SYMETRA FINANCIAL CORP – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

 This discussion contains forward-looking statements that involve risk and uncertainties. Our actual results may differ materially from those discussed in, or implied by, any of the forward-looking statements as a result of various factors, including but not limited to those listed under "Forward-Looking Statements." You should read the following discussion in conjunction with the unaudited interim condensed consolidated financial statements and accompanying condensed notes included in Item 1 - "Condensed Financial Statements" included in this Form 10-Q, our Annual Report for the year ended December 31, 2011, filed with the SEC on February 29, 2012 ("2011 10-K"), as well as our current reports on Form 8-K and other publicly available information. Our fiscal year ends on December 31 of each calendar year.  Management considers certain non-GAAP financial measures, including adjusted operating income, adjusted operating income per common share, pre-tax adjusted operating income, adjusted book value, adjusted book value, as converted, adjusted book value per common share, adjusted book value per common share, as converted, average adjusted book value, and operating return on average equity (ROAE) to be useful to investors in evaluating our financial performance and condition. These measures have been reconciled to their most comparable GAAP financial measures. For a definition and further discussion of these non-GAAP measures, see Item 7 - "Management's Discussion and Analysis of Financial Condition - Use of non-GAAP Financial Measures" in our 2011 10-K.  Historical financial information has been restated to reflect the retrospective adoption of a new accounting standard for deferred acquisition costs on January 1, 2012. See Note 2 in the accompanying unaudited interim condensed consolidated financial statements for discussion of adoption of new accounting pronouncements.  

All dollar and share amounts, except per share data, are in millions unless otherwise stated.

Overview

  We are a financial services company in the life insurance industry providing employee benefits, annuities and life insurance through a national network of benefits consultants, financial institutions and independent agents and advisers. Our operations date back to 1957 and many of our distribution relationships have been in place for decades.  

Our Operations

We manage our business through three divisions composed of four business segments:

  Benefits Division    

• Benefits. We offer medical stop-loss insurance, limited benefit medical

plans, group life insurance, accidental death and dismemberment insurance

and disability income insurance mainly to employer groups of 50 to 5,000

individuals. In addition to our insurance products, we offer managing

general underwriter (MGU) services.

  Retirement Division   

• Deferred Annuities. We offer fixed and variable deferred annuities to

consumers who want to accumulate tax-deferred assets for retirement.

• Income Annuities. We offer single premium income annuities (SPIAs) to

customers seeking a reliable source of retirement income or to protect

against outliving their assets during retirement, and structured

settlement annuities to fund third party personal injury settlements. In

addition, we offer funding services options to existing structured

         settlement clients.   Life Division   

• Life. We offer a wide array of insurance products such as term and

universal life insurance, including single premium life insurance (SPL),

bank-owned life insurance (BOLI) and corporate-owned life insurance

         (COLI).                                            28 

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  In addition, we have our Other segment, which consists primarily of investment income on unallocated surplus, unallocated corporate expenses, interest expense on debt, earnings related to our limited partnership interests, the results of small, non-insurance businesses that are managed outside of our divisions, such as our broker-dealer, and inter-segment elimination entries.  

See Note 11 to the accompanying unaudited interim condensed consolidated financial statements for the financial results of our segments.

Current Outlook

  As we continue to lay the groundwork for future growth, the life insurance industry continues to face a difficult economic environment. The prolonged low-interest rate environment, ongoing concerns over European sovereign debt and credit markets, the United States' growing deficit, prolonged high-levels of unemployment and the slow economic recovery continue to put pressure on life insurance companies. While the combination of these and other challenges has led to several large competitors exiting certain markets, we continue to seek to create long-term stockholder value by being proactive in maintaining our overall margins and focusing on executing our growth strategies.  While interest rates increased slightly at the end of the first quarter, they have since declined back to near-historic low levels, and continue to be extremely low with the United States Federal Reserve indicating no plans to increase interest rates in the near future. Low interest rates and tight credit spreads continue to be a challenge for our interest-sensitive asset-based businesses, particularly sales of fixed annuities, SPIAs and universal life insurance policies. To mitigate the risk of unfavorable consequences in this environment, such as spread compression on our in force business, we remain proactive in our investment and product strategies, interest-crediting strategies and overall asset-liability management practices. In the first quarter, we sold approximately $107 of lower yielding, higher premium, agency RMBS where the prepayment characteristics of these securities had deteriorated. In doing so, we were able to produce realized gains while reducing our future reinvestment risk. We remain proactive in managing our prepayment and reinvestment risk; we have completed similar transactions in the second quarter and will continue to seek similar transactions in 2012. Looking forward, we continue the pursuit of other investment strategies to help us in the current low interest rate environment, and position us well for rising interest rate scenarios.  To manage our asset yield in this environment, we have been and plan to continue increasing our investments in commercial mortgage loans we underwrite. While interest rates on recently written loans have decreased consistent with the overall level of interest rates, they continue to be an attractive investment opportunity. During the first quarter of 2012, we originated mortgage loans of $197.6 with an average yield of approximately 5.2%. This asset class comprised 10.1% of our invested assets as of March 31, 2012, up from 9.6% as of December 31, 2011.  To manage our way through this uncertain environment and grow profitably, we will continue to focus on the strategies outlined in Item 1 - "Business - Our Strategies" in the 2011 10-K. Our 2012 focus is to continue executing on our Grow & Diversify initiatives, while at the same time remaining focused on our core businesses and maintaining our financial strength ratings.  We believe we have adequate levels of capital to support our current business and to fund organic and transactional growth. Recently, major players in the life insurance industry have exited the life and annuities marketplace. These events may provide opportunities for organic growth of our business and for certain strategic transactions. However, the success of these and other strategies may be affected by the factors discussed in Item 1A - "Risk Factors" and other factors as discussed herein.  

Critical Accounting Policies and Estimates

  The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported and disclosed in the unaudited interim condensed consolidated financial statements. The following accounting policies are those we consider to be particularly critical to understanding our condensed financial statements because their application places the most significant demands on our ability to judge the effect of inherently uncertain matters on our financial results:      •   The evaluation of OTTI of investments;       •   The valuation of investments at fair value;          •   The balance, recoverability and amortization of deferred policy          acquisition costs and deferred sales inducements; and                                            29 

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• The liabilities for future policy benefits and policy and contract claims.

   In applying the Company's accounting policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company's businesses and operations. For all of these policies, we caution that future events rarely develop exactly as forecasted, and our best estimates may require adjustment.  On January 1, 2012, we retrospectively adopted a new accounting standard related to the deferral of policy acquisition costs. Our new policy regarding deferrable costs, including the impact of retrospective adoption, is described below. This new accounting standard did not impact the accounting for deferred sales inducements.  

Other than as described above, there have been no material changes to the critical accounting estimates listed above, which are described in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" and Note 2 of the notes to the audited financial statements included in the 2011 10-K.

Deferred Policy Acquisition Costs (DAC)

  Prior to the adoption of new accounting guidance, deferrable acquisition costs were those that varied with and were primarily related to the acquisition of new or renewal business, regardless of whether the efforts were successful or unsuccessful. Under the new standard, the Company defers only costs that are directly related to the successful acquisition or renewal of insurance contracts, including:      •   Commissions for successful contract acquisitions;       •   Premium-based taxes and assessments;    

• Distribution costs directly related to successful contract acquisition;

• Third-party underwriting costs related to contracts that are successfully

         acquired; and    

• The portion of the salaries and benefits related to employee time spent on

the processing of successfully acquired new and renewal contracts.

   All other acquisition-related costs, including costs incurred for soliciting potential customers, managing distribution and underwriting functions, training, administration, unsuccessful acquisition or renewal efforts, market research and product development are not deferrable and are expensed in the period incurred. Additionally, upon adoption, policy acquisition costs in our Benefits segment are no longer being deferred, as the application of the new standard to the short-duration contracts in this segment resulted in an immaterial net impact of deferral of acquisition costs.  While the Company has restated DAC amortization to reflect the retrospective reduction in costs deferred, its policies and methodology have not changed. For more information on the impact of adoption, see Note 2 of the condensed notes to the consolidated financial statements.  

The following table summarizes our DAC asset balances by segment:

                                                                                  As Adjusted                                               As of March 31,2012        As of December 31, 2011 Deferred Annuities                           $               265.5      $                   265.5 Income Annuities                                              39.6                           37.9 Life                                                          67.2                           65.0  Total unamortized balance at end of period                   372.3                          368.4 Accumulated effect of net unrealized gains                  (190.2 )                       (182.4 )  Balance at end of period                     $               182.1      $                   186.0                                             30 

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Amortization of DAC

  In our Deferred Annuities, Income Annuities and Life segments, we amortize DAC over the premium paying period or over the lives of the policies in proportion to the future estimated gross profits (EGPs) of each of these product lines, as follows:         •   Deferred Annuities. The DAC amortization period is typically 20 years for

deferred annuities, although most of the DAC amortization occurs within

the first 10 years because the EGPs are highest during such period. It is

common for deferred annuity policies to lapse after the surrender charge

          period expires.          •   Income Annuities. The DAC amortization period for SPIAs, including

structured settlement annuities, is the benefit payment period. The

benefit payment periods vary by policy; however, 80% of the benefits will

         be paid over the next 45 years and nearly all benefits are paid within          80 years of contract issue.    

• Life. The DAC amortization period related to universal life policies is

typically 25 years. DAC amortization related to our term life insurance

policies is the premium paying period, which ranges from 10 to 30 years.

   To determine the EGPs, we make assumptions as to lapse and withdrawal rates, expenses, interest margins, mortality experience, long-term equity market returns and investment performance. Estimating future gross profits is a complex process requiring considerable judgment and forecasting of events well into the future.  Changes to assumptions can have a significant impact on DAC amortization. In the event actual experience differs from our assumptions or our future assumptions are revised, we adjust our EGPs, which could result in a significant increase in amortization expense. EGPs are adjusted quarterly to reflect actual experience to date. For example, for our deferred annuity products, if renewal crediting rates are greater or lower than the renewal crediting rates we assumed in our DAC asset amortization models, we would record a change in amortization expense to reflect the change in our EGPs. For future assumptions we complete a study and refine our estimates of future gross profits at least annually during the third quarter. Upon completion of an assumption study, we revise our assumptions to reflect our current best estimate, thereby changing our estimate of projected EGPs used in the DAC asset amortization models. This is often referred to as "unlocking" the DAC asset amortization model. We also revise future assumptions as needed throughout the year if a significant transaction or trend is identified that would warrant a change in those assumptions.  

The following would generally cause an increase in DAC amortization expense:

Actual experience differs from our assumptions:

• increases to interest margins in the current period from increased yields

         or decreased crediting rates;       •   increases to lapse and withdrawal rates in the current period;       •   increases to current period expense levels;       •   significant investment prepayment activity;       •   increases to equity market returns; and       •   lower death claims.  

Future assumption changes (unlocking):

• decreases in expected future interest margins due to increases in expected

renewal crediting rates and/or decreases to expected investment yields;

      •   increases to expected future lapse and withdrawal rates;       •   increases to future expected expense levels;    

• significant investment prepayment activity, which results in decreased

         future interest margins;       •   decreases to expected equity market returns; and       •   higher expected future death claims.   We regularly conduct DAC recoverability analyses, where we compare the current DAC asset balances with the estimated present value of future profitability of the underlying business. The DAC asset balance is considered recoverable if the present value of future profits is greater than the current DAC asset balance.                                           31 

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  In connection with our recoverability analyses, we perform sensitivity analyses on our most significant DAC asset balances, which currently relate to our deferred annuity, universal life, and BOLI products, to capture the effect that certain key assumptions have on DAC asset balances. The sensitivity tests are performed independently, without consideration for any correlation among the key assumptions. The following depicts the sensitivities for our deferred annuity, universal life and BOLI DAC asset balances as of March 31, 2012:    

• if we increased our future lapse and withdrawal rate assumptions by a

              factor of 10%, the DAC asset balance would decrease approximately              $5.8;             •    if we increased our future expense assumptions by a factor of 10%, the              DAC asset balance would decrease approximately $0.5.   

In addition, depending on the amount and the type of new business written in the future, we may determine that other assumptions may produce significant variations in our financial results.

  We adjust the unamortized DAC balance for the accumulated effect of net unrealized gains or losses, which is recorded net of taxes in AOCI. This adjustment reflects the impact on estimated future gross profits as if the unrealized investment gains and losses had been realized as of the balance sheet date. Currently, our available-for-sale portfolio is in a net unrealized gain position, primarily due to the low interest rate environment, and the corresponding adjustment decreases our DAC balance and AOCI. In periods of rising interest rates, the fair value of our fixed maturities would generally decrease, and this may result in net unrealized investment losses. In such circumstances, the DAC adjustment would increase our DAC balance and increase AOCI. However, this adjustment is limited to cumulative capitalized acquisition costs plus interest, which would be $141.3, net of taxes of $76.1, in our Deferred Annuities segment and $7.5, net of taxes of $4.1, in our Life segment as of March 31, 2012.  New Accounting Standards 

For a discussion of recently adopted accounting pronouncements see Note 2 in the accompanying unaudited interim condensed consolidated financial statements.

Sources of Revenues and Expenses

  Our primary sources of revenues from our insurance operations are premiums, net investment income and policy fees and contract charges. Our primary sources of expenses from our insurance operations are policyholder benefits and claims, interest credited to policyholder reserves and account balances, and general business and operating expenses, net of DAC. We allocate shared service operating expenses to each segment using multiple factors, including employee headcount, allocated investments, account values and time study results. We also generate net realized investment gains (losses) on sales or impairment of our investments and changes in fair value on our equity trading portfolio.  Each of our four business segments maintains its own portfolio of invested assets, which are managed in accordance with specific guidelines. The net investment income and realized investment gains (losses) are reported in the segment in which they occur. We also allocate surplus net investment income to each segment using a risk-based capital formula. The unallocated portion of net investment income is reported in the Other segment.  

Revenues

Premiums

Premiums consist primarily of premiums from our medical stop-loss and individual term and whole life insurance products.

Net investment income

  Net investment income represents the income earned on our investments, net of investment expenses, including prepayment related income such as bond make-whole payments. Net investment income also includes gains or losses from changes in the fair value of our investments in private equity fund limited partnerships and interest expense from amortization of tax credit investments.  

Policy fees, contract charges and other

  Policy fees, contract charges and other includes cost of insurance (COI) charges on our universal life insurance and BOLI policies, mortality expense, surrender and other administrative charges to policyholders, revenues from our non-insurance businesses, and reinsurance allowance fees.  

Net realized investment gains (losses)

Net realized investment gains (losses) mainly consists of realized gains (losses) from sales of our investments, realized losses from investment impairments and changes in fair value on our trading portfolio and FIA.

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Benefits and Expenses

Policyholder benefits and claims

Policyholder benefits and claims consist of benefits paid and reserve activity on medical stop-loss and individual life and BOLI products.

Interest credited

  Interest credited represents interest credited to policyholder reserves and contract holder general account balances, the impact of mortality and funding services activity within our Income Annuities segment, and the amortization of deferred sales inducement assets.  

Other underwriting and operating expenses

Other underwriting and operating expenses represent non-deferrable costs related to the acquisition and ongoing maintenance of insurance and investment contracts, including certain non-deferrable commissions, policy issuance expenses and other business and administrative operating costs.

Interest expense

  Interest expense primarily includes interest on corporate debt, the impact of interest rate hedging activities on the debt and amortization of debt issuance costs.  

Amortization of deferred policy acquisition costs

  We defer as assets certain commissions, distribution costs and other underwriting costs that are directly related to the successful acquisition of new and renewal business. Amortization of previously capitalized DAC is recorded as an expense.  

Use of non-GAAP Financial Measures

  Certain tables and related disclosures in this report include non-GAAP financial measures. We believe these measures provide useful information to investors in evaluating our financial performance or condition. The non-GAAP financial measures discussed below are not substitutes for their most directly comparable GAAP measures. The adjustments made to derive these non-GAAP measures are important to understanding our overall results of operations and financial position and, if evaluated without proper context, these non-GAAP measures possess material limitations. Therefore, our management and board of directors also separately review the items excluded from or added to the most directly comparable GAAP measures to arrive at these non-GAAP measures. In addition, management and our board of directors also analyze each of the comparable GAAP measures in connection with their review of our results of operations and financial position.  

For a full discussion of each non-GAAP measure, see Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Use of non-GAAP Financial Measures" in our 2011 10-K.

                                                                 As of              As of                                                             March 31,         December 31,                                                                2012               2011 Total stockholders' equity                                  $  3,154.7       $      3,114.9 Less: AOCI                                                     1,000.1              1,027.3  Adjusted book value*                                           2,154.6              2,087.6 Add: Assumed proceeds from exercise of warrants                  218.1      

218.1

  Adjusted book value, as converted*                          $  2,372.7

$ 2,305.7

  Book value per common share (1)                             $    22.85      

$ 22.64

  Adjusted book value per common share (2)*                   $    18.09      

$ 17.60

Adjusted book value per common share, as converted (3)* $ 17.19

 $        16.75                                             33 

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  Table of Contents                                                     For the Twelve Months Ended                                                    March 31,          December 31,                                                      2012                 2011

  Return on stockholders' equity, or ROE                   7.6 %                7.2 %   Net income (4)                                 $       217.7        $       195.8   Average stockholders' equity (5)                     2,869.9             

2,710.2

  Operating return on average equity, or ROAE*            10.0 %                9.5 %   Adjusted operating income (6)*                 $       205.8        $       190.2   Average adjusted book value (7)*                     2,049.5             

2,002.4    

* Represents a non-GAAP measure.

(1) Book value per common share is calculated as stockholders' equity divided by

outstanding common shares and shares subject to outstanding warrants totaling

138.050 and 137.613 as of March 31, 2012 and December 31, 2011, respectively.

(2) Adjusted book value per common share is calculated as adjusted book value

divided by outstanding common shares totaling 119.074 and 118.637 as of

March 31, 2012 and December 31, 2011, respectively.

(3) Adjusted book value per common share, as converted is calculated as adjusted

book value plus the assumed proceeds from exercise of warrants, divided by

outstanding common shares and shares subject to outstanding warrants totaling

138.050 and 137.613 as of March 31, 2012 and December 31, 2011, respectively.

The warrants, which will expire in 2014, have an exercise price of $11.49,

and were out of the money as of March 31, 2012.

(4) Net income for the most recent twelve months is used in the calculation of

ROE. For the twelve months ended March 31, 2012, this consisted of quarterly

net income of $75.4, $73.7, $10.5 and $58.1.

(5) Ending stockholder's equity balances for the most recent five quarters are

used in the calculation of ROE. As of March 31, 2012, stockholder's equity

for the most recent five quarters was $3,154.7, $3,114.9, $3,042.2, $2,627.3

and $2,410.2. As of December 31, 2011, stockholder's equity for the most

recent five quarters was $3,114.9, $3,042.2, $2.627.3, $2,410.2 and $2,356.6.

(6) Adjusted operating income for the most recent twelve months is used in the

calculation of operating ROAE. For the twelve months ended March 31, 2012,

this consisted of quarterly adjusted operating income of $59.3, $51.1, $46.9

and $48.5. Adjusted operating income consists of net income, less after-tax

net realized gains, plus after-tax net realized and unrealized gains related

to our FIA product. For the twelve months ended March 31, 2012, the net

quarterly reconciling amounts were $17.7, $21.8, $(37.2), and $8.8. For the

twelve months ended December 31, 2011, adjusted operating income was $190.2,

with a net reconciling amount of $3.8.

(7) Ending adjusted book values for the most recent five quarters are used in the

calculation of operating ROAE. Adjusted book value consists of stockholders'

equity, less AOCI. As of March 31, 2012, adjusted book value for the most

recent five quarters was $2,154.6, $2,087.6, $2,021.1, $2,017.6, and

$1,966.5. AOCI, for the most recent five quarters was $1,000.1, $1,027.3,

$1,021.1, $609.7 and $443.7. As of December 31, 2011, adjusted book value of

the most recent five quarters was $2,087.5, $2,021.0, $2,017.6, $1,966.5 and

$1,919.0. AOCI, for the most recent five quarters was $1,027.3, $1,021.1,

$609.7, $443.7 and $437.6.                                            34 

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Results of Operations

The following discussion should be read in conjunction with our unaudited interim condensed consolidated financial statements and the related condensed notes.

Total Company

Set forth below is a summary of our consolidated financial results. The variances noted in the total company and segment tables should be interpreted as increases or (decreases), respectively.

                                                       Three Months Ended                    QTD                                                         March 31,                     Variance (%)                                                  2012               2011             2012 vs. 2011 Revenues: Premiums                                       $   150.3          $   120.9                    24.3 % Net investment income                              320.5              310.0                     3.4 Policy fees, contract charges, and other            46.3               44.7                     3.6 Net realized investment gains: Net impairment losses recognized in earnings                                            (2.5 )             (0.9 )                     * Other net realized investment gains                 28.4               16.5                    72.1  Total net realized investment gains                 25.9               15.6                    66.0  Total revenues                                     543.0              491.2                    10.5 Benefits and expenses: Policyholder benefits and claims                   105.2               92.3                    14.0 Interest credited                                  229.5              228.3                     0.5 Other underwriting and operating expenses                                            83.0               71.9                    15.4 Interest expense                                     8.2                8.0                     2.5 Amortization of deferred policy acquisition costs                                   15.8               16.3                    (3.1 )  Total benefits and expenses                        441.7              416.8                     6.0  Income from operations before income taxes                                              101.3               74.4                    36.2  Total provision for income taxes                    25.9               20.9                    23.9  Net income                                     $    75.4          $    53.5                    40.9 %  Net income per common share(1): Basic                                          $    0.55          $    0.39                    41.0 % Diluted                                        $    0.55          $    0.39                    41.0 Weighted-average common shares outstanding: Basic                                            137.776            137.292                     0.4 Diluted                                          137.781            137.300                     0.4 Non-GAAP Financial Measures: Adjusted operating income                      $    59.3          $    43.7                    35.7 %  Adjusted operating income per common share: Basic                                          $    0.43          $    0.32                    34.4 % Diluted                                        $    0.43          $    0.32                    34.4 Reconciliation to net income: Net income                                     $    75.4          $    53.5                    40.9 Less: Net realized investment gains (net of taxes of $9.0 and $5.5)                          16.9               10.1                    67.3 Add: Net realized gains - FIA (net of taxes of $0.4 and $0.2)                              0.8                0.3                       *  Adjusted operating income                      $    59.3          $    43.7                    35.7 %     

* Represents percentage variances that are not meaningful or are explained

through the discussion of other variances.

(1) Basic and diluted net income per common share includes all participating

securities, such as warrants and unvested restricted shares, based on the

application of the two-class method. Diluted net income per common share also

includes the dilutive impact of non-participating securities, to the extent

dilutive, such as stock options and shares estimated to be issued under the

employee stock purchase plan, based on application of the treasury stock

     method. Antidilutive awards were excluded from the computation of dilutive     net income per share.                                            35 

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  The following table sets forth pre-tax adjusted operating income, by segment:                                                               Three Months                  QTD                                                          Ended March 31,             Variance (%)                                                         2012           2011         2012 vs. 2011 Segment pre-tax adjusted operating income (loss): Benefits                                              $   25.1        $ 14.0                  79.3 % Deferred Annuities                                        25.8          20.7                  24.6 Income Annuities                                          14.5           8.9                  62.9 Life                                                      14.5          17.1                 (15.2 ) Other                                                     (3.3 )        (1.4 )                   *  Pre-tax adjusted operating income (1)                 $   76.6        $ 59.3                  29.2 %  

Add: Net realized investment gains, excluding FIA 24.7 15.1

                  63.6  Income from operations before incomes taxes           $  101.3        $ 74.4                  36.2 %     

* Represents percentage variances that are not meaningful or are explained

through the discussion of other variances.

(1) Represents a non-GAAP measure. For a definition of this measure, see - "Use

of non-GAAP Financial Measures" in the 2011 10-K.

Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

  Summary of Results  Net income increased $21.9 as a result of higher pre-tax adjusted operating income and higher net realized investment gains. In addition, the provision for income taxes increased $5.0 on higher pre-tax income, partially offset by an increase in tax credits, which drove a lower effective tax rate of 25.6% for the three months ended March 31, 2012 compared to 28.1% for the same period in 2011.  Net realized investment gains increased $10.3. This was driven by net gains on sales of securities and an increase in net equity gains. Net gains on investment sales for our fixed maturity portfolio were $7.8 for the three months ended March 31, 2012 compared to $(3.4) of net losses on sales of fixed maturities for the three months ended March 31, 2011. Net equity gains were $18.0 for first quarter 2012, compared to net gains of $12.2 for first quarter 2011. For further discussion of our investment results and portfolio refer to - "Investments."  

Further discussion of adjusted operating income drivers described above:

  Pre-tax adjusted operating income increased on higher profitability in three of our four business segments. Further, other underwriting and operating expenses increased $11.1 over first quarter 2011 levels, primarily due to higher employee-related expenses and professional services expenses, including costs related to our Grow & Diversify initiatives.  Our Benefits segment's profitability increased $11.1 for the three months ended March 31, 2012 compared to the same period in 2011, driven by an improved loss ratio on a larger block of medical stop-loss business. The loss ratio improved to 61.6% for the three months ended March 31, 2012, compared to 67.6% for the same period in 2011, which was driven by lower than expected medical stop-loss claims.  Our Deferred Annuities segment's profitability increased $5.1 as the investment margin (net investment income less interest credited) increased $6.7. This was driven by a higher year-over-year base interest spread on increased fixed account values. Fixed account values increased $1.0 billion to $10.8 billion as of March 31, 2012.  Our Income Annuities segment's profitability increased $5.6 on mortality gains of $5.4 during the first quarter 2012, compared to mortality gains of $0.7 for the same period in 2011.  Our Life segment's profitability decreased $2.6 primarily due to less favorable claims experience and lower reinvestment yields, which resulted in a lower BOLI base ROA.                                           36 

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Division Operating Results

  The results of operations and selected operating metrics for our five segments, (Benefits, Deferred Annuities, Income Annuities, Life and Other), for the three months ended March 31, 2012 and 2011 are set forth in the following respective sections.  Benefits  The following table sets forth the results of operations relating to our Benefits segment:                                                       Three Months              QTD                                                  Ended March 31,         Variance (%)                                                  2012        2011       2012 vs. 2011    Operating revenues:    Premiums                                    $  140.5     $ 110.0               27.7 %    Net investment income                            5.4         4.2               28.6    Policy fees, contract charges, and other         3.0         3.3               (9.1 )     Total operating revenues                       148.9       117.5               26.7    Benefits and expenses:    Policyholder benefits and claims                86.6        74.3               16.6    Other underwriting and operating expenses       37.2        29.2               27.4     Total benefits and expenses                    123.8       103.5               19.6     Segment pre-tax adjusted operating income   $   25.1     $  14.0               79.3 %   

The following table sets forth selected historical operating metrics relating to our Benefits segment as of, or for the three months ended:

                                                         Three Months                                                     Ended March 31,                                                     2012         2011                Loss ratio (1)                         61.6 %      67.6 %                Expense ratio (2)                      26.6        25.7                 Combined ratio (3)                     88.2        93.3                 Medical stop-loss-loss ratio (4)       61.9        69.3                Total sales (5)                    $   66.7      $ 48.7    

(1) Loss ratio represents policyholder benefits and claims incurred divided by

premiums earned.

(2) Expense ratio is equal to other underwriting and operating expenses of our

insurance operations divided by premiums earned.

(3) Combined ratio is equal to the sum of the loss ratio and the expense ratio.

(4) Medical stop-loss - loss ratio represents medical stop-loss policyholder

benefits and claims incurred divided by medical stop-loss premiums earned.

(5) Total sales represents annualized first-year premiums net of first year

policy lapses.

Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

  Summary of Results  Segment pre-tax adjusted operating income increased $11.1, primarily the result of an improved loss ratio on a larger medical stop-loss block of business. The first quarter 2012 loss ratio improved to 61.6%, compared to 67.6% for the same period in 2011.  

In addition to the drivers discussed above, we consider the following information regarding operating revenues and benefits and expenses useful in understanding our results.

  Operating Revenues  Premiums increased $30.5 driven by medical stop-loss policies added from a block of business acquired in July 2011 as well as organic growth from strong first quarter sales.                                           37 

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Benefits and Expenses

  Policyholder benefits and claims increased $12.3 driven by growth in our medical stop-loss business. The first quarter 2012 loss ratio decreased as compared to the same period in 2011, which reflects lower than expected claims on a larger medical stop-loss business, as well as our pricing discipline during the 2011 policy year renewals.  The $8.0 increase in other underwriting and operating expenses was driven by higher commissions and incentive compensation on a larger block of business with improved profitability. Also contributing to the increase were expenses related to expansion of our group life and disability operations as part of our Grow & Diversity strategy.  Deferred Annuities  The following table sets forth the results of operations relating to our Deferred Annuities segment:                                                        Three Months Ended                  QTD                                                         March 31,                   Variance (%)                                                   2012              2011           2012 vs. 2011 Operating revenues: Net investment income                           $   134.4          $ 123.1                    9.2 % Policy fees, contract charges, and other              5.1              5.1                     - Net realized gains - FIA                              1.2              0.5                      *  Total operating revenues                            140.7            128.7                    9.3 Benefits and expenses: Policyholder benefits and claims                     (0.1 )           (0.1 )                   - Interest credited                                    82.2             77.6                    5.9 Other underwriting and operating expenses            19.0             16.2                   17.3 Amortization of deferred policy acquisition costs                                    13.8             14.3                   (3.5 )  Total benefits and expenses                         114.9            108.0                    6.4 

Segment pre-tax adjusted operating income $ 25.8$ 20.7

                 24.6 %     

* Represents percentage variances that are not meaningful or are explained

through the discussion of other variances.

The following table sets forth selected historical operating metrics relating to our Deferred Annuities segment as of, or for the three months ended:

                                                      Three Months Ended                                                         March 31,                                                    2012           2011             Account values-Fixed annuities      $ 10,807.7      $ 9,793.9             Account values-Variable annuities        763.8          809.2             Interest spread (1)                       1.94 %         1.82 %             Base earned yield                         4.91           5.07             Base credited yield                       3.01           3.26              Base interest spread (2)                  1.90           1.81              Total sales (3)                     $    353.8      $   618.4    

(1) Interest spread is the difference between the net investment yield and the

credited rate to policyholders. The net investment yield is the approximate

yield on invested assets in the general account attributed to the segment.

The credited rate is the approximate rate credited on policyholder fixed

account values. Interest credited is subject to contractual terms, including

minimum guarantees. Interest is credited on a daily basis and therefore

quarters with more/less days of interest reduces/increases interest spread

and base interest spread.

(2) Base interest spread is the interest spread adjusted to exclude items that

can vary significantly from period to period due to a number of factors and,

therefore, may contribute to yields that are not indicative of the underlying

trends. This is primarily the impact of asset prepayments, such as bond make

whole premiums, net of any related deferred sales inducement unlocking, and

the MBS prepayment speed adjustment. Interest is credited on a daily basis

and therefore quarters with more/less days of interest reduces/increases

interest spread and base interest spread.

   (3) Total sales represent deposits for new policies net of first year policy     lapses and/or surrenders.                                            38 

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Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

  Summary of Results  Segment pre-tax adjusted operating income increased $5.1, primarily driven by higher fixed annuities account values, which increased $1.0 billion to $10.8 billion. Also contributing to the increase in income was a higher year-over-year base interest spread, reflecting continued disciplined pricing on new business and management of renewal crediting rates on existing business.  

In addition to the drivers discussed above, we consider the following information regarding operating revenues and benefits and expenses useful in understanding our results.

  Operating Revenues  Net investment income increased $11.3, driven by a $1.3 billion increase in average invested assets from increased fixed annuities account values. This income growth from higher average invested assets was partially offset by lower yields on fixed maturity purchases. In addition, prepayment related net investment income in first quarter 2012 increased to $1.0 from $0.2 in the first quarter 2011.  Benefits and Expenses  Interest credited increased $4.6, primarily due to a $1.2 billion increase in average fixed annuities account values. Even with the growth in account values, DAC amortization decreased $0.5 as a result of lower lapses than assumed in our models. Other underwriting and operating expenses increased $2.8, primarily related to expenses associated with our new variable annuity product that is one of our Grow & Diversity initiatives. In second quarter of 2012, we plan to launch our new low-cost variable annuity.  

Income Annuities

  The following table sets forth the results of operations relating to our Income Annuities segment:                                                             Three Months Ended                QTD                                                               March 31,                Variance (%)                                                          2012            2011         2012 vs. 2011 Operating revenues: Net investment income                                 $    104.1        $ 105.0                 (0.9 )% Policy fees, contract charges, and other                     1.2            0.2                    *  Total operating revenues                                   105.3          105.2                  0.1 Benefits and expenses: Interest credited                                           84.5           89.7                 (5.8 ) Other underwriting and operating expenses                    5.7            5.9                 (3.4 ) Amortization of deferred policy acquisition costs            0.6            0.7                (14.3 )  Total benefits and expenses                                 90.8           96.3                 (5.7 )  Segment pre-tax adjusted operating income             $     14.5        $   8.9                 62.9 %     

* Represents percentage variances that are not meaningful or are explained

through the discussion of other variances.

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The following table sets forth selected historical operating metrics relating to our Income Annuities segment as of, or for the three months ended:

                                                       Three Months Ended                                                         March 31,                                                    2012           2011            Reserves (1)                          $ 6,610.0      $ 6,681.4            Interest spread (2)                       0.59  %        0.58  %            Base earned yield                          6.10           6.08            Base credited yield                        5.59           5.62             Base interest spread (3)                   0.51           0.46             MBS prepayment speed adjustment (4)   $     0.1      $     1.8            Mortality gains (5)                         5.4            0.7            Total sales (6)                            55.8           64.5    

(1) Reserves represent the present value of future income annuity benefits and

assumed expenses, discounted by the assumed interest rate. This metric

represents the amount of our in-force book of business.

(2) Interest spread is the difference between the net investment yield and the

credited rate to policyholders. The net investment yield is the approximate

yield on invested assets in the general account attributed to the segment.

The credited rate is the approximate rate credited on policyholder reserves.

(3) Base interest spread is the interest spread adjusted to exclude items that

can vary significantly from period to period due to a number of factors and,

therefore, may contribute to yields that are not indicative of the underlying

trends. This is primarily the impact of asset prepayments, such as bond make

whole premiums and the MBS prepayment speed adjustment.

(4) MBS prepayment speed adjustment is the impact to net investment income due to

the change in prepayment speeds on the underlying collateral of

mortgage-backed securities.

(5) Mortality gains (losses) represent the difference between actual and expected

reserves released on our life contingent annuities.

(6) Total sales represent deposits for new policies net of first year policy

lapses and/or surrenders.

Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

  Summary of Results  Segment pre-tax adjusted operating income increased $5.6 primarily due to mortality gains of $5.4 during the first quarter 2012, compared to gains of $0.7 during the first quarter 2011. Higher base interest spreads on slightly lower reserves also contributed to the improved earnings, which was mostly offset by a decline in prepayment related investment income.  

In addition to the drivers discussed above, we consider the following information regarding benefits and expenses useful in understanding our results.

Operating Revenues

  Net investment income decreased $0.9 driven primarily by a reduction in MBS prepayment speed adjustment income, which was $0.1 for the first quarter 2012, compared to $1.8 for the first quarter of 2011. This was partially offset by a slight increase in base earned yields and average invested assets. Investment income from higher year-over-year allocations of mortgage loans contributed to the increase in the base earned yield.  

Benefits and Expenses

  Interest credited decreased $5.2 driven primarily by favorable mortality experience as we experienced mortality gains of $5.4 in the first quarter of 2012 compared to gains of $0.7 in the first quarter of 2011. Mortality experience is volatile and can fluctuate significantly from quarter to quarter. In addition, lower interest credited on slightly lower reserves was offset by decreased funding services activity.                                           40

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Life

  The following table sets forth the results of operations relating to our Life segment:                                                         Three Months Ended                 QTD                                                          March 31,                  Variance (%)                                                     2012             2011          2012 vs. 2011 Operating revenues: Premiums                                         $      9.8         $  10.9                 (10.1 )% Net investment income                                  71.6            71.2                   0.6 Policy fees, contract charges, and other               31.7            30.7                   3.3  Total operating revenues                              113.1           112.8                   0.3 Benefits and expenses: Policyholder benefits and claims                       18.7            18.1                   3.3 Interest credited                                      63.2            61.7                   2.4 Other underwriting and operating expenses              15.3            14.6                   4.8 Amortization of deferred policy acquisition costs                                                   1.4             1.3                   7.7  Total benefits and expenses                            98.6            95.7                   3.0 

Segment pre-tax adjusted operating income $ 14.5$ 17.1

                 (15.2 )%    

The following table sets forth selected historical operating metrics relating to our Life segment as of, or for the three months ended:

                                                   Three Months Ended                                                     March 31,                                                2012           2011                Individual insurance:                Individual claims (1)         $    15.7      $    15.7                UL account value (2)              698.1          617.3                UL interest spread (3)             1.69 %         1.87 %                UL base interest spread (4)        1.68           1.76                Individual sales (5)          $     3.0      $     2.4                BOLI:                BOLI account value (2)        $ 4,544.8      $ 4,403.0                BOLI ROA (6)                       1.01 %         1.14 %                BOLI base ROA (7)                  0.94           1.08                BOLI sales (8)                $     2.0      $      -    

(1) Individual claims represents incurred claims, net of reinsurance, on our term

and universal life policies.

(2) UL account value and BOLI account value represent our liabilities to our

policyholders. UL account values include SPL account values of $183.0 and

$94.2 for the three months ended March 31, 2012 and 2011, respectively.

(3) UL interest spread, excluding the impact of our SPL products, is the

difference between the net investment yield and the credited rate to

policyholders. The net investment yield is the approximate yield on invested

assets in the general account attributed to UL policies. The credited rate is

    the approximate rate credited on UL policyholder fixed account values.     Interest credited is subject to contractual terms, including minimum     guarantees.  

(4) UL base interest spread, excluding the impact of our SPL products, is UL

interest spread adjusted to exclude items that can vary significantly from

period to period due to a number of factors and, therefore, may contribute to

yields that are not indicative of the underlying trends. This is primarily

the impact of asset prepayments, such as bond make whole premiums, the MBS

prepayment speed adjustment, and reserve adjustments.

(5) Individual sales represents annualized first year premiums for recurring

premium products, and 10% of new single premium deposits net of first year

policy lapses and/or surrenders.

(6) BOLI ROA is a measure of the gross margin on our BOLI book of business. This

metric is calculated as the difference between our BOLI revenue earnings rate

and our BOLI policy benefits rate. The revenue earnings rate is calculated as

revenues divided by average invested assets. The policy benefits rate is

calculated as total policy benefits divided by average account value. The

policy benefits used in this metric do not include expenses.

(7) BOLI base ROA is BOLI ROA adjusted to exclude items that can vary

significantly from period to period due to a number of factors and,

therefore, may contribute to yields that are not indicative of the underlying

trends. This is primarily the impact of asset prepayments, such as bond make

whole premiums, the MBS prepayment speed adjustment, and reserve adjustments.

(8) BOLI sales represent 10% of new BOLI total deposits.

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Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

  Summary of Results  Segment pre-tax adjusted operating income decreased $2.6 primarily driven by less favorable claims experience, which resulted in a lower BOLI base ROA as a result of higher claims and lower reinvestment rates. Also contributing to the earnings decline was higher administrative expenses associated with the build out of the Life Division team and expenses related to our Grow & Diversify initiatives.  

In addition to the drivers discussed above, we consider the following information regarding operating revenues and benefits and expenses useful in understanding our results.

  Operating Revenues  Net investment income increased $0.4 due to an increase in average invested assets, primarily related to higher BOLI and UL account values. This was partially offset by lower yields in the first quarter of 2012, compared to the same period in 2011, which was the result of lower yields on asset purchases over the past twelve months.  Benefits and Expenses 

Benefit related expenses (policyholder benefits and claims, and interest credited) increased $2.1. This was primarily driven by higher claims, which contributed to a lower BOLI base ROA.

Other

  The following table sets forth the results of operations relating to our Other segment:                                                  Three Months Ended              QTD                                                    March 31,              Variance (%)                                               2012            2011       2012 vs. 2011 Operating revenues: Net investment income                       $     5.0        $  6.5               (23.1 )% Policy fees, contract charges, and other          5.3           5.4                (1.9 )  Total operating revenues                         10.3          11.9               (13.4 ) Benefits and expenses: Interest credited                                (0.4 )        (0.7 )              42.9 Other underwriting and operating expenses         5.8           6.0                (3.3 ) Interest expense                                  8.2           8.0                 2.5  Total benefits and expenses                      13.6          13.3                2.3  % 

Segment pre-tax adjusted operating loss $ (3.3 ) $ (1.4 )

          *     

* Represents percentage variances that are not meaningful or are explained

through the discussion of other variances.

Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

  Summary of Results  Our Other segment reported pre-tax adjusted operating losses of $3.3 for the first quarter of 2012 compared with losses of $1.4 for the same period in 2011. This decline in results was primarily due to a lower net investment income, mainly from higher amortization of tax credit investments. Tax credit investments reduce investment income, but provide tax benefits that help decrease our effective tax rate. See "Investments - Investments in Limited Partnerships - Tax Credit Investments" for further information.                                           42

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Investments Our investment portfolio is structured with the objective of supporting the expected cash flows of our liabilities and producing stable returns over the long term. The composition of our portfolio reflects our asset management philosophy of protecting principal and receiving appropriate reward for risk. Our investment portfolio mix as of March 31, 2012 consisted in large part of high quality fixed maturities and commercial mortgage loans we originated, as well as a smaller allocation of high yield fixed maturities, marketable equity securities, investments in limited partnerships (primarily tax credit investments and private equity funds) and other investments. Our marked-to-market portfolio of securities, also referred to as our equity investments, support investment strategies as well as asset and liability matching strategies for certain long-duration insurance products. These equity investments include common stock, investments in REITs, and convertible bonds. We believe that prudent levels of equity investments offer enhanced long-term, after-tax total returns to support a portion of our longest duration liabilities.

The following table presents the composition of our investment portfolio:

                                                As of March 31, 2012                  As of December 31, 2011                                           Amount           % of Total            Amount            % of Total Types of Investments Fixed maturities, available-for-sale: Public                                 $    22,057.1              83.5 %     $     21,968.8               83.9 % Private                                        887.7               3.4                936.4                3.6 Marketable equity securities, available-for-sale(1)                           48.6               0.2                 50.3                0.2 Marketable equity securities, trading(2)                                     406.0               1.5                381.7                1.4 Mortgage loans, net                          2,671.1              10.1              2,517.6                9.6 Policy loans                                    70.0               0.3                 69.0                0.3 Investments in limited partnerships(3): Private equity funds                            24.3               0.1                 27.8                0.1 Tax credit investments                         221.4               0.8                199.1                0.8 Other invested assets                           28.8               0.1                 21.0                0.1  Total                                  $    26,415.0             100.0 %     $     26,171.7              100.0 %     

(1) Primarily includes non-redeemable preferred stock.

(2) Includes investments in common stock, including REITs.

(3) Investments in private equity funds are carried at fair value, while our

limited partnership interests related to tax credit investments are carried

at amortized cost.

The increase in invested assets during the first three months of 2012 is primarily due to portfolio growth generated by sales of fixed deferred annuities. As of both March 31, 2012 and December 31, 2011, we had net unrealized gains of $1.8 billion on our fixed maturity portfolio.

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  Table of Contents  Investment Returns  Net Investment Income  Return on invested assets is an important element of our financial results. The following table sets forth the income yield and net investment income, excluding realized investment gains (losses), for each major investment category:                                              For the Three Months Ended                For the Three Months Ended                                                 March 31, 2012                            March 31, 2011                                         Yield(1)               Amount             Yield(1)               Amount Types of Investments Fixed maturities, available-for-sale                            5.38 %        $      284.3                5.55 %        $      286.7 Marketable equity securities, available-for-sale                            4.44                   0.5                4.44                   0.6 Marketable equity securities, trading                                       2.91                   2.7                2.10                   0.9 Mortgage loans, net                           6.29                  40.9                6.22                  27.9 Policy loans                                  5.55                   1.0                5.73                   1.0 Investments in limited partnerships: Private equity and hedge funds                7.92                   0.4                8.25                   0.7 Affordable housing(2)                        (6.82 )                (4.4 )             (6.68 )                (3.3 ) Other income producing assets(3)              2.26                   1.8                1.52                   1.3  Gross investment income before investment expenses                           5.27                 327.2                5.42                 315.8 Investment expenses                          (0.11 )                (6.7 )             (0.10 )                (5.8 )  Net investment income                         5.16 %        $      320.5                5.32 %        $      310.0     

(1) Yields are determined based on monthly averages calculated using beginning

and end-of-period balances. Yields for fixed maturities and private equity

funds are based on amortized cost. Yields for equity securities are based on

cost. Yields for all other asset types are based on carrying values.

(2) The negative yield from these tax credit investments is offset by U.S.

federal income tax benefits. The total impact to net income was $4.5 and $2.1

for the three months ended March 31, 2012 and 2011, respectively.

(3) Other income producing assets includes other invested assets, short-term

investments and cash and cash equivalents.

   For the three months ended March 31, 2012, net investment income increased 3.4% compared to the same period in 2011, driven by an increase in invested assets on sales of our fixed deferred annuities. The income increase driven by growth in invested assets was partially offset by a decrease in the total net investment yield, which decreased to 5.16% for the three months ended March 31, 2012 from 5.32% for the same period in 2011. The reduction in yields is the effect of the prolonged low interest rate environment in 2011 and 2012. Yields on fixed maturity purchases in the three months ended March 31, 2012 were approximately 250 basis points (bps) lower than the average yield on existing fixed maturity investments. To improve our overall yields, we continued to increase our underwriting of commercial mortgage loans.  Additionally, we continue to experience increased prepayment activity. Prepayment-related income generated 9bps of yield in the first three months of 2012, compared to 7bps of yield in the same period in 2011, which included amounts from corporate action activities, such as make-whole or consent fees on early calls of fixed maturities, and prepayment speed adjustments on structured securities. The cash inflows from prepayment activity, which is typically from higher-yielding investments, are then reinvested into new assets at lower yields.  

Net Realized Investment Gains (Losses)

  In the first quarter 2012, our portfolio produced net realized gains of $25.9, as compared to $15.6 for the same period in 2011, primarily due to an improvement in marked-to-market gains on our equity investments. For the three months ended March 31, 2012, our equity portfolio produced net realized gains of $18.0, compared to gains of $12.2 for the same period in 2011, which is discussed further in our "- Return on Equity Investments" section. Additionally, realized gains from sales on our fixed maturity portfolio increased $5.0. This was partially offset by higher realized gains on bond calls during the first quarter of 2011.                                           44 

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  The following table sets forth the detail of our net realized investment gains (losses) before taxes:                                                           For the Three Months Ended                                                                 March 31,                                                         2012                2011

Gross realized gains on sales of fixed maturities $ 9.9 $

2.7

Gross realized losses on sales of fixed maturities (2.1 )

    (6.1 ) Impairments: Public fixed maturities(1)                                  (1.2 )              (0.4 )  Total credit-related                                        (1.2 )              (0.4 ) Other                                                       (1.3 )              (0.5 )  Total impairments                                           (2.5 )              (0.9 ) Net gains on trading securities                             18.0            

12.2

 Other net investment gains (losses)(2): Other gross gains                                            6.3                10.0 Other gross losses                                          (3.7 )              (2.3 )  Net realized investment gains before taxes           $      25.9         $      15.6     

(1) Public fixed maturities include publicly traded securities and highly

marketable private placements for which there is an actively traded market.

(2) This primarily consists of changes in fair value on derivatives instruments,

gains (losses) on calls and redemptions, and the impact of net realized

investment gains (losses) on DAC and DSI.

Impairments

  We monitor our investments for indicators of impairment. When evaluating a security for possible impairment, we consider several factors, which are described in more detail in Note 4 to the accompanying unaudited interim condensed consolidated financial statements. Impairments for the three months ended March 31, 2012 and 2011 were $2.5 and $0.9, respectively, reflecting small increases in both credit-related impairments and impairments based on our intent to sell securities. For those issuers in which we recorded a credit-related impairment during 2012, we had remaining holdings with an amortized cost of $37.0 and a fair value of $36.0 as of March 31, 2012. We believe the amortized cost of these securities is recoverable based on our estimated recovery values.  

Fixed Maturity Securities

  Fixed maturities represented approximately 87% and 88% of invested assets as of March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012, publicly traded and privately placed fixed maturities represented 96.1% and 3.9%, respectively, of our total fixed maturity portfolio at fair value. We invest in privately placed fixed maturities to enhance the overall value of the portfolio, increase diversification and obtain higher yields than can ordinarily be obtained with comparable public market securities.  

Fixed Maturity Securities Credit Quality

  The Securities Valuation Office, or SVO, of the NAIC, evaluates the investments of insurers for regulatory reporting purposes and assigns fixed maturities to one of the six categories called "NAIC Designations." NAIC designations of "1" or "2" include fixed maturities considered investment grade, which generally include securities rated BBB- or higher by Standard & Poor's. NAIC designations of "3" through "6" are referred to as below investment grade, which generally include securities rated BB+ or lower by Standard & Poor's. In recent years, the NAIC adopted a modeling approach to determine the NAIC designation for RMBS and CMBS securities.                                           45 

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  The following table presents our fixed maturities by NAIC designation and S&P equivalent credit ratings, as well as the percentage of total fixed maturities, based upon fair value that each designation comprises:                                                           As of March 31, 2012                          As of December 31, 2011                                             Amortized         Fair         % of Total       Amortized         Fair         % of Total                                                Cost          Value         Fair Value          Cost          Value         Fair Value NAIC:   S&P Equivalent:   1       AAA, AA, A                        $ 12,471.0     $ 13,760.3            60.0  %    $ 12,684.8     $ 13,987.6             61.1 %   2       BBB                                  7,147.2        7,718.9             33.6         6,792.9        7,409.5             32.3          Total investment grade                19,618.2       21,479.2             93.6        19,477.7       21,397.1             93.4   3       BB                                     835.9          849.3              3.7           902.9          897.8              3.9   4       B                                      531.7          509.4              2.2           549.4          507.5              2.2   5       CCC & lower                            122.9          100.5              0.5           124.4           96.2              0.4   6       In or near default                       7.0            6.4               -              7.0            6.6              0.1          Total below investment grade           1,497.5        1,465.6              6.4         1,583.7        1,508.1              6.6  Total                                       $ 21,115.7     $ 22,944.8            100.0 %    $ 21,061.4     $ 22,905.2            100.0 %    Below investment grade securities comprised 6.4% and 6.6% of our fixed maturities portfolio as of March 31, 2012 and December 31, 2011, respectively. We held NAIC 5 and 6 designated securities with gross unrealized losses of $27.0 as of March 31, 2012, of which $20.9, or 77.4%, related to six issuers. These issuers are current on their contractual payments and our analysis supports the recoverability of amortized cost.  Certain of our fixed maturities are supported by guarantees from monoline bond insurers. The credit ratings of our fixed maturities set forth in the table above reflect, where applicable, the guarantees provided by monoline bond insurers. As of March 31, 2012, fixed maturities with monoline guarantees had an amortized cost of $510.8 and a fair value of $541.7, with gross unrealized losses of $4.7. As of December 31, 2011, fixed maturities with monoline guarantees had an amortized cost of $513.4 and a fair value of $543.4, with gross unrealized losses of $4.2. The majority of these securities were municipal bonds. As of March 31, 2012, $515.5, or 95.2%, of the fair value of fixed maturities supported by guarantees from monoline bond insurers had investment grade credit ratings both when including and excluding the effect of the monoline insurance.                                           46 

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Fixed Maturity Securities and Unrealized Gains and Losses by Security Sector

  The following table sets forth the fair value of our fixed maturities by sector, as well as the associated gross unrealized gains and losses and the percentage of total fixed maturities that each sector comprises as of the dates indicated:                                                                              As of March 31, 2012                                         Cost or          Gross            Gross                             % of                                        Amortized       Unrealized       Unrealized          Fair         Total Fair         OTTI                                           Cost           Gains            Losses           Value           Value          in AOCI Security Sector Corporate securities: Consumer discretionary                 $  1,642.6     $      142.3     $       (7.4 )    $  1,777.5              7.7 %    $   (0.7 ) Consumer staples                          2,466.0            275.4             (7.8 )       2,733.6             11.9          (1.4 ) Energy                                      798.3             90.0             (1.8 )         886.5              3.9            - Financials                                1,890.9            103.1            (59.8 )       1,934.2              8.4          (0.7 ) Health care                               1,285.2            157.6             (1.8 )       1,441.0              6.3          (1.8 ) Industrials                               2,875.4            321.1             (6.4 )       3,190.1             13.9           0.5 Information technology                      337.1             44.2               -            381.3              1.7            - Materials                                 1,308.5            109.0            (19.9 )       1,397.6              6.1         (11.1 ) Telecommunication services                  735.1             65.8            (11.3 )         789.6              3.4          (0.8 ) Utilities                                 1,709.0            189.3            (14.9 )       1,883.4              8.2            -  Total corporate securities               15,048.1          1,497.8           (131.1 )      16,414.8             71.5         (16.0 ) U.S. government and agencies                109.7              2.9             (0.1 )         112.5              0.5          (0.1 ) State and political subdivisions            600.3             33.7             (2.3 )         631.7              2.8          (0.1 ) Residential mortgage-backed securities: Agency                                    2,874.6            232.9             (2.1 )       3,105.4             13.5            - Non-agency: Prime                                       262.7              7.4             (7.4 )         262.7              1.1         (21.8 ) Alt-A                                        85.0              2.9             (1.9 )          86.0              0.4          (4.5 )  Total residential mortgage-backed securities                                3,222.3            243.2            (11.4 )       3,454.1             15.0         (26.3 ) Commercial mortgage-backed securities                                1,678.5            150.3             (3.4 )       1,825.4              8.0          (2.2 ) Other debt obligations                      456.8             50.4             (0.9 )         506.3              2.2          (3.9 )  Total                                  $ 21,115.7     $    1,978.3     $     (149.2 )    $ 22,944.8            100.0 %    $  (48.6 )                                             47 

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  Table of Contents                                                                          As of December 31, 2011                                         Cost or          Gross            Gross                             % of                                        Amortized       Unrealized       Unrealized          Fair         Total Fair         OTTI                                           Cost           Gains            Losses           Value           Value          in AOCI Security Sector Corporate securities: Consumer discretionary                 $  1,578.6     $      138.5     $       (8.1 )    $  1,709.0             7.5  %    $   (0.7 ) Consumer staples                          2,409.3            308.3             (6.9 )       2,710.7             11.8          (1.4 ) Energy                                      768.4             94.9             (4.0 )         859.3              3.8            - Financials                                1,882.1             90.5            (93.3 )       1,879.3              8.2          (0.7 ) Health care                               1,280.3            156.6             (3.3 )       1,433.6              6.3          (1.8 ) Industrials                               2,887.3            344.0            (10.8 )       3,220.5             14.0           0.4 Information technology                      355.2             39.0             (0.2 )         394.0              1.7            - Materials                                 1,270.3            110.5            (24.9 )       1,355.9              5.9         (11.4 ) Telecommunication services                  666.4             66.9            (17.6 )         715.7              3.1          (0.8 ) Utilities                                 1,719.2            223.0            (15.9 )       1,926.3              8.4          (0.1 )  Total corporate securities               14,817.1          1,572.2           (185.0 )      16,204.3             70.7         (16.5 ) U.S. government and agencies                 60.3              3.8               -             64.1              0.3          (0.1 ) State and political subdivisions            609.1             28.0             (1.8 )         635.3              2.8          (0.1 ) Residential mortgage-backed securities: Agency                                    3,019.5            243.8             (0.5 )       3,262.8             14.2            - Non-agency: Prime                                       278.3              8.3            (13.8 )         272.8              1.2         (25.7 ) Alt-A                                        90.6              2.1             (3.3 )          89.4              0.4          (8.2 )  Total residential mortgage-backed securities                                3,388.4            254.2            (17.6 )       3,625.0             15.8         (33.9 ) Commercial mortgage-backed securities                                1,698.1            143.0             (4.1 )       1,837.0              8.0          (2.6 ) Other debt obligations                      488.4             52.9             (1.8 )         539.5              2.4          (4.1 )  Total                                  $ 21,061.4     $    2,054.1     $     (210.3 )    $ 22,905.2           100.0  %    $  (57.3 )    During the three months ended March 31, 2012, we increased our investments in corporate securities with cash generated from sales, primarily of fixed deferred annuities. We have mainly purchased investment grade corporate securities, with a focus on obtaining appropriate yields and duration to match our policyholder liabilities while retaining quality.  Our fixed maturities holdings are diversified by industry and issuer. As of March 31, 2012, there was $59.8 of gross unrealized losses in financial sector securities, compared to $93.3 as of December 31, 2011. The losses were primarily associated with long dated subordinated, hybrid, and preferred securities, and the securities' prices reflect relatively wide financial sector credit spreads. Financial sector credit spreads were wider at December 31, 2011 due to heightened concerns over the European debt crisis and its potential impact on the industry. Based on our analysis of each individual issuer's financial condition as of March 31, 2012, we expect to recover the entire amortized cost.  The portfolio does not have significant exposure to any single issuer. As of March 31, 2012 and December 31, 2011, the fair value of our ten largest corporate securities holdings was $1,514.0 and $1,505.0, or 9.2% and 9.3% of total corporate securities, respectively. The fair value of our largest exposure to a single issuer of corporate securities was $216.2, or 1.3% of total corporate securities, as of March 31, 2012. All of the securities related to this issuer have an NAIC rating of 2 or higher. As of December 31, 2011, the fair value of our largest exposure to a single issuer of corporate securities was $221.5, or 1.4% of total corporate securities, all of which had an NAIC rating of 2 or higher.                                           48 

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Fixed Maturity Securities in European Union Countries

  The following table summarizes our exposure to fixed maturities in European Union countries, separated into sovereign debt, financial industry and other corporate debt. The country designation is based on the issuer's country of incorporation.                                                                           As of March 31, 2012                                      Sovereign       Financial        Other           Total            % of         Amortized                                        Debt          Industry       Corporate       Fair Value       Exposure          Cost European Union Countries: United Kingdom                      $        -      $      33.3     $    495.5     $      528.8           36.0 %    $    475.8 Netherlands                                  -               -           461.2            461.2           31.4           429.1 Luxembourg                                   -               -           128.8            128.8            8.7           118.5 Switzerland                                  -            104.6             -             104.6            7.1           102.0 France                                       -             17.0           85.8            102.8            7.0           101.2 Sweden                                       -               -            50.0             50.0            3.4            43.0 Germany                                      -             13.1           10.1             23.2            1.6            25.1 Italy                                        -               -            18.8             18.8            1.3            17.7 Spain                                        -               -            18.8             18.8            1.3            19.0 Belgium                                      -               -             7.8              7.8            0.5             7.1 Finland                                      -               -             7.8              7.8            0.5             7.8 Norway                                       -              0.7            6.3              7.0            0.5             6.1 Greece                                       -               -             5.8              5.8            0.4             5.9 Austria                                      -               -             2.8              2.8            0.2             2.7 Ireland                                      -               -             1.0              1.0            0.1             1.0 Portugal                                    0.9              -              -               0.9             -              1.0  Total                               $       0.9     $     168.7     $  1,300.5     $    1,470.1          100.0 %    $  1,363.0    As of March 31, 2012, the fair value of our fixed maturities in European Union countries was $1,470.1, or 6.4% of our total fixed maturities portfolio. These fixed maturities had gross unrealized losses of $15.3 as of March 31, 2012. The fair value of our ten largest European Union country holdings was $886.3, or 3.9% of the fixed maturities portfolio. The fair value of our largest single issuer exposure to a European Union country was $121.9, or 0.5% of the portfolio.  

Fixed Maturity Securities by Contractual Maturity Date

  As of March 31, 2012 and December 31, 2011, approximately 23% and 24%, respectively, of the fair value of our fixed maturity portfolio was held in mortgaged-backed securities, and approximately 22% and 23%, respectively, of the remaining securities was due after ten years, which we consider to be longer duration assets. Fixed maturities in these categories primarily back long duration reserves in our Income Annuities segment, which can exceed a period of 30 years. As of both March 31, 2012 and December 31, 2011, approximately 78% of the gross unrealized losses on our investment portfolio related to these longer duration assets, which fluctuate more significantly with changes in interest rates and credit spreads.  Mortgage-Backed Securities  As of March 31, 2012, our fixed maturity securities portfolio included $5.3 billion of residential and commercial mortgage-backed securities at fair value. Approximately 68% of these securities are agency securities and approximately 24% are AAA rated non-agency securities in the most senior tranche of the structure type.  All of our RMBS and CMBS securities have prepayment options. Prepayments that vary in amount or timing from our estimates cause fluctuations in our yields due to an acceleration or deceleration of unamortized premium or discount associated with the securities in our portfolio. Such adjustment is recorded in net investment income in our results of operations. These adjustments, which relate primarily to RMBS, create volatility in our net investment income. Refer to the RMBS section below for additional discussion.  

Residential Mortgage-Backed Securities (RMBS)

We classify our investments in RMBS as agency, prime, Alt-A, and subprime. Agency RMBS are guaranteed or otherwise supported by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National

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Mortgage Association. Prime RMBS have underlying loans to the most credit-worthy customers with high quality credit profiles. Alt-A RMBS have overall credit quality between prime and subprime, based on a review of their underlying mortgage loans and factors such as credit scores and financial ratios.

  The following table sets forth the fair value of the Company's investment in agency, prime, and Alt-A RMBS and the percentage of total invested assets they represent:                                             As of March 31, 2012                        As of December 31, 2011                                                         % of  Total                                   % of  Total                                   Fair Value          Invested Assets           Fair Value          Invested Assets Agency                           $     3,105.4                    11.8 %      $      3,262.8                    12.5 % Non-agency: Prime                                    262.7                     1.0                 272.8                     1.0 Alt-A                                     86.0                     0.3                  89.4                     0.3  Subtotal non-agency                      348.7                     1.3                 362.2                     1.3  Total                            $     3,454.1                    13.1 %      $      3,625.0                    13.8 %    The following table sets forth the total fair value, and amortized cost of our non-agency RMBS by credit quality and year of origination (vintage). There were three securities with a total amortized cost and fair value of $15.0 and $15.4, respectively, that were rated below investment grade by either Moody's, S&P or Fitch, while at least one other agency rated them investment grade.                                                                 As of March 31, 2012                                                          Highest Rating Agency Rating                                                                                                            Total as  of                                                                                   BB and                   December 31,                                           AAA         AA         A       BBB       Below        Total          2011 Vintage: 2007                                         -          -         -        -         20.1         20.1              21.4 2006                                         -          -         -        -         89.3         89.3              94.5 2005                                         -          -        3.9       -         97.7        101.6             104.7 2004 and prior                            113.5       22.7        -        -          0.5        136.7             148.3  Total amortized cost                    $ 113.5     $ 22.7     $ 3.9     $ -      $ 207.6      $ 347.7     $       368.9  Net unrealized gains (losses)               3.3        0.8       0.1       -         (3.2 )        1.0              (6.7 )  Total fair value                        $ 116.8     $ 23.5     $ 4.0     $ -      $ 204.4      $ 348.7     $       362.2    On a fair value basis as of March 31, 2012, our Alt-A portfolio was 88.1% fixed rate collateral and 11.9% hybrid adjustable rate mortgages, or ARMs, with no exposure to option ARMs. Generally, fixed rate mortgages perform better than ARMs, with lower delinquencies and defaults on the underlying collateral.  As of March 31, 2012, our Alt-A, prime and total non-agency RMBS had an estimated weighted-average credit enhancement of 13.2%, 7.7% and 9.1%, respectively. Credit enhancement refers to the weighted-average percentage of the outstanding capital structure that is subordinate in the priority of cash flows and absorbs losses first. We monitor delinquency rates associated with these securities, and as of March 31, 2012, we believe that our credit enhancements are sufficient to cover potential delinquencies.  As of March 31, 2012 and December 31, 2011, 61.9% and 59.9%, respectively, of the fair value of our non-agency RMBS had super senior subordination. The super senior class has priority over all principal and interest cash flows and will not experience any loss of principal until lower levels are written down to zero. Therefore, the majority of our RMBS investments have less exposure to defaults and delinquencies in the underlying collateral than if we held the more subordinated classes.  As of March 31, 2012, our RMBS had gross unamortized premiums and discounts of $61.7 and $71.4, respectively. Changes in prepayment speeds, which are based on prepayment activity of the underlying mortgages, create volatility in our net investment income because they accelerate or decelerate our amortization of the unamortized premiums and discounts. The impact to net investment income is dependent on whether the securities are at a discount or premium and whether the prepayment speeds increase or decrease.                                           50

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The following table provides additional information on our RMBS prepayment exposure, by type and vintage:

                                                                                                                                            Prepayment  Speed                                                                          As of March 31, 2012                                               Adjustment                                                                                                                                            Three Months                                                       Unrealized                                                        Average                Ended                                      Amortized          Gains/            Fair           Gross          Gross          Mortgage              March 31,                                         Cost           (Losses)           Value         Discount       Premium         Loan Rate               2012 Agency: CMO: 2012                                 $     25.6      $       (0.3 )     $    25.3      $      0.6      $   (0.4 )             3.6 %     $                - 2011                                      286.4              13.4           299.8            12.1          (2.5 )             3.6                        - 2010                                      508.6              47.1           555.7            14.8         (10.5 )             4.6                       0.3 2009                                      200.4              20.7           221.1             2.1          (2.4 )             4.8                       0.1 2008                                        4.8               0.2             5.0              -             -                5.8                        - 2007                                       28.1               1.7            29.8             1.0            -                6.5                      (0.1 ) 2006                                       34.4               1.7            36.1              -             -                6.7                        - 2005                                       53.6               6.2            59.8             0.4            -                6.3                        - 2004 and prior                            553.1              73.3           626.4            15.1          (5.6 )             6.2                       0.3  Total Agency CMO                     $  1,695.0      $      164.0       $ 1,859.0      $     46.1      $  (21.4 )             5.1 %     $               0.6 Passthrough: 2012                                 $       -       $         -        $      -       $       -       $     -                 -  %     $                - 2011                                       50.3               1.0            51.3             0.1          (2.0 )             4.1                        - 2010                                      264.2              10.8           275.0             0.1          (9.3 )             4.7                        - 2009                                      697.2              38.9           736.1              -          (26.6 )             5.8                       0.1 2008                                       45.6               4.0            49.6              -           (0.9 )             6.3                        - 2007                                       31.9               2.8            34.7             0.2          (0.7 )             6.4                        - 2006                                       10.9               1.2            12.1             0.1            -                6.5                        - 2005                                       12.3               1.4            13.7             0.6          (0.1 )             5.2                        - 2004 and prior                             67.2               6.7            73.9             1.1          (0.5 )             5.8                        -  Total Agency Passthrough             $  1,179.6      $       66.8       $ 1,246.4      $      2.2      $  (40.1 )             5.5 %     $               0.1  Total Agency RMBS                    $  2,874.6      $      230.8       $ 3,105.4      $     48.3      $  (61.5 )             5.3 %     $               0.7  Non-Agency: 2008-2012                            $       -       $         -        $      -       $       -       $     -                 -  %     $                - 2007                                       20.1               1.3            21.4             5.8            -                6.1                        - 2006                                       89.3              (0.8 )          88.5            11.3            -                6.0                       1.3 2005                                      101.6              (3.3 )          98.3             2.8            -                5.7                       0.1 2004 and prior                            136.7               3.8           140.5             3.2          (0.2 )             5.9                       0.2  Total Non-Agency RMBS                $    347.7      $        1.0       $   348.7      $     23.1      $   (0.2 )             5.9 %     $               1.6  Total RMBS                           $  3,222.3      $      231.8       $ 3,454.1      $     71.4      $  (61.7 )             5.3 %     $               2.3    There are various government initiatives through the Obama administration's Making Home Affordable program that may result in higher than expected prepayments on our RMBS portfolio. For example, changes to HARP (Home Affordable Refinance Program), which targets borrowers whose mortgages are owned or guaranteed by Freddie Mac or Fannie Mae, are current on their mortgages, and have loan-to-values exceeding 80% among other qualifying requirements, went into effect in March 2012. Also, the extension of HAMP (Home Affordable Modification Program), which targets employed borrowers facing financial hardship to reduce their mortgage payments through 2013, may increase prepayments. Finally, in February, President Obama proposed details of a new initiative aimed at helping qualified homeowners refinance. We are monitoring the underlying collateral in our RMBS to determine the impact of these programs.                                           51

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  During the three months ended March 31, 2012, we strategically sold $107.2 of lower yielding, higher premium agency RMBS securities for a gain of $6.2 while reducing future reinvestment risk. We continue to manage our prepayment and reinvestment risk; we have completed similar transactions in the second quarter and will continue to seek similar transactions during 2012.  

Commercial Mortgage-Backed Securities (CMBS)

The following table sets forth the fair value of our investment in CMBS and the percentage of total invested assets they represent:

                                               As of March 31, 2012                         As of December 31, 2011                                                           % of Total                                      % of Total                                    Fair Value           Invested Assets           Fair Value           Invested Assets Agency                            $       485.0                      1.8 %      $         521.0                     2.0 % Non-Agency                              1,340.4                      5.1                1,316.0                     5.0  Total                             $     1,825.4                      6.9 %      $       1,837.0                     7.0 %    The following table sets forth the total fair value, and amortized cost of our non-agency CMBS by credit quality and vintage. There were 12 securities having a fair value of $315.3 and an amortized cost of $278.2 that were rated A by S&P, while Moody's and/or Fitch rated them AAA.                                                                 As of March 31, 2012                                                          Highest Rating Agency Rating                                                                                                                Total as  of                                                                                   BB  and                      December 31,                                         AAA          AA         A       BBB        Below          Total            2011 Vintage: 2012                                 $    16.2     $   -      $  -      $ -      $      -       $    16.2     $           - 2011                                     136.3         -         -        -             -           136.3              115.7 2010                                       1.1         -         -        -             -             1.1                1.2 2009                                        -          -         -        -             -              -                  - 2008                                      51.0       18.7        -        -             -            69.7               69.7 2007                                     416.0         -         -        -             -           416.0              422.1 2006                                     158.7         -         -        -           11.5          170.2              170.0 2005                                     247.9         -         -        -             -           247.9              258.7 2004 and prior                           145.9         -        2.4       -            6.5          154.8              165.0  Total amortized cost                 $ 1,173.1     $ 18.7     $ 2.4     $ -      $    18.0      $ 1,212.2     $      1,202.4  Net unrealized gains (losses)            126.4        3.1       0.1       -           (1.4 )        128.2              113.6  Total fair value                     $ 1,299.5     $ 21.8     $ 2.5     $ -      $    16.6      $ 1,340.4     $      1,316.0    On an amortized cost basis, 96.8% of our entire CMBS portfolio was rated AAA, 1.7 % was rated AA or A, and 1.5% was rated B and below as of March 31, 2012. Our CMBS portfolio is highly concentrated in the most senior tranches, with 94.2% of our AAA-rated securities in the most senior tranche with significant credit enhancement.  U.S. CMBS have historically utilized a senior/subordinate credit structure to allocate cash flows and losses. The structure was changed in late 2004 and was in transition into early 2005 when fully implemented to include super-senior, mezzanine and junior AAA tranches. This change resulted in increasing the credit enhancement (subordination) on the most senior tranche (super-senior) to 30%. The mezzanine AAAs were structured to typically have 20% credit enhancement and the junior AAAs 14% credit enhancement. Credit enhancement refers to the weighted-average percentage of outstanding capital structure that is subordinate in the priority of cash flows and absorbs losses first. Credit enhancement does not include any equity interest or property value in excess of outstanding debt. The super senior class has priority over the mezzanine and junior classes to all principal and interest cash flows and will not experience any loss of principal until both the entire mezzanine and junior tranches are written down to zero. Since 2010, new issues of U.S. CMBS (referred to as "CMBS 2.0") have simpler structures. The CMBS 2.0 AAA credit enhancement averages approximately 17%, and the division of the AAA class into super-senior, mezzanine, and junior tranches is no longer present.                                           52 

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  The following tables set forth the amortized cost of our AAA non-agency CMBS by type and vintage:                                                           As of March 31, 2012                                                                                                      Total  AAA                             Super Senior                           Other Structures                Securities  at                   Super                                   Other          Other                       Amortized                  Senior       Mezzanine      Junior      Senior       Subordinate      Other            Cost Vintage: 2012             $    -      $        -      $    -      $    -      $          -      $ 16.2     $           16.2 2011                  -               -           -        136.3                -          -                 136.3 2010                  -               -           -          1.1                -          -                   1.1 2009                  -               -           -           -                 -          -                    - 2008                51.0              -           -           -                 -          -                  51.0 2007               412.0              -           -          4.0                -          -                 416.0 2006               158.7              -           -           -                 -          -                 158.7 2005               132.3            26.2          -         89.4                -          -                 247.9 2004 and prior        -               -           -        120.8              25.1         -                 145.9  Total            $ 754.0     $      26.2     $    -      $ 351.6     $        25.1     $ 16.2     $        1,173.1                                                         As of December 31, 2011 Total            $ 760.4     $      27.1     $    -      $ 347.0     $        27.6     $   -      $        1,162.1    The weighted-average credit enhancement of our CMBS was 29.0% as of March 31, 2012. Adjusted to remove defeased loans, which are loans whose cash flows have been replaced by U.S. Treasury securities, the weighted-average credit enhancement of our CMBS as of March 31, 2012 was 30.1%. We believe this additional credit enhancement is significant, especially in the event of a deep real estate downturn during which losses would be expected to increase substantially.                                           53 

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  The following table provides additional information on our CMBS prepayment exposure by type and vintage:                                                                                                                                        Prepayment                                                                                                                                       Speed                                                                      As of March 31, 2012                                          Adjustment                                                                                                                                   Three  Months                                                     Unrealized                                                    Average             Ended                                     Amortized         Gains/           Fair          Gross         Gross         Mortgage           March 31,                                        Cost          (Losses)          Value        Discount      Premium        Loan Rate            2012 Agency: CMO: 2012                                $       -      $         -       $      -      $       -      $     -                -  %    $            - 2011                                      44.8              1.3           46.1             -          (1.3 )            4.9                   - 2010                                      21.6              1.3           22.9             -          (1.8 )            5.0                   - 2009                                      10.3              0.8           11.1             -            -               6.5                   - 2008                                      36.9              0.6           37.5             -          (1.5 )            4.9                  0.1 2007                                      54.6              1.2           55.8             -          (3.2 )            5.6                   - 2006                                      61.6             (0.6 )         61.0             -          (3.2 )            5.7                 (0.1 ) 2005                                      32.0              1.0           33.0             -          (1.6 )            5.8                   - 2004 and prior                           115.3              8.4          123.7             -          (3.5 )            6.7                 (0.1 )  Total Agency CMO                    $    377.1     $       14.0      $   391.1     $       -      $  (16.1 )            5.8 %    $          (0.1 ) Passthrough: 2005-2012                           $       -      $         -       $      -      $       -      $     -                -  %    $            - 2004 and prior                            89.2              4.7           93.9            0.2         (2.8 )            7.5                   -  Total Agency Passthrough            $     89.2     $        4.7      $    93.9     $      0.2     $   (2.8 )            7.5 %    $            -  Total CMBS Agency                   $    466.3     $       18.7      $   485.0     $      0.2     $  (18.9 )            6.1 %    $          (0.1 )  Non-Agency: 2012                                $     16.2     $         -       $    16.2     $       -      $   (0.2 )            3.8 %    $            - 2011                                     136.3              4.1          140.4             -          (1.7 )            5.5                   - 2010                                       1.2               -             1.2             -            -               4.0                   - 2009                                        -                -              -              -            -                -                    - 2008                                      69.7              8.1           77.8            1.5         (0.2 )            6.1                   - 2007                                     416.0             58.5          474.5           15.9         (0.4 )            5.8                   - 2006                                     170.2             24.4          194.6            7.5         (0.9 )            5.9                   - 2005                                     247.9             29.8          277.7            7.7           -               5.4                 (0.1 ) 2004 and prior                           154.7              3.3          158.0            0.9         (1.7 )            6.1                   -  Total CMBS Non-Agency               $  1,212.2     $      128.2      $ 1,340.4     $     33.5     $   (5.1 )            5.7 %    $          (0.1 )  Total CMBS                          $  1,678.5     $      146.9      $ 1,825.4     $     33.7     $  (24.0 )            5.8 %    $          (0.2 )   

Return on Equity-Like Investments

Prospector Partners, LLC, or Prospector, manages our portfolio of equity and equity-like investments, the majority of which are publicly traded common stock and convertible securities. We believe that these investments are suitable for funding certain long duration liabilities in our Income Annuities segment and, on a limited basis, in our surplus portfolio. These securities are recorded at fair value, with changes in fair value recorded in net realized investment gains (losses). The common stock securities are included in trading marketable equity securities and the convertible securities are included in fixed maturities on our consolidated balance sheets.                                           54

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  The following table compares our total gross return on the equity component of our Prospector portfolio to the benchmark S&P 500 Total Return Index for the three months ended March 31, 2012 and 2011.                                                   Three Months Ended                                                     March 31,                                                2012            2011                 Common stock                       3.7 %         6.5 %                 Convertible securities             6.1 %         2.1 %                 S&P 500 Total Return Index        12.6 %         5.9 %  

Return on Real Estate-Related Investments

  Beginning in the second quarter of 2011, we implemented a new investment strategy focusing on real estate-related investments to enhance funding the long duration liabilities in our Income Annuities segment. The investments for this strategy primarily consist of investments in REITs, which are included in trading marketable equity securities, on our consolidated balance sheets. As of March 31, 2012 and December 31, 2011, the real estate-related investments had a fair value of $157.8 and $147.7, respectively. For the three months ended March 31, 2012, the real estate-related investments had a total gross return of 7.5%, compared with the FTSE NAREIT All Equity REITS Index result of 8.3%.  

Mortgage Loans

  Our mortgage loan department originates commercial mortgages and manages our existing commercial mortgage loan portfolio. Our commercial mortgage loan holdings are secured by first-mortgage liens on income-producing commercial real estate, primarily in the retail, industrial and office building sectors. All loans are underwritten consistently to our standards based on loan-to-value (LTV) ratios and debt service coverage ratios (DSCR) based on income and detailed market, property and borrower analysis using our long-term experience in commercial mortgage lending. A large majority of our loans have personal guarantees and all loans are inspected and evaluated annually. We diversify our mortgage loans by geographic region, loan size and scheduled maturities. On our consolidated balance sheets, mortgage loans are reported net of an allowance for losses, deferred loan origination costs, and unearned mortgage loan fees; however, the following tables exclude these items.  The stress experienced in the U.S. financial markets during the economic downturn and unfavorable credit market conditions led to a decrease in overall liquidity and availability of capital in the commercial mortgage loan market, which has led to greater opportunities for more selective loan originations, especially those loans in our range of specialization, . We believe a disciplined increase in our mortgage loan portfolio will help maintain the overall quality of our investment portfolio and obtain appropriate yields to match our policyholder liabilities. We continue to increase our investments in mortgage loans to improve our overall investment yields. This strategy has resulted in increased net investment yields when compared to fixed maturity investments. We originated $197.6 of mortgage loans during the three months ended March 31, 2012 and expect strong originations for the remainder of 2012.  As of both March 31, 2012 and December 31, 2011, 71.2% of our mortgage loans were under $5.0 and our average loan balance was $2.4. As of March 31, 2012 and December 31, 2011, our largest loan balance was $12.3 and $12.4, respectively.  

Credit Quality

  We use the LTV and DSCR ratios as our primary metrics to assess mortgage loan quality. The following table sets forth the LTV ratios for our gross mortgage loan portfolio:                                As of March 31, 2012                As of December 31, 2011                          Carrying                             Carrying                           Value           % of Total           Value             % of Total Loan-to-Value Ratio: < or = 50%             $      798.2              29.8 %    $        805.7               31.9 % 51% - 60%                     707.7              26.4               689.3               27.3 61% - 70%                     801.0              29.9               720.6               28.5 71% - 75%                     162.5               6.1               121.1                4.8 76% - 80%                      71.9               2.7                58.8                2.3 81% - 100%                     94.6               3.5                89.6                3.6 > 100%                         43.0               1.6                40.1                1.6  Total                  $    2,678.9             100.0 %    $      2,525.2              100.0 %    The LTV ratio compares the amount of the loan to the estimated fair value of the underlying property collateralizing the loan. In the year of funding, LTV ratios are calculated using independent appraisals performed by Member of the Appraisal Institute (MAI)                                           55 

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  designated appraisers. Subsequent to the year of funding, LTV ratios are updated annually using internal valuations based on property income and estimated market capitalization rates. Property income estimates are typically updated during the third quarter of each year. Market capitalization rates are updated during the first quarter based on geographic region, property type and economic climate. LTV ratios greater than 100% indicate that the loan amount is greater than the collateral value. A smaller LTV ratio generally indicates a higher quality loan.  As we increase the volume of originations, we maintain our disciplined underwriting approach. As of March 31, 2012 and December 31, 2011, the mortgage loan portfolio had weighted-average LTV ratios of 57.9% and 57.1%, respectively. The increase in the LTV ratio is driven by a reduction in our estimation of the fair values of the underlying properties, which is the result of declines in property income compared to the previous year. The weighted average LTV ratio was 52.9% and 57.1% for loans funded during the three months ended March 31, 2012 and the year ended December 31, 2011, respectively. For loans originated in the three months ended March 31, 2012, 35.2 % had an LTV ratio of 50% or less, and no loans had an LTV ratio of more than 75%. For loans originated in the year ended December 31, 2011, 23.2% had an LTV ratio of 50% or less, and no loans had an LTV ratio of more than 75%.  The following table sets forth the DSCR for our gross mortgage loan portfolio:                                                 As of March 31, 2012                  As of December 31, 2011                                           Carrying                               Carrying                                            Value            % of Total            Value             % of Total Debt Service Coverage Ratio: > or = 1.60                             $    1,423.1               53.1 %     $      1,310.8               51.9 % 1.40 - 1.59                                    588.3               22.0                566.5               22.4 1.20 - 1.39                                    380.6               14.2                369.7               14.7 1.00 - 1.19                                    160.2                6.0                157.4                6.3 0.85 - 0.99                                     38.4                1.4                 39.0                1.5 < 0.85                                          88.3                3.3                 81.8                3.2  Total                                   $    2,678.9              100.0 %     $      2,525.2              100.0 %    The DSCR compares the amount of rental income a property is generating to the amount of the mortgage payments due on the property. DSCRs are calculated using the most current annual operating history for the collateral. As of March 31, 2012 and December 31, 2011, the mortgage loan portfolio had weighted-average DSCRs of 1.74 and 1.72, respectively. For loans originated during the three months ended March 31, 2012 and the year ended December 31, 2011, 69.9% and 56.0%, respectively, had a DSCR of 1.60 or more. As of March 31, 2012, there were 70 loans with an aggregate carrying value of $126.7 that had a DSCR of less than 1.00. The average outstanding principal balance of these loans was $1.8. As of March 31, 2012, only one loan, with an outstanding principal balance of $7.6, was in default; all other borrowers were current with respect to their loan payments.  

Composition of Mortgage Loans

The following table sets forth the gross carrying value of our investments in mortgage loans by geographic region:

                          As of March 31, 2012                As of December 31, 2011                     Carrying                             Carrying                      Value           % of Total           Value             % of Total      Region:      California   $      825.2              30.8 %    $        813.7               32.2 %      Washington          317.7              11.9               304.8               12.1      Texas               273.6              10.2               265.2               10.5      Oregon              125.0               4.7               114.8                4.5      Illinois            105.2               3.9               105.6                4.2      Other             1,032.2              38.5               921.1               36.5       Total        $    2,678.9             100.0 %    $      2,525.2              100.0 %                                             56 

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The following table sets forth the gross carrying value of our investments in mortgage loans by property type:

                                                As of March 31, 2012                  As of December 31, 2011                                           Carrying                               Carrying                                            Value            % of Total            Value             % of Total Property Type: Shopping centers and retail             $    1,265.4               47.2 %     $      1,190.6               47.1 % Office buildings                               655.8               24.5                628.9               24.9 Industrial                                     538.0               20.1                503.7               19.9 Multi-family                                   117.6                4.4                113.4                4.5 Other                                          102.1                3.8                 88.6                3.6  Total                                   $    2,678.9              100.0 %     $      2,525.2              100.0 %   

Maturity Date of Mortgage Loans

The following table sets forth our gross carrying value of our investments in mortgage loans by contractual maturity date:

                                                   As of March 31, 2012                  As of December 31, 2011                                             Carrying                               Carrying                                              Value            % of Total            Value             % of Total Years to Maturity: Due in one year or less                   $       20.0                0.7 %     $         18.7                0.7 % Due after one year through five years            154.2                5.8                154.0                6.1 Due after five years through ten years         1,422.3               53.1              1,322.5               52.4 Due after ten years                            1,082.4               40.4              1,030.0               40.8  Total                                     $    2,678.9              100.0 %     $      2,525.2              100.0 %    For more information and further discussion of our allowance for mortgage loan losses, see Note 5 to our unaudited interim condensed consolidated financial statements.  

Investments in Limited Partnerships - Tax Credit Investments

  We invest in limited partnership interests related to tax credit investments, which are typically 15-year investments that provide tax credits in the first ten years. We increased our holdings in these tax credit investments in the first three months of 2012, and continue to look for further tax credit investment opportunities.  Although these investments decrease our net investment income over time on a pre-tax basis, they provide us with significant tax benefits, which decrease our effective tax rate. The following table sets forth the impact the amortization of our investments and related tax credits had on net income:                                                                      Three Months Ended                                                                        March 31,                                                                  2012              2011

Amortization related to tax credit investments, net of taxes

                                                          $    (2.9 )        $ (2.2 ) Realized losses related to tax credit investments, net of taxes                                                               (0.2 )            - Tax credits                                                          7.6             4.3  Impact to net income                                           $     4.5          $  2.1   

The following table provides the future estimated impact to net income:

                                                      Impact to Net                                                       Income                  Remainder of 2012                $          14.0                  2013                                        19.9                  2014                                        20.0                  2015 and beyond                             52.0                   Estimated impact to net income   $         105.9                                             57 

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  The tax credits from our investments in limited partnerships occur in the first 10 years, with the largest portions provided in the middle years. A significant amount of our investments are entering these middle years and we expect the future impact to net income to grow significantly in the next few years.  

Liquidity and Capital Resources

  Symetra conducts its operations through its operating subsidiaries, and our liquidity requirements primarily have been and will continue to be met by funds from such subsidiaries. Dividends from its subsidiaries are Symetra's principal sources of cash to pay dividends and meet its obligations, including payments of principal and interest on notes payable and tax obligations.  We have and intend to pay quarterly cash dividends on our common stock and warrants. During the three months ended March 31, 2012, we declared and paid a cash dividend of $0.07 per share. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors. See "- Dividends" below for further discussion.  

We actively manage our liquidity in light of changing market, economic and business conditions and we believe that our liquidity levels are more than adequate to cover our exposures, as evidenced by the following:

• We continued to generate strong cash inflows on our deposit contracts

(annuities and universal life policies) for the three months ended March

31, 2012 despite the low interest rate environment, which has reduced the

          market demand for fixed annuities.          •   While certain policy lapses and surrenders occur in the normal course of

business, these lapses and surrenders have not increased materially from

         management expectations.    

• As of March 31, 2012, we had the ability to borrow, on an unsecured basis,

         up to a maximum principal amount of $300.0 under a revolving line of          credit arrangement.    

• We continued to generate strong cash flows from operations, which grew by

$24.4 to $238.6 for the three months ended March 31, 2012, from $214.2 for

         the three months ended March 31, 2011.    

• The amount of AOCI, net of taxes, on our balance sheet remained strong, at

$1,000.1 as of March 31, 2012 compared to $1,027.3 as of December 31,          2011.    

• As of March 31, 2012 our primary life insurance company, Symetra Life

Insurance Company, had an estimated risk-based capital ratio of

approximately 466%. This provides adequate capital levels for growth of

our business.

Liquidity Requirements and Sources of Liquidity

  The liquidity requirements of our insurance subsidiaries principally relate to the liabilities associated with their various insurance and investment products, operating costs and expenses, the payment of dividends to the holding company, and payment of income taxes. Liabilities arising from insurance and investment products include the payment of benefits, as well as cash payments in connection with policy and contract surrenders and withdrawals and policy loans. Historically, Symetra's insurance subsidiaries have used cash flows from operations, cash flows from invested assets and sales of investment securities to fund their liquidity requirements.                                           58

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  In managing the liquidity of our insurance operations, we also consider the risk of policyholder and contract holder withdrawals of funds earlier than assumed when selecting assets to support these contractual obligations. We use surrender charges and other contract provisions to mitigate the extent, timing and profitability impact of withdrawals of funds by customers from annuity contracts and deposit liabilities. The following table sets forth withdrawal characteristics of our general account policyholder liabilities, composed of annuity reserves, deposit liabilities and policy and contract claim liabilities, net of reinsurance recoverables:                                                   As of March 31, 2012                As of December 31, 2011                                              Amount          % of Total           Amount            % of Total Illiquid Liabilities Structured settlements & other SPIAs(1)   $     6,606.2             28.7 %    $      6,605.4               29.0 % Deferred annuities with 5-year payout provision or MVA(2)                               307.6              1.3               372.3                1.6 Traditional insurance (net of reinsurance)(3)                                   178.9              0.8               180.1                0.8 Group health & life (net of reinsurance)(3)                                   126.8              0.6               127.5                0.6  Total illiquid liabilities                      7,219.5             31.4             7,285.3               32.0 Somewhat Liquid Liabilities Bank-owned life insurance (BOLI)(4)             4,630.3             20.1             4,575.9               20.1 Deferred annuities with surrender charges of 5% or higher                         6,933.4             30.1             6,984.4               30.7 Universal life with surrender charges of 5% or higher                                   269.9              1.2               250.5                1.0  Total somewhat liquid liabilities              11,833.6             51.4            11,810.8               51.8 Fully Liquid Liabilities Deferred annuities with surrender charges of: 3% up to 5%                                       816.0              3.5               710.7                3.1 Less than 3%                                      163.3              0.7               142.9                0.6 No surrender charges(5)                         2,515.5             10.9             2,346.9               10.3 Universal life with surrender charges less than 5%                                      444.8              1.9               444.8                2.0 Other(6)                                           17.8              0.2                37.3                0.2  Total fully liquid liabilities                  3,957.4             17.2             3,682.6               16.2  Total(7)                                  $    23,010.5            100.0 %    $     22,778.7              100.0 %     

(1) These contracts cannot be surrendered. The benefits are specified in the

contracts as fixed amounts, primarily to be paid over the next several

decades.

(2) In a liquidity crisis situation, we could invoke the five-year payout

provision so that the contract value with interest is paid out ratably over

five years.

(3) Represents incurred but not reported claim liabilities. The surrender value

on these contracts is generally zero.

(4) The biggest deterrent to surrender is the taxation on the gain within these

contracts, which includes a 10% non-deductible penalty tax. Banks can

exchange certain of these contracts with other carriers, tax-free. However, a

significant portion of this business does not qualify for this tax-free

treatment due to the employment status of the original covered employees and

charges may be applicable.

(5) Approximately half of the account value has been with us for many years, due

to guaranteed minimum interest rates of 4.0 - 4.5% that are significantly

higher than those currently offered on new business, which range from 1.0 -

1.5%. Given the current low interest rate environment, we do not expect

significant changes in the persistency of this business.

(6) Represents BOLI, traditional insurance, and Group health and life reported

claim liabilities.

(7) Represents the sum of funds held under deposit contracts, future policy

benefits and policy and contract claims on the consolidated balance sheets,

excluding other policyholder related liabilities and reinsurance recoverables

of $229.0 and $232.9 as of March 31, 2012 and December 31, 2011,

    respectively.   Liquid Assets  Symetra's insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance policies and structured settlement annuities, are matched with investments having similar estimated lives such as long-term fixed maturities, mortgage loans and marketable equity securities. Shorter-term liabilities are matched with fixed maturities that have short- and medium-terms. In addition, our insurance subsidiaries hold highly liquid, high quality, shorter-term investment securities and other liquid investment-grade fixed maturities and cash equivalents to fund anticipated operating expenses, surrenders and withdrawals.  We define liquid assets to include cash, cash equivalents, short-term investments, publicly traded fixed maturities and public equity securities. As of March 31, 2012 and December 31, 2011, our insurance subsidiaries had liquid assets of $22.7 billion and $22.5 billion, respectively, and Symetra had liquid assets of $133.8 and $114.6, respectively. The portion of total company liquid assets comprised of cash and cash equivalents and short-term investments was $282.4 and $245.1 as of March 31, 2012 and December 31, 2011, respectively. The increase in our insurance subsidiaries' liquid assets was primarily the result of sales of deferred annuities during the first quarter of 2012.                                           59

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  We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in evaluating the adequacy of our insurance operations' liquidity under a variety of stress scenarios. We believe that the liquidity profile of our assets is sufficient to satisfy liquidity requirements, including under foreseeable stress scenarios.  Given the size and liquidity profile of our investment portfolio, we believe that claim experience varying from our projections does not constitute a significant liquidity risk. Our asset/liability management program takes into account the expected cash flows on investments and expected claim payments as well as the specific nature and risk profile of the liabilities. Historically, there has been limited variation between the expected cash flows on our investments and the payment of claims.  

Dividends

  We declared and paid a quarterly dividend of $0.07 per common share during the first quarter of 2012. On May 4, 2012, we declared a quarterly dividend of $0.07 per common share to shareholders and warrant holders as of May 18, 2012, for an approximate total of $9.7 to be paid on or about June 1, 2012.  

Cash Flows

  The following table sets forth a summary of our consolidated cash flows for the dates indicated:                                                               Three Months Ended March 31,                                                            2012                    2011

Net cash flows provided by operating activities $ 238.6

    $       214.2 Net cash flows used in investing activities                   (236.2 )                (558.3 ) Net cash flows provided by financing activities                 34.5                   377.4   Operating Activities  Cash flows from our operating activities are primarily driven by the amounts and timing of cash received for premiums on our group medical stop-loss and term life insurance products, income on our investments, including dividends and interest, as well as the amounts and timing of cash disbursed for our payment of policyholder benefits and claims, underwriting and operating expenses and income taxes.  Net cash provided by operating activities for the three months ended March 31, 2012 increased $24.4 over the same period in 2011. This increase was primarily the result of increased net investment income driven by an increase in average assets and an increase in premiums received from the growth of our medical stop-loss product.  

Investing Activities

  Cash flows from our investing activities are primarily driven by the amounts and timing of cash received from our sales of investments and from maturities and calls of fixed maturity securities, as well as the amounts and timing of cash disbursed for purchases of investments and funding of mortgage loan originations.  Net cash used in investing activities for the three months ended March 31, 2012 decreased $322.1 over the same period in 2011. This decrease was primarily the result of lower purchases of fixed maturities, related to a decline in sales of fixed deferred annuities, and higher sales of fixed maturities, partially offset by a decline in cash received from prepayments, maturities and calls on fixed maturities.  Financing Activities  Cash flows from our financing activities are primarily driven by the amounts and timing of cash received from deposits into certain life insurance and annuity policies and proceeds from our issuances of debt and common stock, as well as the amounts and timing of cash disbursed to fund withdrawals from certain life insurance and annuity policies, and dividend distributions to our stock and warrant holders.                                           60 

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  Net cash provided by financing activities for the three months ended March 31, 2012 decreased $342.9 over the same period in 2011. This was primarily driven by lower policyholder deposits, mainly on fixed deferred annuities. In addition, there were higher fixed deferred annuity policyholder withdrawals, which we anticipated as policies on a growing block of business moved out of the surrender charge period. 

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