The decrease in ceded premiums for 2012 as compared to 2011 was caused primarily by lower ceded traditional life premiums of $38.4 million, partially offset by higher ceded universal life premiums of $23.4 million.    Ceded benefits and settlement expenses were higher for the year ended December 31, 2012, as compared to the year ended December 31, 2011, due to higher increases in ceded reserves and higher ceded claims. Traditional ceded benefits decreased $44.0 million for the year ended December 31, 2012, as compared to the year ended December 31, 2011, due to a decrease in ceded reserves and slightly lower ceded death benefits. Universal life ceded benefits increased $110.0 million for the year ended December 31, 2012, as compared to the year ended December 31, 2011, due to an increase in ceded reserves primarily due to unlocking, new business, and higher ceded claims. Ceded universal life claims were $26.7 million higher for the year ended December 31, 2012, as compared to the year ended December 31, 2011.    

Ceded amortization of deferred policy acquisitions costs decreased for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily due to the differences in unlocking between the two periods.

    Total allowances recognized for the year ended December 31, 2012, decreased slightly from the year ended December 31, 2011, as the impact of the continued reduction in our traditional life reinsurance allowances more than offset the impact of growth in the universal life product line.    

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.

                                       56  --------------------------------------------------------------------------------

Table of Contents

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.

                                       57  --------------------------------------------------------------------------------

   Table of Contents    Acquisitions    Segment results of operations   

Segment results were as follows:

                                        For The Year Ended December 31,               Change                                      2012           2011         2010         2012        2011                                          (Dollars In Thousands) REVENUES Gross premiums and policy fees                             $    847,080    $  834,499    $ 676,849         1.5 %      23.3 % Reinsurance ceded                    (387,245 )    (419,676 )   (430,151 )       7.7         2.4 Net premiums and policy fees          459,835       414,823      246,698        10.9        68.2 Net investment income                 550,334       529,261      458,703         4.0        15.4 Other income                            6,003         5,561        5,886         7.9        (5.5 ) Total operating revenues            1,016,172       949,645      711,287         7.0        33.5 Realized gains (losses) - investments                           178,941       167,107      116,044 Realized gains (losses) - derivatives                          (130,818 )    (133,931 )    (65,987 ) Total revenues                      1,064,295       982,821      761,344 BENEFITS AND EXPENSES Benefits and settlement expenses                              716,893       662,293      512,433         8.2        29.2 Amortization of value of business acquired                      76,505        74,167       62,152         3.2        19.3 Other operating expenses               51,714        55,792       25,559        (7.3 )       n/m Operating benefits and expenses                              845,112       792,252      600,144         6.7        32.0 Amortization of VOBA related to realized gains (losses) - investments                               746           874        2,258 Total benefits and expenses           845,858       793,126      602,402         6.6        31.7 INCOME BEFORE INCOME TAX              218,437       189,695      158,942        15.2        19.3 Less: realized gains (losses)          48,123        33,176       50,057 Less: related amortization of VOBA                                     (746 )        (874 )     (2,258 ) OPERATING INCOME                 $    171,060    $  157,393    $ 111,143         8.7        41.6                                              58 

--------------------------------------------------------------------------------

Table of Contents

The following table summarizes key data for the Acquisitions segment:

                                         For The Year Ended December 31,                   Change                                   2012              2011             2010          2012       2011                                            (Dollars In Thousands) Average Life Insurance In-Force(1) Traditional                   $ 179,586,818     $ 188,439,000    $ 186,005,583       (4.7 )%     1.3 % Universal life                    30,351,626       30,670,689      27,033,770        (1.0 )     13.5                               $  209,938,444    $ 219,109,689    $ 213,039,353       (4.2 )      2.8 Average Account Values Universal life                $    3,418,753    $   3,304,966    $   2,764,614        3.4       19.5 Fixed annuity(2)                   3,187,616        3,329,680        3,378,176       (4.3 )     (1.4 ) Variable annuity                     597,467          665,742          

209,034 (10.3 ) n/m

                               $    7,203,836    $   7,300,388    $   6,351,824       (1.3 )     14.9 Interest Spread - UL & Fixed Annuities Net investment income yield(3)                                5.83 %           5.86 %           6.01 % Interest credited to policyholders                           3.99             3.98             3.97 Interest spread                         1.84 %           1.88 %           2.04 %    

--------------------------------------------------------------------------------

(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)Earned rates exclude portfolios supporting modified coinsurance and crediting rates exclude 100% cessions.

For The Year Ended December 31, 2012 as compared to The Year Ended December 31, 2011

    Segment operating income    Operating income was $171.1 million for the year ended December 31, 2012, an increase of $13.7 million, or 8.7%, as compared to the year ended December 31, 2011, primarily due to the Liberty Life coinsurance transaction. The Liberty Life transaction added $50.2 million to segment operating income for the year ended December 31, 2012, an increase of $15.1 million as compared to the year ended December 31, 2011. The Liberty Life transaction was effective April 30, 2011, therefore, the 2012 results include twelve months of Liberty Life activity as compared to eight months included in the 2011 results. This was partly offset by the expected runoff in the older acquired blocks.    Operating revenues    Net premiums and policy fees increased $45.0 million, or 10.9%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily due to the additional months of the Liberty Life blocks of business and the impact of a reinsurance recapture more than offsetting expected runoff related to other blocks of business. Net investment income increased $21.1 million, or 4.0%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011, due to the additional months associated with the 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 $52.7 million, or 6.6%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. The increase was due to the additional months associated with the Liberty Life blocks, the impact of a reinsurance recapture and less favorable mortality, which was partly offset by the expected runoff of the in-force business.                                           59  --------------------------------------------------------------------------------

Table of Contents

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

    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 to 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 partly offset by the expected runoff of the in-force business.    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.    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,                                                  2012           2011           2010                                                        (Dollars In Thousands) REVENUES Reinsurance ceded                            $   (387,245 )  $  (419,676 )  $  (430,151 ) BENEFITS AND EXPENSES Benefits and settlement expenses                 (320,662 )     (383,439 )     (368,647 ) Amortization of deferred policy acquisition costs                                 (11,766 )      (19,062 )      (19,216 ) Other operating expenses                          (54,595 )      (54,894 )      (56,487 ) Total benefits and expenses                      (387,023 )     (457,395 )     (444,350 )  NET IMPACT OF REINSURANCE (1)                $       (222 )  $    37,719    $    14,199    

--------------------------------------------------------------------------------

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

                                       60  --------------------------------------------------------------------------------

Table of Contents

    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 decreased $37.9 million for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily due to a larger decrease in ceded benefits and settlement expenses in relation to the decrease in ceded premiums.    

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.

                                       61  --------------------------------------------------------------------------------

   Table of Contents    Annuities    Segment results of operations   

Segment results were as follows:

                                        For The Year Ended December 31,                Change                                      2012            2011          2010        2012        2011                                           (Dollars In Thousands) REVENUES Gross premiums and policy fees                             $      97,928    $    68,385    $ 42,786        43.2 %      59.8 % Reinsurance ceded                          (26 )          (66 )      (136 )      60.6        51.5 Net premiums and policy fees            97,902         68,319      42,650        43.3        60.2 Net investment income                  504,342        507,229     482,264        (0.6 )       5.2 Realized gains (losses) - derivatives                            (36,501 )      (21,881 )   (10,460 )     (66.8 )       n/m Other income                            82,607         53,999      29,053        53.0        85.9 Total operating revenues               648,350        607,666     543,507         6.7        11.8 Realized gains (losses) - investments                             28,470          9,461      10,175 Realized gains (losses) - derivatives, net of economic cost                                   (66,331 )       16,058     (52,985 ) Total revenues                         610,489        633,185     500,697        (3.6 )      26.5 BENEFITS AND EXPENSES Benefits and settlement expenses                               369,692        391,880     399,014        (5.7 )      (1.8 ) Amortization of deferred policy acquisition costs and value of business acquired              60,032         51,417      28,278        16.8        81.8 Other operating expenses               100,848         84,996      68,106        18.7        24.8 Operating benefits and expenses                               530,572        528,293     495,398         0.4         6.6 Amortization related to benefits and settlement expenses                                   (70 )       (1,092 )     8,441 Amortization of DAC related to realized gains (losses) - investments                            (14,713 )        5,784     (28,202 ) Total benefits and expenses            515,789        532,985     475,637        (3.2 )      12.1 INCOME BEFORE INCOME TAX                94,700        100,200      25,060        (5.5 )       n/m Less: realized gains (losses) - investments                           28,470          9,461      10,175 Less: realized gains (losses) - derivatives, net of economic cost                          (66,331 )       16,058     (52,985 ) Less: amortization related to benefits and settlement expenses                                    70          1,092      (8,441 ) Less: related amortization of DAC                                     14,713         (5,784 )    28,202 OPERATING INCOME                 $     117,778    $    79,373    $ 48,109        48.4        65.0                                            62 

--------------------------------------------------------------------------------

Table of Contents

The following table summarizes key data for the Annuities segment:

                                             For The Year Ended December 31,                   Change                                      2012             2011             2010           2012        2011                                              (Dollars In Thousands) Sales Fixed annuity                    $     591,711    $   1,032,582    $     930,294       (42.7 )%     11.0 % Variable annuity                     2,734,985        2,348,599        1,714,753        16.5        37.0                                  $   3,326,696    $   3,381,181    $   2,645,047        (1.6 )      27.8 Average Account Values Fixed annuity(1)                 $   8,559,562    $   8,538,007    $   7,920,539         0.3         7.8 Variable annuity                     7,550,714        5,397,720        3,409,506        39.9        58.3                                  $  16,110,276    $  13,935,727    $  11,330,045        15.6        23.0 Interest Spread - Fixed Annuities(2) Net investment income yield               5.80 %           5.93 %           6.04 % Interest credited to policyholders                             3.85             4.33             4.55 Interest spread                           1.95 %           1.60 %           1.49 %    

--------------------------------------------------------------------------------

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

  (2)       Interest spread on average general account values.                                         For The Year Ended December 31,               Change                                       2012           2011        2010         2012        2011                                           (Dollars In Thousands) Derivatives related to variable annuity contracts: Interest rate futures - VA        $      21,138    $ 164,221   $ (11,778 ) $ (143,083 ) $ 175,999 Equity futures - VA                     (50,797 )    (30,061 )   (42,258 )    (20,736 )    12,197 Currency futures - VA                    (2,763 )      2,977           -       (5,740 )     2,977 Volatility futures - VA                    (132 )          -           -         (132 )         - Volatility swaps - VA                   (11,792 )       (239 )    (2,433 )    (11,553 )     2,194 Equity options - VA                     (37,370 )    (15,051 )    (1,824 )    (22,319 )   (13,227 ) Interest rate swaptions - VA             (2,260 )          -           -       (2,260 )         - Interest rate swaps - VA                  3,264        7,718           -       (4,454 )     7,718 Credit default swaps - VA                     -       (7,851 )         -        7,851      (7,851 ) Embedded derivative - GMWB(1)           (22,120 )   (127,537 )    (5,728 )    105,417    (121,809 ) Total derivatives related to variable annuity contracts        $    (102,832 )  $  (5,823 ) $ (64,021 ) $  (97,009 ) $  58,198 Economic cost(2)                         36,501       21,881      11,036       14,620      10,845 Realized gains (losses) - derivatives, net of economic cost                              $     (66,331 )  $  16,058   $ (52,985 ) $  (82,389 ) $  69,043    

--------------------------------------------------------------------------------

(1) Includes impact of nonperformance risk of $(70.4) million for the year ended December 31, 2012.

  (2)       Economic cost is the long-term expected average cost of providing the product benefit over the life of the policy based on product pricing assumptions. These include assumptions about the economic/market environment, and elective and non-elective policy owner behavior (e.g. lapses, withdrawal timing, mortality, etc.).                                              As of December 31,                                           2012            2011      Change                                         (Dollars In Thousands)

GMDB - Net amount at risk(1) $ 129,309$ 317,671 (59.3 )% GMDB Reserves

                                19,316         9,498      n/m GMWB and GMAB Reserves(1)                   169,269       147,148     15.0 Account value subject to GMWB rider       7,165,375     4,406,041     62.6 GMWB Benefit Base                         6,888,471     4,562,515     51.0 S&P 500® Index                                1,426         1,258     13.4    

--------------------------------------------------------------------------------

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

                                       63  --------------------------------------------------------------------------------

Table of Contents

For The Year Ended December 31, 2012 as compared to The Year Ended December 31, 2011

    Segment operating income    Segment operating income was $117.8 million for the year ended December 31, 2012, as compared to $79.4 million for the year ended December 31, 2011, an increase of $38.4 million. This variance included a favorable change of $41.2 million in operating revenue driven by higher policy fees and other income in the VA line and lower benefits and settlement expenses. Partially offsetting these favorable changes was an unfavorable change of $14.7 million in unlocking and an increase in DAC amortization and non-deferred expenses.    Operating revenues    Segment operating revenues increased $40.7 million, or 6.7%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily due to increases in policy fees and other income from the VA line of business. Those increases were partially offset by lower investment income and increased GMWB economic cost from the VA line of business. Average fixed account balances grew 0.3% and average variable account balances grew 39.9% for the year ended December 31, 2012, as compared to the year ended December 31, 2011.    

Benefits and settlement expenses

    Benefits and settlement expenses decreased $22.2 million, or 5.7%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. This decrease was primarily the result of lower credited interest, a $9.0 million favorable change in SPIA mortality results and other favorable reserve changes. These favorable changes were partially offset by higher realized losses in the market value adjusted line, a $4.0 million unfavorable change in the EIA fair value adjustments, and an unfavorable change in unlocking. Unfavorable unlocking of $13.8 million was recorded in the year ended December 31, 2012, as compared to $3.1 million of favorable unlocking during the year ended December 31, 2011.    Amortization of DAC    The increase in DAC amortization for the year ended December 31, 2012, as compared to the year ended December 31, 2011, was primarily due to growth in the VA line of business. The segment recorded unfavorable DAC unlocking of $11.4 million for the year ended December 31, 2012, as compared to unfavorable unlocking of $13.6 million for the year ended December 31, 2011.    Other operating expenses    Other operating expenses increased $15.9 million, or 18.7%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. The increase is due to higher commissions, maintenance, and acquisition expenses driven by the growth of the business.    Sales    Total sales decreased $54.5 million, or 1.6%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. Sales of variable annuities increased $386.4 million, or 16.5% for the year ended December 31, 2012, as compared to the year ended December 31, 2011. Sales of fixed annuities decreased by $440.9 million, or 42.7% for the year ended December 31, 2012, as compared to the year ended December 31, 2011, driven by a decrease in single premium deferred annuity and market value adjusted annuity sales.                                           64  --------------------------------------------------------------------------------

Table of Contents

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

    Segment operating income    Segment operating income was $79.4 million for the year ended December 31, 2011, as compared to $48.1 million for the year ended December 31, 2010, an increase of $31.3 million. This variance included favorable changes in operating revenue and benefits and settlement expenses. Partially offsetting these favorable changes were increases in DAC amortization and other operating expenses.    Operating revenues    Segment operating revenues increased $64.2 million, or 11.8%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily due to increases in net investment income, policy fees, and other 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.   

Benefits and settlement expenses

    Benefits and settlement expenses decreased $7.1 million, or 1.8%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. This decrease was primarily the result 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 $3.1 million was recorded in the year ended December 31, 2011, as compared to $5.8 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 due to unfavorable DAC unlocking. There was unfavorable DAC unlocking of $23.5 million for the year ended December 31, 2011, as compared to favorable unlocking of $2.5 million for the year ended December 31, 2010.    Other operating expenses    Other operating expenses increased $16.9 million, or 24.8%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010. The increase is due to higher commissions, maintenance, and acquisition expenses driven by the growth of the business.    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 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.                                           65 

--------------------------------------------------------------------------------

   Table of Contents    Stable Value Products    Segment results of operations   

Segment results were as follows:

                                       For The Year Ended December 31,               Change                                     2012           2011         2010         2012        2011                                         (Dollars In Thousands) REVENUES Net investment income           $    128,239    $  145,150    $ 171,327       (11.7 )%    (15.3 )% Other income                               1            (1 )          -         n/m         n/m Total operating revenues             128,240       145,149      171,327       (11.6 )     (15.3 ) Realized gains (losses)               (4,966 )      25,306       (3,200 )       n/m         n/m Total revenues                       123,274       170,455      168,127       (27.7 )       1.4 BENEFITS AND EXPENSES Benefits and settlement expenses                              64,790        81,256      123,365       (20.3 )     (34.1 ) Amortization of deferred policy acquisition costs                 947         4,556        5,430       (79.2 )     (16.1 ) Other operating expenses               2,174         2,557        3,325       (15.0 )     (23.1 ) Total benefits and expenses           67,911        88,369      132,120       (23.2 )     (33.1 ) INCOME BEFORE INCOME TAX              55,363        82,086       36,007       (32.6 )       n/m Less: realized gains (losses)                              (4,966 )      25,306       (3,200 ) OPERATING INCOME                $     60,329    $   56,780    $  39,207         6.3        44.8     The following table summarizes key data for the Stable Value Products segment:                                       For The Year Ended December 31,           Change                                   2012          2011          2010       2012     2011                                        (Dollars In Thousands) Sales GIC                            $   400,104   $   498,695   $   132,612   (19.8 )%   n/m % GFA - Direct Institutional         221,500       300,000       625,000   (26.2 )  (52.0 )                                $   621,604   $   798,695   $   757,612   (22.2 )    5.4  Average Account Values         $ 2,637,549   $ 2,685,194   $ 3,329,510    (1.8 )% (19.4 )% Ending Account Values          $ 2,510,559   $ 2,769,510   $ 3,076,233    (9.4 )% (10.0 )%  Operating Spread Net investment income yield           4.87 %        5.43 %        5.13 % Interest credited                     2.44          3.03          3.69 Operating expenses                    0.12          0.26          0.27 Operating spread                      2.31 %        2.14 %        1.17 %  Adjusted operating spread(1)          2.09 %        1.80 %        1.11 %    

--------------------------------------------------------------------------------

(1)Excludes participating mortgage loan income and bank loan fee income.

                                       66  --------------------------------------------------------------------------------

Table of Contents

For The Year Ended December 31, 2012 as compared to The Year Ended December 31, 2011

    Segment operating income    Operating income was $60.3 million and increased $3.5 million, or 6.3%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. 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 accelerated DAC amortization of $3.4 million for the year ended December 31, 2011. We did not accelerate DAC amortization during the year ended December 31, 2012 as no contracts were called. The operating spread increased 17 basis points to 231 basis points for the year ended December 31, 2012, as compared to an operating spread of 214 basis points for the year ended December 31, 2011. The adjusted operating spread, which excludes participating income, increased by 29 basis points for the year ended December 31, 2012 over the prior year.    Sales   

Total sales were $621.6 million for the year ended December 31, 2012.

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.

                                       67  --------------------------------------------------------------------------------

   Table of Contents    Asset Protection    Segment results of operations   

Segment results were as follows:

                                    For The Year Ended December 31,               Change                                  2012           2011         2010         2012        2011                                      (Dollars In Thousands) REVENUES Gross premiums and policy fees                         $    259,741    $  268,200    $ 289,794        (3.2 )%     (7.5 )% Reinsurance ceded                 (91,085 )     (97,302 )   (110,911 )       6.4        12.3 Net premiums and policy fees                              168,656       170,898      178,883        (1.3 )      (4.5 ) Net investment income              19,698        21,650       23,959        (9.0 )      (9.6 ) Other income                      105,792        90,039       66,755        17.5        34.9 Total operating revenues          294,146       282,587      269,597         4.1         4.8 BENEFITS AND EXPENSES Benefits and settlement expenses                           91,778        88,257       86,799         4.0         1.7 Amortization of deferred policy acquisition costs           22,569        22,607       25,077        (0.2 )      (9.8 ) Other operating expenses          170,034       154,831      133,454         9.8        16.0 Total benefits and expenses                          284,381       265,695      245,330         7.0         8.3 INCOME BEFORE INCOME TAX            9,765        16,892       24,267       (42.2 )     (30.4 ) OPERATING INCOME             $      9,765    $   16,892    $  24,267       (42.2 )     (30.4 )    

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

                               For The Year Ended December 31,          Change                              2012           2011        2010      2012     2011                                  (Dollars In Thousands) Sales Credit insurance         $     35,336    $   35,767   $  36,216    (1.2 )% (1.2 )% Service contracts             328,931       286,485     235,585    14.8    21.6 GAP and Other products         62,342        72,908      54,489   (14.5 )  33.8                          $    426,609    $  395,160   $ 326,290     8.0    21.1 Loss Ratios(1) Credit insurance                 37.7 %        33.8 %      37.8 % Service contracts                58.7          56.5        56.7 GAP and Other products           41.3          33.8       (11.3 )    

--------------------------------------------------------------------------------

(1)Incurred claims as a percentage of earned premiums

For The Year Ended December 31, 2012 as compared to The Year Ended December 31, 2011

    Segment operating income    Operating income was $9.8 million, representing a decrease of $7.1 million, or 42.2%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. Service contract earnings decreased $3.2 million, or 61.6%, primarily due to $4.1 million of expense to impair and dispose of previously capitalized costs associated with developing internal-use software. Credit insurance earnings decreased $4.1 million primarily due to $3.1 million in legal settlement and related costs.  Earnings from the GAP product line increased $0.2 million, or 1.8%.                                           68 

--------------------------------------------------------------------------------

     Table of Contents    Net premiums and policy fees    Net premiums and policy fees decreased $2.2 million, or 1.3%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. Service contract premiums decreased $3.7 million, or 2.8% and credit insurance premiums decreased $2.1 million, or 11.6%. The decrease was primarily the result of decreasing sales in prior years and the related impact on earned premiums. The decrease was partially offset by an increase of $3.6 million, or 20.5%, in the GAP product line.    Other income    Other income increased $15.8 million, or 17.5%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily due to an increase in 2012 sales reflecting improvement in the U.S. automobile market and increased market share.   

Benefits and settlement expenses

    Benefits and settlement expenses increased $3.5 million, or 4.0%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. GAP claims increased $2.5 million, or 39.7%, due to an increase in earned premiums and higher loss ratios.  Service contract claims increased $1.1 million, or 1.4%.  Credit insurance claims decreased $0.1 million, or 1.3%.    

Amortization of DAC and Other operating expenses

    Amortization of DAC remained consistent for the year ended December 31, 2012, as compared to the year ended December 31, 2011. Other operating expenses increased $15.2 million, or 9.8%, for the year ended December 31, 2012, partly due to the $4.1 million impairment and disposal of capitalized costs associated with developing internal-use software and $2.0 million legal settlement and related costs.  Expenses related to higher sales and expenses related to new initiatives also contributed to the increase.    Sales   

Total segment sales increased $31.4 million, or 8.0%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. Service contract sales increased $42.4 million, or 14.8%. The increase is attributable to the improvement in auto sales over the prior year and increased market share. Sales in the GAP product line decreased $10.6 million, or 14.5%, primarily due to a change in mix of GAP business. Credit insurance sales decreased $0.4 million, or 1.2%, as compared to the prior year.

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

    Segment operating income    Operating income was $16.9 million, representing a decrease of $7.4 million, or 30.4%, for the year ended December 31, 2011, as compared to the year ended December 31, 2010$6.9 million 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 $3.5 million 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 partially offset by an increase in GAP earnings resulting from higher volume and favorable loss experience. Credit insurance earnings increased $3.0 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 $2.5 million, or 9.8%, lower for the year ended December 31, 2011, as compared to the year ended December 31, 2010, primarily due to lower earned premiums in the GAP product line and reduced amortization in the credit insurance product line. Other operating expenses increased $21.4 million, or 16.0%, 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.    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.                                           70  --------------------------------------------------------------------------------

Table of Contents

    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,                                               2012           2011           2010                                                     (Dollars In Thousands) REVENUES Reinsurance ceded                         $    (91,086 )  $   (97,302 )  $  (110,911 ) BENEFITS AND EXPENSES Benefits and settlement expenses               (56,958 )      (63,406 )      (77,188 ) Amortization of deferred policy acquisition costs                              (18,869 )      (24,614 )      (31,970 ) Other operating expenses                        (9,353 )      (11,759 )      (11,046 ) Total benefits and expenses                    (85,180 )      (99,779 )     (120,204 )  NET IMPACT OF REINSURANCE (1)             $     (5,906 )  $     2,477    $     9,293    

--------------------------------------------------------------------------------

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

For The Year Ended December 31, 2012 as compared to The Year Ended December 31, 2011

    Reinsurance premiums ceded decreased $6.2 million, or 6.4%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. The decrease was primarily due to a decline in ceded dealer credit insurance premiums due to lower sales in prior years and a decrease in ceded GAP premiums primarily due to a change in mix of GAP business, somewhat offset by an increase in service contract premiums.    Benefits and settlement expenses ceded decreased $6.4 million, or 10.2%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. The decrease was primarily due to lower losses in the service contract line.    Amortization of DAC ceded decreased $5.7 million, or 23.3%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily as the result of the decreases in the ceded dealer credit and GAP product lines. Other operating expenses ceded decreased $2.4 million, or 20.5%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily as a result of decreases in the dealer credit and GAP product lines.    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.    

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, 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.                                           71  --------------------------------------------------------------------------------

Table of Contents

    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  --------------------------------------------------------------------------------

   Table of Contents    Corporate and Other    Segment results of operations   

Segment results were as follows:

                                          For The Year Ended December 31,              Change                                       2012           2011          2010        2012       2011                                            (Dollars In Thousands) REVENUES

Gross premiums and policy fees $ 19,567$ 21,469$ 24,164

     (8.9 )%   (11.2 )% Reinsurance ceded                          (28 )         (108 )         (2 )     74.1        n/m Net premiums and policy fees            19,539         21,361       24,162       (8.5 )    (11.6 ) Net investment income                  100,351        104,140      100,639       (3.6 )      3.5 Realized gains (losses) - derivatives                                  -              -          168 Other income                            32,231         36,802        5,463      (12.4 )      n/m Total operating revenues               152,121        162,303      130,432       (6.3 )     24.4 Realized gains (losses) - investments                            (27,930 )       (1,801 )     (5,846 ) Realized gains (losses) - derivatives                              6,011        (14,892 )    (15,291 ) Total revenues                         130,202        145,610      109,295      (10.6 )     33.2 BENEFITS AND EXPENSES Benefits and settlement expenses                                19,393         21,528       24,575       (9.9 )    (12.4 ) Amortization of deferred policy acquisition costs                        1,018          2,654        1,694      (61.6 )     56.7 Other operating expenses               130,591        131,136      117,621       (0.4 )     11.5 Total benefits and expenses            151,002        155,318      143,890       (2.8 )      7.9 INCOME (LOSS) BEFORE INCOME TAX        (20,800 )       (9,708 )    (34,595 )      n/m       71.9 Less: realized gains (losses) - investments                            (27,930 )       (1,801 )     (5,846 ) Less: realized gains (losses) - derivatives                              6,011        (14,892 )    (15,291 ) OPERATING INCOME (LOSS)            $     1,119    $     6,985    $ (13,458 )    (84.0 )      n/m    

For The Year Ended December 31, 2012 as compared to The Year Ended December 31, 2011

Segment operating income (loss)

    Corporate and Other segment operating income was $1.1 million for the year ended December 31, 2012, as compared to an operating income of $7.0 million for the year ended December 31, 2011. The decrease was primarily due to $8.5 million of pre-tax earnings recorded during 2011 relating to the settlement of a dispute with respect to certain investments and a $3.5 million unfavorable variance related to gains on the repurchase of non-recourse funding obligations. For the year ended December 31, 2012, $32.0 million of pre-tax gains were generated by repurchases as compared to $35.5 million of pre-tax gains generated during the year ended December 31, 2011.  Partially offsetting this variance was an $8.6 million favorable variance related to mortgage loan prepayment fee income as compared to the year ended December 31, 2011.    Operating revenues    Net investment income for the segment decreased $3.8 million, or 3.6%, for the year ended December 31, 2012, as compared to the year ended December 31, 2011, and net premiums and policy fees decreased $1.8 million, or 8.5%. The decrease in net investment income was primarily the result of $8.5 million of pre-tax earnings recorded in 2011 relating to the settlement of a dispute with respect to certain investments.  In addition, the segment experienced a decrease in investment income related to the lower interest rate environment as compared to the year ended December 31, 2011.  Partially offsetting this variance was an $8.6 million increase in mortgage loan prepayment fee income as compared to the year ended December 31, 2011.  Other income decreased $4.6 million for the year ended December 31,                                           73 

--------------------------------------------------------------------------------

Table of Contents

    2012 as compared to the year ended December 31, 2011, primarily due to a $3.5 million unfavorable variance related to gains generated on the repurchase of non-recourse funding obligations.    Total benefits and expenses   

Total benefits and expenses decreased $4.3 million for the year ended December 31, 2012, as compared to the year ended December 31, 2011. This decrease was primarily due to a $2.1 million decrease in benefits and settlement expenses from a reduction in policy benefits on non-core lines of business.

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.    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.                                           74  --------------------------------------------------------------------------------

   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, 2012, our investment portfolio was approximately $36.9 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,                                               2012                         2011                                                     (Dollars In Thousands) Publicly issued bonds (amortized cost: 2012 - $21,228,463; 2011 - $21,172,568)                        $ 23,808,542         64.6 %  $ 22,829,335         65.5 % Privately issued bonds (amortized cost: 2012 - $5,732,847; 2011 - $4,936,563)         6,261,436         17.0       5,128,230         14.7 Fixed maturities                      30,069,978         81.6      27,957,565         80.2 Equity securities (cost: 2012 - $371,827; 2011 - $303,578)               373,715          1.0         292,413          0.8 Mortgage loans                         4,948,625         13.4       5,351,902         15.4 Investment real estate                     6,517            -          10,991            - Policy loans                             865,391          2.3         879,819          2.5 Other long-term investments              378,821          1.0         264,031          0.8 Short-term investments                   216,787          0.7         101,470          0.3 Total investments                   $ 36,859,834        100.0 %  $ 34,858,191        100.0 %     Included in the preceding table are $3.0 billion and $3.0 billion of fixed maturities and $118.9 million and $85.8 million of short-term investments classified as trading securities as of December 31, 2012 and 2011, respectively. The trading portfolio includes invested assets of $3.0 billion and $2.9 billion as of December 31, 2012 and 2011, respectively, held pursuant to modified coinsurance ("Modco") arrangements under which the economic risks and benefits of the investments are passed to third party reinsurers. Also included above, are $300.0 million of securities classified as held-to-maturity as of December 31, 2012. The Company held no held-to-maturity securities as of December 31, 2011.                                           75 

--------------------------------------------------------------------------------

   Table of Contents    Fixed Maturity Investments   

As of December 31, 2012, our fixed maturity investment holdings were approximately $30.1 billion. The approximate percentage distribution of our fixed maturity investments by quality rating is as follows:

                              As of December 31, Rating                     2012         2011 AAA                           14.7 %       16.5 % AA                             7.2          8.0 A                             30.8         27.6 BBB                           39.7         41.0 Below investment grade         6.6          6.9 Not rated                      1.0            -                              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.  Some bonds are not rated.    We do not have material exposure to financial guarantee insurance companies with respect to our investment portfolio. As of December 31, 2012, based upon amortized cost, $38.0 million of our securities were guaranteed either directly or indirectly by third parties out of a total of $26.5 billion fixed maturity securities held by us (0.1% 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                                                 2012          2011                                                    (Dollars In Millions) Corporate bonds                                  $   22,037.9   $ 20,128.7 Residential mortgage-backed securities                2,197.1      2,651.0 Commercial mortgage-backed securities                 1,040.9        740.8 Other asset-backed securities                         1,133.0        971.0 U.S. government-related securities                    1,474.3      1,771.5 Other government-related securities                     164.2        137.9 States, municipals, and political subdivisions        1,722.6      1,556.7 Other                                                   300.0            - Total fixed income portfolio                     $   30,070.0   $ 27,957.6     Within our fixed maturity investments, we maintain portfolios classified as "available-for-sale", "trading" and "held-to-maturity".  We purchase our available for sale investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, we may sell any of our available-for-sale and trading investments to maintain proper matching of assets and liabilities. Accordingly, we classified $26.8 billion, or 89.0%, of our fixed maturities as "available-for-sale" as of December 31, 2012. These securities are carried at fair value on our consolidated balance sheets.                                           76  --------------------------------------------------------------------------------

Table of Contents

    Fixed maturities that we have both the positive intent and ability to hold to maturity are classified as "held-to-maturity". We classified $300.0 million, or 1.0% of our fixed maturities as "held-to-maturity" as of December 31, 2012. These securities are carried at amortized cost 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 10.0%, of our fixed maturities and $118.9 million of short-term investments as of December 31, 2012. Changes in fair value on 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, Rating                                     2012          2011                                          (Dollars In Thousands) AAA                                    $    559,374   $   845,498 AA                                          239,834       267,450 A                                           801,562       702,889 BBB                                       1,038,873       909,296 Below investment grade                      353,089       211,672

Total Modco trading fixed maturities $ 2,992,732$ 2,936,805

     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. These holdings as of December 31, 2012, 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  --------------------------------------------------------------------------------

Table of Contents

    Residential mortgage-backed securities - As of December 31, 2012, our RMBS portfolio was approximately $2.2 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.    

The tables below include a breakdown of these holdings by type and rating as of December 31, 2012.

                  Percentage of                 Residential                  Mortgage-                   Backed Type            Securities Sequential              23.7 % PAC                     42.4 Pass Through             7.0 Other                   26.9                        100.0 %                               Percentage of                            Residential                          Mortgage-Backed Rating                     Securities AAA                                 55.8 % AA                                   0.6 A                                    1.5 BBB                                  1.3 Below investment grade              40.8                                    100.0 %                                            78 

--------------------------------------------------------------------------------

   Table of Contents    Alt-A Collateralized Holdings    As of December 31, 2012, we held securities with a fair value of $443.6 million, or 1.2% of invested assets, supported by collateral classified as Alt-A. As of December 31, 2011, we held securities with a fair value of $354.4 million supported by collateral classified as Alt-A. We included in this classification certain whole loan securities where such securities had underlying mortgages with a high level of limited loan documentation. As of December 31, 2012, these securities had a fair value of $140.3 million and an unrealized gain of $20.1 million.   

The following table includes the percentage of our collateral classified as Alt-A, grouped by rating category, as of December 31, 2012:

                            Percentage of                              Alt-A Rating                    Securities A                                  0.2 % Below investment grade            99.8                                  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, 2012:

Alt-A Collateralized Holdings                                                     Estimated Fair Value of

Security by Year of Security Origination

                                    2008 and Rating                                Prior              2009           2010           2011           2012              Total                                                                        (Dollars In Millions) A                               $             0.9     $        -     $        -     $        -     $        -     $             0.9 Below investment grade                      442.7              -              -              -              -                 442.7 Total mortgage-backed securities collateralized by Alt-A mortgage loans            $           443.6     $        -     $        -     $        -     $        -     $           443.6                                                       Estimated Unrealized Gain

(Loss) of Security by Year of Security Origination

                                        2008 and Rating                                   Prior                 2009              2010              2011              2012             Total                                                                               (Dollars In Millions) A                                 $                 -      $          -      $          -      $          -      $          -      $          - Below investment grade                           18.3                 -                 -                 -                 -              18.3 Total mortgage-backed securities collateralized by Alt-A mortgage loans              $              18.3      $          -      $          -      $          -      $          -      $       18.3                                            79 

--------------------------------------------------------------------------------

Table of Contents

Sub-prime Collateralized Holdings

As of December 31, 2012, we held securities with a total fair value of $2.7 million that were supported by collateral classified as sub-prime. As of December 31, 2011, we held securities with a fair value of $0.1 million that were supported by collateral classified as sub-prime.

Prime Collateralized Holdings    As of December 31, 2012, we had RMBS collateralized by prime mortgage loans (including agency mortgages) with a total fair value of $1.8 billion, or 4.8%, of total invested assets. As of December 31, 2011, we held securities with a fair value of $2.3 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, 2012:

                            Percentage of                              Prime Rating                    Securities AAA                               70.0 % AA                                 0.7 A                                  1.8 BBB                                1.6 Below investment grade            25.9                                  100.0 %                                            80 

--------------------------------------------------------------------------------

Table of Contents

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, 2012:

Prime Collateralized Holdings                                      Estimated Fair Value of Security by Year

of Security Origination

                          2008 and Rating                     Prior           2009           2010            2011           2012         Total                                                         (Dollars In Millions) AAA                     $      428.0    $     83.4    $      356.7    $      358.3    $        -    $ 1,226.4 AA                              12.5             -               -               -             -         12.5 A                               32.4             -               -               -             -         32.4 BBB                             28.7             -               -               -             -         28.7 Below investment grade                          450.9             -               -               -             -        450.9 Total mortgage-backed securities collateralized by prime mortgage loans    $      952.5    $     83.4    $      356.7    $      358.3    $        -    $ 1,750.9                                             Estimated Unrealized Gain (Loss) of

Security by Year of Security Origination

                               2008 and Rating                          Prior              2009              2010               2011              2012           Total                                                                     (Dollars In Millions) AAA                         $         26.3     $        9.1     $         23.5     $         26.3     $          -     $     85.2 AA                                       -                -                  -                  -                -              - A                                      0.9                -                  -                  -                -            0.9 BBB                                    1.3                -                  -                  -                -            1.3 Below investment grade                12.5                -                  -                  -                -           12.5 Total mortgage-backed securities collateralized by prime mortgage loans     $         41.0     $        9.1     $         23.5     $         26.3     $          -     $     99.9                                            81 

--------------------------------------------------------------------------------

Table of Contents

    Commercial mortgage-backed securities - Our CMBS portfolio consists of commercial mortgage-backed securities issued in securitization transactions. As of December 31, 2012, the CMBS holdings were approximately $1.0 billion. As of December 31, 2011, the CMBS holdings were approximately $740.8 million.    

The following table includes the percentages of our CMBS holdings, grouped by rating category, as of December 31, 2012:

                                         Percentage of                                        Commercial                                      Mortgage-Backed                             Rating     Securities                             AAA                 68.9 %                             AA                  11.4                             A                   18.1                             BBB                  1.6                                                100.0 %    

The following tables categorize the estimated fair value and unrealized gain/(loss) of our CMBS as of December 31, 2012:

                         Commercial Mortgage-Backed Securities                                    Estimated Fair Value of Security by Year of Security Origination                          2008 and Rating                     Prior         2009          2010           2011           2012         Total                                                       (Dollars In Millions) AAA                     $     113.8    $       -    $      86.5    $     244.1    $     272.8   $   717.2 AA                                -            -           34.2           39.4           44.5       118.1 A                              47.2          2.2           35.5           88.2           14.9       188.0 BBB                            17.6            -              -              -              -        17.6 Total commercial mortgage- backed securities              $     178.6    $     2.2    $     156.2    $     371.7    $     332.2   $ 1,040.9                                          Estimated Unrealized Gain (Loss) of

Security by Year of Security Origination

                            2008 and Rating                       Prior            2009              2010               2011               2012            Total                                                                  (Dollars In Millions) AAA                       $        3.5     $         -     $         10.9     $         32.1     $         13.4     $    59.9 AA                                   -               -                3.0                4.4                0.4           7.8 A                                  2.8               -                2.9                4.7                0.5          10.9 BBB                                0.7               -                  -                  -                  -           0.7 Total commercial mortgage- backed securities                $        7.0     $         -     $         16.8     $         41.2     $         14.3     $    79.3                                            82 

--------------------------------------------------------------------------------

Table of Contents

    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, 2012, these holdings were approximately $1.1 billion. As of December 31, 2011, these holdings were approximately $971.0 million.    

The following table includes the percentages of our other asset-backed holdings, grouped by rating category, as of December 31, 2012:

                                                 Percentage of                                               Other Asset-                                                  Backed                      Rating                    Securities                      AAA                               57.6 %                      AA                                15.2                      A                                 15.8                      BBB                                0.2                      Below investment grade            11.2                                                       100.0 %    

The following tables categorize the estimated fair value and unrealized gain/(loss) of our asset-backed securities as of December 31, 2012:

                            Other Asset-Backed Securities                                    Estimated Fair Value of Security by Year of Security Origination                          2008 and Rating                     Prior         2009          2010          2011           2012          Total                                                       (Dollars In Millions) AAA                     $     554.6    $     4.6    $     32.1    $      26.3    $      35.1    $   652.7 AA                            165.5            -             -              -            6.7        172.2 A                              31.6            -             -           75.5           71.7        178.8 BBB                             2.4            -             -              -              -          2.4 Below investment grade                         126.9            -             -              -              -        126.9 Total other asset-backed securities              $     881.0    $     4.6    $     32.1    $     101.8    $     113.5    $ 1,133.0                                           Estimated Unrealized Gain (Loss) of

Security by Year of Security Origination

                               2008 and Rating                           Prior              2009             2010             2011             2012           Total                                                                  (Dollars In Millions) AAA                        $           (24.4 )   $         -     $        0.1     $        0.4     $        0.6     $   (23.3 ) AA                                     (14.3 )             -                -                -              0.3         (14.0 ) A                                        1.5               -                -              6.5              1.4           9.4 BBB                                        -               -                -                -                -             - Below investment grade                   1.0               -                -                -                -           1.0 Total other asset-backed securities                 $           (36.2 )   $         -     $        0.1     $        6.9     $        2.3     $   (26.9 )     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, 2012, over 98.0% of our fixed maturities were rated by Moody's, S&P, Fitch, and/or the NAIC.                                           83  --------------------------------------------------------------------------------

Table of Contents

    The industry segment composition of our fixed maturity securities is presented in the following table:                                               As of            % Fair            As of            % Fair                                      December 31, 2012      Value       December 31, 2011      Value                                                           (Dollars In Thousands) Banking                             $         2,314,924         7.7 %  $         2,282,096         8.2 % Other finance                                   346,029         1.2                247,963         0.9 Electric                                      3,782,241        12.6              3,726,291        13.3 Natural gas                                   2,199,265         7.3              2,261,519         8.1 Insurance                                     2,539,394         8.4              2,127,963         7.6 Energy                                        1,820,275         6.1              1,722,926         6.2 Communications                                1,260,773         4.2              1,239,770         4.4 Basic industrial                              1,293,037         4.3              1,196,626         4.3 Consumer noncyclical                          1,738,686         5.8              1,324,561         4.7 Consumer cyclical                               941,057         3.1                737,424         2.6 Finance companies                               244,107         0.8                218,699         0.8 Capital goods                                 1,065,864         3.5                934,137         3.3 Transportation                                  670,477         2.2                622,729         2.2 Other industrial                                235,642         0.8                175,063         0.6 Brokerage                                       588,307         2.0                520,892         1.9 Technology                                      844,036         2.8                677,844         2.4 Real estate                                     119,021         0.4                 83,208         0.3 Other utility                                    34,779         0.1                 28,973         0.1 Commercial mortgage-backed securities                                    1,040,896         3.5                740,775         2.6 Other asset-backed securities                 1,132,943         3.8                970,957         3.5 Residential mortgage-backed non-agency securities                           987,035         3.3              1,215,872         4.3 Residential mortgage-backed agency securities                             1,210,098         4.0              1,435,135         5.1 U.S. government-related securities                                    1,474,319         4.9              1,771,535         6.3 Other government-related securities                                      164,222         0.5                137,862         0.5 State, municipals, and political divisions                                     1,722,551         5.7              1,556,745         5.8 Other                                           300,000         1.0                      -           - Total                               $        30,069,978       100.0 %  $        27,957,565       100.0 %     Our investments classified as available-for-sale and trading in debt and equity securities are reported at fair value. Our investments classified as held-to-maturity are reported at amortized cost. As of December 31, 2012, our fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $30.1 billion, which was 13.6% above amortized cost of $26.5 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.                                           84  --------------------------------------------------------------------------------

   Table of Contents    Mortgage Loans    We invest a portion of our investment portfolio in commercial mortgage loans. As of December 31, 2012, our mortgage loan holdings were approximately $4.9 billion. We have specialized in making loans on credit-oriented commercial properties, 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, 2012 and 2011, our allowance for mortgage loan credit losses was $2.9 million and $5.0 million, respectively. While our mortgage loans do not have quoted market values, as of December 31, 2012, we estimated the fair value of our mortgage loans to be $5.7 billion (using discounted cash flows from the next call date), which was approximately 16% 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, 2012 and 2011, approximately $817.3 million and $876.8 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.    Certain 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 $224.8 million will be due in 2013, $1.3 billion in 2014 through 2018, $599.0 million in 2019 through 2023, and $179.6 million thereafter.    As of December 31, 2012, approximately $17.9 million or 0.05%, or, 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. During the year ended December 31, 2012, certain mortgage loan transactions occurred that were accounted for as troubled debt restructurings under Topic 310 of the FASB ASC. These transactions generally included acceptance of assets in satisfaction of principal or foreclosure on collateral property, and were the result of agreements between the creditor and the debtor or imposition of law.  For all mortgage loans, the impact of troubled debt restructurings is reflected in our investment balance and in the allowance for mortgage loan credit losses. Transactions accounted for as troubled debt restructurings during the year ended December 31, 2012 resulted in a reduction of $7.8 million in our investment in mortgage loans, net of existing allowances for mortgage loan losses.  None of these loans remained on our balance sheets as of December 31, 2012. Our mortgage loan portfolio consists of two categories of loans: (1) those not subject to a pooling and servicing agreement and (2) those subject to a contractual pooling and servicing agreement.    

As of December 31, 2012, $11.0 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, 2012.

                                       85  --------------------------------------------------------------------------------

Table of Contents

As of December 31, 2012, $6.9 million of loans subject to a pooling and servicing agreement were nonperforming. None of these nonperforming loans have been restructured during the year ended December 31, 2012.

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. During the second quarter of 2011, we discontinued this program. Certain collateral assets, which we previously intended to 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, 2012, with a balance of $3.7 million. We currently do not have any intent to sell these securities, and do not 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, 2012:

                                                                 Percent of            Rating                         Fair Value          Fair Value                                     (Dollars In Thousands)            AAA                      $             3,846,005         14.4 %            AA                                     1,912,080          7.1            A                                      8,455,930         31.6            BBB                                   10,894,207         40.7            Investment grade                      25,108,222         93.8            BB                                       759,323          2.8            B                                        136,368          0.5            CCC or lower                             758,757          2.9            Below investment grade                 1,654,448          6.2            Total                    $            26,762,670        100.0 %    

Not included in the table above are $2.6 billion of investment grade and $367.1 million of below investment grade fixed maturities classified as trading securities and $300.0 million of not rated fixed maturities classified as held-to-maturity.

                                           86  --------------------------------------------------------------------------------

Table of Contents

    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, 2012. 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, 2012:                                       Fair Value of                                 Funded       Unfunded       Total Creditor                      Securities    Exposures     Fair Value                                        (Dollars In Millions) Duke Energy Corp              $     213.5   $        -   $      213.5 Comcast Corp.                       194.8            -          194.8 Nextera Energy Inc.                 182.4            -          182.4 Exelon Corp.                        179.7            -          179.7 Berkshire Hathaway Inc.             173.3            -          173.3 General Electric                    164.8            -          164.8 Verizon Communications Inc.         160.2            -          160.2 JP Morgan Chase                     144.2         14.0          158.2 Rio Tinto PLC                       158.0            -          158.0 Morgan Stanley                      150.9          0.6          151.5     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.    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. 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, 2012, we concluded that approximately $58.1 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 a $9.0 million reduction of non-credit losses in other comprehensive income for the                                           87  --------------------------------------------------------------------------------

Table of Contents

    securities where an other-than-temporary impairment was recorded for the year ended December 31, 2012, respectively. The reduction in non-credit losses was caused by recognizing, in the current quarter, credit losses in earnings that had previously been recognized as non-credit losses in other comprehensive income.    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. There remains considerable uncertainty as to future developments in the European debt crisis and the impact on financial markets.    

The chart shown below includes our non-sovereign fair value exposures in these countries as of December 31, 2012. As December 31, 2012, 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                     $    385.7   $         402.5   $       788.2 Switzerland                             154.9             207.8           362.7 France                                   69.7             100.0           169.7 Sweden                                  152.2               5.0           157.2 Netherlands                             162.6              89.5           252.1 Spain                                    38.3              97.8           136.1 Belgium                                     -              90.9            90.9 Germany                                  26.9              58.3            85.2 Ireland                                   6.0              85.0            91.0 Luxembourg                                  -              53.9            53.9 Italy                                       -              48.5            48.5 Norway                                      -              14.3            14.3 Total securities                        996.3           1,253.5         2,249.8 Derivatives: Germany                                  22.2                 -            22.2 Switzerland                               3.5                 -             3.5 Total derivatives                        25.7                 -            25.7 Total securities                   $  1,022.0   $       1,253.5   $     2,275.5                                            88 

--------------------------------------------------------------------------------

   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                                          2012           2011          2010         2012        2011                                                           (Dollars In Thousands)

Fixed maturity gains - sales $ 73,017$ 95,384$ 93,310 (22,367 ) 2,074 Fixed maturity losses - sales

              (5,348 )     (15,340 )     (41,494 )     9,992      26,154 Equity gains - sales                          206         9,136         6,492      (8,930 )     2,644 Equity losses - sales                        (251 )           -            (3 )      (251 )         3 Impairments on fixed maturity securities                                (58,144 )     (47,321 )     (39,550 )   (10,823 )    (7,771 ) Impairments on equity securities                -             -        (1,815 )         -       1,815 Modco trading portfolio                   177,986       164,224       109,399      13,762      54,825 Other                                     (12,774 )      (5,651 )      (9,283 )    (7,123 )     3,632 Total realized gains (losses) - investments                          $    174,692    $  200,432    $  

117,056 (25,740 ) 83,376

  Derivatives related to variable annuity contracts: Interest rate futures - VA           $     21,138    $  164,221    $  (11,778 )  (143,083 )   175,999 Equity futures - VA                       (50,797 )     (30,061 )     (42,258 )   (20,736 )    12,197 Currency futures - VA                      (2,763 )       2,977             -      (5,740 )     2,977 Volatility futures - VA                      (132 )           -             -        (132 )         - Volatility swaps - VA                     (11,792 )        (239 )      (2,433 )   (11,553 )     2,194 Equity options - VA                       (37,370 )     (15,051 )      (1,824 )   (22,319 )   (13,227 ) Interest rate swaptions - VA               (2,260 )           -             -      (2,260 )         - Interest rate swaps - VA                    3,264         7,718             -      (4,454 )     7,718 Credit default swaps - VA                       -        (7,851 )           -       7,851      (7,851 ) Embedded derivative - GMWB                (22,120 )    (127,537 )      (5,728 )   105,417    (121,809 ) Total derivatives related to variable annuity contracts               (102,832 )      (5,823 )     (64,021 )   (97,009 )    58,198 Embedded derivative - Modco reinsurance treaties                     (132,816 )    (134,340 )     (67,989 )     1,524     (66,351 ) Interest rate swaps                           (87 )     (11,264 )      (8,427 )    11,177      (2,837 ) Interest rate caps                         (2,666 )      (2,801 )           -         135      (2,801 ) Derivatives with PLC(1)                    10,664          (300 )      (4,800 )    10,964       4,500 Other derivatives                             (79 )        (477 )         799         398      (1,276 ) Total realized gains (losses) - derivatives                          $   (227,816 )  $ (155,005 )  $ (144,438 )   (72,811 )   (10,567 )    

--------------------------------------------------------------------------------

(1) These derivatives include the Interest, YRT premium support,and portfolio maintenance agreements between certain of the Company's subsidiaries and PLC.

    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, 2012, 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.    From time to time, we are required to post and obligated to return collateral related to derivative transactions. As of December 31, 2012, we had posted cash and securities (at fair value) as collateral of approximately $34.8 million and $54.9 million, respectively. As of December 31, 2012, we received $11.6 million of cash as collateral. We do not net the collateral posted or received with the fair value of the derivative financial instruments for reporting purposes.                                           89  --------------------------------------------------------------------------------

Table of Contents

    Realized losses are comprised of both write-downs of other-than-temporary impairments and actual sales of investments. For the year ended December 31, 2012, we recognized pre-tax other-than-temporary impairments of $58.1 million due to credit-related factors, resulting in a charge to earnings. Additionally, we recognized $9.0 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, we recognized pre-tax other-than-temporary impairments of $47.3 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,                         2012                 2011                           (Dollars In Millions) Alt-A MBS         $            9.1     $           17.9 Other MBS                     17.0                 15.0 Corporate bonds               32.0                 12.4 Sub-prime bonds                  -                  2.0 Total             $           58.1     $           47.3     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, 2012, we sold securities in an unrealized loss position with a fair value of $38.0 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                  $  23,002         60.6 % $        (1,713 )            30.6 % >90 days but <= 180 days        4,230         11.1              (852 )            15.2 >180 days but <= 270 days         820          2.2              (153 )             2.7 >270 days but <= 1 year           906          2.4              (167 )             3.0 >1 year                         8,992         23.7            (2,714 )            48.5 Total                       $  37,950        100.0 % $        (5,599 )           100.0 %     For the year ended December 31, 2012, we sold securities in an unrealized loss position with a fair value (proceeds) of $38.0 million. The loss realized on the sale of these securities was $5.6 million. The $5.6 million loss recognized on available-for-sale securities for the year ended December 31, 2012, includes an $1.9 million loss on the sale of BNP Paribas and $1.1 million loss on the sale of Credit Suisse. We made the decision to exit these holdings in order to reduce our European financial exposure.    For the year ended December 31, 2012, we sold securities in an unrealized gain position with a fair value of $1.6 billion. The gain realized on the sale of these securities was $73.2 million.    The $12.8 million of other realized losses recognized for the year ended December 31, 2012, consists of the decrease in the mortgage loan reserves of $2.1 million, mortgage loan losses of $15.4 million, real estate gains of $0.5 million, fixed asset losses of $0.1 million, and partnership gains of $0.1 million.    For the year ended December 31, 2012, net gains of $178.0 million primarily related to changes in fair value on our Modco trading portfolios were included in realized gains and losses. Of this amount, approximately $32.3 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. The Modco embedded derivative associated with the trading portfolios had realized pre-tax losses of $132.8 million during the year ended                                           90 

--------------------------------------------------------------------------------

Table of Contents

December 31, 2012. These losses were primarily the result of credit spreads tightening and a continued decline in treasury yields.

Realized investment gains and losses related to derivatives represent changes in their fair value during the period and termination gains/(losses) on those derivatives that were closed during the period.

    We use equity, interest rate, currency, and volatility 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 net pre-tax losses of $50.8 million, interest rate futures resulted in pre-tax gains of $21.1 million, currency futures resulted in net pre-tax losses of $2.8 million, and volatility futures resulted in net pre-tax losses of $0.1 million for the year ended December 31, 2012, 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 $37.4 million and the volatility swaps resulted in a net pre-tax loss of $11.8 million, respectively, for year ended December 31, 2012.    We use interest rate swaps and interest rate swaptions to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within our variable annuity products. The interest rate swaps resulted in net pre-tax gains of $3.3 million and interest rate swaptions resulted in a net pre-tax loss of $2.3 million for year ended December 31, 2012.    The GMWB rider embedded derivative on variable deferred annuities, with the GMWB rider, had net realized losses of $22.1 million for the year ended December 31, 2012.    We use certain interest rate swaps to mitigate the price volatility of fixed maturities. These positions resulted in net pre-tax losses of $0.1 million for the year ended December 31, 2012. The net pre-tax losses were primarily the result of $0.7 million in realized losses due to interest settlements and $0.6 million in unrealized gains during the year ended December 31, 2012.    We purchased interest rate caps during 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 $2.7 million for the year ended December 31, 2012.    We have certain derivatives with PLC. These derivatives consist of an interest support agreement, a YRT premium support agreement, and two portfolio maintenance agreements with PLC. We recognized a pre-tax gain of $9.6 million for the year ended December 31, 2012 related to the interest support agreement. We recognized a pre-tax gain of $0.6 million for the year ended December 31, 2012 related to the YRT premium support agreement. We entered into two separate portfolio maintenance agreements in October 2012.  We recognized pre-tax gains of $0.5 million for the year ended December 31, 2012 related to our portfolio maintenance agreements.   

We also use various swaps and other types of derivatives to mitigate risk related to other exposures. These contracts generated net pre-tax losses of $0.1 million for the year ended December 31, 2012.

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, 2012, 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 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                                           91  --------------------------------------------------------------------------------

Table of Contents

    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. We had an overall net unrealized gain of $3.1 billion, prior to tax and DAC offsets, as of December 31, 2012, and an overall net unrealized gain of $1.8 billion as of December 31, 2011.    For fixed maturity and equity securities held that are in an unrealized loss position as of December 31, 2012, 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                  $ 1,027,068       43.4 % $ 1,058,766          42.2 % $   (31,698 )         22.5 % >90 days but <= 180 days         77,608        3.3        85,729           3.4        (8,121 )          5.8 >180 days but <= 270 days        26,518        1.1        27,454           1.1          (936 )          0.7 >270 days but <= 1 year         442,887       18.7       470,166          18.7       (27,279 )         19.4 >1 year but <= 2 years          158,120        6.7       169,129           6.7       (11,009 )          7.8 >2 years but <= 3 years          57,579        2.4        61,809           2.5        (4,230 )          3.0 >3 years but <= 4 years           5,473        0.2         6,939           0.3        (1,466 )          1.0 >4 years but <= 5 years         164,753        7.0       178,110           7.1       (13,357 )          9.5 >5 years                        407,514       17.2       450,075          18.0       (42,561 )         30.3 Total                       $ 2,367,520      100.0 % $ 2,508,177         100.0 % $  (140,657 )        100.0 %     The majority of the unrealized loss as of December 31, 2012 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, 2011. 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 uncertainties regarding future performance of the underlying mortgage loans and/or assets.    As of December 31, 2012, the Barclays Investment Grade Index was priced at 128.5 bps versus a 10 year average of 164.8 bps. Similarly, the Barclays High Yield Index was priced at 539.2 bps versus a 10 year average of 617.3 bps. As of December 31, 2012, the five, ten, and thirty-year U.S. Treasury obligations were trading at levels of 0.724%, 1.758%, and 2.950%, as compared to 10 year averages of 2.871%, 3.659%, and 5.562%, respectively.    As of December 31, 2012, 48.3% 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.    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                                           92 

--------------------------------------------------------------------------------

Table of Contents

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, 2012, there were estimated gross unrealized losses of $16.5 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, 2012, 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.    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, 2012, is presented in the following table:                                                                                                    %                             Fair        % Fair     Amortized    % Amortized   Unrealized    Unrealized                             Value       Value        Cost          Cost          Loss          Loss                                                     (Dollars In Thousands) Banking                  $   244,025       10.3 % $   258,343          10.3 % $   (14,318 )       10.2 % Other finance                  4,272        0.2         4,946           0.2          (674 )        0.5 Electric                     137,060        5.8       146,297           5.8        (9,237 )        6.6 Natural gas                   87,171        3.7        92,974           3.7        (5,803 )        4.1 Insurance                     52,032        2.2        62,289           2.5       (10,257 )        7.3 Energy                        19,465        0.8        19,937           0.8          (472 )        0.3 Communications                34,334        1.5        34,928           1.4          (594 )        0.4 Basic industrial             106,419        4.5       110,895           4.4        (4,476 )        3.2 Consumer noncyclical         188,249        8.0       191,990           7.7        (3,741 )        2.7 Consumer cyclical             73,183        3.1        74,379           3.0        (1,196 )        0.9 Finance companies             38,027        1.6        40,488           1.6        (2,461 )        1.7 Capital goods                 35,040        1.5        37,831           1.5        (2,791 )        2.0 Transportation                     -          -             -             -             -            - Other industrial              34,617        1.5        34,951           1.4          (334 )        0.2 Brokerage                      9,500        0.4        10,034           0.4          (534 )        0.4 Technology                   131,127        5.5       132,595           5.3        (1,468 )        1.0 Real estate                    1,013          -         1,045             -           (32 )          - Other utility                      -          -             -             -             -            - Commercial mortgage-backed securities                    50,506        2.1        51,104           2.0          (598 )        0.4 Other asset-backed securities                   721,781       30.5       783,205          31.2       (61,424 )       43.8 Residential mortgage-backed non-agency securities        262,024       11.1       281,349          11.2       (19,325 )       13.7 Residential mortgage-backed agency securities                     4,388        0.2         4,410           0.2           (22 )          - U.S. government-related securities                   106,806        4.5       107,397           4.3          (591 )        0.4 Other government-related securities                    14,955        0.6        15,000           0.6           (45 )          - States, municipals, and political divisions                     11,526        0.4        11,790           0.5          (264 )        0.2 Total                    $ 2,367,520      100.0 % $ 2,508,177         100.0 % $  (140,657 )      100.0 %                                            93 

--------------------------------------------------------------------------------

Table of Contents

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

                                                         As of December 31,                                                       2012         2011  Banking                                                  10.2 %       28.3 % Other finance                                             0.5          0.6 Electric                                                  6.6          6.0 Natural gas                                               4.1          1.6 Insurance                                                 7.3          7.8 Energy                                                    0.3          1.1 Communications                                            0.4          2.0 Basic industrial                                          3.2          2.0 Consumer noncyclical                                      2.7          0.1 Consumer cyclical                                         0.9          1.8 Finance companies                                         1.7          1.9 Capital goods                                             2.0          2.0 Transportation                                              -            - Other industrial                                          0.2          0.6 Brokerage                                                 0.4          3.0 Technology                                                1.0          0.7 Real estate                                                 -            - Other utility                                               -            - Commercial mortgage-backed securities                     0.4          0.9 Other asset-backed securities                            43.8         20.3 

Residential mortgage-backed non-agency securities 13.7 19.2 Residential mortgage-backed agency securities

               -          0.1 U.S. government-related securities                        0.4            - Other government-related securities                         -            - States, municipals, and political divisions               0.2            - Total                                                   100.0 %      100.0 %    

The range of maturity dates for securities in an unrealized loss position as of December 31, 2012, varies, with 10.1% maturing in less than 5 years, 17.8% maturing between 5 and 10 years, and 72.1% maturing after 10 years. The following table shows the credit rating of securities in an unrealized loss position as of December 31, 2012:

      S&P or Equivalent         Fair        % Fair     Amortized    % Amortized   Unrealized    % Unrealized      Designation            Value       Value        Cost          Cost          Loss           Loss                                                      (Dollars In Thousands) AAA/AA/A                 $ 1,214,544       51.3 % $ 1,271,545          50.7 % $   (57,001 )         40.5 % BBB                          448,069       18.9       459,016          18.3       (10,947 )          7.8 Investment grade           1,662,613       70.2     1,730,561          69.0       (67,948 )         48.3 BB                           224,960        9.5       241,691           9.6       (16,731 )         11.9 B                             77,477        3.3        79,549           3.2        (2,072 )          1.5 CCC or lower                 402,470       17.0       456,376          18.2       (53,906 )         38.3 Below investment grade       704,907       29.8       777,616          31.0       (72,709 )         51.7 Total                    $ 2,367,520      100.0 % $ 2,508,177         100.0 % $  (140,657 )        100.0 %     As of December 31, 2012, we held a total of 254 positions that were in an unrealized loss position. Included in that amount were 122 positions of below investment grade securities with a fair value of $704.9 million that were in an unrealized loss position. Total unrealized losses related to below investment grade securities were $72.7 million, of                                           94  --------------------------------------------------------------------------------

Table of Contents

    which $45.8 million had been in an unrealized loss position for more than twelve months. Below investment grade securities in an unrealized loss position were 1.9% of invested assets.    As of December 31, 2012, securities in an unrealized loss position that were rated as below investment grade represented 29.8% of the total fair value and 51.7% of the total unrealized loss. We have the ability and intent to hold 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, 2012, total unrealized losses for all securities in an unrealized loss position for more than twelve months were $72.6 million. A widening of credit spreads is estimated to account for unrealized losses of $264.9 million, with changes in treasury rates offsetting this loss by an estimated $192.3 million.    

The majority of our RMBS holdings as of December 31, 2012, were super senior or senior bonds in the capital structure. Our total non-agency portfolio has a weighted-average life of 3.04 years. The following table categorizes the weighted-average life for our non-agency portfolio, by category of material holdings, as of December 31, 2012:

                          Weighted-Average Non-agency portfolio         Life  Prime                        2.19 Alt-A                        4.63 Sub-prime                    3.18     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, 2012:                                  Fair       % Fair    Amortized    % Amortized    Unrealized    % Unrealized                               Value      Value        Cost         Cost           Loss           Loss                                                        (Dollars In Thousands) <= 90 days                  $ 175,525       24.9 % $  191,244          24.6 % $    (15,719 )         21.6 % >90 days but <= 180 days       11,236        1.6       17,352           2.2         (6,116 )          8.4 >180 days but <= 270 days      17,433        2.5       18,064           2.3           (631 )          0.9 >270 days but <= 1 year        36,839        5.2       41,245           5.3         (4,406 )          6.1 >1 year but <= 2 years         77,720       11.0       85,181          11.0         (7,461 )         10.3 >2 years but <= 3 years        21,754        3.1       23,251           3.0         (1,497 )          2.1 >3 years but <= 4 years         5,445        0.8        6,866           0.9         (1,421 )          2.0 >4 years but <= 5 years        83,920       11.9       90,655          11.7         (6,735 )          9.3 >5 years                      275,035       39.0      303,758          39.0        (28,723 )         39.3 Total                       $ 704,907      100.0 % $  777,616         100.0 % $    (72,709 )        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.                                           95 

--------------------------------------------------------------------------------

Table of Contents

    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 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, 2012, the fair value of securities pledged under the repurchase program was $168.1 million and the repurchase obligation of $150.0 million was included in our consolidated balance sheets (at an average borrowing rate of 15 basis points). During 2012, the maximum balance outstanding at any one point in time related to these programs was $425.0 million. The average daily balance was $266.3 million (at an average borrowing rate of 14 basis points) during the year ended December 31, 2012. As of December 31, 2011, we had no outstanding balance related to such borrowings. During 2011, the maximum balance outstanding at any one point in time related to these programs was $348.2 million. The average daily balance was $147.7 million (at an average borrowing rate of 13 basis points) 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 that was in effect until July 17, 2012 (the "Credit Facility"), we had the ability to borrow on an unsecured basis up to an aggregate principal amount of $500 million. We had 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 accrued 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 our senior unsecured long-term debt. The Credit Agreement provides that we were 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 was April 16, 2013. The Company did not have an outstanding balance under the Credit Facility as of July 17, 2012. PLC had an outstanding balance of $160.0 million at an interest rate of LIBOR plus 0.40% under the Credit Facility as of July 17, 2012.    On July 17, 2012 we replaced the Credit Facility with a new credit facility ("2012 Credit Facility"). Under the 2012 Credit Facility, we and PLC have the ability to borrow on an unsecured basis up to an aggregate principal amount of $750 million. We have the right in certain circumstances to request that the commitment under the 2012 Credit Facility be increased up to a maximum principal amount of $1.0 billion. Balances outstanding under the 2012 Credit Facility accrue interest at a rate equal to, at the option of the Borrowers, (i) LIBOR plus a spread based on the ratings of our senior unsecured long-term debt ("Senior Debt"), or (ii) the sum of (A) a rate equal to the highest of (x) the Administrative Agent's prime rate, (y) 0.50% above the Federal Funds rate, or (z) the one-month LIBOR plus 1.00% and (B) a spread based on the ratings of our Senior Debt. The 2012 Credit Facility also provides for a facility fee at a rate, currently 0.175%, that varies with the ratings of our Senior Debt and that is calculated on the aggregate amount of commitments under the 2012 Credit Facility, whether used or unused. The maturity date on the 2012 Credit Facility is July 17, 2017. We were not aware of any non-compliance with the financial debt covenants of the 2012 Credit Facility as of December 31, 2012. The Company did not have an outstanding balance under the Credit Facility as of December 31, 2012. PLC had an outstanding balance of $50.0 million at an interest rate of LIBOR plus 1.20% under the 2012 Credit Facility as of December 31, 2012.                                           96  --------------------------------------------------------------------------------

   Table of Contents    Sources and Use of Cash    Our primary sources of funding are from our insurance operations and revenues from investments.  These sources of cash support our operations and are used to pay dividends to PLC.  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/or surplus.    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, 2012, 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, 2012, we had $921.8 million of funding agreement-related advances and accrued interest outstanding under the FHLB program.    As of December 31, 2012, we reported approximately $644.6 million (fair value) of Auction Rate Securities ("ARS") in non-Modco portfolios. As of December 31, 2012, 100% of these ARS were rated Aaa/AA+. While the auction rate market has experienced liquidity constraints, we 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, 2012, 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 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 $44.0 million and $42.7 million was recorded as of December 31, 2012 and December 31, 2011, 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 credit 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 do not intend to sell or expect to be required to sell the securities before recovering our amortized cost of these securities. 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.                                           97 

--------------------------------------------------------------------------------

Table of Contents

    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, 2012, to fund mortgage loans in the amount of $182.6 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, 2012, we held cash and short-term investments of $486.4 million.    

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,                                                     2012           2011           2010                                                          (Dollars In Thousands)

Net cash provided by operating activities $ 696,632$ 632,399

    $  689,508 Net cash used in investing activities               (585,833 )     (787,744 )    (599,791 ) Net cash (used in) provided by financing activites                                            (10,992 )       88,122       (15,577 ) Total                                           $     99,807    $   (67,223 )  $   74,140    

For The Year Ended December 31, 2012 as compared to The Year Ended December 31, 2011

    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 benefit payments 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.

    Net cash (used in) provided by financing activities - Changes in cash from financing activities included $150.0 million inflows from repurchase program borrowings as compared to no borrowings for the year ended December 31, 2011 and $102.3 million outflows of investment product and universal life net activity, as compared to $439.4 million of inflows in the prior year. Net issuances of non-recourse funding obligations equaled $198.3 million during the year ended December 31, 2012, as compared to repurchases of $112.2 million during 2011.    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. Additionally, the Company has access to the 2012 Credit Facility.    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, 2012. 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%.                                           98  --------------------------------------------------------------------------------

Table of Contents

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, 2012. These outstanding non-recourse funding obligations were issued to special purpose trusts, which in turn issued securities to third parties. Certain of our affiliates own a portion of these securities. As a result of these purchases, as of December 31, 2012, securities related to $286.0 million of the outstanding balance of the non-recourse funding obligations were held by external parties, securities related to $60.9 million of the non-recourse funding obligations were held by nonconsolidated affiliates, and securities related to $228.1 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 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 of interest expense 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 non-recourse funding obligations, the holders of the non-recourse funding obligations cannot require repayment from PLC, us, or any of our subsidiaries, other than Golden Gate II, the direct issuers of the non-recourse funding obligations, 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 non-recourse funding obligations). 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 wholly owned Vermont special purpose financial captive insurance company, 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 West Coast Life Insurance Company ("WCL"). The LOC balance increased during 2012 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 $580 million as of December 31, 2012. 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 one of its affiliates. The LOC was issued to support certain obligations of Golden Gate III to WCL under an indemnity reinsurance agreement. In addition, we have entered into certain support agreements with Golden Gate III obligating us to make capital contributions or provide support related to certain of Golden Gate III's expenses and in certain circumstances, to collateralize certain of our obligations to Golden Gate III.    Golden Gate IV Vermont Captive Insurance Company ("Golden Gate IV"), a wholly owned Vermont special purpose financial captive insurance company, 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 2012 and was $625 million as of December 31, 2012. 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. In addition, we have entered into certain support agreements with Golden Gate IV obligating us to make capital contributions or provide support related to certain of Golden Gate IV's expenses and in certain circumstances, to collateralize certain of our obligations to Golden Gate IV.    On October 10, 2012, Golden Gate V Vermont Captive Insurance Company ("Golden Gate V") and Red Mountain, LLC ("Red Mountain"), wholly owned subsidiaries of the Company, entered into a 20-year transaction to finance up to $945 million of "AXXX" reserves related to a block of universal life insurance policies with secondary guarantees issued by the Company and its subsidiary, WCL. Golden Gate V issued non-recourse funding obligations to Red Mountain, and Red Mountain issued a note with an initial principal amount of $275 million, increasing to a maximum of $945 million in 2027, to Golden Gate V for deposit to a reinsurance trust supporting Golden Gate V's obligations under a reinsurance agreement with WCL, pursuant to which WCL cedes liabilities relating to the policies                                           99  --------------------------------------------------------------------------------

Table of Contents

    of WCL and retrocedes liabilities relating to the policies of the Company. Through the structure, Hannover Life Reassurance Company of America ("Hannover Re"), the ultimate risk taker in the transaction, provides credit enhancement to the Red Mountain note for the 20-year term in exchange for a fee. The transaction is "non-recourse" to Golden Gate V, Red Mountain, WCL, PLC and the Company, meaning that none of these companies are liable for the reimbursement of any credit enhancement payments required to be made. As of December 31, 2012, the principal balance of the Red Mountain note was $300 million. In connection with the transaction, PLC has entered into certain support agreements under which we guarantee or otherwise support certain obligations of Golden Gate V and Red Mountain.    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 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 the statutory capital of our insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or our 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. The maximum amount that would qualify as an ordinary dividend from our insurance subsidiaries in 2013 is estimated to be $95 million.    State insurance regulators and the NAIC have adopted risk-based capital ("RBC") requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements 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, 2012, our total adjusted capital and company action level RBC was $3.3 billion and $644 million, respectively providing an RBC of approximately 510%.    During 2012, PLC entered into an intercompany capital support agreement with Shades Creek Captive Insurance Company ("Shades Creek"), a direct wholly owned insurance subsidiary. The agreement provides through a guarantee that PLC will contribute assets or purchase surplus notes (or cause an affiliate or third party to contribute assets or purchase surplus notes) in amounts necessary for Shades Creek's regulatory capital levels to equal or exceed minimum thresholds as defined by the agreement. As of December 31, 2012, Shades Creek maintained capital levels in excess of the required minimum thresholds. The maximum potential future payment amount which could be required under the capital support agreement will be dependent on numerous factors, including the performance of equity markets, the level of interest rates, performance of associated hedges, and related policyholder behavior.    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 may be non-linear during any given reporting period. Market conditions greatly influence the capital required due to their 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, 2012, 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, 2012, 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 RBC ratio. 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.                                          100 

--------------------------------------------------------------------------------

Table of Contents

    In an effort to mitigate the equity market risks discussed above relative to our RBC ratio, in the fourth quarter of 2012, the Company established Shades Creek to which we have reinsured GMWB and GMDB riders related to our variable annuity contracts. The purpose of Shades Creek is to reduce the volatility in RBC due to non-economic variables included within the RBC calculation.    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 a positive impact to our statutory surplus of approximately $20 million on a pre-tax basis for the year ended December 31, 2012, as compared to an immaterial impact to our statutory surplus for the year ended December 31, 2011.    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 it assumed. We evaluate the financial condition of our reinsurers and monitor the associated concentration of credit risk. For the year ended December 31, 2012, we ceded premiums to third party reinsurers amounting to $1.3 billion. In addition, we had receivables from reinsurers amounting to $5.7 billion as of December 31, 2012. 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 9, Reinsurance.    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, 2012:                                                                    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. A downgrade or other negative action by a ratings organization with respect to our financial strength ratings or those of our insurance subsidiaries could adversely affect sales, relationships with distributors, the level of policy surrenders and withdrawals, competitive position in the marketplace, and the cost or availability of reinsurance.

                                      101  --------------------------------------------------------------------------------

   Table of Contents    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, 2012, we had policy liabilities and accruals of approximately $23.0 billion. Our interest-sensitive life insurance policies have a weighted average minimum credited interest rate of approximately 3.56%.    Contractual 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 solely 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 contractual obligations. These include expenditures for income taxes and payroll.    As of December 31, 2012, we carried a $74.3 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.                                          102  --------------------------------------------------------------------------------

Table of Contents

    The table below sets forth future maturities of our contractual obligations.                                                                  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)               $  2,404,303    $    24,709    $    62,250    $    78,808    $  2,238,536 Stable value products(2)        2,597,626        531,621      1,376,678        621,856          67,471 Operating leases(3)                20,278          6,948          9,691          3,404             235 Home office lease(4)               75,744            679         75,065              -               - Mortgage loan and investment commitments            191,023        191,023              -              -               - Repurchase program borrowings(5)                     150,005        150,005              -              -               - Policyholder obligations(6)                 28,647,869      2,427,757      3,667,659      3,060,176      19,492,277 Total                        $ 34,086,848    $ 3,332,742    $ 5,191,343    $ 3,764,244    $ 21,798,519    

-------------------------------------------------------------------------------- (1)  Non-recourse funding obligations include all undiscounted principal amounts owed and expected future interest payments due over the term of the notes.  Of the total undiscounted cash flows, $1.9 billion relates to the Golden Gate V transaction.  These cash out flows are matched and predominantly offset by the cash in flows Golden Gate V receives from notes issued by a nonconsolidated variable interest entity. The remaining amounts are associated with the Golden Gate and Golden Gate II notes outstanding.  

(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) Represents secured borrowings as part of our repurchase program as well as related interest.

  (6)  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%.                                          103  --------------------------------------------------------------------------------

Table of Contents

    In July of 2012, the Moving Ahead for Progress in the 21st Century Act ("MAP-21"), which includes pension funding stabilization provisions, was signed into law. These provisions establish an interest rate corridor which is designed to stabilize the segment rates used to determine funding requirements from the effects of interest rate volatility. The funding stabilization provisions of MAP-21 will reduce PLC's minimum required defined benefit plan contributions for the 2012 and 2013 plan years. PLC is evaluating the impact this change will have on funding requirements in future years.  Since the funding stabilization provisions of MAP-21 do not apply for Pension Benefit Guaranty Corporation ("PBGC") reporting purposes, PLC may also make additional contributions in future periods to maintain an 80% funded status for PBGC reporting purposes.    

PLC has not yet determined the total amount it will fund during 2013, but it estimates that the amount will be between $6 million and $15 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.   

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, 2012, $924.5 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, 2012, the Level 3 fair values of derivative assets and liabilities determined by these quantitative models were $48.7 million and $611.4 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, 2012, the Level 3 fair value of these liabilities was $129.5 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.                                          104 

--------------------------------------------------------------------------------

Table of Contents

Of our $973.2 million, or 3.2% of total assets (measured at fair value on a recurring basis) classified as Level 3 assets, $666.7 million were ABS. Of this amount, $618.9 million were student loan related ABS and $47.8 million were non-student loan related ABS. The years of issuance of the ABS are as follows:

Year of Issuance Amount

                    (In Millions)        2002         $         283.6       2003                   118.5       2004                   114.0       2005                     7.1       2006                    22.7       2007                   114.2       2012                     6.6      Total         $         666.7     The ABS was rated as follows: $523.3 million were AAA rated, $119.1 million were AA rated, $23.5 million were A rated, $0.1 million were BBB rated, and $0.7 million were less than investment grade. 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, the yield curve, spreads between risk-adjusted and risk-free interest rates, foreign currency rates, 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, net of collateral held, based upon current market conditions and potential payment obligations between us 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 period-to-period. 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.                                          105 

--------------------------------------------------------------------------------

Table of Contents

    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.    

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  †          Interest Rate Swaptions  †          Volatility Futures    Other Derivatives    We have certain derivatives with PLC. These derivatives consist of an interest support agreement, a YRT premium support arrangement, and portfolio maintenance agreements 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, 2012, and the percent change in fair value the following estimated fair values would represent:                                                   Percent As of December 31,           Amount            Change                       (Dollars In Millions) 2012 Fixed maturities     $              27,811.7       7.5 % Mortgage loans                       5,463.2       4.6 2011 Fixed maturities     $              25,975.4      (7.1 )% Mortgage loans                       5,973.7      (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 value changes or the potential impact of fluctuations in credit spreads. Actual results may differ from these estimates.                                          106  --------------------------------------------------------------------------------

Table of Contents

    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.    As of December 31, 2012 and 2011, we had outstanding mortgage loan commitments of $182.6 million at an average rate of 5.1% and $182.4 million at an average rate of 5.58%, respectively, with estimated fair values of $210.5 million and $211.9 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, 2012, and the percent change in fair value the following estimated fair values would represent:                                                   Percent As of December 31,           Amount            Change                       (Dollars In Millions)        2012          $                 200.8      (4.6 )%        2011                            202.4      (4.5 )     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, 2012, total derivative contracts with a notional amount of $17.2 billion were in a $637.4 million net loss position. Included in the $17.2 billion, is a notional amount of $2.7 billion in a $410.6 million net loss position that relates to our Modco trading portfolio. Also included in the total, is $6.9 billion in a $169.3 million net loss position that relates to our GMWB derivatives. 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. We recognized losses of $227.8 million, $155.0 million, and $144.4 million related to derivative financial instruments for the years ended December 31, 2012, 2011, and 2010, respectively.                                          107 

--------------------------------------------------------------------------------

Table of Contents

    The following table sets forth the notional amount and fair value of our freestanding 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                                           Fair Value       in the Underlying Reference                              Notional        as of                Interest Rates                               Amount     December 31,       +100 bps          -100 bps                                                 (Dollars In Millions) 2012 Futures(1)                   $   893.5   $       (14.0 ) $        (118.3 )  $       109.8 Caps                           3,000.0               -               2.6                - Interest Rate Swaptions          400.0            11.4               4.3             36.0 Floating to fixed Swaps(2)       308.0            (8.3 )             0.9            (19.0 ) Fixed to floating Swaps(2)       630.0            (0.2 )           (67.8 )           83.6 Total                        $ 5,231.5   $       (11.1 ) $        (178.3 )  $       210.4  2011 Futures                      $   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    

--------------------------------------------------------------------------------

(1) Interest rate change scenario subject to floor, based on treasury rates as of December 31, 2012.

(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                          Fair Value         in the Underlying Reference            Notional        as of                Index Equity Level             Amount      December 31,          +10%                -10%                                 (Dollars In Millions) 2012 Futures   $    299.9   $         (2.7 ) $          (33.0 )   $         27.6 Options        573.7             62.1               69.4               59.2 Total     $    873.6   $         59.4   $           36.4     $         86.8  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                                           108 

--------------------------------------------------------------------------------

Table of Contents

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                                   Fair Value         in the Underlying Reference                     Notional        as of                 in Currency Level                      Amount      December 31,          +10%                -10%                                          (Dollars In Millions) 2012 Currency futures   $    147.9   $         (1.1 ) $          (16.0 )   $         13.8 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                              Fair Value         in the Underlying Reference                 Notional        as of               in Volatility Level                  Amount     December 31,         +10%                -10%                                      (Dollars In Millions) 2012 Variance swap   $     3.2   $       (11.8 ) $          17.7     $          31.5  2011 Variance swap   $       -   $           -   $             -     $             -     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 $1.4 billion of our stable value contracts have no early termination rights.    As of December 31, 2012, we had $2.5 billion of stable value product account balances with an estimated fair value of $2.5 billion (using discounted cash flows) and $10.7 billion of annuity account balances with an estimated fair value of $10.5 billion (using discounted cash flows). 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).                                          109 

--------------------------------------------------------------------------------

Table of Contents

    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) 2012 Stable value product account balances   $               2,549.0       1.5 % Annuity account balances                               10,633.5       1.0  

2011

 Stable value product account balances   $               2,791.8       1.3 % Annuity account balances                               10,879.4       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.    

Impact of continued low interest rate environment

    Significant changes in interest rates expose us to the risk of not realizing anticipated spreads between the interest rate earned on investments and the interest rate credited to in-force policies and contracts. In addition, certain of our insurance and investment products guarantee a minimum credited interest rate ("MGIR"). In periods of prolonged low interest rates, the interest spread earned may be negatively impacted to the extent our ability to reduce policyholder crediting rates is limited by the guaranteed minimum credited interest rates. Additionally, those policies without account values may exhibit lower profitability in periods of prolonged low interest rates due to reduced investment income.                                          110 

--------------------------------------------------------------------------------

Table of Contents

    The table below presents account values by range of current minimum guaranteed interest rates and current crediting rates for our universal life and deferred fixed annuity products:                                 Credited Rate Summary                                As of December 31, 2012                                               1-50 bps     More than Minimum Guaranteed Interest Rate     At        above        50 bps Account Value                       MGIR        MGIR      above MGIR     Total                                                    (In Millions) Universal Life Insurance >2% - 3%                           $    36   $        1   $       911   $    948 >3% - 4%                             1,402          649         1,137      3,188 >4% - 5%                             2,058        3,069           385      5,512 >5% - 6%                               223            -             -        223 Subtotal                             3,719        3,719         2,433      9,871  Fixed Annuities 1%                                 $     -   $        -   $       856   $    856 >1% - 2%                               195            -         1,323      1,518 >2% - 3%                             1,166            6         1,617      2,789 >3% - 4%                               347            -             -        347 >4% - 5%                               240            -             -        240 Subtotal                             1,948            6         3,796      5,750 Total                              $ 5,667   $    3,725   $     6,229   $ 15,621  Percentage of Total                     36 %         24 %          40 %      100 %     We are active in mitigating the impact of a continued low interest rate environment through product design, as well as adjusting crediting rates on current in-force policies and contracts. We also manage interest rate and reinvestment risks through our asset/liability management process. Our asset/liability management programs and procedures involve the monitoring of asset and liability durations; cash flow testing under various interest rate scenarios; and the regular 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.    Employee Benefit Plans    Pursuant to the accounting guidance related to PLC's 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.                                          111 

--------------------------------------------------------------------------------

Table of Contents

The following presents PLC's estimates of the hypothetical impact to the December 31, 2012 benefit obligation and to the 2012 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                     $       (24,022.0 ) $        (4,453.0 ) 100 basis point decrease                              29,739.0             5,318.0  Increase (Decrease) in Benefit Cost: 100 basis point increase                     $        (3,455.0 ) $          (283.0 ) 100 basis point decrease                               4,302.0               327.0    

--------------------------------------------------------------------------------

(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 2012 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               $        (1,408.0 ) $           (62.0 ) 100 basis point decrease                         1,408.0                62.0    

--------------------------------------------------------------------------------

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

    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 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.                                          112 

--------------------------------------------------------------------------------

Table of Contents

RECENTLY ISSUED ACCOUNTING STANDARDS

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

    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 was effective for us on January 1, 2012. We retrospectively adopted this Update, which resulted in a reduction in our deferred acquisition cost asset as well as a decrease in the amortization associated with those previously deferred costs. There was also a reduction in the level of costs deferred. For additional information on the effect this Update had on our statements, see Note 6, Deferred Acquisition Costs and Value of Business Acquired.    ASU No. 2011-05-Comprehensive Income-Presentation of Comprehensive Income. In this Update, a company has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in 1) a single continuous statement of comprehensive income, or 2) in two separate but consecutive statements. In both choices, a company is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this Update do not change the items that must be reported in other comprehensive income, or the timing of its subsequent reclassification to net income. This Update was effective January 1, 2012. The Company has implemented the two-page report format beginning in the first quarter of 2012.                                          113  --------------------------------------------------------------------------------

Table of Contents

   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.

Wordcount:

37413