UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~March 31,~~June 30, 2011

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 001-31901

Protective Life Insurance Company

(Exact name of registrant as specified in its charter)

Tennessee

(State or other jurisdiction of incorporation or organization)

63-0169720

(IRS Employer Identification Number)

2801 Highway 280 South

Birmingham, Alabama 35223

(Address of principal executive offices and zip code)

(205) 268-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ox No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated Filer o

Non-accelerated filer x		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

Number of shares of Common Stock, $1.00 Par Value, outstanding as of ~~May~~August 3, 2011: 5,000,000

Table of Contents

PROTECTIVE LIFE INSURANCE COMPANY

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED ~~MARCH 31,~~JUNE 30, 2011

TABLE OF CONTENTS

		Page
			PART I: Financial Information

Item 1.	Financial Statements (unaudited):
	Consolidated Condensed Statements of Income for the Three and Six Months Ended ~~March 31,~~June 30, 2011 and 2010	3
	Consolidated Condensed Balance Sheets as of ~~March 31,~~June 30, 2011 and December 31, 2010	4
	Consolidated Condensed Statement of Shareowner’s Equity For The Three Months Ended March 31, 2011 and June 30, 2011	5
	Consolidated Condensed Statements of Cash Flows for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2011 and 2010	6
	Notes to Consolidated Condensed Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3539
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	8799
Item 4.	Controls and Procedures	87100

			PART II

Item 1A.	Risk Factors and Cautionary Factors that may Affect Future Results	88100
Item 6.	Exhibits	90105
	Signature	91106

Table of Contents

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

							For The						For The
							Three Months Ended						Six Months Ended
	For The Three Months Ended March 31,						June 30,						June 30,
	2011			2010			2011			2010			2011			2010
	(Dollars In Thousands)						(Dollars In Thousands)
Revenues
Premiums and policy fees	$	662,256		$	624,835		$	712,472		$	675,205		$	1,374,728		$	1,300,040
Reinsurance ceded	(324,417		)	(299,914		)	(356,603		)	(372,925		)	(681,020		)	(672,839		)
Net of reinsurance ceded	337,839			324,921			355,869			302,280			693,708			627,201
Net investment income	427,311			398,188			434,425			408,548			861,736			806,736
Realized investment (losses) gains:
Derivative financial instruments	(12,864		)	(24,477		)	(35,045		)	(119,346		)	(47,909		)	(143,823		)
All other investments	10,541			49,637			64,454			68,729			74,995			118,366
Other-than-temporary impairment losses	(16,021		)	(21,856		)	(15,564		)	(36,554		)	(31,585		)	(58,409		)
Portion of loss recognized in other comprehensive income (before taxes)	10,358			9,987			6,129			19,785			16,487			29,771
Net impairment losses recognized in earnings	(5,663		)	(11,869		)	(9,435		)	(16,769		)	(15,098		)	(28,638		)
Other income	43,863			22,557			56,107			25,205			99,970			47,762
Total revenues	801,027			758,957			866,375			668,647			1,667,402			1,427,604
Benefits and expenses
Benefits and settlement expenses, net of reinsurance ceded: (three months: 2011 - $313,997; 2010 - $304,142)	533,860			504,298
Benefits and settlement expenses, net of reinsurance ceded: (three months: 2011 - $357,948; 2010 - $360,933; six months: 2011 - $671,945; 2010 - $665,075)							548,650			522,174			1,082,510			1,026,472
Amortization of deferred policy acquisition costs and value of business acquired	69,939			75,445			75,682			17,950			145,621			93,395
Other operating expenses, net of reinsurance ceded: (three months: 2011 - $46,275; 2010 - $44,296)	88,505			67,741
Other operating expenses, net of reinsurance ceded: (three months: 2011 - $49,988; 2010 - $52,613; six months: 2011 - $96,263; 2010 - $96,909)							93,448			66,354			181,953			134,095
Total benefits and expenses	692,304			647,484			717,780			606,478			1,410,084			1,253,962
Income before income tax	108,723			111,473			148,595			62,169			257,318			173,642
Income tax expense	37,965			35,296			51,546			21,555			89,511			56,851
Net income	$	70,758		$	76,177		$	97,049		$	40,614		$	167,807		$	116,791

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

	As of						As of
	March 31, 2011			December 31, 2010			June 30, 2011			December 31, 2010
	(Dollars In Thousands)						(Dollars In Thousands)
Assets
Fixed maturities, at fair value (amortized cost: 2011 - $23,924,370; 2010 - $23,967,656)	$	24,644,333		$	24,644,187
Equity securities, at fair value (cost: 2011 - $301,256; 2010 - $307,971)	309,901			317,255
Mortgage loans (includes amounts related to securitizations of: 2011 - $903,122; 2010 - $934,655)	4,864,249			4,883,400
Investment real estate, net of accumulated depreciation (2011 - $826; 2010 - $767)	7,636			7,196
Fixed maturities, at fair value (amortized cost: 2011 - $25,123,826; 2010 - $23,967,656)							$	26,104,047		$	24,644,187
Equity securities, at fair value (cost: 2011 - $301,464; 2010 - $307,971)							304,913			317,255
Mortgage loans (includes amounts related to securitizations of: 2011 - $888,607; 2010 - $934,655)							5,344,514			4,883,400
Investment real estate, net of accumulated depreciation (2011 - $869; 2010 - $767)							12,498			7,196
Policy loans	784,320			793,448			881,757			793,448
Other long-term investments	282,550			283,002			304,004			283,002
Short-term investments	405,419			349,245			134,686			349,245
Total investments	31,298,408			31,277,733			33,086,419			31,277,733
Cash	199,868			236,998			370,431			236,998
Accrued investment income	336,965			322,351			341,662			322,351
Accounts and premiums receivable, net of allowance for uncollectible amounts (2011 - $3,988; 2010 - $4,295)	45,626			42,544
Accounts and premiums receivable, net of allowance for uncollectible amounts (2011 - $3,855; 2010 - $4,295)							51,612			42,544
Reinsurance receivables	5,556,432			5,504,291			5,628,899			5,504,291
Deferred policy acquisition costs and value of business acquired	3,857,787			3,822,572			4,001,999			3,822,572
Goodwill	89,195			89,970			88,421			89,970
Property and equipment, net of accumulated depreciation (2011 - $130,039; 2010 - $128,437)	41,820			38,597
Property and equipment, net of accumulated depreciation (2011 - $129,489; 2010 - $128,437)							42,467			38,597
Other assets	389,773			399,205			369,067			399,205
Income tax receivable	23,297			37,628			49,032			37,628
Assets related to separate accounts
Variable annuity	5,797,956			5,170,193			6,291,158			5,170,193
Variable universal life	561,044			534,219			556,419			534,219
Total Assets	$	48,198,171		$	47,476,301		$	50,877,586		$	47,476,301
Liabilities
Policy liabilities and accruals	$	19,887,761		$	19,672,190		$	21,803,883		$	19,672,190
Stable value product account balances	2,664,139			3,076,233			2,565,235			3,076,233
Annuity account balances	10,781,341			10,591,605			10,899,995			10,591,605
Other policyholders’ funds	557,255			577,924			589,764			577,924
Other liabilities	840,637			834,274			804,237			834,274
Mortgage loan backed certificates	51,540			61,678			42,862			61,678
Deferred income taxes	1,071,854			1,035,173			1,190,275			1,035,173
Non-recourse funding obligations	1,325,100			1,360,800			1,270,100			1,360,800
Liabilities related to separate accounts
Variable annuity	5,797,956			5,170,193			6,291,158			5,170,193
Variable universal life	561,044			534,219			556,419			534,219
Total liabilities	43,538,627			42,914,289			46,013,928			42,914,289
Commitments and contingencies - Note 7
Commitments and contingencies - Note 8
Shareowner’s equity
Preferred Stock, $1 par value, shares authorized: 2,000; Liquidation preference: $2,000	2			2			2			2
Common Stock, $1 par value, shares authorized and issued: 2011 and 2010 - 5,000,000	5,000			5,000			5,000			5,000
Additional paid-in-capital	1,361,734			1,361,734			1,361,734			1,361,734
Retained earnings	2,922,790			2,852,032			2,994,839			2,852,032
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on investments, net of income tax: (2011 - $211,144; 2010 - $196,358)	392,124			364,664
Net unrealized losses relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (2011 - $(8,808); 2010 - $(5,179))	(16,357		)	(9,618		)
Accumulated loss - derivatives, net of income tax: (2011 - $(3,096); 2010 - $(6,355))	(5,749		)	(11,802		)
Net unrealized gains (losses) on investments, net of income tax: (2011 - $289,201; 2010 - $196,358)							537,088			364,664
Net unrealized losses relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (2011 - $(14,215); 2010 - $(5,179))							(26,400		)	(9,618		)
Accumulated loss - derivatives, net of income tax: (2011 - $(4,633); 2010 - $(6,355))							(8,605		)	(11,802		)
Total shareowner’s equity	4,659,544			4,562,012			4,863,658			4,562,012
Total liabilities and shareowner’s equity	$	48,198,171		$	47,476,301		$	50,877,586		$	47,476,301

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNER’S EQUITY

(Unaudited)

									Accumulated Other																		Accumulated Other
									Comprehensive Income (Loss)																		Comprehensive Income (Loss)
					Additional				Net Unrealized			Accumulated			Total							Additional					Net Unrealized			Accumulated			Total
	Preferred		Common		Paid-In-		Retained		Gains / (Losses)			Gain / (Loss)			Shareowner’s			Preferred		Common		Paid-In-		Retained			Gains / (Losses)			Gain / (Loss)			Shareowner’s
	Stock		Stock		Capital		Earnings		on Investments			Derivatives			Equity			Stock		Stock		Capital		Earnings			on Investments			Derivatives			Equity
	(Dollars In Thousands)																	(Dollars In Thousands)
Balance, December 31, 2010	$	2	$	5,000	$	1,361,734	$	2,852,032	$	355,046		$	(11,802	)	$	4,562,012		$	2	$	5,000	$	1,361,734	$	2,852,032		$	355,046		$	(11,802	)	$	4,562,012
Net income for the three months ended March 31, 2011							70,758								70,758									70,758									70,758
Change in net unrealized gains/losses on investments (net of income tax - $17,829)									33,117						33,117												33,117						33,117
Reclassification adjustment for investment amounts included in net income (net of income tax - $(3,043))									(5,657		)				(5,657		)										(5,657		)				(5,657		)
Change in net unrealized gains/losses relating to other-than-temporary impaired investments for which a portion has been recognized in earnings (net of income tax $(3,629))									(6,739		)				(6,739		)										(6,739		)				(6,739		)
Change in accumulated gain (loss) derivatives (net of income tax - $3,621)												6,724			6,724															6,724			6,724
Reclassification adjustment for derivative amounts included in net income (net of income tax - $(361))												(671		)	(671		)													(671		)	(671		)
Comprehensive income for the three months ended March 31, 2011															97,532																		97,532
Balance, March 31, 2011	$	2	$	5,000	$	1,361,734	$	2,922,790	$	375,767		$	(5,749	)	$	4,659,544		$	2	$	5,000	$	1,361,734	$	2,922,790		$	375,767		$	(5,749	)	$	4,659,544
Net income for the three months ended June 30, 2011																								97,049									97,049
Change in net unrealized gains/losses on investments (net of income tax - $85,407)																											158,618						158,618
Reclassification adjustment for investment amounts included in net income (net of income tax - $(7,349))																											(13,654		)				(13,654		)
Change in net unrealized gains/losses relating to other-than-temporary impaired investments for which a portion has been recognized in earnings (net of income tax $(5,407))																											(10,043		)				(10,043		)
Change in accumulated gain (loss) derivatives (net of income tax - $(1,777))																														(3,299		)	(3,299		)
Reclassification adjustment for derivative amounts included in net income (net of income tax - $238																														443			443
Comprehensive income for the three months ended June 30, 2011																																	229,114
Dividend paid to the parent company																								(25,000		)							(25,000		)
Balance, June 30, 2011																		$	2	$	5,000	$	1,361,734	$	2,994,839		$	510,688		$	(8,605	)	$	4,863,658

See Notes to Consolidated Condensed Financial Statements

Table of Contents

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	For The						For The
	Three Months Ended						Six Months Ended
	March 31,						June 30,
	2011			2010			2011			2010
	(Dollars In Thousands)						(Dollars In Thousands)
Cash flows from operating activities
Net income	$	70,758		$	76,177		$	167,807		$	116,791
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment losses (gains)	7,986			(13,291		)	(11,988		)	54,095
Amortization of deferred policy acquisition costs and value of business acquired	69,939			75,445			145,621			93,395
Capitalization of deferred policy acquisition costs	(115,596		)	(119,863		)	(247,076		)	(242,371		)
Depreciation expense	1,605			1,767			4,222			4,249
Deferred income tax	27,036			(10,923		)	63,123			16,532
Accrued income tax	14,331			94,572			(11,404		)	76,115
Interest credited to universal life and investment products	237,391			246,524			490,348			494,693
Policy fees assessed on universal life and investment products	(165,564		)	(150,168		)	(343,102		)	(299,620		)
Change in reinsurance receivables	(52,141		)	(109,328		)	(115,097		)	(214,223		)
Change in accrued investment income and other receivables	(13,846		)	(19,609		)	(23,150		)	(2,936		)
Change in policy liabilities and other policyholders’ funds of traditional life and health products	(13,730		)	63,597			58,106			241,080
Trading securities:
Maturities and principal reductions of investments	105,170			89,700			172,470			175,017
Sale of investments	300,010			244,133			456,232			319,383
Cost of investments acquired	(275,880		)	(272,249		)	(498,105		)	(468,303		)
Other net change in trading securities	(36,908		)	(26,432		)	2,549			(33,950		)
Change in other liabilities	(65,551		)	(36,706		)	(129,974		)	(53,129		)
Other income - surplus note repurchase	(10,095		)	—			(29,757		)	—
Other, net	(2,752		)	43,539			54,793			53,015
Net cash provided by operating activities	82,163			176,885			205,618			329,833
Cash flows from investing activities
Maturities and principal reductions of investments, available-for-sale	651,848			591,892			933,011			886,859
Sale of investments, available-for-sale	284,736			1,034,545			1,741,381			1,977,830
Cost of investments acquired, available-for-sale	(997,934		)	(2,405,763		)	(2,631,205		)	(3,625,117		)
Mortgage loans:
New borrowings	(122,370		)	(30,531		)	(267,724		)	(150,743		)
Repayments	135,824			69,363			239,351			148,701
Change in investment real estate, net	(440		)	44			(5,302		)	86
Change in policy loans, net	9,128			10,696			12,252			19,171
Change in other long-term investments, net	(34,713		)	(17,308		)	(72,394		)	(29,210		)
Change in short-term investments, net	(22,283		)	411,313			105,785			81,077
Net unsettled security transactions	148,319			157,162			187,885			215,258
Purchase of property and equipment	(4,826		)	(1,645		)	(6,902		)	(5,119		)
Payments for business acquisitions	(20,418		)	—			(209,609		)	—
Net cash provided by (used in) investing activities	26,871			(180,232		)	26,529			(481,207		)
Cash flows from financing activities
Issuance (repayment) of non-recourse funding obligations	(35,700		)	—			(90,700		)	(180,000		)
Dividend paid to the parent company							(25,000		)	—
Investments product deposits and change in universal life deposits	996,367			785,155			2,101,553			1,827,781
Investment product withdrawals	(1,081,920		)	(797,767		)	(2,060,672		)	(1,529,502		)
Other financing activities, net	(24,911		)	(4,305		)	(23,895		)	(3,943		)
Net cash used in financing activities	(146,164		)	(16,917		)
Net cash (used in) provided by financing activities							(98,714		)	114,336
Change in cash	(37,130		)	(20,264		)	133,433			(37,038		)
Cash at beginning of period	236,998			162,858			236,998			162,858
Cash at end of period	$	199,868		$	142,594		$	370,431		$	125,820

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.BASIS OF PRESENTATION

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements of Protective Life Insurance Company (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair statement of the results for the interim periods presented. Operating results for the three ~~months~~and six month periods ended ~~March 31,~~June 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The Company is a wholly owned subsidiary of Protective Life Corporation (“PLC”).

The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to changing competition, economic conditions, interest rates, investment performance, insurance ratings, claims, persistency, and other factors.

Reclassifications

Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income or shareowner’s equity.

Entities Included

The consolidated condensed financial statements include the accounts of Protective Life Insurance Company and its affiliate companies in which the Company holds a majority voting or economic interest. Intercompany balances and transactions have been eliminated.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Pronouncements Recently Adopted

Accounting Standard Update (“ASU” or “Update”) No. 2010-06 — Fair Value Measurements and Disclosures — Improving Disclosures about Fair Value Measurements. In January of 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-06 — Fair Value Measurements and Disclosures — Improving Disclosures about Fair Value Measurements. This Update provides amendments to Subtopic 820-10 that ~~require~~requires the following new disclosures. 1) A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).

This Update provides amendments to Subtopic 820-10 that ~~clarify~~clarifies existing disclosures. 1) A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. 2) A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. This Update also includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets (Subtopic 715-20). The conforming amendments to Subtopic 715-20 change the terminology from major categories of assets to classes of assets and provide a cross reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures. This

Table of Contents

Update is effective for interim and annual reporting periods beginning after December 15, 2009, which the Company adopted for the period ending March 31, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures were adopted by the Company as of January 1, 2011. This Update did not have ~~a material~~an impact on the Company’s consolidated condensed results of operations or financial position.

ASU No. 2010-15 — Financial Services—Insurance — How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments. The amendments in this Update clarify that an insurance entity should not consider any separate account interests held for the benefit of policy holders in an investment to be the insurer’s interests. The entity should not combine general account and separate account interests in the same investment when assessing the investment for consolidation. Additionally, the amendments do not require an insurer to consolidate an investment in which a separate account holds a controlling financial interest if the investment is not or would not be consolidated in the standalone financial statements of the separate account. The amendments in this Update also provide guidance on how an insurer should consolidate an investment fund in situations in which the insurer concludes that consolidation is required. This Update is effective for fiscal years beginning after December 15, 2010. For the Company this Update became effective January 1, 2011. This Update did not have an impact on the Company’s consolidated condensed results of operations or financial position.

ASU No. 2010-28 — Intangibles — Goodwill and Other — When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this Update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. This Update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. This Update was effective for the Company as of January 1, 2011. This Update did not have an impact on the Company’s results of operations or financial position.

Accounting Pronouncements Not Yet Adopted

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

ASU No. 2011-02 — Receivables — A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The objective of this Update is to evaluate whether a restructuring constitutes a troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: 1) the restructuring constitutes a concession and 2) the debtor is experiencing financial difficulties. This Update also clarifies the guidance on a creditor’s evaluation of whether it has granted a concession. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For the Company, this Update will become effective on July 1, 2011. The Company is currently evaluating the impact this Update will have on its results of operations or financial position.

ASU No. 2011-03 — Transfers and Servicing - Reconsideration of Effective Control for Repurchase Agreements. This Update amends the assessment of effective control for repurchase agreements to remove 1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and 2) the collateral maintenance implementation guidance related to the criterion. The Boards determined that these criterion should not be a determining factor of effective control. This Update is effective for the first interim or annual period beginning on or after December 15,

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~~2011, for~~2011. For the Company, the Update will be applied to all repurchase agreements beginning January 1, 2012. The Company is currently evaluating the ~~possible~~ impact this Update will have on its results of operations or financial position.

ASU No. 2011-04 — Fair Value Measurement - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.The amendments in this Update result in common fair value measurement and disclosure requirements in GAAP and IFRSs. The amendments change the wording used to describe many of the requirements for measuring fair value and for disclosing information about fair value measurements. The intent of this ~~Update.~~Update was not to change the application of the requirements in Topic 820. Some of the amendments clarify the intent regarding the application of existing fair value measurement requirements. The Update did modify several principles or requirements for measuring fair value or for disclosing information about fair value measurements. These changes are effective for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact this Update will have on its results of operations or financial position.

ASU No. 2011-05 — Comprehensive Income — Presentation of Comprehensive Income. In this Update, a company has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in 1) a single continuous statement of comprehensive income, or 2) in two separate but consecutive statements. In both choices, a company is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this Update do not change the items that must be reported in other comprehensive income, or the timing of its subsequent reclassification to net income. This Update is effective January 1, 2012. The Company is currently evaluating the appropriate format to which it will adhere.

Significant Accounting Policies

For a full description of significant accounting policies, see Note 2 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. There were no significant changes to the Company’s accounting policies during the ~~three~~six months ended ~~March 31,~~June 30, 2011, except as noted above.

3. SIGNIFICANT ACQUISITIONS

On December 31, 2010, the Company completed the acquisition of all of the outstanding stock of United Investors Life Insurance Company (“United Investors”), pursuant to a Stock Purchase Agreement, between the Company, Torchmark Corporation (“Torchmark”) and its wholly owned subsidiaries, Liberty National Life Insurance Company (“Liberty National”) and United Investors.

The Company accounted for this transaction under the purchase method of accounting as required by FASB guidance under the ASC Business Combinations topic. This guidance requires that the total purchase price be allocated to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The aggregate purchase price for United Investors was $363.3 million.

On April 29, 2011, the Company closed a previously announced and unrelated reinsurance transaction with Liberty Life Insurance Company (“Liberty Life”) under the terms of which the Company reinsured substantially all of the life and health business of Liberty Life. The transaction closed in conjunction with Athene Holding Ltd’s acquisition of Liberty Life from an affiliate of Royal Bank of Canada. The capital invested by the Company in the transaction at closing was $321 million, including a $225 million ceding commission which has been recorded and is subject to adjustment upon completion of the final Liberty Life closing statutory balance sheet. In conjunction with the closing, the Company invested $40 million in a surplus note issued by Athene Life Re. The Company accounted for this transaction in a manner consistent with the purchase method of accounting as required by FASB guidance under the ASC Business Combinations topic. This guidance requires that the total consideration paid be allocated to the assets acquired and liabilities assumed based on their fair values at the transaction date.

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The following table summarizes the fair values of the net assets acquired from the Liberty Life reinsurance transaction as of the transaction date:

	Fair Value as of
	April 29, 2011
	(Dollars In Thousands)
ASSETS
Investments	$	1,768,297
Cash	35,959
Accrued investment income	154
Accounts and premiums receivable, net	877
Reinsurance receivable	9,511
Value of business acquired	135,876
Other assets	1
Total assets	1,950,675
LIABILITIES
Policy liabilities and accrual	1,665,294
Annuity account balances	4,420
Other policyholders’ funds	24,977
Other liabilities	30,834
Total liabilities	1,725,525

NET ASSETS ACQUIRED	$	225,150

The following (unaudited) pro forma condensed consolidated results of operations assumes that the aforementioned transactions with Liberty Life and United Investors were completed as of January 1, 2010:

	For The				For The
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
	(Dollars In Thousands)
Revenue	$	887,017	$	809,184	$	1,750,231	$	1,703,805

Net income	$	97,691	$	75,601	$	168,844	$	181,127

4. INVESTMENT OPERATIONS

Net realized investment gains (losses) for all other investments are summarized as follows:

	For The			For The			For The
	Three Months Ended			Three Months Ended			Six Months Ended
	March 31, 2011			June 30, 2011			June 30, 2011
	(Dollars In Thousands)			(Dollars In Thousands)
Fixed maturities	$	5,262		$	30,418		$	35,680
Equity securities	9,100			21			9,121
Impairments on fixed maturity securities	(5,662		)	(9,435		)	(15,098		)
Impairments on equity securities	—			—			—
Modco trading portfolio	(5,649		)	33,603			27,954
Other investments	1,827			412			2,240
Total realized gains (losses) - investments	$	4,878		$	55,019		$	59,897

For the three and six months ended ~~March 31,~~June 30, 2011, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were ~~$14.6~~$31.9 million and $46.5 million and gross realized losses were ~~$5.8~~$10.7 million and $16.5 million, including ~~$5.6~~$9.1 million and $14.7 million of impairment ~~losses.~~losses,

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respectively. The ~~$5.6~~$9.1 million ~~excludes $0.1~~and $14.7 million exclude $0.3 million and $0.4 million of impairment losses in the trading portfolio for the three and six months ended ~~March 31, 2011.~~June 30, 2011, respectively.

The $9.1 million of gains included in equity securities primarily relates to gains of $6.9 million on securities that have recovered in value as the issuer exited bankruptcy and $1.2 million that relates to gains recognized on the sale of Federal National Mortgage Association preferreds.

For the three and six months ended ~~March 31,~~June 30, 2011, the Company sold securities in an unrealized gain position with a fair value (proceeds) of ~~$235.7 million.~~$1.3 billion and $1.5 billion, respectively. The gain realized on the sale of these securities was ~~$14.6 million.~~$31.9 million and $46.5 million, respectively.

For the three and six months ended ~~March 31,~~June 30, 2011, the Company sold securities in an unrealized loss position with a fair value (proceeds) of ~~$20.0 million.~~$141.9 million and $161.9 million, respectively. The loss realized on the sale of these securities was ~~$0.2 million.~~

~~Table of Contents~~$1.5 million and $1.7 million, respectively.

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

			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	(Dollars In Thousands)									(Dollars In Thousands)
Fixed maturities:
Bonds
Residential mortgage-backed securities	$	2,341,357	$	49,152	$	(101,806	)	$	2,288,703	$	2,536,158	$	56,240	$	(108,778	)	$	2,483,620
Commercial mortgage-backed securities	177,249		5,409		(1,106		)	181,552		282,527		5,971		(2,045		)	286,453
Other asset-backed securities	889,737		1,236		(30,505		)	860,468		875,894		1,276		(32,907		)	844,263
U.S. government-related securities	1,205,592		27,064		(5,548		)	1,227,108		1,097,064		36,511		(2,262		)	1,131,313
Other government-related securities	164,395		5,231		(46		)	169,580		135,993		7,126		—			143,119
States, municipals, and political subdivisions	979,512		11,809		(21,069		)	970,252		1,140,856		41,744		(7,852		)	1,174,748
Corporate bonds	15,317,163		935,157		(155,014		)	16,097,306		16,168,681		1,119,092		(133,895		)	17,153,878
	21,075,005		1,035,058		(315,094		)	21,794,969		22,237,173		1,267,960		(287,739		)	23,217,394
Equity securities	289,893		12,884		(4,239		)	298,538		290,210		8,460		(5,011		)	293,659
Short-term investments	249,976		—		—			249,976		32,511		—		—			32,511
	$	21,614,874	$	1,047,942	$	(319,333	)	$	22,343,483	$	22,559,894	$	1,276,420	$	(292,750	)	$	23,543,564

As of ~~March 31,~~June 30, 2011, the Company had an additional $2.9 billion of fixed maturities, ~~$11.4~~$11.3 million of equity securities, and ~~$155.4~~$102.2 million of short-term investments classified as trading securities.

The amortized cost and fair value of available-for-sale fixed maturities as of ~~March 31,~~June 30, 2011, by expected maturity, are shown below. Expected maturities of securities without a single maturity date are allocated based on estimated rates of prepayment that may differ from actual rates of prepayment.

	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(Dollars In Thousands)				(Dollars In Thousands)
Due in one year or less	$	397,102	$	408,675	$	625,122	$	639,940
Due after one year through five years	4,723,835		4,884,852		3,710,322		3,871,112
Due after five years through ten years	5,339,213		5,589,634		6,299,458		6,650,516
Due after ten years	10,614,855		10,911,808		11,602,271		12,055,826
	$	21,075,005	$	21,794,969	$	22,237,173	$	23,217,394

Each quarter the Company reviews investments with unrealized losses and tests for other-than-temporary impairments. The Company analyzes various factors to determine if any specific other-than-temporary asset impairments exist. These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) an assessment of the Company’s intent to sell the security (including a more likely than not assessment of whether the Company will be required to sell the security) before recovering the security’s amortized cost, 5) the time period during which the decline has occurred, 6) an economic analysis of the issuer’s industry, and 7) the financial strength, liquidity, and recoverability of the issuer. Management performs a

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security by security review each quarter in evaluating the need for any other-than-temporary impairments. Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures considered, and in some cases, an analysis regarding the Company’s expectations for recovery of the security’s entire amortized cost basis through the receipt of future cash flows is performed. Once a determination has been made that a specific other-than-temporary impairment exists, the security’s basis is adjusted and an other-than-temporary impairment is recognized. Equity securities that are other-than-temporarily impaired are written down to fair value with a realized loss recognized in earnings. Other-than-temporary impairments to debt securities that the Company does not intend to sell and does not expect to be required to sell before recovering the security’s amortized cost are written down to discounted expected future cash flows (“post impairment cost”) and credit losses are recorded in earnings. The difference between the securities’ discounted expected future cash flows and the fair value of the securities is recognized in other comprehensive income (loss) as a non-credit portion of the recognized other-than-temporary impairment. When calculating the post impairment cost for residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), and other asset-backed securities, the Company considers all known market data related to cash flows to estimate future cash flows. When calculating the post impairment cost for corporate debt securities, the Company considers all contractual cash flows to estimate

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expected future cash flows. To calculate the post impairment cost, the expected future cash flows are discounted at the original purchase yield. Debt securities that the Company intends to sell or expects to be required to sell before recovery are written down to fair value with the change recognized in earnings.

During the three and six months ended ~~March 31,~~June 30, 2011, the Company recorded other-than-temporary impairments on investments of ~~$16.0~~$15.6 million and $31.6 million, respectively, related to debt securities. Of the ~~$16.0~~$15.6 million of impairments for the three months ended ~~March 31,~~June 30, 2011, ~~$5.7~~$9.4 million was recorded in earnings and ~~$10.3~~$6.2 million was recorded in other comprehensive income (loss). ~~For~~Of the ~~three~~$31.6 million of impairments for the six months ended ~~March 31,~~June 30, 2011, ~~there were no other-than-temporary impairments related to equity securities.~~$15.1 million was recorded in earnings and $16.5 million was recorded in other comprehensive income (loss). During this period, there were no other-than-temporary impairments related to debt securities or equity securities that the Company intends to sell or expects to be required to sell, except with respect to certain debt securities that were part of the Company’s collateral in its securities lending program.

AtFor the ~~end of the period, the Company decided~~three and six months ended June 30, 2011, there were no other-than-temporary impairments related to discontinue this program. The Company believed that certain debt securities that were part of this program’s collateral, and were in an unrealized loss position, will be sold prior to their respective maturities. Therefore, the Company recorded a $1.3 million other-than-temporary impairment loss on these securities during the period.equity securities.

The following chart is a rollforward of credit losses on debt securities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss):

	For The					For The					For The
	Three Months Ended					Three Months Ended					Six Months Ended
	March 31,					June 30,					June 30,
	2011			2010		2011		2010			2011			2010
	(Dollars In Thousands)					(Dollars In Thousands)
Beginning balance	$	39,275		$	25,066	$	40,463	$	33,356		$	39,275		$	25,066
Additions for newly impaired securities	3,609			6,556		5,765		12,869			9,374			19,425
Additions for previously impaired securities	668			1,734		3,415		17			4,083			1,751
Reductions for previously impaired securities due to a change in expected cash flows	—			—		—		—			—			—
Reductions for previously impaired securities that were sold in the current period	(3,089		)	—		—		(14,701		)	(3,089		)	(14,701		)
Ending balance	$	40,463		$	33,356	$	49,643	$	31,541		$	49,643		$	31,541

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The following table includes investments’ gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of ~~March 31,~~June 30, 2011:

	Less Than 12 Months					12 Months or More					Total					Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss			Value		Loss			Value		Loss			Value		Loss
	(Dollars In Thousands)															(Dollars In Thousands)
Residential mortgage-backed securities	$	273,938	$	(21,813	)	$	781,233	$	(79,993	)	$	1,055,171	$	(101,806	)	$	451,222	$	(22,814	)	$	681,851	$	(85,964	)	$	1,133,073	$	(108,778	)
Commercial mortgage-backed securities	33,147		(1,106		)	—		—			33,147		(1,106		)	109,354		(2,045		)	—		—			109,354		(2,045		)
Other asset-backed securities	89,807		(2,269		)	579,475		(28,236		)	669,282		(30,505		)	78,404		(1,556		)	584,735		(31,351		)	663,139		(32,907		)
U.S. government-related securities	272,367		(5,548		)	—		—			272,367		(5,548		)	214,222		(2,262		)	—		—			214,222		(2,262		)
Other government-related securities	28,854		(40		)	14,994		(6		)	43,848		(46		)	—		—			—		—			—		—
States, municipals, and political subdivisions	560,651		(21,069		)	—		—			560,651		(21,069		)	232,750		(6,214		)	23,362		(1,638		)	256,112		(7,852		)
Corporate bonds	2,631,082		(82,535		)	741,114		(72,479		)	3,372,196		(155,014		)	2,079,383		(67,096		)	559,191		(66,799		)	2,638,574		(133,895		)
Equities	15,596		(2,296		)	13,345		(1,943		)	28,941		(4,239		)	20,950		(2,956		)	13,199		(2,055		)	34,149		(5,011		)
	$	3,905,442	$	(136,676	)	$	2,130,161	$	(182,657	)	$	6,035,603	$	(319,333	)	$	3,186,285	$	(104,943	)	$	1,862,338	$	(187,807	)	$	5,048,623	$	(292,750	)

The RMBS have a gross unrealized loss greater than twelve months of ~~$80.0~~$86.0 million as of ~~March 31,~~June 30, 2011. These losses relate to a widening in spreads and defaults as a result of continued weakness in the residential housing market which have reduced the fair value of the RMBS holdings. Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of ~~the~~these investments.

The other asset-backed securities have a gross unrealized loss greater than twelve months of ~~$28.2~~$31.4 million as of ~~March 31,~~June 30, 2011. This category predominately includes student-loan backed auction rate securities whose underlying collateral is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). These

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losses relate to the auction rate securities (“ARS”) market collapse during 2008. At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary. In addition, the Company has the ability and intent to hold these securities until their values recover or until maturity.

The corporate bonds category has gross unrealized losses greater than twelve months of ~~$72.5~~$66.8 million as of ~~March 31,~~June 30, 2011. These losses relate primarily to fluctuations in credit spreads. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information including the Company’s ability and intent to hold these securities to recovery.

The Company does not consider these unrealized loss positions to be other-than-temporary, based on the factors discussed and because the Company has the ability and intent to hold these investments until the fair values recover, and does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost ~~basis.~~of debt securities.

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	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(Dollars In Thousands)
Residential mortgage-backed securities	$	236,615	$	(17,773	)	$	1,167,747	$	(126,304	)	$	1,404,362	$	(144,077	)
Commercial mortgage-backed securities	25,679		(933		)	—		—			25,679		(933		)
Other asset-backed securities	167,089		(2,452		)	594,756		(27,212		)	761,845		(29,664		)
U.S. government-related securities	144,807		(3,071		)	—		—			144,807		(3,071		)
Other government-related securities	33,936		(8		)	14,993		(7		)	48,929		(15		)
States, municipals, and political subdivisions	563,352		(22,345		)	—		—			563,352		(22,345		)
Corporate bonds	2,262,224		(82,409		)	830,351		(94,408		)	3,092,575		(176,817		)
Equities	11,950		(3,321		)	13,344		(1,921		)	25,294		(5,242		)
	$	3,445,652	$	(132,312	)	$	2,621,191	$	(249,852	)	$	6,066,843	$	(382,164	)

The RMBS have a gross unrealized loss greater than twelve months of $126.3 million as of December 31, 2010. These losses relate to a widening in spreads and defaults as a result of continued weakness in the residential housing market which have reduced the fair value of the RMBS holdings. Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of the investments.

The other asset-backed securities have a gross unrealized loss greater than twelve months of $27.2 million as of December 31, 2010. This category predominately includes student-loan backed auction rate securities whose underlying collateral is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). These losses relate to the auction rate securities (“ARS”) market collapse during 2008. At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary. In addition, the Company has the ability and intent to hold these securities until their values recover or maturity.

The corporate bonds category has gross unrealized losses greater than twelve months of $94.4 million as of December 31, 2010. These losses relate primarily to fluctuations in credit spreads. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information including the Company’s ability and intent to hold these securities to recovery.

As of ~~March 31,~~June 30, 2011, the Company had securities in its available-for-sale portfolio which were rated below investment grade of ~~$2.7~~$2.4 billion and had an amortized cost of ~~$2.8~~$2.5 billion. In addition, included in the Company’s trading portfolio, the Company held ~~$290.5~~$242.6 million of securities which were rated below investment grade. Approximately ~~$566.5~~$523.1 million of the below investment grade securities were not publicly traded.

The change in unrealized gains (losses), net of income tax, on fixed maturity and equity securities, classified as available-for-sale is summarized as follows:

	For The			For The			For The
	Three Months Ended			Three Months Ended			Six Months Ended
	March 31, 2011			June 30, 2011			June 30, 2011
	(Dollars In Thousands)			(Dollars In Thousands)
Fixed maturities	$	28,232		$	169,167		$	197,399
Equity securities	(415		)	(3,377		)	(3,793		)

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4.5. MORTGAGE LOANS

The Company invests a portion of its investment portfolio in commercial mortgage loans. As of ~~March 31,~~June 30, 2011, the Company’s mortgage loan holdings were approximately ~~$4.9~~$5.3 billion.

As of ~~March 31,~~June 30, 2011 and December 31, 2010, the Company had an allowance for mortgage loan credit losses of ~~$4.3~~$3.8 million and $11.7 million, respectively. Over the past ten years, the Company’s commercial mortgage loan portfolio has experienced an average credit loss factor of approximately ~~0.2%~~0.02%. Due to such low historical losses, the Company believes that a collectively evaluated allowance would be inappropriate. The Company believes an allowance calculated through an analysis of specific loans that are believed to have a higher risk of credit impairment provides a more accurate presentation of expected losses in the portfolio and is consistent with the applicable guidance for loan impairments in Subtopic 310. Since the Company uses the specific identification method for calculating reserves, it is necessary to review the economic situation of each borrower to determine those that have higher risk of credit impairment. The Company has a team of professionals that ~~monitor~~monitors borrower conditions such as payment practices, borrower credit, operating performance, and property conditions, as well as ensuring the timely payment of property taxes and insurance. Through this monitoring process, the Company assesses the risk of each borrower. When issues are identified, the severity of the issues ~~are~~is assessed and reviewed for possible credit impairment. If a loss is probable, an expected loss calculation is performed and an allowance is established for that borrower. A loan may be subsequently charged off at such point that the Company no longer expects to receive cash payments, the present value of future expected payments of the renegotiated loan is less than the current principal balance, or at such time that the Company is party to foreclosure or bankruptcy proceedings associated with the borrower and does not expect to recover the principal balance of the loan. A charge off is recorded by eliminating the allowance against the mortgage loan and recording the renegotiated loan or the collateral property related to the loan as investment real estate on the balance sheet, which is carried at the lower of the appraised fair value of the property or the unpaid principal balance of the loan, less estimated selling costs associated with the property.

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As of March 31, 2011, delinquent mortgage loans, foreclosed properties, and restructured loans pursuant to a pooling and servicing agreement totaled $19.6 million were less than 0.1% of invested assets. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities. The Company’s mortgage loan portfolio consists of two categories of loans: 1) those not subject to a pooling and servicing agreement and 2) those previously a part of variable interest entity securitizations and thus subject to a contractual pooling and servicing agreement. The loans subject to a pooling and servicing agreement have been included on our consolidated condensed balance sheet ~~(“balance sheet”)~~ beginning in the first quarter of 2010 in accordance with ASU 2009-17.

For loans not subject to a pooling and servicing agreement, as of ~~March 31,~~June 30, 2011, ~~$3.0~~$13.4 million, or ~~0.1%~~0.3%, of the mortgage loan portfolio was nonperforming. ~~In addition, as~~As of ~~March 31,~~June 30, 2011, ~~$16.6 million, 0.3%, of the~~delinquent mortgage ~~loan portfolio that is subject~~loans, foreclosed properties, and restructured loans pursuant to a pooling and servicing agreement totaled $20.2 million, and were less than 0.1% of invested assets. This amount pursuant to a pooling and servicing agreement includes $19.7 million, or 0.4%, that was either nonperforming or has been restructured under the terms and conditions of the pooling and service agreement.

The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities.

An analysis of the change in the allowance for mortgage loan credit losses is provided in the following chart:

	As of						As of
	March 31, 2011			December 31, 2010			June 30, 2011			December 31, 2010
	(Dollars In Thousands)						(Dollars In Thousands)
Beginning balance	$	11,650		$	1,725		$	11,650		$	1,725
Charge offs	(8,008		)	(1,146		)	(9,358		)	(1,146		)
Recoveries	(2,000		)	—			(2,705		)	—
Provision	2,643			11,071			4,253			11,071
Ending balance	$	4,285		$	11,650		$	3,840		$	11,650

It is the Company’s policy to cease to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is the Company’s general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. For loans subject to a pooling and

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servicing agreement, there are certain additional restrictions and/or requirements related to workout proceedings, and as such, these loans may have different attributes and/or circumstances affecting the status of delinquency or categorization of those in nonperforming status. An analysis of the delinquent loans is shown in the following chart as of ~~March 31,~~June 30, 2011:

					Greater								Greater
	30-59 Days		60-89 Days		than 90 Days		Total		30-59 Days		60-89 Days		than 90 Days		Total
	Delinquent		Delinquent		Delinquent		Delinquent		Delinquent		Delinquent		Delinquent		Delinquent
	(Dollars In Thousands)								(Dollars In Thousands)
Commercial mortgage loans	$	61,699	$	—	$	3,026	$	64,725	$	40,759	$	5,236	$	11,721	$	57,716
Number of delinquent commercial mortgage loans	8		—		1		9		8		2		6		16

The Company’s commercial mortgage loan portfolio consists of mortgage loans that are collateralized by real estate. Due to the collateralized nature of the loans, any assessment of impairment and ultimate loss given a default on the loans is based upon a consideration of the estimated fair value of the real estate. The Company limits accrued interest income on impaired loans to ninety days of interest. Once accrued interest on the impaired loan is received, interest income is recognized on a cash basis. For information regarding impaired loans, please refer to the following chart as of ~~March 31,~~June 30, 2011:

Unpaid

Average

Interest

Cash Basis

Recorded

Principal

Related

Recorded

Income

Interest

Investment

Balance

Allowance

Investment

Recognized

Income

(Dollars In Thousands)

Commercial mortgage loans:

With no related allowance recorded

$
3,740

$
3,740

$
—

$
1,870

$
35

$
35

With an allowance recorded

22,066

22,066

4,285

4,413

119

119

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			Unpaid				Average		Interest		Cash Basis
	Recorded		Principal		Related		Recorded		Income		Interest
	Investment		Balance		Allowance		Investment		Recognized		Income
	(Dollars In Thousands)
Commercial mortgage loans:
With no related allowance recorded	$	12,510	$	12,510	$	—	$	1,787	$	35	$	56
With an allowance recorded	13,282		13,282		3,840		4,428		101		118

5.6. GOODWILL

During the ~~three~~six months ended ~~March 31,~~June 30, 2011, the Company decreased its goodwill balance by approximately ~~$0.8~~$1.5 million. The decrease was due to adjustments in the Acquisitions segment related to tax benefits realized during 2011 on the portion of tax goodwill in excess of GAAP basis goodwill. As of ~~March 31,~~June 30, 2011, the Company had an aggregate goodwill balance of ~~$89.2~~$88.4 million.

Accounting for goodwill requires an estimate of the future profitability of the associated lines of business to assess the recoverability of the capitalized acquisition goodwill. The Company evaluates the carrying value of goodwill at the segment (or reporting unit) level at least annually and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: 1) a significant adverse change in legal factors or in business climate, 2) unanticipated competition, or 3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compared its estimate of the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The Company utilizes a fair value measurement (which includes a discounted cash flows analysis) to assess the carrying value of the reporting units in consideration of the recoverability of the goodwill balance assigned to each reporting unit as of the measurement date. The Company’s material goodwill balances are attributable to certain of its operating segments (which are each considered to be reporting units). The cash flows used to determine the fair value of the Company’s reporting units are dependent on a number of significant assumptions. The Company’s estimates, which consider a market participant view of fair value, are subject to change given the inherent uncertainty in predicting future results and cash flows, which are impacted by such things as policyholder behavior, competitor pricing, capital limitations, new product introductions, and specific industry and market conditions. Additionally, the discount rate used is based on the Company’s judgment of the appropriate rate for each reporting unit based on the relative risk associated with the projected cash flows. As of December 31, 2010, the Company performed its annual evaluation of goodwill and determined that no adjustment to impair goodwill was necessary.

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6.7. DEBT AND OTHER OBLIGATIONS

Non-recourse funding obligations outstanding as of ~~March 31,~~June 30, 2011, on a consolidated basis, are shown in the following table:

				Year-to-Date					Year-to-Date
				Weighted-Avg					Weighted-Avg
Issuer	Balance		Maturity Year	Interest Rate		Balance		Maturity Year	Interest Rate
	(Dollars In Thousands)					(Dollars In Thousands)
Golden Gate Captive Insurance Company	$	800,000	2037	7.97	%	$	800,000	2037	7.97	%
Golden Gate II Captive Insurance Company	525,100		2052	1.40	%	470,100		2052	1.35	%
Total	$	1,325,100				$	1,270,100

During the first six months of 2011, the Company repurchased $90.7 million of its outstanding non-recourse funding obligations, at a discount. These repurchases resulted in a $29.8 million gain for the Company.

Golden Gate Captive Insurance Company (“Golden Gate”), a South Carolina special purpose financial captive insurance company and wholly owned subsidiary, had three series of Surplus Notes with a total outstanding balance of $800 million as of ~~March 31,~~June 30, 2011. PLC holds the entire outstanding balance of Surplus Notes. The Series A1 Surplus Notes have a balance of $400 million and accrue interest at 7.375%, the Series A2 Surplus Notes have a balance of $100 million and accrue interest at 8%, and the Series A3 Surplus Notes have a balance of $300 million and accrue interest at 8.45%.

Golden Gate II Captive Insurance Company (“Golden Gate II”), a wholly owned special purpose financial captive insurance company, had ~~$575.0~~$575 million of non-recourse funding obligations outstanding as of ~~March 31,~~June 30, 2011. These outstanding non-recourse funding obligations were issued to special purpose trusts, which in turn issued securities to third parties. Certain of our affiliates purchased a portion of these securities during 2010 and 2011. As a result of these purchases, as of ~~March 31,~~June 30, 2011, securities related to ~~$496.7~~$438.3 million of the outstanding balance of the non-recourse funding obligations was held by external parties, securities related to ~~$28.4~~$31.8 million of the non-recourse funding obligations was held by a nonconsolidated ~~affiliate,~~affiliates, and ~~$49.9~~$104.9 million was held by a consolidated ~~subsidiary~~subsidiaries of the Company.

Under a revolving line of credit arrangement, the Company has the ability to borrow on an unsecured basis up to an aggregate principal amount of $500 million (the “Credit Facility”). The Company has the right in certain circumstances to request that the commitment under the Credit Facility be increased up to a maximum principal

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amount of $600 million. Balances outstanding under the Credit Facility accrue interest at a rate equal to (i) either the prime rate or the London Interbank Offered Rate (“LIBOR”), plus (ii) a spread based on the ratings of PLC’s senior unsecured long-term debt. The Credit Agreement provides that we are liable for the full amount of any obligations for borrowings or letters of credit, excluding those of PLC, under the Credit Facility. The maturity date on the Credit Facility is April 16, 2013. The Company did not have an outstanding balance under the Credit Facility as of ~~March 31,~~June 30, 2011. PLC had an outstanding balance of ~~$125.0~~$135.0 million at an interest rate of LIBOR plus 0.40% under the Credit Facility as of ~~March 31,~~June 30, 2011.

7.8. COMMITMENTS AND CONTINGENCIES

Under insurance guaranty fund laws, in most states insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer’s own financial strength.

A number of civil jury verdicts have been returned against insurers, broker dealers and other providers of financial services involving sales, refund or claims practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or persons with whom the insurer does business, and other matters. Often these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited appellate review. In addition, in some class action and other lawsuits, companies

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have made material settlement payments. The Company, in the ordinary course of business, is involved in such litigation and arbitration. The occurrence of such litigation and arbitration may become more frequent and/or severe when general economic conditions have deteriorated. The Company is unable to predict the outcome of such litigation and arbitration and is unable to provide a reasonable range of possible losses. Although the Company cannot predict the outcome of any such litigation or arbitration, the Company does not believe that any such outcome will have a material impact, either individually or in the aggregate, on its financial condition or results of the operations. Given the inherent difficulty in predicting the outcome of such legal proceedings, however, it is possible that an adverse outcome in certain such matters could be material to the Company’s financial condition or results of operations for any particular reporting period.

8.9. COMPREHENSIVE INCOME (LOSS)

The following table sets forth the Company’s comprehensive income (loss) for the periods presented below:

For The

Three Months Ended

March 31,

2011

2010

(Dollars In Thousands)

Net income

$
70,758

$
76,177

Change in net unrealized (losses) gains on investments, net of income tax: (three months: 2011 - $17,829; 2010 - $141,790)

33,117

262,782

Change in net unrealized (losses) gains relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (three months: 2011 - $(3,629); 2010 - $(3,495))

(6,739
)
(6,492
)
Change in accumulated gain (loss) - derivative, net of income tax: (three months: 2011 - $3,621; 2010 - $3,423)

6,724

5,718

Reclassification adjustment for investment amounts included in net income, net of income tax: (three months: 2011 - $(3,043); 2010 - $1,168)

(5,657
)
2,238

Reclassification adjustment for derivative amounts included in net income, net of income tax: (three months: 2011 - $(361); 2010 - $(974))

(671
)
(1,752
)
Comprehensive income (loss)

$
97,532

$
338,671

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	For The						For The
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	(Dollars In Thousands)
Net income	$	97,049		$	40,614		$	167,807		$	116,791
Change in net unrealized (losses) gains on investments, net of income tax: (three months: 2011 - $85,407; 2010 - $130,532; six months: 2011 - $103,236; 2010 - $272,322)	158,618			242,408			191,735			505,190
Change in net unrealized (losses) gains relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (three months: 2011 - $(5,407); 2010 - $(6,924); six months: 2011 - $(9,036); 2010 - $(10,419))	(10,043		)	(12,860		)	(16,782		)	(19,352		)
Change in accumulated gain (loss) - derivative, net of income tax: (three months: 2011 - $(1,777); 2010 - $(3,229); six months: 2011 - $1,844; 2010 - $(194))	(3,299		)	(5,952		)	3,425			(234		)
Reclassification adjustment for investment amounts included in net income, net of income tax: (three months: 2011 - $(7,349); 2010 - $3,801; six months: 2011 - $(10,392); 2010 - $4,969)	(13,654		)	7,069			(19,311		)	9,307
Reclassification adjustment for derivative amounts included in net income, net of income tax: (three months: 2011 - $238; 2010 - $768; six months: 2011 - $(123); 2010 - $(206))	443			1,382			(228		)	(370		)
Comprehensive income (loss)	$	229,114		$	272,661		$	326,646		$	611,332

9.10. STOCK-BASED COMPENSATION

During the ~~three~~six months ended ~~March 31,~~June 30, 2011, 191,000 performance shares with an estimated fair value of $5.4 million were issued by PLC. The criteria for payment of the 2011 performance awards is based primarily on PLC’s average operating return on average equity (“ROE”) over a three-year period. If PLC’s ROE is below 9.0%, no award is earned. If PLC’s ROE is at or above 10.0%, the award maximum is earned. Awards are paid in shares of PLC’s common stock. No performance share awards were issued during the ~~three~~six months ended ~~March 31,~~June 30, 2010.

Additionally, PLC issued 172,000 restricted stock units for the ~~three~~six months ended ~~March 31,~~June 30, 2011. These awards had a total fair value at grant date of $4.9 million. Approximately half of these restricted stock units vest in 2014, and the remainder vest in 2015.

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Stock appreciation right (“SARs”) have been granted to certain officers of PLC and the Company to provide long-term incentive compensation based solely on the performance of PLC’s common stock. The SARs are exercisable either five years after the date of grants or in three or four equal annual installments beginning one year after the date of grant (earlier upon the death, disability, or retirement of the officer, or in certain circumstances, of a change in control of PLC) and expire after ten years or upon termination of employment. The SARs activity as well as weighted-average base price is as follows:

	Weighted-Average			Weighted-Average
	Base Price per share		No. of SARs	Base Price per share		No. of SARs
Balance as of December 31, 2010	$	21.97	2,324,837	$	21.97	2,324,837
SARs granted	—		—	—		—
SARs exercised / forfeited / expired	5.05		29,141	6.65		41,319
Balance as of March 31, 2011	$	22.18	2,295,696
Balance as of June 30, 2011				$	22.25	2,283,518

There were no SARs issued for the ~~three~~six months ended ~~March 31,~~June 30, 2011. PLC will pay an amount in stock equal to the difference between the specified base price of PLC’s common stock and the market value at the exercise date for each SAR.

~~10.~~11. EMPLOYEE BENEFIT PLANS

Components of the net periodic benefit cost of PLC’s defined benefit pension plan and unfunded excess ~~benefits~~benefit plan are as follows:

	For The						For The						For The
	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2011			2010			2011			2010			2011			2010
	(Dollars In Thousands)						(Dollars In Thousands)
Service cost – benefits earned during the period	$	2,194		$	2,068
Service cost — benefits earned during the period							$	2,194		$	2,068		$	4,388		$	4,136
Interest cost on projected benefit obligation	2,508			2,357			2,508			2,357			5,016			4,714
Expected return on plan assets	(2,512		)	(2,312		)	(2,512		)	(2,312		)	(5,024		)	(4,624		)
Amortization of prior service cost	(98		)	(98		)	(98		)	(98		)	(196		)	(196		)
Amortization of actuarial losses	1,388			1,026			1,388			1,026			2,776			2,052
Total benefit cost	$	3,480		$	3,041		$	3,480		$	3,041		$	6,960		$	6,082

During the ~~three~~six months ended ~~March 31,~~June 30, 2011, PLC contributed $2.1 million to its defined benefit pension plan for the 2010 plan year and $2.3 million for the 2011 plan year. In addition, during ~~April~~July of 2011, PLC contributed $2.3 million to the defined benefit pension plan for the 2011 plan year. PLC will continue to make contributions in future periods as necessary to at least satisfy minimum funding requirements. PLC may also make additional contributions in future periods to maintain an adjusted funding target attainment percentage (“AFTAP”) of at least 80%.

In addition to pension benefits, PLC provides life insurance benefits to eligible retirees and limited healthcare benefits to eligible retirees who are not yet eligible for Medicare. For a closed group of retirees over age 65, PLC provides a prescription drug benefit. The cost of these plans for the ~~three~~six months ended ~~March 31,~~June 30, 2011, was immaterial to PLC’s financial statements.

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~~11.~~12. INCOME TAXES

There have been no material changes to the balance of unrecognized income tax benefits which impacted earnings for the ~~three~~six months ended ~~March 31,~~June 30, 2011. Within the next twelve months, the Company does not expect to have any material adjustments to its unrecognized income tax benefits liability with regard to any of the tax jurisdictions in which it conducts its business operations.

The Company has computed its effective income tax rate for the three and six months ended ~~March 31,~~June 30, 2011 and 2010, based upon its estimate of its annual 2011 and 2010 income. The effective tax rate for the three and six months ended ~~March 31,~~June 30, 2011 was 34.7% and 34.8%, respectively, and 34.7% and 32.7% for the three and six months ended June 30, 2010, ~~was 34.9% and 31.7%,~~ respectively. ~~In the quarter ending March 31, 2010, the effective tax rate was favorably impacted by a release~~

Table of ~~$2.7 million of unrecognized income tax benefits.~~Contents

Based on the Company’s current assessment of future taxable income, including available tax planning opportunities, the Company anticipates that it is more likely than not that it will generate sufficient taxable income to realize all of its material deferred tax assets. The Company did not record a valuation allowance against its material deferred tax assets as of ~~March 31,~~June 30, 2011.

~~12.~~13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company determined the fair value of its financial instruments based on the fair value hierarchy established in FASB guidance referenced in the Fair Value Measurements and Disclosures Topic which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has adopted the provisions from the FASB guidance that is referenced in the Fair Value Measurements and Disclosures Topic for non-financial assets and liabilities (such as property and equipment, goodwill, and other intangible assets) that are required to be measured at fair value on a periodic basis. The effect on the Company’s periodic fair value measurements for non-financial assets and liabilities was not material.

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded at fair value on the consolidated condensed balance sheets are categorized as follows:

· Level 1: Unadjusted quoted prices for identical assets or liabilities in an active market.

· Level 2: Quoted prices in markets that are not active or significant inputs that are observable either directly or indirectly. Level 2 inputs include the following:

a) Quoted prices for similar assets or liabilities in active markets

b) Quoted prices for identical or similar assets or liabilities in non-active markets

c) Inputs other than quoted market prices that are observable

d) Inputs that are derived principally from or corroborated by observable market data through correlation or other means.

· Level 3: Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

1720

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The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of ~~March 31,~~June 30, 2011:

	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)								(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	2,288,684	$	19	$	2,288,703	$	—	$	2,483,613	$	7	$	2,483,620
Commercial mortgage-backed securities	—		181,552		—		181,552		—		286,453		—		286,453
Other asset-backed securities	—		221,061		639,407		860,468		—		206,517		637,746		844,263
U.S. government-related securities	1,102,449		109,575		15,084		1,227,108		898,072		218,241		15,000		1,131,313
States, municipals, and political subdivisions	—		970,252		—		970,252		—		1,174,748		—		1,174,748
Other government-related securities	14,994		154,586		—		169,580		15,016		128,103		—		143,119
Corporate bonds	98		16,032,337		64,871		16,097,306		100		17,035,789		117,989		17,153,878
Total fixed maturity securities - available-for-sale	1,117,541		19,958,047		719,381		21,794,969		913,188		21,533,464		770,742		23,217,394

Fixed maturity securities - trading
Residential mortgage-backed securities	—		400,459		—		400,459		—		348,536		—		348,536
Commercial mortgage-backed securities	—		133,781		—		133,781		—		170,034		—		170,034
Other asset-backed securities	—		50,382		41,713		92,095		—		20,486		41,093		61,579
U.S. government-related securities	383,554		8,280		3,384		395,218		388,541		8,608		3,512		400,661
States, municipals, and political subdivisions	—		170,356		—		170,356		—		208,383		—		208,383
Other government-related securities	—		107,624		—		107,624		—		110,343		—		110,343
Corporate bonds	—		1,549,831		—		1,549,831		3,982		1,541,094		42,041		1,587,117
Total fixed maturity securities - trading	383,554		2,420,713		45,097		2,849,364		392,523		2,407,484		86,646		2,886,653
Total fixed maturity securities	1,501,095		22,378,760		764,478		24,644,333		1,305,711		23,940,948		857,388		26,104,047
Equity securities	229,813		11,050		69,038		309,901		223,256		11,381		70,276		304,913
Other long-term investments (1)	14,457		4,216		32,372		51,045		7,005		4,074		33,781		44,860
Short-term investments	397,878		7,541		—		405,419		134,686		—		—		134,686
Total investments	2,143,243		22,401,567		865,888		25,410,698		1,670,658		23,956,403		961,445		26,588,506
Cash	199,868		—		—		199,868		370,431		—		—		370,431
Other assets	—		—		—		—		—		—		—		—
Assets related to separate accounts
Variable annuity	5,797,956		—		—		5,797,956		6,291,158		—		—		6,291,158
Variable universal life	561,044		—		—		561,044		556,419		—		—		556,419
Total assets measured at fair value on a recurring basis	$	8,702,111	$	22,401,567	$	865,888	$	31,969,566	$	8,888,666	$	23,956,403	$	961,445	$	33,806,514

Liabilities:
Annuity account balances (2)	$	—	$	—	$	143,020	$	143,020	$	—	$	—	$	142,470	$	142,470
Other liabilities (1)	2,078		15,685		178,386		196,149		6,578		25,028		213,659		245,265
Total liabilities measured at fair value on a recurring basis	$	2,078	$	15,685	$	321,406	$	339,169	$	6,578	$	25,028	$	356,129	$	387,735

(1) Includes certain freestanding and embedded derivatives.

(2) Represents liabilities related to equity indexed annuities.

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The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2010:

	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	2,538,253	$	20	$	2,538,273
Commercial mortgage-backed securities	—		154,058		19,901		173,959
Other asset-backed securities	—		207,638		641,129		848,767
U.S. government-related securities	1,054,203		104,419		15,109		1,173,731
States, municipals, and political subdivisions	—		963,226		—		963,226
Other government-related securities	14,993		186,214		—		201,207
Corporate bonds	100		15,703,977		64,996		15,769,073
Total fixed maturity securities - available-for-sale	1,069,296		19,857,785		741,155		21,668,236

Fixed maturity securities - trading
Residential mortgage-backed securities	—		432,015		—		432,015
Commercial mortgage-backed securities	—		137,606		—		137,606
Other asset-backed securities	—		18,415		59,925		78,340
U.S. government-related securities	383,423		11,369		3,442		398,234
States, municipals, and political subdivisions	—		160,539		—		160,539
Other government-related securities	—		126,553		—		126,553
Corporate bonds	—		1,642,664		—		1,642,664
Total fixed maturity securities - trading	383,423		2,529,161		63,367		2,975,951
Total fixed maturity securities	1,452,719		22,386,946		804,522		24,644,187
Equity securities	239,832		10,831		66,592		317,255
Other long-term investments (1)	6,794		3,808		31,765		42,367
Short-term investments	341,217		8,028		—		349,245
Total investments	2,040,562		22,409,613		902,879		25,353,054
Cash	236,998		—		—		236,998
Other assets	—		—		—		—
Assets related to separate accounts
Variable annuity	5,170,193		—		—		5,170,193
Variable universal life	534,219		—		—		534,219
Total assets measured at fair value on a recurring basis	$	7,981,972	$	22,409,613	$	902,879	$	31,294,464

Liabilities:
Annuity account balances (2)	$	—	$	—	$	143,264	$	143,264
Other liabilities (1)	23,995		27,888		190,529		242,412
Total liabilities measured at fair value on a recurring basis	$	23,995	$	27,888	$	333,793	$	385,676

(1) Includes certain freestanding and embedded derivatives.

(2) Represents liabilities related to equity indexed annuities.

Determination of fair values

The valuation methodologies used to determine the fair values of assets and liabilities reflect market participant assumptions and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market prices, where available. The Company also determines certain fair values based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s credit standing, liquidity, and where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments as listed in the above table.

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The fair value of fixed maturity, short-term, and equity securities is determined by management after considering one of three primary sources of information: third party pricing services, non-binding independent broker quotations, or pricing matrices. Security pricing is applied using a ‘‘waterfall’’ approach whereby publicly available prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for non-binding prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these three pricing methods include, but are not limited to: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. Third party pricing services price over 90% of the Company’s fixed maturity securities. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services derive the majority of security prices from observable market inputs such as recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information outlined above. If there are no recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Certain securities are priced via independent non-binding broker quotations, which are considered to have no significant unobservable inputs. When using non-binding independent broker quotations, the Company obtains one quote per security, typically from the broker from which we purchased the security. A pricing matrix is used to price securities for which the Company is unable to obtain or effectively rely on either a price from a third party pricing service or an independent broker quotation.

The pricing matrix used by the Company begins with current spread levels to determine the market price for the security. The credit spreads, assigned by brokers, incorporate the issuer’s credit rating, liquidity discounts, weighted-average of contracted cash flows, risk premium, if warranted, due to the issuer’s industry, and the security’s time to maturity. The Company uses credit ratings provided by nationally recognized rating agencies.

For securities that are priced via non-binding independent broker quotations, the Company assesses whether prices received from independent brokers represent a reasonable estimate of fair value through an analysis using internal and external cash flow models developed based on spreads and, when available, market indices. The Company uses a market-based cash flow analysis to validate the reasonableness of prices received from independent brokers. These analytics, which are updated daily, incorporate various metrics (yield curves, credit spreads, prepayment rates, etc.) to determine the valuation of such holdings. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly. The Company did not adjust any quotes or prices received from brokers during the ~~three~~six months ended ~~March 31,~~June 30, 2011.

The Company has analyzed the third party pricing services’ valuation methodologies and related inputs and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs that is in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. Based on this evaluation and investment class analysis, each price was classified into Level 1, 2, or 3. Most prices provided by third party pricing services are classified into Level 2 because the significant inputs used in pricing the securities are market observable and the observable inputs are corroborated by the Company. Since the matrix pricing of certain debt securities includes significant non-observable inputs, they are classified as Level 3.

Asset-Backed Securities

This category mainly consists of residential mortgage-backed securities, commercial mortgage-backed securities, and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”). As of ~~March 31,~~June 30, 2011, the Company held ~~$3.3~~$3.5 billion of ABS classified as Level 2. These securities are priced from information provided by a third party pricing service and independent broker quotes. The third party pricing services and brokers mainly value securities using both a market and income approach to valuation. As part of this valuation process they consider the following characteristics of the item being measured to be relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, and 7) credit ratings of the securities.

After reviewing these characteristics of the ABS, the third party pricing service and brokers use certain inputs to determine the value of the security. For ABS classified as Level 2, the valuation would consist of predominantly market observable inputs such as, but not limited to: 1) monthly principal and interest payments on

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the underlying assets, 2) average life of the security, 3) prepayment speeds, 4) credit spreads, 5) treasury and swap yield curves, and 6) discount margin.

As of ~~March 31,~~June 30, 2011, the Company held ~~$681.1~~$678.8 million of Level 3 ABS, which included ~~$41.7~~$41.1 million of other asset-backed securities classified as trading. These securities are predominantly ARS whose underlying collateral is at least 97% guaranteed by the FFELP. As a result of the ARS market collapse during 2008, the Company prices its ARS using an income approach valuation model. As part of the valuation process the Company reviews the following characteristics of the ARS in determining the relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, and 7) credit ratings of the securities.

The fair value calculation of available-for-sale ABSs classified as Level 3 had, but were not limited to, the following inputs:

Investment grade credit rating		100.0%
Weighted-average yield		~~1.6%~~0.9%
~~Amortized cost~~Par Value		$~~652.8~~657.7 million
Weighted-average life		7.5 years

Corporate bonds, U.S. Government-related securities, States, municipals, and political subdivisions, and Other government related securities

As of ~~March 31,~~June 30, 2011, the Company classified approximately ~~$19.1~~$20.4 billion of corporate bonds, U.S. government-related securities, states, municipals, and political subdivisions, and other government-related securities as Level 2. The fair value of the Level 2 bonds and securities is predominantly priced by broker quotes and a third party pricing service. The Company has reviewed the valuation techniques of the brokers and third party pricing service and has determined that such techniques used Level 2 market observable inputs. The following characteristics of the bonds and securities are considered to be the primary relevant inputs to the valuation: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) seniority, and 4) credit ratings.

The brokers and third party pricing service utilizes a valuation model that consists of a hybrid income and market approach to valuation. The pricing model utilizes the following inputs: 1) principal and interest payments, 2) treasury yield curve, 3) credit spreads from new issue and secondary trading markets, 4) dealer quotes with adjustments for issues with early redemption features, 5) liquidity premiums present on private placements, and 6) discount margins from dealers in the new issue market.

As of ~~March 31,~~June 30, 2011, the Company classified approximately ~~$83.3~~$178.5 million of bonds and securities as Level 3 valuations. The fair value of the Level 3 bonds and securities are derived from an internal pricing model that utilizes a hybrid market/income approach to valuation. The Company reviews the following characteristics of the bonds and securities to determine the relevant inputs to use in the pricing model: 1) coupon rate, 2) years to maturity, 3) seniority, 4) embedded options, 5) trading volume, and 6) credit ratings.

Level 3 bonds and securities primarily represent investments in illiquid bonds for which no price is readily available. To determine a price, the Company uses a discounted cash flow model with both observable and unobservable inputs. These inputs are entered into an industry standard pricing model to determine the final price of the security. These inputs include: 1) principal and interest payments, 2) coupon rate, 3) sector and issuer level spreads, 4) underlying collateral, 5) credit ratings, 6) maturity, 7) embedded options, 8) recent new issuance, 9) comparative bond analysis, and 10) an illiquidity premium.

The fair value calculation of bonds and securities classified as Level 3 had, but were not limited to, the following weighted-average inputs:

Investment grade credit rating		~~82.6%~~69.6%
Weighted-average market yield		~~5.3%~~4.4%
Weighted-average coupon		~~7.3%~~4.5%
~~Amortized cost~~Par Value		$~~80.3~~194.1 million
Weighted-average stated maturity		~~6.5~~5.7 years

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Equities

As of ~~March 31,~~June 30, 2011, the Company held approximately ~~$80.1~~$81.7 million of equity securities classified as Level 2 and Level 3. Of this total, ~~$62.7~~$64.6 million represents Federal Home Loan Bank (“FHLB”) stock. The Company believes that the cost of the FHLB stock approximates fair value. The remainder of these equity securities is primarily made up of holdings we have obtained through bankruptcy proceedings or debt restructurings.

Other long-term investments and Other liabilities

Other long-term investments and other liabilities consist entirely of free standing and embedded derivative instruments. Refer to Note ~~13,~~14, Derivative Financial Instruments for additional information related to derivatives. Derivative instruments are valued using exchange prices, independent broker quotations, or pricing valuation models, which utilize market data inputs. Excluding embedded derivatives, as of ~~March 31,~~June 30, 2011, ~~60.4%~~60.5% of derivatives based upon notional values were priced using exchange prices or independent broker quotations. The remaining derivatives were priced by pricing valuation models, which predominantly utilize observable market data inputs. Inputs used to value derivatives include, but are not limited to, interest swap rates, credit spreads, interest and equity volatility, equity index levels, and treasury rates. The Company performs monthly analysis on derivative valuations that includes both quantitative and qualitative analysis.

Derivative instruments classified as Level 1 include futures and certain options, which are traded on active exchange markets.

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

Derivative instruments classified as Level 3 were total return swaps and embedded derivatives and include at least one non-observable significant input. A derivative instrument containing Level 1 and Level 2 inputs will be classified as a Level 3 financial instrument in its entirety if it has at least one significant Level 3 input.

The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instruments may not be classified within the same fair value hierarchy level as the associated assets and liabilities. Therefore, the changes in fair value on derivatives reported in Level 3 may not reflect the offsetting impact of the changes in fair value of the associated assets and liabilities.

The guaranteed minimum withdrawal benefit (“GMWB”) embedded derivative is carried at fair value in “other assets” and “other liabilities” on the Company’s consolidated balance sheet. The changes in fair value are recorded in earnings as “Realized investment gains (losses) — derivative financial instruments”; refer to Note ~~13,~~14, Derivative Financial Instruments for more information related to GMWB embedded derivative gains and losses. The fair value of the GMWB embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using ~~1,000~~multiple risk neutral stochastic equity scenarios and policyholder behavior assumptions. The risk neutral scenarios are generated using the current swap curve and projected equity volatilities and correlations. The projected equity volatilities are based on a blend of historical volatility and near-term equity market implied volatilities. The equity correlations are based on historical price observations. For policyholder behavior assumptions, expected lapse and utilization assumptions are used and updated for actual experience, as necessary. The Company assumes mortality of 65% of the National Association of Insurance Commissioners 1994 Variable Annuity GMDB Mortality Table. The present value of the cash flows is found using the discount rate curve, which is London Interbank Offered Rate (“LIBOR”) plus a credit spread (to represent the Company’s non-performance risk). As a result of using significant unobservable inputs, the GMWB embedded derivative is categorized as Level 3. These assumptions are reviewed on a quarterly basis.

The Company has ceded certain blocks of policies under modified coinsurance agreements in which the investment results of the underlying portfolios are passed directly to the reinsurers. As a result, these agreements are deemed to contain embedded derivatives that must be reported at fair value. Changes in fair value of the embedded derivatives are reported in earnings. The investments supporting these agreements are designated as “trading securities”; therefore changes in fair value of such investments are reported in earnings. The fair value of the embedded derivatives represents the unrealized gain or loss on the block of business in relation to the unrealized gain or loss of the trading securities. As a result, changes in fair value of the embedded derivatives reported in earnings are largely offset by the changes in fair value of the investments.

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Annuity account balances

The equity indexed annuity (“EIA”) model calculates the present value of future benefit cash flows less the projected future profits to quantify the net liability that is held as a reserve. This calculation is done ~~on a stochastic basis~~ using ~~1,000~~multiple risk neutral stochastic equity scenarios. The cash flows are discounted using LIBOR plus a credit spread. Best estimate assumptions are used for partial withdrawals, lapses, expenses and asset earned rate with a risk margin applied to each. These assumptions are reviewed annually as a part of the formal unlocking process. If an event were to occur within a quarter that would make the assumptions unreasonable, the assumptions would be reviewed within the quarter.

Included in the chart below, are current key assumptions which include risk margins for the Company. ~~These assumptions are reviewed for reasonableness on a quarterly basis.~~

Asset Earned Rate		5.90%
Admin Expense per Policy		$91
Partial Withdrawal Rate (for ages less than 70)		2.20%
Partial Withdrawal Rate (for ages 70 and greater)		2.20%
Mortality		65% of 94 GMDB table
Lapse		2.2% to 55% depending on the surrender charge period
Return on Assets		1.5% to 1.85% depending on the guarantee period

The discount rate for the equity indexed annuities is based on an upward sloping rate curve which is updated each quarter. The discount rates for ~~March 31,~~June 30, 2011, ranged from a one month rate of ~~0.32%~~0.33%, a 5 year rate of ~~3.58%~~3.11%, and a 30 year rate of ~~5.61%~~5.38%.

Separate Accounts

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

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The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended ~~March 31,~~June 30, 2011, for which the Company has used significant unobservable inputs (Level 3):


																														Total																															Total
																														Gains (losses)																															Gains (losses)
			Total				Total																							included in					Total				Total																						included in
			Realized and Unrealized				Realized and Unrealized																							Earnings					Realized and Unrealized				Realized and Unrealized																						Earnings
			Gains				Losses																							related to					Gains				Losses																						related to
					Included in					Included in																				Instruments							Included in					Included in																			Instruments
					Other					Other												Transfers								still held at							Other					Other												Transfers							still held at
	Beginning		Included in		Comprehensive		Included in			Comprehensive												in/out of						Ending		the Reporting			Beginning		Included in		Comprehensive		Included in			Comprehensive												in/out of					Ending		the Reporting
	Balance		Earnings		Income		Earnings			Income			Purchases		Sales			Issuances		Settlements		Level 3			Other			Balance		Date			Balance		Earnings		Income		Earnings			Income			Purchases		Sales			Issuances		Settlements		Level 3		Other			Balance		Date
	(Dollars In Thousands)																																(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	20	$	—	$	12	$	(4	)	$	—		$	—	$	—		$	—	$	—	$	(9	)	$	—		$	19	$	—		$	19	$	—	$	—	$	—		$	—		$	—	$	(12	)	$	—	$	—	$	—	$	—		$	7	$	—
Commercial mortgage-backed securities	19,901		—		148		—			—			—		(103		)	—		—		(19,946		)	—			—		—			—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	641,129		—		407		—			(2,096		)	—		—			—		—		—			(33		)	639,407		—			639,407		1,786		1,751		(2,133		)	(3,050		)	109,148		(109,148		)	—		—		—		(15		)	637,746		—
U.S. government-related securities	15,109		—		—		—			(28		)	—		—			—		—		—			3			15,084		—			15,084		—		—		—			(87		)	—		—			—		—		—		3			15,000		—
States, municipals, and political subdivisions	—		—		—		—			—			—		—			—		—		—			—			—		—			—		—		—		—			—			—		—			—		—		—		—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—			—			—		—			—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	64,996		—		13		—			(669		)	—		(1,357		)	—		—		1,888			—			64,871		—			64,871		—		1,471		—			(287		)	40,000		(764		)	—		—		12,698		—			117,989		—
Total fixed maturity securities - available-for-sale	741,155		—		580		(4		)	(2,793		)	—		(1,460		)	—		—		(18,067		)	(30		)	719,381		—			719,381		1,786		3,222		(2,133		)	(3,424		)	149,148		(109,924		)	—		—		12,698		(12		)	770,742		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			—		—			—		—		—			—			—		—			—		—		—		—			—			—		—			—		—		—		—			—		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—			—			—		—			—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	59,925		823		—		(855		)	—			—		(18,893		)	—		—		—			713			41,713		199			41,713		329		—		(457		)	—			3,792		(5,060		)	—		—		—		776			41,093		(128		)
U.S. government-related securities	3,442		—		—		(56		)	—			—		—			—		—		—			(2		)	3,384		(56		)	3,384		130		—		—			—			—		—			—		—		—		(2		)	3,512		130
States, municipals and political subdivisions	—		—		—		—			—			—		—			—		—		—			—			—		—			—		—		—		—			—			—		—			—		—		—		—			— —		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—			—			—		—			—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	—		—		—		—			—			—		—			—		—		—			—			—		—			—		—		—		—			—			—		—			—		—		42,041		—			42,041		374
Total fixed maturity securities - trading	63,367		823		—		(911		)	—			—		(18,893		)	—		—		—			711			45,097		143			45,097		459		—		(457		)	—			3,792		(5,060		)	—		—		42,041		774			86,646		376
Total fixed maturity securities	804,522		823		580		(915		)	(2,793		)	—		(20,353		)	—		—		(18,067		)	681			764,478		143			764,478		2,245		3,222		(2,590		)	(3,424		)	152,940		(114,984		)	—		—		54,739		762			857,388		376
Equity securities	66,592		—		446		—			—			2,000		—			—		—		—			—			69,038		—			69,038		49		—		—			(745		)	1,962		(49		)	—		—		21		—			70,276		—
Other long-term investments (1)	31,765		607		—		—			—			—		—			—		—		—			—			32,372		607			32,372		1,409		—		—			—			—		—			—		—		—		—			33,781		1,409
Short-term investments	—		—		—		—			—			—		—			—		—		—			—			—		—			—		—		—		—			—			—		—			—		—		—		—			—		—
Total investments	902,879		1,430		1,026		(915		)	(2,793		)	2,000		(20,353		)	—		—		(18,067		)	681			865,888		750			865,888		3,703		3,222		(2,590		)	(4,169		)	154,902		(115,033		)	—		—		54,760		762			961,445		1,785
Total assets measured at fair value on a recurring basis	$	902,879	$	1,430	$	1,026	$	(915	)	$	(2,793	)	$	2,000	$	(20,353	)	$	—	$	—	$	(18,067	)	$	681		$	865,888	$	750		$	865,888	$	3,703	$	3,222	$	(2,590	)	$	(4,169	)	$	154,902	$	(115,033	)	$	—	$	—	$	54,760	$	762		$	961,445	$	1,785

Liabilities:
Annuity account balances (2)	$	143,264	$	—	$	—	$	2,132		$	—		$	—	$	—		$	178	$	2,554	$	—		$	—		$	143,020	$	—		$	143,020	$	—	$	—	$	2,104		$	—		$	—	$	—		$	135	$	2,789	$	—	$	—		$	142,470	$	—
Other liabilities (1)	190,529		12,143		—		—			—			—		—			—		—		—			—			178,386		12,143			178,386		—		—		37,141			—			—		1,868			—		—		—		—			213,659		(37,141		)
Total liabilities measured at fair value on a recurring basis	$	333,793	$	12,143	$	—	$	2,132		$	—		$	—	$	—		$	178	$	2,554	$	—		$	—		$	321,406	$	12,143		$	321,406	$	—	$	—	$	39,245		$	—		$	—	$	1,868		$	135	$	2,789	$	—	$	—		$	356,129	$	(37,141	)

(1) Represents certain freestanding and embedded derivatives.

(2) Represents liabilities related to equity indexed annuities.

For the three months ended ~~March 31,~~June 30, 2011, ~~$1.9~~$54.8 million of securities were transferred into Level 3. This amount was transferred almost entirely from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous quarters, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of ~~March 31,~~June 30, 2011.

For the three months ended ~~March 31,~~June 30, 2011, there were no securities transferred out of Level 3.

For the three months ended June 30, 2011, there were no transfers from Level 2 to Level 1.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended June 30, 2010, for which the Company has used significant unobservable inputs (Level 3):

																	Total
																	Gains (losses)
																	included in
			Total Realized and Unrealized														Earnings
			Gains (losses)														related to
						Included in			Purchases,								Instruments
						Other			Issuances, and			Transfers in					still held at
	Beginning		Included in			Comprehensive			Settlements			and/or out of			Ending		the Reporting
	Balance		Earnings			Income			(net)			Level 3			Balance		Date
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	22	$	—		$	—		$	(1	)	$	—		$	21	$	—
Commercial mortgage-backed securities	—		—			—			39,952			—			39,952		—
Other asset-backed securities	599,116		—			(1,759		)	(66		)	—			597,291		—
U.S. government-related securities	15,151		—			(6		)	4			—			15,149		—
States, municipals, and political subdivisions	—		—			—			—			—			—		—
Other government-related securities	—		—			—			—			—			—		—
Corporate bonds	95,331		—			(2,615		)	15,624			—			108,340		—
Total fixed maturity securities - available-for-sale	709,620		—			(4,380		)	55,513			—			760,753		—
Fixed maturity securities - trading
Residential mortgage-backed securities	3,563		(28		)	—			(3,535		)	—			—		—
Commercial mortgage-backed securities	—		—			—			—			—			—		—
Other asset-backed securities	48,450		(1,451		)	—			14,138			—			61,137		(1,451		)
U.S. government-related securities	3,310		254			—			(2		)	—			3,562		253
States, municipals and political subdivisions	—		—			—			—			—			—		—
Other government-related securities	—		—			—			—			—			—		—
Corporate bonds	26,971		404			—			(199		)	(27,133		)	43		(1		)
Total fixed maturity securities - trading	82,294		(821		)	—			10,402			(27,133		)	64,742		(1,199		)
Total fixed maturity securities	791,914		(821		)	(4,380		)	65,915			(27,133		)	825,495		(1,199		)
Equity securities	60,892		4			—			1,736			—			62,632		—
Other long-term investments (1)	27,562		(8,031		)	—			—			—			19,531		(8,031		)
Short-term investments	—		—			—			—			—			—		—
Total investments	880,368		(8,848		)	(4,380		)	67,651			(27,133		)	907,658		(9,230		)
Total assets measured at fair value on a recurring basis	$	880,368	$	(8,848	)	$	(4,380	)	$	67,651		$	(27,133	)	$	907,658	$	(9,230	)

Liabilities:
Annuity account balances (2)	$	150,630	$	(738	)	$	—		$	1,928		$	—		$	149,440	$	—
Other liabilities (1)	128,235		(104,962		)	—			—			—			233,197		(104,962		)
Total liabilities measured at fair value on a recurring basis	$	278,865	$	(105,700	)	$	—		$	1,928		$	—		$	382,637	$	(104,962	)

(1) Represents certain freestanding and embedded derivatives.

(2) Represents liabilities related to equity indexed annuities.

(3) Represents mortgage loan held by the trusts that have been consolidated upon the adoption of ASU No. 2009-17.

Table of Contents

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


																														Total
																														Gains (losses)
			Total				Total																							included in
			Realized and Unrealized				Realized and Unrealized																							Earnings
			Gains				Losses																							related to
					Included in					Included in																				Instruments
					Other					Other												Transfers								still held at
	Beginning		Included in		Comprehensive		Included in			Comprehensive												in/out of						Ending		the Reporting
	Balance		Earnings		Income		Earnings			Income			Purchases		Sales			Issuances		Settlements		Level 3			Other			Balance		Date
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	20	$	—	$	12	$	(4	)	$	—		$	—	$	(12	)	$	—	$	—	$	(9	)	$	—		$	7	$	—
Commercial mortgage-backed securities	19,901		—		147		—			—			—		(102		)	—		—		(19,946		)	—			—		—
Other asset-backed securities	641,129		1,786		2,158		(2,133		)	(5,146		)	118,598		(118,598		)	—		—		—			(48		)	637,746		—
U.S. government-related securities	15,109		—		—		—			(115		)	—		—			—		—		—			6			15,000		—
States, municipals, and political
subdivisions	—		—		—		—			—			—		—			—		—		—			—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Corporate bonds	64,996		—		1,485		—			(956		)	40,000		(2,121		)	—		—		14,585			—			117,989		—
Total fixed maturity securities - available-for-sale	741,155		1,786		3,802		(2,137		)	(6,217		)	158,598		(120,833		)	—		—		(5,370		)	(42		)	770,742		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Other asset-backed securities	59,925		1,152		—		(1,313		)	—			3,792		(23,952		)	—		—		—			1,489			41,093		71
U.S. government-related securities	3,442		130		—		(56		)	—			—		—			—		—		—			(4		)	3,512		74
States, municipals and political																												—
subdivisions	—		—		—		—			—			—		—			—		—		—			—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—			—			—		—
Corporate bonds	—		—		—		—			—			—		—			—		—		42,041			—			42,041		374
Total fixed maturity securities - trading	63,367		1,282		—		(1,369		)	—			3,792		(23,952		)	—		—		42,041			1,485			86,646		519
Total fixed maturity securities	804,522		3,068		3,802		(3,506		)	(6,217		)	162,390		(144,785		)	—		—		36,671			1,443			857,388		519
Equity securities	66,592		49		445		—			(745		)	3,963		(49		)	—		—		21			—			70,276		—
Other long-term investments (1)	31,765		2,016		—		—			—			—		—			—		—		—			—			33,781		2,016
Short-term investments	—		—		—		—			—			—		—			—		—		—			—			—		—
Total investments	902,879		5,133		4,247		(3,506		)	(6,962		)	166,353		(144,834		)	—		—		36,692			1,443			961,445		2,535
Total assets measured at fair value on a recurring basis	$	902,879	$	5,133	$	4,247	$	(3,506	)	$	(6,962	)	$	166,353	$	(144,834	)	$	—	$	—	$	36,692		$	1,443		$	961,445	$	2,535

Liabilities:
Annuity account balances (2)	$	143,264	$	—	$	—	$	4,235		$	—		$	—	$	—		$	314	$	5,343	$	—		$	—		$	142,470	$	—
Other liabilities (1)	190,529		—		—		24,998			—			—		1,868			—		—		—			—			213,659		(24,998		)
Total liabilities measured at fair value on a recurring basis	$	333,793	$	—	$	—	$	29,233		$	—		$	—	$	1,868		$	314	$	5,343	$	—		$	—		$	356,129	$	(24,998	)

(1) Represents certain freestanding and embedded derivatives.

(2) Represents liabilities related to equity indexed annuities.

For the six months ended June 30, 2011, $56.7 million of securities were transferred into Level 3. This amount was transferred almost entirely from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous quarters, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of June 30, 2011.

For the six months ended June 30, 2011, $20.0 million of securities were transferred out of Level 3. This amount was transferred almost entirely to Level 2. These transfers resulted from securities that were previously valued using an internal model that utilized significant unobservable inputs but were valued internally or by independent pricing services or brokers, utilizing no significant unobservable inputs, as of ~~March 31,~~June 30, 2011. All transfers are recognized as of the end of the reporting period.

For the ~~three~~six months ended ~~March 31,~~June 30, 2011, there were no transfers from Level 2 to Level 1.

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The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the ~~three~~six months ended ~~March 31,~~June 30, 2010, for which the Company has used significant unobservable inputs (Level 3):

																	Total																			Total
																	Gains (losses)																			Gains (losses)
																	included in																			included in
			Total Realized and Unrealized														Earnings					Total Realized and Unrealized														Earnings
			Gains (losses)														related to					Gains (losses)														related to
						Included in			Purchases,								Instruments								Included in			Purchases,								Instruments
						Other			Issuances, and			Transfers in					still held at								Other			Issuances, and			Transfers in					still held at
	Beginning		Included in			Comprehensive			Settlements			and/or out of			Ending		the Reporting			Beginning		Included in			Comprehensive			Settlements			and/or out of			Ending		the Reporting
	Balance		Earnings			Income			(net)			Level 3			Balance		Date			Balance		Earnings			Income			(net)			Level 3			Balance		Date
	(Dollars In Thousands)																			(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	23	$	4		$	—		$	(5	)	$	—		$	22	$	—		$	23	$	4		$	—		$	(6	)	$	—		$	21	$	—
Commercial mortgage-backed securities	844,535		—			38,281			(882,816		)(3)	—			—		—			844,535		—			38,281			(842,864		)(3)	—			39,952		—
Other asset-backed securities	693,930		5,868			(1,937		)	(89,407		)	(9,338		)	599,116		—			693,930		5,868			(3,696		)	(89,473		)	(9,338		)	597,291		—
U.S. government-related securities	15,102		—			46			3			—			15,151		—			15,102		—			40			7			—			15,149		—
States, municipals, and political subdivisions	—		—			—			—			—			—		—
States, municipals, and political
subdivisions																				—		—			—			—			—			—		—
Other government-related securities	—		—			—			—			—			—		—			—		—			—			—			—			—		—
Corporate bonds	86,292		—			5,781			3,108			150			95,331		—			86,292		—			3,166			18,732			150			108,340		—
Total fixed maturity securities - available-for-sale	1,639,882		5,872			42,171			(969,117		)	(9,188		)	709,620		—			1,639,882		5,872			37,791			(913,604		)	(9,188		)	760,753		—
Fixed maturity securities - trading
Residential mortgage-backed securities	7,244		27			—			(320		)	(3,388		)	3,563		159			7,244		(1		)	—			(3,855		)	(3,388		)	—		—
Commercial mortgage-backed securities	—		—			—			—			—			—		—			—		—			—			—			—			—		—
Other asset-backed securities	47,509		696			—			245			—			48,450		(858		)	47,509		(755		)	—			14,383			—			61,137		(985		)
U.S. government-related securities	3,310		2			—			(2		)	—			3,310		2			3,310		255			—			(3		)	—			3,562		255
States, municipals and political subdivisions	4,994		77			—			—			(5,071		)	—		—
States, municipals and political
subdivisions																				4,994		77			—			—			(5,071		)	—		—
Other government-related securities	41,965		1,058			—			(47		)	(42,976		)	—		—			41,965		1,058			—			(47		)	(42,976		)	—		—
Corporate bonds	67		(82		)	—			26,986			—			26,971		(82		)	67		322			—			26,787			(27,133		)	43		(1		)
Total fixed maturity securities - trading	105,089		1,778			—			26,862			(51,435		)	82,294		(779		)	105,089		956			—			37,265			(78,568		)	64,742		(731		)
Total fixed maturity securities	1,744,971		7,650			42,171			(942,255		)	(60,623		)	791,914		(779		)	1,744,971		6,828			37,791			(876,339		)	(87,756		)	825,495		(731		)
Equity securities	60,203		—			—			689			—			60,892		—			60,203		4			—			2,425			—			62,632		—
Other long-term investments (1)	28,025		(463		)	—			—			—			27,562		(463		)	28,025		(8,494		)	—			—			—			19,531		(8,494		)
Short-term investments	—		—			—			—			—			—		—			—		—			—			—			—			—		—
Total investments	1,833,199		7,187			42,171			(941,566		)	(60,623		)	880,368		(1,242		)	1,833,199		(1,662		)	37,791			(873,914		)	(87,756		)	907,658		(9,225		)
Total assets measured at fair value on a recurring basis	$	1,833,199	$	7,187		$	42,171		$	(941,566	)	$	(60,623	)	$	880,368	$	(1,242	)	$	1,833,199	$	(1,662	)	$	37,791		$	(873,914	)	$	(87,756	)	$	907,658	$	(9,225	)

Liabilities:
Annuity account balances (2)	$	149,893	$	(2,103	)	$	—		$	1,366		$	—		$	150,630	$	—		$	149,893	$	(2,841	)	$	—		$	3,294		$	—		$	149,440	$	—
Other liabilities (1)	105,838		(22,397		)	—			—			—			128,235		(22,397		)	105,838		(127,359		)	—			—			—			233,197		(127,359		)
Total liabilities measured at fair value on a recurring basis	$	255,731	$	(24,500	)	$	—		$	1,366		$	—		$	278,865	$	(22,397	)	$	255,731	$	(130,200	)	$	—		$	3,294		$	—		$	382,637	$	(127,359	)

(1) Represents certain freestanding and embedded derivatives.

(2) Represents liabilities related to equity indexed annuities.

(3) Represents mortgage loan held by the trusts that have been consolidated upon the adoption of ASU No. 2009-17.

Total realized and unrealized gains (losses) on Level 3 assets and liabilities are primarily reported in either realized investment gains (losses) within the consolidated statements of income (loss) or other comprehensive income (loss) within ~~shareowner’s~~shareowners’ equity based on the appropriate accounting treatment for the item.

Purchases, sales, issuances, and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily relates to purchases and sales of fixed maturity securities and issuances and settlements of equity indexed annuities.

The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. The asset transfers in the table(s) above primarily related to positions moved from Level 3 to Level 2 as the Company determined that certain inputs were observable.

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The amount of total gains (losses) for assets and liabilities still held as of the reporting date primarily represents changes in fair value of trading securities and certain derivatives that exist as of the reporting date and the change in fair value of equity indexed annuities.

Estimated Fair Value of Financial Instruments

The carrying amounts and estimated fair values of the Company’s financial instruments as of the periods shown below are as follows:

	As of								As of
	March 31, 2011				December 31, 2010				June 30, 2011				December 31, 2010
	Carrying				Carrying				Carrying				Carrying
	Amounts		Fair Values		Amounts		Fair Values		Amounts		Fair Values		Amounts		Fair Values
	(Dollars In Thousands)								(Dollars In Thousands)
Assets:
Mortgage loans on real estate	$	4,864,249	$	5,239,757	$	4,883,400	$	5,326,037	$	5,344,514	$	5,863,953	$	4,883,400	$	5,326,037
Policy loans	784,320		784,320		793,448		793,448		881,757		881,757		793,448		793,448

Liabilities:
Stable value product account balances	$	2,664,139	$	2,751,100	$	3,076,233	$	3,163,902	$	2,565,235	$	2,637,115	$	3,076,233	$	3,163,902
Annuity account balances	10,781,341		10,777,690		10,591,605		10,451,526		10,899,995		10,761,826		10,591,605		10,451,526
Mortgage loan backed certificates	51,540		52,593		61,678		63,127		42,862		43,602		61,678		63,127
Non-recourse funding obligations	1,325,100		1,271,999		1,360,800		1,210,894		1,270,100		1,200,337		1,360,800		1,210,894

Except as noted below, fair values were estimated using quoted market prices.

Fair Value Measurements

Mortgage loans on real estate

The Company estimates the fair value of mortgage loans using an internally developed model. This model includes inputs derived by the Company based on assumed discount rates relative to the Company’s current mortgage loan lending rate and an expected cash flow analysis based on a review of the mortgage loan terms. The model also contains the Company’s determined representative risk adjustment assumptions related to nonperformance and liquidity risks.

Policy loans

The Company believes the fair value of policy loans approximates book value. Policy loans are funds provided to policy holders in return for a claim on the policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the fair value of policy loans approximates carrying value.

Stable value product and Annuity account balances

The Company estimates the fair value of stable value product account balances and annuity account balances using models based on discounted expected cash flows. The discount rates used in the models were based on a current market rate for similar financial instruments.

Non-recourse funding obligations

As of ~~March 31,~~June 30, 2011, the Company estimated the fair value of its non-recourse funding obligations using internal discounted cash flow models. The discount rates used in the model were based on a current market yield for similar financial instruments.

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~~13.~~14. DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes a risk management strategy that incorporates the use of derivative financial instruments to reduce exposure to interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk. These strategies are developed through the Company’s analysis of data from financial simulation models and other internal and industry sources, and are then incorporated into the Company’s risk management program.

Derivative instruments expose the Company to credit and market risk and could result in material changes from period to period. The Company minimizes its credit risk by entering into transactions with highly rated counterparties. The Company manages the market risk by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. The Company monitors its use of derivatives in connection with its overall asset/liability management programs and risk management strategies. In addition, all derivative programs are monitored by our risk management department.

Derivative instruments that are used as part of the Company’s interest rate risk management strategy include interest rate swaps, interest rate futures, interest rate options, and interest rate swaptions. The Company’s inflation risk management strategy involves the use of swaps that requires the Company to pay a fixed rate and receive a floating rate that is based on changes in the Consumer Price Index (“CPI”).

The Company uses foreign currency swaps to manage its exposure to changes in the value of foreign currency. The Company also uses equity options and futures, interest rate futures, and variance swaps to mitigate its exposure to the value of equity indexed annuity contracts and guaranteed benefits related to variable annuity contracts.

During the second quarter of 2011, the Company sold credit default protection on single name entities to mitigate the risk related to certain guaranteed minimum benefits within its variable annuity products. These contracts entitle the Company to receive periodic payments in exchange for the obligation to compensate the counterparty should the referenced security experience a credit event. The maximum potential amount of future payments (undiscounted) that the Company could be required to make under the credit derivatives is $220.0 million. As of June 30, 2011, the fair value of the credit derivatives was a liability of $2.5 million. As of June 30, 2011, the Company had no collateral posted with the counterparties to these positions. If the credit default swaps needed to be settled immediately, the Company would need to post additional payments of $2.5 million.

The Company records its derivative instruments in the consolidated balance sheet in “other long-term investments” and “other liabilities” in accordance with GAAP, which requires that all derivative instruments be recognized in the balance sheet at fair value. The accounting for changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship in accordance with GAAP. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge related to foreign currency exposure. For derivatives that are designated and qualify as cash flow hedges, the effective portion of the gain or loss realized on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction impacts earnings. The remaining gain or loss on these derivatives is recognized as ineffectiveness in current earnings during the period of the change. For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of change in fair values. Effectiveness of the Company’s hedge relationships is assessed on a quarterly basis. The Company accounts for changes in fair values of derivatives that are not part of a qualifying hedge relationship through earnings in the period of change. Changes in the fair value of derivatives that are recognized in current earnings are reported in “realized investment gains (losses)—derivative financial instruments”.

Cash-Flow Hedges

·~~During 2004 and 2005, in~~In connection with the issuance of inflation adjusted funding agreements, the Company has entered into swaps to convert the floating CPI-linked interest rate on the contracts to a fixed rate. The Company paid a fixed rate on the swap and received a floating rate equal to the CPI change paid on the funding agreements.

Table of Contents

· ~~During 2006 and 2007, the~~The Company has entered into interest rate swaps to convert LIBOR based floating rate interest payments on funding agreements to fixed rate interest payments.

Other Derivatives

The Company also uses various other derivative instruments for risk management purposes that either do not qualify for hedge accounting treatment or have not currently been designated by the Company for hedge accounting treatment. Changes in the fair value of these derivatives are recognized in earnings during the period of change.

· The Company uses equity, ~~and~~ interest rate, and currency futures to mitigate the interest rate risk related to certain guaranteed minimum benefits within ~~its~~our variable annuity products. In general, the cost of such benefits varies with the level of equity and interest rate markets and overall volatility. The equity

~~Table of Contents~~

futures resulted in net pre-tax losses of ~~$17.8~~$1.5 million and $19.3 million for the three and six months ended June 30, 2011, respectively. The interest rate futures resulted in pre-tax gains of $9.0 million and $3.4 million, and currency futures resulted in a net pre-tax loss of ~~$5.7~~$0.2 million for the three and six months ended ~~March 31, 2011.~~June 30, 2011, respectively. Such positions were not held ~~for~~during the ~~three~~six months ended ~~March 31,~~June 30, 2010.

· ~~During the fourth quarter of 2010, the~~The Company ~~began a program of transacting in~~uses equity options and volatility swaps to mitigate the risk related to certain guaranteed minimum benefits, including guaranteed minimum withdrawal benefits, within our variable annuity products. In general, the cost of such benefits varies with the level of equity and interest rate markets and overall volatility. The equity options resulted in net pre-tax losses of $4.0 million and $7.3 million and volatility swaps resulted in net pre-tax losses of ~~$6.1~~$0.9 million and $3.7 million for the three and six months ended ~~March 31, 2011.~~June 30, 2011, respectively. Such positions were not held during the ~~three~~six months ended ~~March 31,~~June 30, 2010.

· The Company markets certain variable annuity products with a GMWB rider. The GMWB component is considered an embedded derivative, not considered to be clearly and closely related to the host contract. The Company recognized pre-tax losses of $5.5 million and gains of $2.7 million for the three and six months ended June 30, 2011, and pre-tax losses of $49.3 million and $40.2 million for the three and six months ended June 30, 2010, respectively, related to these embedded derivatives.

·The Company has an interest rate floor agreement and a yearly renewable term (“YRT”) premium support arrangement with PLC. The Company recognized ~~a pre-tax~~an immaterial loss ~~of $0.4 million~~ for the three months ended ~~March 31,~~June 30, 2011 and a pre-tax loss of $0.5 million for the six months ended June 30, 2011, related to the interest rate floor agreement. There are no YRT premium support arrangement gains or losses for the three and six months ended ~~March 31,~~June 30, 2011.

· The Company uses certain interest rate swaps to mitigate interest rate risk related to floating rate exposures. The Company recognized pre-tax ~~gains~~losses of ~~$0.5~~$3.0 million and ~~pre-tax losses of $2.4~~$2.5 million on interest rate swaps for the three and six months ended ~~March 31,~~June 30, 2011 and pre-tax losses of $6.4 million and $8.8 million on interest rate swaps for the three and six months ended June 30, 2010, respectively.

· The Company uses other types of derivatives to manage risk related to other exposures. The Company recognized pre-tax ~~gains~~losses of $0.6 ~~million and $0.8~~ million for the three months ended ~~March 31,~~June 30, 2011 and ~~2010, respectively,~~losses that were immaterial for the ~~change in fair value~~six months ended June 30, 2011. The Company recognized gains that were immaterial for the three months ended June 30, 2010 and pre-tax gains of ~~these derivatives.~~$0.8 million for the six months ended June 30, 2010.

· The Company is involved in various modified coinsurance and funds withheld arrangements which contain embedded derivatives that must be reported at fair value. Changes in fair value are recorded in current period earnings. The investment portfolios that support the related modified coinsurance reserves and funds withheld arrangements had mark-to-market changes which substantially offset the gains or losses on these embedded derivatives.

·The Company markets certain variable annuity products with a GMWB rider. The GMWB component is considered an embedded derivative, not considered to be clearly and closely related to the host contract. The Company recognized pre-tax gains of $8.2 million and $9.1 million for the three months ended March 31, 2011 and 2010, respectively, related to these embedded derivatives.

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The tables below present information about the nature and accounting treatment of the Company’s primary derivative financial instruments and the location in and effect on the consolidated condensed financial statements for the periods presented below:

	As of March 31, 2011				As of December 31, 2010				As of June 30, 2011				As of December 31, 2010
	Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair
	Amount		Value		Amount		Value		Amount		Value		Amount		Value
	(Dollars In Thousands)								(Dollars In Thousands)
Other long-term investments
Cash flow hedges:
Inflation									$	29,828	$	13	$	—	$	—
Derivatives not designated as hedging instruments:
Interest rate swaps	$	25,000	$	4,216	$	25,000	$	3,808	25,000		3,596		25,000		3,808
Credit default swaps									80,000		465		—		—
Interest rate floors/YRT premium support arrangements	772,046		6,300		770,261		6,700		753,339		6,250		770,261		6,700
Embedded derivative - Modco reinsurance treaties	29,929		2,306		29,563		2,687		30,030		1,988		29,563		2,687
Embedded derivative - GMWB	1,437,247		23,759		1,094,395		22,346
Interest rate futures	563,640		5,211		—		—
Embedded derivative – GMWB									1,645,178		25,540		1,094,395		22,346
Equity futures									581		11		—		—
Currency futures									38,085		420		—		—
Other	417,395		9,253		100,507		6,826		414,289		6,577		100,507		6,826
	$	3,245,257	$	51,045	$	2,019,726	$	42,367	$	3,016,330	$	44,860	$	2,019,726	$	42,367
Other liabilities
Cash flow hedges:
Inflation	$	293,379	$	2,753	$	293,379	$	12,005	$	263,551	$	8,152	$	293,379	$	12,005
Interest rate	75,000		5,009		75,000		6,747		75,000		5,315		75,000		6,747
Derivatives not designated as hedging instruments:
Credit default swaps									140,000		2,944		—		—
Interest rate swaps	110,000		7,924		110,000		9,137		110,000		8,618		110,000		9,137
Embedded derivative - Modco reinsurance treaties	2,851,937		137,884		2,842,862		146,105		2,799,920		166,779		2,842,862		146,105
Embedded derivative GMWB	1,681,454		35,165		1,493,745		41,948
Embedded derivative - GMWB									2,052,821		42,481		1,493,745		41,948
Interest rate futures	—		—		598,357		16,764		381,653		3,531		598,357		16,764
Equity futures	98,454		2,078		327,321		7,231		89,808		3,045		327,321		7,231
Currency futures									13,581		2		—		—
Other	342,756		5,336		339,350		2,475		240,084		4,398		339,350		2,475
	$	5,452,980	$	196,149	$	6,080,014	$	242,412	$	6,166,418	$	245,265	$	6,080,014	$	242,412

Gain (Loss) on Derivatives in Cash Flow Hedging Relationships

	For The Three Months Ended March 31, 2011								For The Three Months Ended June 30, 2011									For The Six Months Ended June 30, 2011
	Realized		Benefits and			Other			Realized			Benefits and			Other			Realized		Benefits and			Other
	investment		settlement			comprehensive			investment			settlement			comprehensive			investment		settlement			comprehensive
	gains (losses)		expenses			income (loss)			gains (losses)			expenses			income (loss)			gains (losses)		expenses			income (loss)
	(Dollars In Thousands)								(Dollars In Thousands)
Gain (loss) recognized in other comprehensive income (effective portion):
Interest rate	$	—	$	—		$	(95	)	$	—		$	—		$	(248	)	$	—	$	—		$	(343	)
Inflation	—		—			8,091			—			—			(5,907		)	—		—			2,184

Gain (loss) reclassified from accumulated other comprehensive income into income (effective portion):
Interest rate	$	—	$	(883	)	$	—		$	—		$	(895	)	$	—		$	—	$	(1,778	)	$	—
Inflation	—		(1,078		)	—			—			(250		)	—			—		(1,328		)	—

Gain (loss) recognized in income (ineffective portion):
Inflation	$	645	$	—		$	—		$	(617	)	$	—		$	—		$	28	$	—		$	—

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Gain (Loss) on Derivatives in Cash Flow Hedging Relationships

	For The Three Months Ended March 31, 2010								For The Three Months Ended June 30, 2010									For The Six Months Ended June 30, 2010
	Realized		Benefits and			Other			Realized			Benefits and			Other			Realized			Benefits and			Other
	investment		settlement			comprehensive			investment			settlement			comprehensive			investment			settlement			comprehensive
	gains (losses)		expenses			income (loss)			gains (losses)			expenses			income (loss)			gains (losses)			expenses			income (loss)
	(Dollars In Thousands)								(Dollars In Thousands)
Gain (loss) recognized in other comprehensive income (effective portion):
Interest rate	$	—	$	—		$	(1,259	)	$	—		$	—		$	(858	)	$	—		$	—		$	(2,116	)
Inflation	—		—			5,422			—			—			(9,314		)	—			—			(3,892		)

Gain (loss) reclassified from accumulated other comprehensive income into income (effective portion):
Interest rate	$	—	$	(1,991	)	$	—		$	—		$	(1,982	)	$	—		$	—		$	(3,973	)	$	—
Inflation	—		(621		)	—			—			(463		)	—			—			(1,084		)	—

Gain (loss) recognized in income (ineffective portion):
Inflation	$	360	$	—		$	—		$	(696	)	$	—		$	—		$	(336	)	$	—		$	—

Based on the expected cash flows of the underlying hedged items, the Company expects to reclassify ~~$0.4~~$2.7 million out of accumulated other comprehensive income into earnings during the next twelve months.

Realized investment gains (losses) - derivative financial instruments

	For The						For The						For The
	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2011			2010			2011			2010			2011			2010
	(Dollars In Thousands)						(Dollars In Thousands)
Interest rate risk
Interest rate futures	$	(5,670	)	$	—		$	9,039		$	—		$	3,369		$	—
Interest rate swaps	532			(2,392		)	(2,989		)	(6,382		)	(2,457		)	(8,774		)
Interest rate floors/YRT premium support arrangements	(401		)	(900		)	(50		)	(600		)	(451		)	(1,500		)
Credit default swaps							915			—			915			—
Embedded derivative - Modco reinsurance treaties	7,842			(31,094		)	(29,214		)	(63,063		)	(21,372		)	(94,157		)
Embedded derivative - GMWB	8,195			9,124			(5,533		)	(49,326		)	2,662			(40,202		)
Derivatives related to equity futures	(17,843		)	—			(1,503		)	—			(19,346		)	—
Derivatives related to equity options and volatility swaps	(6,094		)	—
Derivatives related to currency futures							(199		)	—			(199		)	—
Derivatives related to volatility swaps							(917		)	—			(3,734		)	—
Derivatives related to equity options							(3,982		)	—			(7,259		)	—
Other	575			785			(612		)	25			(37		)	810
	$	(12,864	)	$	(24,477	)	$	(35,045	)	$	(119,346	)	$	(47,909	)	$	(143,823	)

Realized investment gains (losses) - all other investments

For The

Three Months Ended

March 31,

2011

2010

(Dollars In Thousands)

Fixed income Modco trading portfolio(1)

$
(5,649
)
$
44,093

	For The				For The
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
	(Dollars In Thousands)

Modco trading portfolio(1)	$	33,603	$	63,967	$	27,954	$	108,060

(1) The Company elected to include the use of alternate disclosures for trading activities

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~~14.~~15. OPERATING SEGMENTS

The Company has several operating segments each having a strategic focus. An operating segment is distinguished by products, channels of distribution, and/or other strategic distinctions. The Company periodically evaluates its operating segments, as prescribed in the ASC Segment Reporting Topic, and makes adjustments to its segment reporting as needed. A brief description of each segment follows.

· The Life Marketing segment markets ~~universal life (“UL”),~~UL, variable universal life, bank-owned life insurance (“BOLI”), and level premium term insurance (“traditional”~~), and bank-owned life insurance (“BOLI”~~) products on a national basis primarily through networks of independent insurance agents and brokers, stockbrokers, and independent marketing organizations.

· The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment’s primary focus is on life insurance policies and annuity products that were sold to individuals. In the ordinary course of business, the Acquisitions segment regularly considers acquisitions of blocks of policies or insurance companies. The level of the segment’s acquisition activity is predicated upon many factors, including available capital, operating capacity, and market dynamics. Policies acquired through the Acquisitions segment are typically “closed” blocks of business (no new policies are being marketed). Therefore, in such instances, earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made.

· The Annuities segment markets fixed and variable annuity products. These products are primarily sold through broker-dealers, financial institutions, and independent agents and brokers.

· The Stable Value Products segment sells guaranteed funding agreements (“GFAs”) to special purpose entities that in turn issue notes or certificates in smaller, transferable denominations. The segment also markets fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds. In addition, the segment issues funding agreements to the ~~FHLB. Additionally, the segment~~FHLB, and markets guaranteed investment contracts (“GICs”) to 401(k) and other qualified retirement savings plans.

· The Asset Protection segment markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles and recreational vehicles. In addition, the segment markets a guaranteed asset protection (“GAP”) product. GAP coverage covers the difference between the loan pay-off amount and an asset’s actual cash value in the case of a total loss.

· The Corporate and Other segment primarily consists of net investment income (including the impact of carrying excess liquidity), expenses not attributable to the segments above (including interest on debt), and a trading portfolio that was previously part of a variable interest entity. This segment includes earnings from several non-strategic or runoff lines of business, various investment-related transactions, the operations of several small subsidiaries, and the repurchase of non-recourse funding obligations.

The Company uses the same accounting policies and procedures to measure segment operating income (loss) and assets as it uses to measure consolidated net income and assets. Segment operating income (loss) is income (loss) before income tax excluding net realized investment gains and losses (net of the related amortization of deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”) and participating income from real estate ventures), and the cumulative effect of change in accounting principle. Periodic settlements of derivatives associated with corporate debt and certain investments and annuity products are included in realized gains and losses but are considered part of operating income because the derivatives are used to mitigate risk in items affecting consolidated and segment operating income (loss). Segment operating income (loss) represents the basis on which the performance of the Company’s business is internally assessed by management. Premiums and policy fees, other income, benefits and settlement expenses, and amortization of DAC/VOBA are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner that most appropriately reflects the operations of that segment. Investments and other assets are allocated based on statutory policy liabilities, while DAC/VOBA and goodwill are shown in the segments to which they are attributable.

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During the first quarter of 2010, the Company recorded a $7.8 million decrease in reserves related to the final settlement in the runoff Lender’s Indemnity line of business.

During the first quarter of 2011, the Company recorded $8.5 million of pre-tax earnings in the Corporate and Other business segment relating to the settlement of a dispute with respect to certain investments.

There were no significant intersegment transactions during the ~~three~~six months ended ~~March 31,~~June 30, 2011 and 2010.

The following tables summarize financial information for the Company’s segments:

	For The						For The						For The
	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2011			2010			2011			2010			2011			2010
	(Dollars In Thousands)						(Dollars In Thousands)
Revenues
Life Marketing	$	303,260		$	289,067		$	298,116		$	275,798		$	601,376		$	564,865
Acquisitions	200,123			198,717			242,771			177,579			442,894			376,296
Annuities	129,875			139,991			153,311			84,961			283,186			224,952
Stable Value Products	44,709			47,956			46,630			37,511			91,339			85,467
Asset Protection	68,985			66,486			70,787			67,897			139,772			134,383
Corporate and Other	54,075			16,740			54,760			24,901			108,835			41,641
Total revenues	$	801,027		$	758,957		$	866,375		$	668,647		$	1,667,402		$	1,427,604
Segment Operating Income (Loss)
Life Marketing	$	25,888		$	41,730		$	34,496		$	35,595		$	60,384		$	77,325
Acquisitions	32,391			31,369			39,429			30,190			71,820			61,559
Annuities	12,862			16,818			24,261			(655		)	37,123			16,163
Stable Value Products	9,195			11,027			19,142			10,979			28,337			22,006
Asset Protection	3,987			10,826			3,590			5,112			7,577			15,938
Corporate and Other	11,836			(3,783		)	5,320			(713		)	17,156			(4,496		)
Total segment operating income	96,159			107,987			126,238			80,508			222,397			188,495
Realized investment (losses) gains - investments(1)(3)	3,945			37,554			55,206			51,632			59,151			89,186
Realized investment (losses) gains - derivatives(2)	8,619			(34,068		)	(32,849		)	(69,971		)	(24,230		)	(104,039		)
Income tax expense	(37,965		)	(35,296		)	(51,546		)	(21,555		)	(89,511		)	(56,851		)
Net income	$	70,758		$	76,177		$	97,049		$	40,614		$	167,807		$	116,791

(1) Realized investment (losses) gains - investments	$	4,878		$	37,768		$	55,019		$	51,960		$	59,897		$	89,728
Less: related amortization of DAC	933			214			(187		)	328			746			542
	$	3,945		$	37,554		$	55,206		$	51,632		$	59,151		$	89,186

(2) Realized investment gains (losses) - derivatives	$	(12,864	)	$	(24,477	)	$	(35,045	)	$	(119,346	)	$	(47,909	)	$	(143,823	)
Less: settlements on certain interest rate swaps	—			42			—			42			—			84
Less: derivative activity related to certain annuities	(21,483		)	9,549			(2,196		)	(49,417		)	(23,679		)	(39,868		)
	$	8,619		$	(34,068	)	$	(32,849	)	$	(69,971	)	$	(24,230	)	$	(104,039	)

(3) Includes other-than-temporary impairments of ~~$5.7~~$9.4 million and ~~$11.9~~$15.1 million for the three and six months ended ~~March 31,~~June 30, 2011, respectively, and $16.7 million and $28.6 million for three and six months ended June 30, 2010, respectively.

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	Operating Segment Assets								Operating Segment Assets
	As of March 31, 2011								As of June 30, 2011
	(Dollars In Thousands)								(Dollars In Thousands)
	Life						Stable Value		Life						Stable Value
	Marketing		Acquisitions		Annuities		Products		Marketing		Acquisitions		Annuities		Products
Investments and other assets	$	9,866,975	$	10,228,527	$	13,384,288	$	2,660,783	$	10,165,261	$	11,677,513	$	14,140,861	$	2,562,165
Deferred policy acquisition costs and value of business acquired	2,504,114		790,056		504,203		3,356		2,532,898		892,883		518,129		3,070
Goodwill	—		41,037		—		—		—		40,263		—		—
Total assets	$	12,371,089	$	11,059,620	$	13,888,491	$	2,664,139	$	12,698,159	$	12,610,659	$	14,658,990	$	2,565,235

	Asset		Corporate				Total		Asset		Corporate				Total
	Protection		and Other		Adjustments		Consolidated		Protection		and Other		Adjustments		Consolidated
Investments and other assets	$	682,757	$	7,404,597	$	23,262	$	44,251,189	$	682,179	$	7,537,208	$	21,979	$	46,787,166
Deferred policy acquisition costs and value of business acquired	52,631		3,427		—		3,857,787		51,739		3,280		—		4,001,999
Goodwill	48,158		—		—		89,195		48,158		—		—		88,421
Total assets	$	783,546	$	7,408,024	$	23,262	$	48,198,171	$	782,076	$	7,540,488	$	21,979	$	50,877,586

	Operating Segment Assets
	As of December 31, 2010
	(Dollars In Thousands)
	Life						Stable Value
	Marketing		Acquisitions		Annuities		Products
Investments and other assets	$	9,623,944	$	10,270,540	$	12,603,533	$	3,069,330
Deferred policy acquisition costs and value of business acquired	2,475,621		810,681		471,163		6,903
Goodwill	—		41,812		—		—
Total assets	$	12,099,565	$	11,123,033	$	13,074,696	$	3,076,233

	Asset		Corporate				Total
	Protection		and Other		Adjustments		Consolidated
Investments and other assets	$	677,297	$	7,295,429	$	23,686	$	43,563,759
Deferred policy acquisition costs and value of business acquired	54,707		3,497		—		3,822,572
Goodwill	48,158		—		—		89,970
Total assets	$	780,162	$	7,298,926	$	23,686	$	47,476,301

~~Table of Contents~~

~~15.~~16. SUBSEQUENT EVENTS

The Company has evaluated the effects of events subsequent to ~~March 31,~~June 30, 2011, and through the date we filed our consolidated condensed financial statements with the United States Securities and Exchange Commission. All accounting and disclosure requirements related to subsequent events are included in our consolidated condensed financial statements.

Subsequent to March 31, 2011, the Company closed a previously announced transaction with Liberty Life Insurance Company (“Liberty Life”) under the terms of which the Company reinsured substantially all of the life and health business of Liberty Life. The transaction closed in conjunction with Athene Holding Ltd’s acquisition of Liberty Life from an affiliate of Royal Bank of Canada.

~~The capital invested by the Company in the transaction at closing was $313~~million, including a $222 million ceding commission paid to Liberty Life. The final amount of the ceding commission is subject to adjustment upon completion of the final Liberty Life closing statutory balance sheet. In conjunction with closing, the Company invested $40 million in a surplus note issued by Athene Life Re.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our consolidated condensed financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report on Form 10-Q and our audited consolidated financial statements for the year ended December 31, 2010, included in our Annual Report on Form 10-K.

For a more complete understanding of our business and current period results, please read the following MD&A in conjunction with our latest Annual Report on Form 10-K and other filings with the United States Securities and Exchange Commission (the “SEC”).

Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior period amounts comparable to those of the current period. Such reclassifications had no effect on previously reported net income or shareowner’s equity.

FORWARD-LOOKING STATEMENTS — CAUTIONARY LANGUAGE

This report reviews our financial condition and results of operations including our liquidity and capital resources. Historical information is presented and discussed, and where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate, or imply future results, performance, or achievements instead of historical facts and may contain words like “believe,” “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,” “shall,” “may,” and other words, phrases, or expressions with similar meaning. Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from the results contained in the forward-looking statements, and we cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. For more information about the risks, uncertainties and other factors that could affect our future results, please see Part I, Item II, Risks and Uncertainties and Part II, Item 1A, Risk Factors, of this report, as well as Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

OVERVIEW

Our business

We are a wholly owned subsidiary of Protective Life Corporation (“PLC”), an insurance holding company whose common stock is traded on the New York Stock Exchange under the symbol “PL”. Founded in 1907, we are the largest operating subsidiary of PLC. We provide financial services through the production, distribution, and administration of insurance and investment products. Unless the context otherwise requires, “Company,” “we,” “us,” or “our” refers to the consolidated group of Protective Life Insurance Company and our subsidiaries.

We have several operating segments, each having a strategic focus. An operating segment is distinguished by products, channels of distribution, and/or other strategic distinctions. We periodically evaluate our operating segments as prescribed in the Accounting Standards Codification (“ASC”) Segment Reporting Topic, and make adjustments to our segment reporting as needed.

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

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

· Acquisitions - We focus on acquiring, converting, and servicing policies acquired from other companies. The segment’s primary focus is on life insurance policies and annuity products that were

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sold to individuals. The level of the segment’s acquisition activity is predicated upon many factors, including available capital, operating capacity, and market dynamics. Policies acquired through the Acquisition segment are typically “closed” blocks of business (no new policies are being marketed). Therefore, in such instances, earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made.

· Annuities - We market fixed and variable annuity products. These products are primarily sold through broker-dealers, financial institutions, and independent agents and brokers.

· Stable Value Products - We sell guaranteed funding agreements (“GFAs”) to special purpose entities that in turn issue notes or certificates in smaller, transferable denominations. The segment also markets fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds. In addition, the segment issues funding agreements to the Federal Home Loan Bank (“FHLB”)~~. Additionally, the segment~~, and markets guaranteed investment contracts (“GICs”) to 401(k) and other qualified retirement savings plans.

· Asset Protection - We market extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles and recreational vehicles. In addition, the segment markets a guaranteed asset protection (“GAP”) product. GAP coverage covers the difference between the loan pay-off amount and an asset’s actual cash value in the case of a total loss.

· Corporate and Other - This segment primarily consists of net investment income (including the impact of carrying excess liquidity), expenses not attributable to the segments above (including interest on debt), and a trading portfolio that was previously part of a variable interest entity. This segment includes earnings from several non-strategic or runoff lines of business, various investment-related transactions, the operations of several small subsidiaries, and the repurchase of non-recourse funding obligations.

EXECUTIVE SUMMARY

We reported solid core performance across our business segments in the first ~~quarter~~six months of 2011. Our operating earnings, adjusted for non-core items and the later-than-expected closing of the coinsurance agreement with Liberty Life Insurance Company, were essentially in line with our ~~plan for the quarter.~~plan. We were also encouraged by the fact that sales in our life insurance, ~~annuity~~annuities, stable value products, and asset protection segments exceeded our plans for the first ~~quarter.~~six months of the year. Based on the fundamental underlying trends we have experienced, ~~in the quarter,~~ we believe we are ~~off to a good start~~positioning ourselves well and on our way toward successfully executing our plan for the year.

Significant financial information related to each of our segments is included in “Results of Operations”.

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RISKS AND UNCERTAINTIES

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

General

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

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

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

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

· we are dependent on the performance of others;

· our risk management policies, practices, and procedures could leave us exposed to unidentified or unanticipated risks, which could negatively affect our business or result in losses;

· our strategies for mitigating risks arising from our day-to-day operations may prove ineffective resulting in a material adverse effect on our results of operations and financial condition;

Financial environment

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

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

· equity market volatility could negatively impact our business;

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

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

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

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

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

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

· difficult conditions in the economy generally could adversely affect our business and results from operations;

· deterioration of general economic conditions could result in a severe and extended economic recession, which could materially adversely affect our business and results of operations;

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

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

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

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

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Industry

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

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

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

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

· new accounting rules, changes to existing accounting rules, or the grant of permitted accounting practices to competitors could negatively impact us;

· use of reinsurance introduces variability in our statements of income;

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

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

Competition

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

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

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

For more information about the risks, uncertainties, and other factors that could affect our future results, please see Part II, Item 1A of this report and our Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES

Our accounting policies inherently require the use of judgments relating to a variety of assumptions and estimates, in particular expectations of current and future mortality, morbidity, persistency, expenses, and interest rates. Because of the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could be materially different from those reported in the consolidated condensed financial statements. For a complete listing of our critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2010.

RESULTS OF OPERATIONS

In the following discussion, segment operating income (loss) is defined as income before income tax excluding net realized investment gains and losses (net of the related deferred acquisitions costs (“DAC”) and value of business acquired (“VOBA”) and participating income from real estate ventures), and the cumulative effect of change in accounting principle. Periodic settlements of derivatives associated with corporate debt and certain investments and annuity products are included in realized gains and losses but are considered part of segment operating income (loss) because the derivatives are used to mitigate risk in items affecting segment operating income (loss). Management believes that segment operating income (loss) provides relevant and useful information to investors, as it represents the basis on which the performance of our business is internally assessed. Although the items excluded from segment operating income (loss) may be significant components in understanding and assessing our overall financial performance, management believes that segment operating income (loss) enhances an investor’s understanding of our results of operations by highlighting the operating income (loss) usually attributable to the normal, recurring operations of our business. However, segment operating income (loss) should not be viewed as a substitute for GAAP net income. In addition, our segment operating income (loss) measures may not be comparable to similarly titled measures reported by other companies.

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

	For The								For The								For The
	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2011			2010			Change		2011			2010			Change		2011			2010			Change
	(Dollars In Thousands)								(Dollars In Thousands)								(Dollars In Thousands)
Segment Operating Income (Loss)
Life Marketing	$	25,888		$	41,730		(38.0	)%	$	34,496		$	35,595		(3.1	)%	$	60,384		$	77,325		(21.9	)%
Acquisitions	32,391			31,369			3.3		39,429			30,190			30.6		71,820			61,559			16.7
Annuities	12,862			16,818			(23.5	)	24,261			(655		)	n/m		37,123			16,163			n/m
Stable Value Products	9,195			11,027			(16.6	)	19,142			10,979			74.4		28,337			22,006			28.8
Asset Protection	3,987			10,826			(63.2	)	3,590			5,112			(29.8	)	7,577			15,938			(52.5	)
Corporate and Other	11,836			(3,783		)	n/m		5,320			(713		)	n/m		17,156			(4,496		)	n/m
Total segment operating income	96,159			107,987			(11.0	)	126,238			80,508			56.8		222,397			188,495			18.0
Realized investment gains (losses) - investments(1)(3)	3,945			37,554					55,206			51,632					59,151			89,186
Realized investment gains (losses) - derivatives(2)	8,619			(34,068		)			(32,849		)	(69,971		)			(24,230		)	(104,039		)
Income tax expense	(37,965		)	(35,296		)			(51,546		)	(21,555		)			(89,511		)	(56,851		)
Net income	$	70,758		$	76,177		(7.1	)	$	97,049		$	40,614		n/m		$	167,807		$	116,791		43.7

(1) Realized investment gains (losses) - investments(3)	$	4,878		$	37,768				$	55,019		$	51,960				$	59,897		$	89,728
Less: related amortization of DAC	933			214					(187		)	328					746			542
	$	3,945		$	37,554				$	55,206		$	51,632				$	59,151		$	89,186

(2) Realized investment gains (losses) - derivatives	$	(12,864	)	$	(24,477	)			$	(35,045	)	$	(119,346	)			$	(47,909	)	$	(143,823	)
Less: settlements on certain interest rate swaps	—			42					—			42					—			84
Less: derivative activity related to certain annuities	(21,483		)	9,549					(2,196		)	(49,417		)			(23,679		)	(39,868		)
	$	8,619		$	(34,068	)			$	(32,849	)	$	(69,971	)			$	(24,230	)	$	(104,039	)

(3) Includes other-than-temporary impairments of ~~$5.7~~$9.4 million and ~~$11.9~~$15.1 million for the three and six months ended ~~March 31,~~June 30, 2011, respectively, and $16.7 million and $28.6 million for the three and six months ended June 30, 2010, respectively.

For The Three Months Ended ~~March 31,~~June 30, 2011 as compared to The Three Months Ended ~~March 31,~~June 30, 2010

Net income for the three months ended ~~March 31,~~June 30, 2011, included ~~an $11.8~~a $45.7 million, or ~~11.0%~~56.8%, ~~decrease~~increase in segment operating income. The ~~decrease~~increase was primarily related to a ~~$15.8~~$9.2 million increase in the Acquisition segment, a $24.9 million increase in the Annuities segment, an $8.2 million increase in the Stable Value Products segment, and a $6.0 million increase in the Corporate and Other segment. These increase were partially offset by a $1.1 million decrease in the Life Marketing segment and a ~~$4.0 million decrease in the Annuities segment, a $6.8~~$1.5 million decrease in the Asset Protection segment, and a $1.8 million decrease in the Stable Value Products segment. These decreases were partially offset by a $1.0 million increase in the Acquisitions segment and a $15.6 million improvement in the Corporate and Other segment.

We experienced net realized ~~losses~~gains of ~~$8.0~~$20.0 million for the three months ended ~~March 31,~~June 30, 2011, as compared to net realized ~~gains~~losses of ~~$13.3~~$67.4 million for the three months ended ~~March 31,~~June 30, 2010. The ~~losses~~gains realized for the three months ended ~~March 31,~~June 30, 2011, were primarily ~~caused by~~related to $30.4 million of gains related to investment securities sale activity, a ~~loss~~gain of ~~$23.5~~$9.0 million related to ~~equity and~~ interest rate futures that were entered into to mitigate risk related to certain guaranteed minimum variable annuity benefits, ~~$5.7 million of other-than-temporary impairment credit-related losses,~~ and ~~a loss of $6.1 million related to equity options and volatility swaps. Offsetting these losses were $2.2~~$4.4 million of gains related to the net activity related to the modified coinsurance ~~portfolio~~portfolio. Offsetting these gains were losses of $9.4 million of other-than-temporary impairment credit-related losses, a loss of $5.5 million related to equity options and equity futures, a $3.0 million loss on interest rate swaps, a $0.2 million loss related to other investment and derivative activity, and a ~~gain~~loss of ~~$8.2~~$5.5 million related to guaranteed minimum withdrawal benefits (“GMWB”) embedded derivative valuation changes and derivative ~~activity, and $14.4 million of gains related to investment securities sale~~ activity.

· Life Marketing segment operating income was ~~$25.9~~$34.5 million for the three months ended ~~March 31,~~June 30, 2011, representing a decrease of ~~$15.8~~$1.1 million, or ~~38.0%~~3.1%, from the three months ended ~~March 31,~~June 30, 2010. The decrease was primarily due to ~~less favorable mortality results and~~ higher ~~non-deferred~~ insurance ~~company~~related operating expenses, including interest expense associated with programs designed to fund traditional life statutory reserves.

· Acquisitions segment operating income was ~~$32.4~~$39.4 million for the three months ended ~~March 31,~~June 30, 2011, an increase of ~~$1.0~~$9.2 million, or ~~3.3%~~30.6%, as compared to the three months ended ~~March 31,~~June 30, 2010, primarily due to the addition of the United Investors and Liberty Life blocks which added $12.6 million to operating income. This increase was partially offset by expected runoff in the existing blocks.

39·Annuities segment pre-tax operating income was $24.3 million for the three months ended June 30, 2011, as compared to $0.7 million for the three months ended June 30, 2010. The current quarter included a favorable $2.0 million impact related to guaranteed benefits of certain variable annuity (“VA”) contracts, as

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compared to an unfavorable $14.6 million impact in the second quarter of 2010 related to guaranteed benefits of certain VA contracts. The remainder of the favorable variance is from higher VA fees, higher spreads, and higher average account value growth in the single premium deferred annuities (“SPDA”) line in the current period.

·Stable Value Products segment operating income was $19.1 million and increased $8.2 million, or 74.4%, for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010. The increase in operating earnings resulted from higher operating spreads offset by a decline in average account values. Included in the second quarter 2011 results are participating mortgage loan income and bank loan fee income of $5.4 million and $1.7 million, respectively, as compared to $0.2 million and $1.9 million, respectively, in the second quarter of 2010. The operating spread increased 186 basis points to 312 basis points for the three months ended June 30, 2011, as compared to an operating spread of 126 basis points for the three months ended June 30, 2010.

·Asset Protection Operating income was $3.6 million, representing a decrease of $1.5 million, or 29.8%, for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010. Service contract earnings decreased $2.7 million, or 79.4%, as compared to the three months ended June 30, 2010, resulting primarily from higher expenses attributable to increased contingent commissions and expenses related to new initiatives. Credit insurance earnings increased $0.3 million as compared to the three months ended June 30, 2010, primarily due to lower expenses. Earnings from other products, including non-core lines, increased $0.9 million, or 55.3%, for the three months ended June 30, 2011, primarily due to higher volume in the GAP product line.

·Corporate and Other segment operating income was $5.3 million for the three months ended June 30, 2011, as compared to a loss of $0.7 million for the three months ended June 30, 2010. The variance was primarily due to a $19.7 million pre-tax gain on the repurchase of non-recourse funding obligations in the second quarter of 2011, as compared to no gains recorded in the second quarter of 2010. In addition, a favorable variance of $4.9 million related to a portfolio of securities designated for trading as compared to the same period in the prior year. Partially offsetting these increases was a decline in the segment’s core net investment income.

For The Six Months Ended June 30, 2011 as compared to The Six Months Ended June 30, 2010

Net income for the six months ended June 30, 2011, included a $33.9 million, or 18.0%, increase in segment operating income. The increase was primarily related to a $10.3 million increase in the Acquisitions segment, a $21.0 million increase in the Annuities segment, a $6.3 million increase in the Stable Value Products segment, and a $21.7 million improvement in the Corporate and Other segment. These increases were partially offset by a $16.9 million decrease in the Life Marketing segment and a $8.4 million decrease in the Asset Protection segment.

We experienced net realized gains of $12.0 million for the six months ended June 30, 2011, as compared to net realized losses of $54.1 million for the six months ended June 30, 2010. The gains realized for the six months ended June 30, 2011, were primarily caused by a gain of $44.8 million related to investment securities sale activity, $3.4 million related to interest rate futures that were entered into to mitigate risk related to certain guaranteed minimum variable annuity benefits, $6.6 million of gains related to the net activity related to the modified coinsurance portfolio, and a gain of $2.7 million related to GMWB embedded derivative valuation changes and derivative activity. Offsetting these gains were losses of $15.1 million of other-than-temporary impairment credit-related losses, a loss of $26.6 million related to equity options and equity futures, and a $2.5 million loss on interest rate swaps.

·Life Marketing segment operating income was $60.4 million for the six months ended June 30, 2011, representing a decrease of $16.9 million, or 21.9%, from the six months ended June 30, 2010. The decrease was primarily due to less favorable mortality results and higher insurance related operating expenses, including interest expenses associated with programs designed to fund traditional life statutory reserves. These decreases were partially offset by higher investment income associated with growth in reserve balances.

·Acquisitions segment operating income was $71.8 million for the six months ended June 30, 2011, an increase of $10.3 million, or 16.7%, as compared to the six months ended June 30, 2010, primarily due to the addition of the United Investors ~~acquisition~~and Liberty Life blocks which added ~~$7.7~~$20.3 million to operating

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income. This increase was partly offset by lower spreads and higher mortality and morbidity in some lines and the expected runoff in ~~the~~ other blocks of business.

· Annuities segment pre-tax operating income was ~~$12.9~~$37.1 million infor the ~~first quarter of~~six months ended June 30, 2011, as compared to ~~$16.8~~$16.2 million infor the ~~first quarter of~~six months ended June 30, 2010. The ~~current quarter~~first six months of 2011 included an unfavorable ~~$10.5~~impact of $8.5 million ~~impact~~ related to guaranteed benefits of certain variable annuity (“VA”) contracts. The impact included $8.8 million related primarily to being over hedged regarding equity market exposure and $1.7 million related to in-force changes and updated model assumptions to value guaranteed minimum withdrawal benefits (“GMWB”). TheVA contracts, while the first ~~quarter~~six months of 2010 included ~~a favorable $4.6~~an unfavorable $10.0 million impact related to guaranteed benefits of certain VA contracts. ~~Partially offsetting these~~Other items ~~were higher VA fees, higher spreads and average account value~~accounted for the remainder of the variance including growth in the ~~single premium deferred annuities (“SPDA”)~~SPDA line of business, higher fees related to VA account balances and ~~favorable~~a $1.7 million improvement in single premium immediate annuities (“SPIA”) mortality ~~compared to the prior year’s quarter.~~results.

· Stable Value Products segment operating income was ~~$9.2~~$28.3 million and ~~decreased $1.8~~increased $6.3 million, or ~~16.6%~~28.8%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010. The ~~decrease~~increase in operating earnings resulted from higher operating spreads offset by a decline in average account values. ~~We also called certain retail notes, which caused accelerated DAC amortization~~Included in the six months ended June 30, 2011 results are participating mortgage loan income and bank loan fee income of ~~$3.1~~$5.5 million ~~on those called contracts.~~and $1.7 million, respectively, as compared to $0.3 million and $2.1 million, respectively, for the six months ended June 30, 2010. The operating spread increased 897 basis points to ~~134~~223 basis points for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to an operating spread of 126 basis points for the ~~three~~six months ended ~~March 31,~~June 30, 2010.

· Asset Protection segment operating income was ~~$4.0~~$7.6 million, representing a decrease of ~~$6.8~~$8.4 million, or ~~63.2%~~52.5%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010. Earnings from core product lines totaled $3.9 million for the three months ended March 31, 2011, an increase of $0.7 million, or 19.7%, as compared to the three months ended March 31, 2010. Credit insurance earnings increased $0.6 million, or 69.4%, as compared to the three months ended March 31, 2010, primarily due to lower loss ratios and lower expenses. Service contract earnings decreased $0.7 million, or 29.6%, as compared to the first quarter of 2010. The decrease primarily resulted from higher expenses in certain product lines partially offset by higher volume. Earnings from other products, including the GAP product and non-core lines, decreased ~~$6.7~~$5.7 million, or ~~73.0%~~52.8%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, primarily due to a $7.8 million excess reserve release related to the runoff Lender’s Indemnity line of business in the first quarter of 2010. This decrease was partially offset by a ~~$0.8~~$1.8 million, or 53.5%, increase in earnings from the GAP product ~~line, as compared to the same quarter last year.~~line. Higher volume and favorable loss experience contributed to the increase. Service contract earnings decreased $3.5 million, or 58.5%, as compared to the six months ended June 30, 2010. The decrease primarily resulted from higher expenses attributable to increased contingent commissions and expenses related to new initiatives. Credit insurance earnings increased $0.9 million as compared to the six months ended June 30, 2010, primarily due to lower loss ratios and lower expenses.

· Corporate and Other segment operating income was ~~$11.8~~$17.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to a loss of ~~$3.8~~$4.5 million for the ~~three~~six months ended ~~March 31,~~June 30, 2010. The improvement was primarily due to ~~the growth in net investment income due to deploying liquidity and yield improvements and~~ a ~~$10.1~~$29.8 million pre-tax gain on the repurchase of non-recourse funding ~~obligations.~~obligations generated in the first six months of 2011, as compared to no gains recorded in the first six months of 2010. In addition, during the first quarter of 2011, we recorded $8.5 million of pre-tax earnings in the segment relating to the settlement of a dispute with respect to certain investments. Partially offsetting ~~the increase~~these increases, was a ~~decrease~~$13.8 million increase in other operating expenses, which includes an increase in interest expense of ~~$7.5 million related to a portfolio of securities designated for trading compared to the same period in the prior year.~~$10.4 million.

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Life Marketing

Segment results of operations

Segment results were as follows:

	For The								For The								For The
	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2011			2010			Change		2011			2010			Change		2011			2010			Change
	(Dollars In Thousands)								(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	393,665		$	373,390		5.4	%	$	406,566		$	407,900		(0.3	)%	$	800,231		$	781,290		2.4	%
Reinsurance ceded	(198,086		)	(176,752		)	12.1		(219,292		)	(227,543		)	(3.6	)	(417,378		)	(404,295		)	3.2
Net premiums and policy fees	195,579			196,638			(0.5	)	187,274			180,357			3.8		382,853			376,995			1.6
Net investment income	106,590			91,121			17.0		110,185			94,730			16.3		216,775			185,851			16.6
Other income	1,091			1,308			(16.6	)	657			711			(7.6	)	1,748			2,019			(13.4	)
Total operating revenues	303,260			289,067			4.9		298,116			275,798			8.1		601,376			564,865			6.5
BENEFITS AND EXPENSES
Benefits and settlement expenses	245,162			220,556			11.2		236,439			217,032			8.9		481,601			437,588			10.1
Amortization of deferred policy acquisition costs	35,569			34,078			4.4		31,989			30,892			3.6		67,558			64,970			4.0
Other operating expenses	(3,359		)	(7,297		)	(54.0	)	(4,808		)	(7,721		)	(37.7	)	(8,167		)	(15,018		)	(45.6	)
Total benefits and expenses	277,372			247,337			12.1		263,620			240,203			9.7		540,992			487,540			11.0
INCOME BEFORE INCOME TAX	25,888			41,730			(38.0	)	34,496			35,595			(3.1	)	60,384			77,325			(21.9	)
OPERATING INCOME	$	25,888		$	41,730		(38.0	)	$	34,496		$	35,595		(3.1	)	$	60,384		$	77,325		(21.9	)

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

	For The								For The								For The
	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2011			2010			Change		2011			2010			Change		2011			2010			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Sales By Product
Traditional	$	1,863		$	20,765		(91.0	)%	$	1,305		$	17,626		(92.6	)%	$	3,168		$	38,391		(91.7	)%
Universal life	35,945			21,263			69.0		32,988			23,313			41.5		68,933			44,576			54.6
BOLI	4,661			940			n/m		3,460			1,974			75.3		8,121			2,914			n/m
	$	42,469		$	42,968		(1.2	)	$	37,753		$	42,913		(12.0	)	$	80,222		$	85,881		(6.6	)
Sales By Distribution Channel
Brokerage general agents	$	24,520		$	26,351		(6.9	)	$	21,183		$	26,654		(20.5	)	$	45,703		$	53,005		(13.8	)
Independent agents	4,723			6,691			(29.4	)	4,507			6,254			(27.9	)	9,230			12,945			(28.7	)
Stockbrokers / banks	8,343			8,971			(7.0	)	8,427			8,031			4.9		16,770			17,002			(1.4	)
BOLI / other	4,883			955			n/m		3,636			1,974			84.2		8,519			2,929			n/m
	$	42,469		$	42,968		(1.2	)	$	37,753		$	42,913		(12.0	)	$	80,222		$	85,881		(6.6	)
Average Life Insurance In-force(1)
Traditional	$	485,744,921		$	497,128,581		(2.3	)	$	479,932,682		$	497,366,086		(3.5	)	$	482,799,992		$	497,143,901		(2.9	)
Universal life	62,689,692			53,604,563			16.9		68,085,488			54,125,544			25.8		65,610,664			53,884,068			21.8
	$	548,434,613		$	550,733,144		(0.4	)	$	548,018,170		$	551,491,630		(0.6	)	$	548,410,656		$	551,027,969		(0.5	)
Average Account Values
Universal life	$	5,844,583		$	5,418,442		7.9		$	5,994,964		$	5,515,913		8.7		$	5,918,246		$	5,465,071		8.3
Variable universal life	376,659			324,071			16.2		386,002			319,278			20.9		379,685			317,522			19.6
	$	6,221,242		$	5,742,513		8.3		$	6,380,966		$	5,835,191		9.4		$	6,297,931		$	5,782,593		8.9

Traditional Life Mortality Experience(2)	94		%	77		%			89		%	87		%			91		%	81		%

(1)Amounts are not adjusted for reinsurance ceded.

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

Operating expenses detail

Other operating expenses for the segment were as follows:

	For The								For The								For The
	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2011			2010			Change		2011			2010			Change		2011			2010			Change
	(Dollars In Thousands)								(Dollars In Thousands)
First year commissions	$	48,193		$	51,643		(6.7	)%	$	42,415		$	51,837		(18.2	)%	$	90,608		$	103,480		(12.4	)%
Renewal commissions	8,842			8,614			2.6		8,990			9,142			(1.7	)	17,832			17,756			0.4
First year ceding allowances	(2,168		)	(2,088		)	3.8		(2,229		)	(2,390		)	(6.7	)	(4,398		)	(4,478		)	(1.8	)
Renewal ceding allowances	(40,467		)	(45,870		)	(11.8	)	(42,871		)	(48,356		)	(11.3	)	(83,337		)	(94,226		)	(11.6	)
General & administrative	39,906			39,834			0.2		38,210			41,681			(8.3	)	78,116			81,515			(4.2	)
Taxes, licenses, and fees	9,275			7,983			16.2		9,160			8,536			7.3		18,435			16,519			11.6
Other operating expenses incurred	63,581			60,116			5.8		53,675			60,450			(11.2	)	117,256			120,566			(2.7	)
Less: commissions, allowances & expenses capitalized	(66,940		)	(67,413		)	(0.7	)	(58,483		)	(68,171		)	(14.2	)	(125,423		)	(135,584		)	(7.5	)
Other insurance expenses	$	(3,359	)	$	(7,297	)	(54.0	)	$	(4,808	)	$	(7,721	)	(37.7	)	$	(8,167	)	$	(15,018	)	(45.6	)

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For The Three Months Ended ~~March 31,~~June 30, 2011 as compared to The Three Months Ended ~~March 31,~~June 30, 2010

Segment operating income

Operating income was ~~$25.9~~$34.5 million for the three months ended ~~March 31,~~June 30, 2011, representing a decrease of ~~$15.8~~$1.1 million, or ~~38.0%~~3.1%, from the three months ended ~~March 31,~~June 30, 2010. The decrease was primarily due to ~~less favorable mortality results and~~ higher ~~non-deferred~~ insurance ~~company~~related operating expenses, including interest expense associated with programs designed to fund traditional life statutory reserves.

Operating revenues

~~Total~~Operating revenues for the three months ended ~~March 31,~~June 30, 2011, increased ~~$14.2~~$22.3 million, or ~~4.9%~~8.1%, as compared to the three months ended ~~March 31,~~June 30, 2010. This increase was the result of higher premiums and policy fees resulting from larger universal life in-force, higher investment income due to increases in net in-force ~~reserves.~~reserves, and higher yields.

Net premiums and policy fees

Net premiums and policy fees ~~decreased~~increased by ~~$1.1~~$6.9 million, or ~~0.5%~~3.8%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31, 2010. First quarter~~June 30, 2010, showed higher than normal premiums due to the one-time impact of a large block of policies reaching the end of the level pay period. Lapses on this block of policies caused decreases in both direct and ceded premiums in the first quarter of 2010. However, the ceded premium decrease was lower than the direct premium decrease. The impact on net income was not material as the impact ~~on premiums was largely offset by an impact on reserve changes included in benefits and settlement expenses. Due to an increase in retention levels on certain traditional life products and continued~~of growth in universal life in-force ~~business, net premiums should continue to grow~~more than offset the impact of lower in-force premium in ~~future periods. Our maximum retention level for newly issued~~the traditional ~~life and universal life products is $2,000,000.~~line.

Net investment income

Net investment income in the segment increased $15.5 million, or ~~17.0%~~16.3%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010. Increased retained universal life reserves led to increased investment income of ~~$8.1~~$9.1 million for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010. BOLI reserves ~~and yields were generally steady~~slightly increased as BOLI investment income increased ~~$0.5~~$1.1 million. In addition, traditional life investment income increased ~~$6.6~~$5.3 million between 2010 and 2011. Growth in retained reserves and more favorable yields ~~on assets related to the Company’s capital market blocks~~ contributed most of the traditional life increase. ~~The impact of our traditional and universal life capital markets programs on investment income allocated to the segment caused an increase of $6.6 million in 2011, as compared to 2010.~~

Other income

Other income decreased ~~$0.2~~$0.1 million, or ~~16.6%~~7.6%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010. The ~~increase~~decrease relates primarily to ~~fees~~fluctuations in fee income on variable universal life funds.

Benefits and settlement expenses

Benefits and settlement expenses increased by ~~$24.6~~$19.4 million, or ~~11.2%~~8.9%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010, due to growth in retained universal life insurance in-force, ~~increased retention levels on certain newly written traditional life products, and~~ higher credited interest on UL products resulting from increases in account values, and ~~less favorable mortality.~~higher claims resulting from growth in the UL block and maturing of the traditional in-force block. These items were partly offset by lower traditional reserve increases partly due to lower ~~sales and partly due to certain blocks of policies reaching the end of the level pay period reducing reserves changes as it reduced premiums.~~sales.

Amortization of DAC

DAC amortization increased ~~$1.5~~$1.1 million, or ~~4.4%~~3.6%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010, primarily reflecting growth in the universal life block.

~~Table of Contents~~

Other operating expenses

Other operating expenses increased ~~$3.9~~$2.9 million for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010. This increase reflects a reduction in reinsurance allowances and an increase in interest expense as compared to the three months ended June 30, 2010, of ~~$4.8~~$2.5 million associated with letter of credit facilities designed to fund traditional life statutory reserves.

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Sales

Sales for the segment decreased ~~$0.5~~$5.2 million, or ~~1.2%~~12.0%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010. Traditional sales decreased ~~$18.9~~$16.3 million, or ~~91.0%~~92.6%, as we focused sales efforts on other product lines. A new universal life product was introduced in 2010 which has substantially replaced traditional life products for new sales. Universal life sales increased ~~$14.7~~$9.7 million, or ~~69.0%~~41.5%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010, primarily due to our increased focus on the product line, including the introduction of new products. While BOLI sales can be somewhat volatile, our BOLI sales have generally increased over the past year due to more favorable market conditions.

For The Six Months Ended June 30, 2011 as compared to The Six Months Ended June 30, 2010

Segment operating income

Operating income was $60.4 million for the six months ended June 30, 2011, representing a decrease of $16.9 million, or 21.9%, from the six months ended June 30, 2010. The decrease was primarily due to less favorable mortality results and higher insurance related operating expenses, including interest expenses associated with programs designed to fund traditional life statutory reserves. These decreases were partially offset by higher investment income associated with growth in reserve balances.

Operating revenues

Operating revenues for the six months ended June 30, 2011, increased $36.5 million, or 6.5%, as compared to the six months ended June 30, 2010. This increase was the result of higher premiums and policy fees, higher investment income due to increases in net in-force reserves, and higher yields.

Net premiums and policy fees

Net premiums and policy fees increased by $5.9 million, or 1.6%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, primarily due to continued growth in universal life in-force policy fees.

Net investment income

Net investment income in the segment increased $30.9 million, or 16.6%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010. Increased retained universal life reserves led to increased investment income of $17.2 million for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010. Increases in BOLI reserves led to higher BOLI investment income of $1.6 million in the same period. In addition, traditional life investment income increased $11.9 million between 2010 and 2011. Growth in retained reserves and more favorable yields explained most of the traditional life increase.

Other income

Other income decreased $0.3 million, or 13.4%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010. The decrease relates primarily to fluctuations in fee income on variable universal life funds.

Benefits and settlement expenses

Benefits and settlement expenses increased by $44.0 million, or 10.1%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, due to growth in retained universal life insurance in-force, higher credited interest on UL products resulting from increases in account values, higher claims resulting from growth in the UL block, less favorable traditional mortality, and maturing of the traditional in-force block.

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Amortization of DAC

DAC amortization increased $2.6 million, or 4.0%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, primarily reflecting growth in the universal life block.

Other operating expenses

Other operating expenses increased $6.9 million for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010. This increase reflects a reduction in reinsurance allowances and an increase in interest expense as compared to the six months ended June 30, 2010, of $7.3 million associated with letter of credit facilities designed to fund traditional life statutory reserves, which was partly offset by lower general administrative insurance company expenses.

Sales

Sales for the segment decreased $5.7 million, or 6.6%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010. Traditional sales decreased $35.2 million, or 91.7%, as we focused sales efforts on other product lines. A new universal life product was introduced in 2010 which has substantially replaced traditional life products for new sales. Universal life sales increased $24.4 million, or 54.6%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, primarily due to our increased focus on the product line, including the introduction of new products.

Reinsurance

~~Currently, the~~The Life Marketing segment reinsures significant amounts of its life insurance in-force. Pursuant to the underlying reinsurance contracts, reinsurers pay allowances to the segment as a percentage of both first year and renewal premiums. Reinsurance allowances represent the amount the reinsurer is willing to pay for reimbursement of acquisition costs incurred by the direct writer of the business. A portion of reinsurance allowances received is deferred as part of DAC and a portion is recognized immediately as a reduction of other operating expenses. As the non-deferred portion of allowances reduces operating expenses in the period received, these amounts represent a net increase to operating income during that period.

Reinsurance allowances do not affect the methodology used to amortize DAC or the period over which such DAC is amortized. However, they do affect the amounts recognized as DAC amortization. DAC on universal life-type, limited-payment long duration, and investment contracts business is amortized based on the estimated gross profits of the policies in-force. Reinsurance allowances are considered in the determination of estimated gross profits, and therefore, impact DAC amortization on these lines of business. Deferred reinsurance allowances on level term business as required by the ASC Financial Services-Insurance Topic are recorded as ceded DAC, which is amortized over estimated ceded premiums of the policies in-force. Thus, deferred reinsurance allowances on policies as required under the Financial Services-Insurance Topic may impact DAC amortization.

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Impact of reinsurance

Reinsurance impacted the Life Marketing segment line items as shown in the following table:

Life Marketing Segment

Line Item Impact of Reinsurance

	For The						For The						For The
	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2011			2010			2011			2010			2011			2010
	(Dollars In Thousands)						(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(198,086	)	$	(176,752	)	$	(219,292	)	$	(227,543	)	$	(417,378	)	$	(404,295	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(203,128		)	(194,005		)	(225,537		)	(244,737		)	(428,665		)	(438,742		)
Amortization of deferred policy acquisition costs	(12,336		)	(7,864		)	(14,995		)	(12,117		)	(27,331		)	(19,981		)
Other operating expenses (1)	(32,257		)	(31,295		)	(34,711		)	(35,661		)	(66,968		)	(66,956		)
Total benefits and expenses	(247,721		)	(233,164		)	(275,243		)	(292,515		)	(522,964		)	(525,679		)

NET IMPACT OF REINSURANCE (2)	$	49,635		$	56,412		$	55,951		$	64,972		$	105,586		$	121,384

Allowances received	$	(42,635	)	$	(47,958	)	$	(45,100	)	$	(50,746	)	$	(87,735	)	$	(98,704	)
Less: Amount deferred	10,378			16,663			10,389			15,085			20,767			31,748
Allowances recognized (ceded other operating expenses) (1)	$	(32,257	)	$	(31,295	)	$	(34,711	)	$	(35,661	)	$	(66,968	)	$	(66,956	)

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

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

The table above does not reflect the impact of reinsurance on our net investment income. By ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed, which will increase the assuming companies’ profitability on the business we cede. The net investment income impact to us and the assuming companies has not been quantified. The impact of including foregone investment income would be to substantially reduce the favorable net impact of reinsurance reflected above. We estimate that the impact of foregone investment income would be to reduce the net impact of reinsurance presented in the table above by 90% to 160%. The Life Marketing segment’s reinsurance programs do not materially impact the “other income” line of our income statement.

As shown above, reinsurance had a favorable impact on the Life Marketing segment’s operating income for the periods presented above. The impact of reinsurance is largely due to our quota share coinsurance program in place prior to mid-2005. Under that program, generally 90% of the segment’s traditional new business was ceded to reinsurers. Since mid-2005, a much smaller percentage of overall term business ~~was~~has been ceded due to ~~our~~a change in reinsurance strategy on traditional ~~business discussed previously.~~business. As a result of that change, the relative impact of reinsurance on the Life Marketing segment’s overall results is expected to decrease over time. While the significance of reinsurance is expected to decline over time, the overall impact of reinsurance for a given period may fluctuate due to variations in mortality and unlocking of balances under the ASC Financial Services-Insurance Topic.

45For The Three Months Ended June 30, 2011 as compared to The Three Months Ended June 30, 2010

The decrease in ceded premiums for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, was caused primarily by lower ceded traditional life premiums and policy fees of $11.4 million reflecting the runoff of an older in-force block of business which was heavily reinsured. This decrease was partly offset by an increase in universal life ceded premiums and policy fees reflecting growth in in-force business.

Table of Contents

Ceded benefits and settlement expenses were lower for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, due to lower increases in ceded reserves partially offset by higher ceded claims. Traditional ceded benefits decreased $10.0 million for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, as a smaller increase in ceded reserves more than offset higher ceded death benefits. Universal life ceded benefits decreased $9.5 million for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, due to lower ceded claims and a lower change in ceded reserves. Ceded universal life claims were $1.3 million lower for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010.

Ceded amortization of deferred policy acquisitions costs increased for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, primarily due to growth in universal life in-force and differences in DAC unlocking between the two periods.

Total allowances recognized for the three months ended June 30, 2011, decreased from the three months ended June 30, 2010, primarily due to runoff in older blocks of heavily reinsured traditional life business.

For The ~~Three~~Six Months Ended ~~March 31,~~June 30, 2011 as compared to The ~~Three~~Six Months Ended ~~March 31,~~June 30, 2010

The increase in ceded premiums ~~above~~ for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010, was caused primarily by higher ceded traditional life premiums and policy fees of ~~$18.6~~$7.2 million, higher universal life ceded premiums and policy fees of $4.6 million. ~~First quarter~~The six months ended June 30, 2010 showed lower than normal ceded traditional life premiums due to the one-time impact of a large block of policies reaching the end of the level pay period. Lapses on this block of policies caused decreases in ceded premiums infor the ~~first quarter of~~six months ended June 30, 2010. The impact on net income was not material as the impact on premiums was largely offset by an impact on reserve changes included in benefits and ~~settlement~~settlements expenses. Universal life ceded premium increased due to growth in in-force business.

Ceded benefits and settlement expenses were ~~higher~~lower for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010, due to ~~higher ceded claims partly offset by~~ lower increases in ceded ~~reserves.~~reserves partially offset by higher ceded claims. Traditional ceded benefits ~~increased $9.0~~decreased $1.0 million for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010, asdue to a ~~larger~~lower increase in ceded reserves ~~more than~~partly offset ~~lower~~by higher ceded death benefits. Universal life ceded benefits decreased ~~$0.1~~$9.6 million for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010, due to ~~higher ceded claims more than offsetting~~ a lower change in ceded ~~reserves.~~reserves more than offsetting higher ceded claims. Ceded universal life claims were ~~$14.5~~$13.2 million higher for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010.

Ceded amortization of deferred policy acquisitions costs increased for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010, primarily due to ~~the~~growth in universal life in-force and differences in DAC unlocking between the two periods.

Total allowances recognized for the ~~three~~six months ended ~~March 31,~~June 30, 2011, ~~increased from~~were virtually identical to those recognized for the ~~three~~six months ended ~~March 31,~~June 30, 2010, as ~~the impact of~~ growth in universal life ~~sales more than~~allowances offset ~~the impact of the continued reduction in our traditional life reinsurance~~decreased term allowances.

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Acquisitions

Segment results of operations

Segment results were as follows:

	For The								For The								For The
	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2011			2010			Change		2011			2010			Change		2011			2010			Change
	(Dollars In Thousands)								(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	180,494		$	160,721		12.3	%	$	215,533		$	178,389		20.8	%	$	396,027		$	339,110		16.8	%
Reinsurance ceded	(101,794		)	(93,134		)	9.3		(112,681		)	(117,492		)	(4.1	)	(214,475		)	(210,626		)	1.8
Net premiums and policy fees	78,700			67,587			16.4		102,852			60,897			68.9		181,552			128,484			41.3
Net investment income	117,938			115,401			2.2		132,710			116,748			13.7		250,648			232,149			8.0
Other income	1,279			1,273			0.5		1,391			1,375			1.2		2,670			2,648			0.8
Total operating revenues	197,917			184,261			7.4		236,953			179,020			32.4		434,870			363,281			19.7
Realized gains (losses) - investments	(5,274		)	44,519					34,676			61,152					29,402			105,671
Realized gains (losses) - derivatives	7,480			(30,063		)			(28,858		)	(62,593		)			(21,378		)	(92,656		)
Total revenues	200,123			198,717					242,771			177,579					442,894			376,296
BENEFITS AND EXPENSES
Benefits and settlement expenses	142,481			133,474			6.7		164,906			127,554			29.3		307,387			261,028			17.8
Amortization of value of business acquired	15,904			13,195			20.5		17,883			15,868			12.7		33,787			29,063			16.3
Other operating expenses	7,141			6,223			14.8		14,735			5,408			n/m		21,876			11,631			88.1
Operating benefits and expenses	165,526			152,892			8.3		197,524			148,830			32.7		363,050			301,722			20.3
Amortization of VOBA related to realized gains (losses) - investments	699			143					170			(266		)			869			(123		)
Total benefits and expenses	166,225			153,035			8.6		197,694			148,564			33.1		363,919			301,599			20.7
INCOME BEFORE INCOME TAX	33,898			45,682			(25.8	)	45,077			29,015			55.4		78,975			74,697			5.7
Less: realized gains (losses)	2,206			14,456					5,818			(1,441		)			8,024			13,015
Less: related amortization of VOBA	(699		)	(143		)			(170		)	266					(869		)	123
OPERATING INCOME	$	32,391		$	31,369		3.3		$	39,429		$	30,190		30.6		$	71,820		$	61,559		16.7

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The following table summarizes key data for the Acquisitions segment:

	For The								For The								For The
	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2011			2010			Change		2011			2010			Change		2011			2010			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Average Life Insurance In-Force(1)
Traditional	$	187,504,555		$	189,300,917		(0.9	)%	$	189,302,441		$	186,269,289		1.6	%	$	188,378,733		$	187,785,103		0.3	%
Universal life	27,927,654			27,324,752			2.2		30,436,492			26,952,745			12.9		29,258,124			27,138,749			7.8
	$	215,432,209		$	216,625,669		(0.6	)	$	219,738,933		$	213,222,034		3.1		$	217,636,857		$	214,923,852		1.3
Average Account Values
Universal life	$	3,004,513		$	2,755,125		9.1		$	3,271,798		$	2,735,942		19.6		$	3,138,171		$	2,752,506		14.0
Fixed annuity(2)	3,385,490			3,425,604			(1.2	)	3,344,125			3,380,571			(1.1	)	3,363,378			3,400,338			(1.1	)
Variable annuity	736,726			139,690			n/m		706,370			134,278			n/m		718,739			136,983			n/m
	$	7,126,729		$	6,320,419		12.8		$	7,322,293		$	6,250,791		17.1		$	7,220,288		$	6,289,827		14.8
Interest Spread - UL & Fixed Annuities
Net investment income yield(3)	5.71		%	5.89		%			5.79		%	6.01		%			5.75		%	5.95		%
Interest credited to policyholders	4.14			4.28					4.17			4.10					4.10			4.19
Interest spread	1.57		%	1.61		%			1.62		%	1.91		%			1.65		%	1.76		%

(1)Amounts are not adjusted for reinsurance ceded.

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

(3)Includes available-for-sale and trading portfolios. Available-for-sale portfolio yields were ~~6.20%~~6.04% and 6.10% for the three and six months ended June 30, 2011, respectively, as compared to 6.34% for the three and six months ended ~~March 31, 2011 and 2010, respectively.~~June 30, 2010.

For The Three Months Ended ~~March 31,~~June 30, 2011 as compared to The Three Months Ended ~~March 31,~~June 30, 2010

Segment operating income

Operating income was ~~$32.4~~$39.4 million for the three months ended ~~March 31,~~June 30, 2011, an increase of ~~$1.0~~$9.2 million, or ~~3.3%~~30.6%, as compared to the three months ended ~~March 31,~~June 30, 2010, primarily due to the addition of the United Investors and Liberty Life blocks which added $12.6 million to operating income. This increase was partially offset by expected runoff in the existing blocks.

Operating revenues

Operating revenues for the three months ended June 30, 2011, increased $57.9 million, or 32.4%, as compared to the three months ended June 30, 2010. The increase was primarily due to an increase of $42.0 million in net premiums and policy fees as compared to the three months ended June 30, 2010. The increase in net premiums and policy fees was primarily due to the addition of the United Investors and Liberty Life blocks which added $45.9 million to premiums. This was partly offset by runoff of the existing in-force business. Net investment income increased $16.0 million, or 13.7%, for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, due to the addition of the United Investors and Liberty Life blocks which added $24.2 million to net investment income. This increase was partly offset by runoff of the segment’s existing in-force business, resulting in a reduction of invested assets and lower investment income.

Total benefits and expenses

Total benefits and expenses increased $49.1 million, or 33.1%, for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010. The increase related primarily to the addition of the United Investors and Liberty Life blocks which added $57.9 million to total benefits and expenses. This was partly offset by expected runoff of the in-force business and lower operating expenses.

For The Six Months Ended June 30, 2011 as compared to The Six Months Ended June 30, 2010

Segment operating income

Operating income was $71.8 million for the six months ended June 30, 2011, an increase of $10.3 million, or 16.7%, as compared to the six months ended June 30, 2010, primarily due to the United Investors ~~acquisition~~and Liberty Life blocks which added ~~$7.7~~$20.3 million to operating income. This increase was partly offset by lower spreads and higher mortality and morbidity in some lines and the expected runoff in ~~the~~ other blocks of business.

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Operating revenues

~~Net~~Operating revenues for the six months ended June 30, 2011, increased $71.6 million, or 19.7%, as compared to the six months ended June 30, 2010. The increase was primarily due to an increase of $53.1 million in net premiums and policy fees ~~increased $11.1 million, or 16.4%, for the three months ended March 31, 2011,~~ as compared to the ~~three~~six months ended ~~March 31, 2010, which~~June 30, 2010. The increase in net premiums and policy fees was primarily due to the United Investors ~~acquisition~~and Liberty Life blocks which added ~~$16.6~~$62.5 million to net premiums and policy fees. This was partly offset by the expected runoff of other lines of business. Net investment income increased ~~$2.5~~$18.5 million, or ~~2.2%~~8.0%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010. United Investors and Liberty Life investment income of ~~$8.8~~$33.0 million was partly offset by runoff of the segment’s in-force business and lower yields on certain investment portfolios.

Total benefits and expenses

Total benefits and expenses increased ~~$13.2~~$62.3 million, or ~~8.6%~~20.7%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010. The increase reflects ~~$18.0~~the addition of the United Investors and Liberty Life blocks which added $75.9 million ~~related~~ to ~~United Investors,~~total benefits and expenses which was partly offset by ~~the expected~~ runoff of the segment’s in-force business and fluctuations in mortality. The variance in the amortization of VOBA related to realized gains (losses) on investments is due to the size of the gains or losses relative to the gross profits used to amortize VOBA in a given year.

~~Table of Contents~~business.

Reinsurance

The Acquisitions segment currently reinsures portions of both its life and annuity in-force. The cost of reinsurance to the segment is reflected in the chart shown below.

Impact of reinsurance

Reinsurance impacted the Acquisitions segment line items as shown in the following table:

Acquisitions Segment

Line Item Impact of Reinsurance

	For The						For The						For The
	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2011			2010			2011			2010			2011			2010
	(Dollars In Thousands)						(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(101,794	)	$	(93,134	)	$	(112,681	)	$	(117,492	)	$	(214,475	)	$	(210,626	)
BENEFITS AND EXPENSES
Benefit and settlement expenses	(91,875		)	(85,069		)
Benefits and settlement expenses							(96,898		)	(93,901		)	(188,773		)	(178,970		)
Amortization of deferred policy acquisition costs	(5,196		)	(5,422		)	(3,169		)	(2,231		)	(8,365		)	(7,653		)
Other operating expenses	(12,944		)	(12,785		)	(13,973		)	(15,110		)	(26,917		)	(27,895		)
Total benefits and expenses	(110,015		)	(103,276		)	(114,040		)	(111,242		)	(224,055		)	(214,518		)

NET IMPACT OF REINSURANCE(1)	$	8,221		$	10,142		$	1,359		$	(6,250	)	$	9,580		$	3,892

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

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

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The net favorable impact of reinsurance ~~decreased $1.9~~increased $7.6 million for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010, as ceded benefits increased in spite of lower ceded premiums in existing in-force blocks.

The favorable net impact of reinsurance increased $5.7 million for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, as increases in ceded ~~premiums partly due to the United Investors acquisition~~benefits and expenses more than offset increases in ceded premiums. Increases in ceded premiums, benefits and ~~expenses.~~amortization reflect the addition of the United Investors block.

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Annuities

Segment results of operations

Segment results were as follows:

	For The								For The								For The
	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2011			2010			Change		2011			2010			Change		2011			2010			Change
	(Dollars In Thousands)								(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	14,923		$	8,775		70.1	%	$	16,709		$	9,800		70.5	%	$	31,632		$	18,575		70.3	%
Reinsurance ceded	(21		)	(37		)	(43.2	)	(17		)	(38		)	(55.3	)	(38		)	(75		)	(49.3	)
Net premiums and policy fees	14,902			8,738			70.5		16,692			9,762			71.0		31,594			18,500			70.8
Net investment income	124,356			116,197			7.0		128,202			118,719			8.0		252,558			234,916			7.5
Realized gains (losses) - derivatives	(21,483		)	9,549			n/m		(2,196		)	(49,417		)	(95.6	)	(23,679		)	(39,868		)	(40.6	)
Other income	11,101			5,405			n/m		12,828			6,421			99.8		23,929			11,826			n/m
Total operating revenues	128,876			139,889			(7.9	)	155,526			85,485			81.9		284,402			225,374			26.2
Realized gains (losses) - investments	999			102					(2,215		)	(524		)			(1,216		)	(422		)
Total revenues	129,875			139,991			(7.2	)	153,311			84,961			80.4		283,186			224,952			25.9
BENEFITS AND EXPENSES
Benefits and settlement expenses	96,242			94,241			2.1		99,844			114,534			(12.8	)	196,086			208,775			(6.1	)
Amortization of deferred policy acquisition costs and value of business acquired	6,843			19,600			(65.1	)	18,530			(38,143		)	n/m		25,373			(18,543		)	n/m
Other operating expenses	12,929			9,230			40.1		12,891			9,749			32.2		25,820			18,979			36.0
Operating benefits and expenses	116,014			123,071			(5.7	)	131,265			86,140			52.4		247,279			209,211			18.2
Amortization related to benefit and settlement expense	5			—					12			—					17			—
Amortization of DAC related to realized gains (losses) - investments	229			71					(369		)	594					(140		)	665
Total benefits and expenses	116,248			123,142			(5.6	)	130,908			86,734			50.9		247,156			209,876			17.8
INCOME BEFORE INCOME TAX	13,627			16,849			(19.1	)	22,403			(1,773		)	n/m		36,030			15,076			n/m
Less: realized gains (losses)	999			102					(2,215		)	(524		)			(1,216		)	(422		)
Less: amortization related to benefit and settlement expense	(5		)	—
Less: amortization related to benefits and settlement expenses									(12		)	—					(17		)	—
Less: related amortization of DAC	(229		)	(71		)			369			(594		)			140			(665		)
OPERATING INCOME	$	12,862		$	16,818		(23.5	)	$	24,261		$	(655	)	n/m		$	37,123		$	16,163		n/m

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The following table summarizes key data for the Annuities segment:

	For The								For The								For The
	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2011			2010			Change		2011			2010			Change		2011			2010			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Sales
Fixed annuity	$	309,264		$	218,029		41.8	%	$	245,803		$	325,299		(24.4	)%	$	555,067		$	543,328		2.2	%
Variable annuity	607,795			349,936			73.7		669,021			412,789			62.1		1,276,816			762,725			67.4
	$	917,059		$	567,965		61.5		$	914,824		$	738,088		23.9		$	1,831,883		$	1,306,053		40.3
Average Account Values
Fixed annuity(1)	$	8,292,589		$	7,600,963		9.1		$	8,522,369		$	7,820,272		9.0		$	8,407,479		$	7,710,618		9.0
Variable annuity	4,755,225			2,909,757			63.4		5,392,972			3,212,315			67.9		5,074,099			3,061,036			65.8
	$	13,047,814		$	10,510,720		24.1		$	13,915,341		$	11,032,587		26.1		$	13,481,578		$	10,771,654		25.2
Interest Spread - Fixed Annuities(2)
Net investment income yield	5.95		%	6.12		%			6.00		%	6.06		%			5.99		%	6.09		%
Interest credited to policyholders	4.41			4.63					4.42			4.61					4.41			4.62
Interest spread	1.54		%	1.49		%			1.58		%	1.45		%			1.58		%	1.47		%

	As of
	March 31, 2011			December 31, 2010			Change
GMDB - Net amount at risk(3)	$	178,647		$	221,907		(19.5	)%
GMDB Reserves	5,923			6,107			(3.0	)
GMWB Reserves	11,486			19,611			(41.4	)
Account value subject to GMWB rider	3,248,092			2,686,125			20.9
S&P 500® Index	1,326			1,258			5.4

	As of
	June 30, 2011		December 31, 2010		Change
	(Dollars In Thousands)
GMDB - Net amount at risk(3)	$	176,278	$	221,907	(20.6	)%
GMDB Reserves	5,213		6,107		(14.6	)
GMWB Reserves	17,036		19,611		(13.1	)
Account value subject to GMWB rider	3,774,599		2,686,125		40.5
S&P 500® Index	1,321		1,258		5.0

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

(2) Interest spread on average general account values.

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

For The Three Months Ended ~~March 31,~~June 30, 2011 as compared to The Three Months Ended ~~March 31,~~June 30, 2010

Segment operating income

Segment pre-tax operating income was ~~$12.9~~$24.3 million infor the ~~first quarter of~~three months ended June 30, 2011, as compared to ~~$16.8~~a $0.7 million inloss for the ~~first quarter of~~three months ended June 30, 2010. The current quarter included ~~an unfavorable $10.5~~a favorable $2.0 million impact related to guaranteed benefits of certain VA ~~contracts. The~~contracts, as compared to an unfavorable $14.6 million impact ~~included $8.8 million related primarily to being over hedged regarding equity market exposure and $1.7 million related to in-force changes and updated model assumptions to value GMWB. The first~~in the second quarter of 2010 ~~included a favorable $4.6 million impact~~ related to guaranteed benefits of certain VA contracts. ~~Partially offsetting these items were~~The remainder of the favorable variance is from higher VA fees, higher spreads, and higher average account value growth in the SPDA line ~~and favorable SPIA mortality compared to~~in the ~~prior year’s quarter.~~current period.

Operating revenues

Operating revenues ~~decreased $11.0~~increased $70.4 million, or ~~7.9%~~81.9%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010, primarily due to ~~an unfavorable~~a favorable impact from derivatives associated with the VA GMWB rider and the EIA product of ~~$15.1 million. These losses were partially offset by a $0.4~~$49.8 million ~~favorable fair value change associated with~~and $1.5 million, respectively. The remainder of the ~~equity indexed annuity (“EIA”) product along with~~increase is due to increases in net investment income, policy fees, and other income. Average fixed account balances grew ~~9.1%~~9.0% and average variable account balances grew ~~63.4%~~67.9% for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010, resulting in higher investment income, policy fees, and other income.

~~Table of Contents~~

Benefits and settlement expenses

Benefits and settlement expenses ~~increased $2.0~~decreased $14.7 million, or ~~2.1%~~12.8%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010. This ~~increase~~decrease was primarily ~~the result of higher credited interest, an unfavorable change in unearned premium reserve amortization, and an unfavorable change related~~due to ~~EIA liability fair value adjustments. The unfavorable~~a $19.0 million favorable change in unearned premium amortization and bonus interest amortization associated with the VA ~~GMWB rider and the~~product line. Offsetting this was a $2.1 million unfavorable fair value change related to the EIA ~~liability were $2.4 million~~reserves. Also, growth in the SPDA and ~~$0.4 million, respectively. Offsetting these increases was a favorable change~~VA has caused an increase in benefits and settlement expenses for those lines.

Table of ~~$2.0 million in SPIA mortality results.~~Contents

Amortization of DAC

The ~~decrease~~increase in DAC amortization for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010, was primarily due to changes related to the VA GMWB rider, which caused ~~a decrease~~an increase in amortization of ~~$16.3~~$42.2 million. Unfavorable DAC unlocking of ~~$0.4~~$1.9 million was recorded by the segment during the three months ended ~~March 31,~~June 30, 2011. In addition, growth in the SPDA and VA has caused an increase in DAC amortization for those lines.

Sales

Total sales increased ~~$349.1~~$176.7 million, or ~~61.5%~~23.9%, for the three ~~month~~months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010. Sales of variable annuities increased ~~$257.9~~$256.2 million, or ~~73.7%~~62.1%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010, primarily due to product positioning and more focus on the VA line of business. Sales of fixed annuities decreased $79.5 million, or 24.4%, for the three months ended June 30, 2011, as compared to the three month ended June 30, 2010, largely due to a decrease in credited rates.

For The Six Months Ended June 30, 2011 as compared to The Six Months Ended June 30, 2010

Segment operating income

Segment pre-tax operating income was $37.1 million for the six months ended June 30, 2011, as compared to $16.2 million for the six months ended June 30, 2010. The first six months of 2011 included an unfavorable impact of $8.5 million related to guaranteed benefits of certain VA contracts, while the first six months of 2010 included an unfavorable $10.0 million impact related to guaranteed benefits of certain VA contracts. Other items accounted for the remainder of the variance including growth in the SPDA line of business, higher fees related to VA account balances and a $1.7 million improvement in SPIA mortality results.

Operating revenues

Segment operating revenues increased $59.0 million, or 26.2%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, primarily due to a favorable impact from derivatives associated with the VA GMWB rider and the EIA product of $21.6 million and $1.9 million, respectively. The remainder of the increase is due to increases in net investment income, policy fees, and other income. Average fixed account balances grew 9.0% and average variable account balances grew 65.8% for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, resulting in higher investment income, policy fees, and other income.

Benefits and settlement expenses

Benefits and settlement expenses decreased $12.7 million, or 6.1%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010. This decrease was primarily due to a $18.7 million favorable change in unearned premium amortization and bonus interest amortization associated with the VA product line. There was also a $1.7 million favorable change in the SPIA mortality results. Offsetting these favorable changes were increased credited interest and a $2.5 million unfavorable fair value change related to the EIA reserves. Also, growth in the SPDA and VA has caused an increase in benefits and settlement expenses for those lines.

Amortization of DAC

The increase in DAC amortization for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, was primarily due to changes related to the VA GMWB rider, which caused an increase in amortization of $25.9 million. Unfavorable DAC unlocking of $2.4 million was recorded by the segment during the six months ended June 30, 2011. In addition, growth in the SPDA and VA has caused an increase in DAC amortization for those lines.

Sales

Total sales increased $525.8 million, or 40.3%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010. Sales of variable annuities increased $514.1 million, or 67.4%, for the six months

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ended June 30, 2011, as compared to the six months ended June 30, 2010, primarily due to product positioning and more focus on the VA line of business. Sales of fixed annuities increased ~~$91.2~~$11.7 million, or ~~41.8%~~2.2%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the three month ended March 31, 2010. The increase in fixed annuity sales was driven by SPDA sales, reflecting higher demand for fixed products in the current interest rate environment, which increased by $63.1 million, or 34.3%, for the threesix months ended ~~March 31, 2011, as compared to the three months ended March 31,~~June 30, 2010.

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Stable Value Products

Segment results of operations

Segment results were as follows:

	For The							For The							For The
	Three Months Ended							Three Months Ended							Six Months Ended
	March 31,							June 30,							June 30,
	2011			2010		Change		2011		2010			Change		2011		2010			Change
	(Dollars In Thousands)							(Dollars In Thousands)
REVENUES
Net investment income	$	36,104		$	46,420	(22.2	)%	$	39,376	$	45,724		(13.9	)%	$	75,480	$	92,144		(18.1	)%
Other income	(1		)	—		n/m		1		—			n/m		—		—			n/m
Realized gains (losses)	8,606			1,536		n/m		7,253		(8,213		)	n/m		15,859		(6,677		)	n/m
Total revenues	44,709			47,956		(6.8	)	46,630		37,511			24.3		91,339		85,467			6.9
BENEFITS AND EXPENSES
Benefits and settlement expenses	22,790			33,731		(32.4	)	19,381		32,972			(41.2	)	42,171		66,703			(36.8	)
Amortization of deferred policy acquisition costs	3,547			979		n/m		286		882			(67.6	)	3,833		1,861			n/m
Other operating expenses	571			683		(16.4	)	568		891			(36.3	)	1,139		1,574			(27.6	)
Total benefits and expenses	26,908			35,393		(24.0	)	20,235		34,745			(41.8	)	47,143		70,138			(32.8	)
INCOME BEFORE INCOME TAX	17,801			12,563		41.7		26,395		2,766			n/m		44,196		15,329			n/m
Less: realized gains (losses)	8,606			1,536				7,253		(8,213		)			15,859		(6,677		)
OPERATING INCOME	$	9,195		$	11,027	(16.6	)	$	19,142	$	10,979		74.4		$	28,337	$	22,006		28.8

The following table summarizes key data for the Stable Value Products segment:

	For The								For The								For The
	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2011			2010			Change		2011			2010			Change		2011			2010			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Sales
GIC	$	74,658		$	1,000		n/m	%	$	161,137		$	6,500		n/m	%	$	235,795		$	7,500		n/m	%
GFA - Direct Institutional	—			150,000			n/m		100,000			250,000			(60.0	)	100,000			400,000			(75.0	)
	$	74,658		$	151,000		(50.6	)	$	261,137		$	256,500		1.8		$	335,795		$	407,500		(17.6	)

Average Account Values	$	2,750,596		$	3,494,977		(21.3	)	$	2,450,620		$	3,497,115		(29.9	)	$	2,599,435		$	3,496,283		(25.7	)
Ending Account Values	$	2,664,139		$	3,454,186		(22.9	)	$	2,565,235		$	3,488,175		(26.5	)	$	2,565,235		$	3,488,175		(26.5	)

Operating Spread
Net investment income yield	5.25		%	5.31		%			6.42		%	5.23		%			5.84		%	5.27		%
Interest credited	3.31			3.86					3.16			3.77					3.24			3.81
Operating expenses	0.60			0.19					0.14			0.20					0.37			0.20
Operating spread	1.34		%	1.26		%			3.12		%	1.26		%			2.23		%	1.26		%

Adjusted operating spread(1)									1.97		%	1.07		%			1.64		%	1.15		%

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

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For The Three Months Ended ~~March 31,~~June 30, 2011 as compared to The Three Months Ended ~~March 31,~~June 30, 2010

Segment operating income

Operating income was ~~$9.2~~$19.1 million and ~~decreased $1.8~~increased $8.2 million, or ~~16.6%~~74.4%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010. The ~~decrease~~increase in operating earnings resulted from higher operating spreads offset by a decline in average account values. ~~We also called certain retail notes, which caused accelerated DAC amortization~~Included in the second quarter 2011 results are participating mortgage loan income and bank loan fee income of ~~$3.1~~$5.4 million ~~on those called contracts.~~and $1.7 million, respectively, as compared to $0.2 million and $1.9 million, respectively, in the second quarter of 2010. The operating spread increased 8186 basis points to ~~134~~312 basis points for the three months ended ~~March 31,~~June 30, 2011, as compared to an operating spread of 126 basis points for the three months ended ~~March 31,~~June 30, 2010.

Sales

Total sales were ~~$74.7~~$261.1 million for the three months ended ~~March 31,~~June 30, 2011, as compared to ~~$151.0~~$256.5 million for the three months ended ~~March 31,~~June 30, 2010.

54For The Six Months Ended June 30, 2011 as compared to The Six Months Ended June 30, 2010

Segment operating income

Operating income was $28.3 million and increased $6.3 million, or 28.8%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010. The increase in operating earnings resulted from higher operating spreads offset by a decline in average account values. Included in the six months ended June 30, 2011 results are participating mortgage loan income and bank loan fee income of $5.5 million and $1.7 million, respectively, as compared to $0.3 million and $2.1 million, respectively, for the six months ended June 30, 2010. The operating spread increased 97 basis points to 223 basis points for the six months ended June 30, 2011, as compared to an operating spread of 126 basis points for the six months ended June 30, 2010.

Sales

Total sales were $335.8 million for the six months ended June 30, 2011 as compared to $407.5 million for the six months ended June 30, 2010.

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Asset Protection

Segment results of operations

Segment results were as follows:

	For The								For The								For The
	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2011			2010			Change		2011			2010			Change		2011			2010			Change
	(Dollars In Thousands)								(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	67,519		$	75,578		(10.7	)%	$	68,219		$	72,948		(6.5	)%	$	135,738		$	148,526		(8.6	)%
Reinsurance ceded	(24,422		)	(29,991		)	(18.6	)	(24,608		)	(27,850		)	(11.6	)	(49,030		)	(57,841		)	(15.2	)
Net premiums and policy fees	43,097			45,587			(5.5	)	43,611			45,098			(3.3	)	86,708			90,685			(4.4	)
Net investment income	5,726			6,330			(9.5	)	5,526			6,105			(9.5	)	11,252			12,435			(9.5	)
Other income	20,162			14,569			38.4		21,650			16,694			29.7		41,812			31,263			33.7
Total operating revenues	68,985			66,486			3.8		70,787			67,897			4.3		139,772			134,383			4.0
BENEFITS AND EXPENSES
Benefits and settlement expenses	21,357			15,759			35.5		22,244			23,640			(5.9	)	43,601			39,399			10.7
Amortization of deferred policy acquisition costs	6,790			6,931			(2.0	)	6,841			7,671			(10.8	)	13,631			14,602			(6.6	)
Other operating expenses	36,851			32,970		��	11.8		38,112			31,474			21.1		74,963			64,444			16.3
Total benefits and expenses	64,998			55,660			16.8		67,197			62,785			7.0		132,195			118,445			11.6
INCOME BEFORE INCOME TAX	3,987			10,826			(63.2	)	3,590			5,112			(29.8	)	7,577			15,938			(52.5	)
OPERATING INCOME	$	3,987		$	10,826		(63.2	)	$	3,590		$	5,112		(29.8	)	$	7,577		$	15,938		(52.5	)

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

	For The								For The								For The
	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2011			2010			Change		2011			2010			Change		2011			2010			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Sales
Credit insurance	$	8,766		$	7,692		14.0	%	$	9,650		$	9,693		(0.4	)%	$	18,416		$	17,385		5.9	%
Service contracts	59,420			49,605			19.8		74,393			60,612			22.7		133,812			110,217			21.4
Other products	17,244			11,459			50.5		20,116			13,363			50.5		37,360			24,822			50.5
	$	85,430		$	68,756		24.3		$	104,159		$	83,668		24.5		$	189,588		$	152,424		24.4
Loss Ratios (1)
Credit insurance	35.5		%	43.9		%			30.5		%	29.2		%			33.2		%	36.7		%
Service contracts	53.0			52.9					55.5			57.5					54.3			55.2
Other products	38.3			(142.8		)			36.2			37.7					37.2			(53.5		)

(1) Incurred claims as a percentage of earned premiums

For The Three Months Ended ~~March 31,~~June 30, 2011 as compared to The Three Months Ended ~~March 31,~~June 30, 2010

Segment operating income

Operating income was ~~$4.0~~$3.6 million, representing a decrease of ~~$6.8~~$1.5 million, or ~~63.2%~~29.8%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010. ~~Earnings from core product lines totaled $3.9 million for the three months ended March 31, 2011, an increase of $0.6~~Service contract earnings decreased $2.7 million, or ~~19.6%~~79.4%, as compared to the three months ended ~~March 31, 2010.~~June 30, 2010, resulting primarily from higher expenses attributable to increased contingent commissions and expenses related to new initiatives. Credit insurance earnings increased ~~$0.6~~$0.3 million as compared to the three months ended June 30, 2010, primarily due to lower expenses. Earnings from other products, including non-core lines, increased $0.9 million, or ~~69.4%~~55.3%, for the three months ended June 30, 2011, primarily due to higher volume in the GAP product line.

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Net premiums and policy fees

Net premiums and policy fees decreased $1.5 million, or 3.3%, for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010. Credit insurance premiums decreased $0.9 million and service contract premiums decreased $1.1 million, or 3.0%, as compared to the three months ended ~~March 31, 2010,~~June 30, 2010. The decreases were primarily ~~due to lower loss ratios~~the result of decreased sales in prior years and ~~lower expenses. Service contract earnings decreased $0.7~~the related impact on earned premiums. Within the other product lines, net premiums increased $0.5 million, or 29.6%, as compared to the first quarter of 2010. The decrease primarily resulted from higher expenses in certain product lines partially offset by higher volume. Earnings from other products, including non-core lines, decreased $6.711.4%.

Other income

Other income increased $5.0 million, or ~~73.0%~~29.7%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended June 30, 2010, primarily due to an increase in 2011 sales, reflecting improvement in U.S. auto sales and increased market share.

Benefits and settlement expenses

Benefits and settlement expenses decreased $1.4 million, or 5.9%, for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010. Credit insurance claims decreased $0.2 million and service contract claims decreased $1.3 million, or 6.3%. Other products claims increased $0.1 million, or 7.2%.

Amortization of DAC and Other operating expenses

Amortization of DAC was $0.8 million, or 10.8%, lower for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, primarily due to reduced amortization in the credit insurance product line. Other operating expenses increased $6.6 million, or 21.1%, for the three months ended June 30, 2011, mainly due to higher commission expense resulting from an increase in sales and expenses related to new initiatives.

Sales

Total segment sales increased $20.5 million, or 24.5%, for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010. This increase was primarily due to service contract sales, which increased $13.8 million, or 22.7%, as compared to the three months ended June 30, 2010. Sales in other products increased $6.8 million, or 50.5%, primarily in the GAP product line. Increases in the service contract and GAP lines are attributable to the improvement in auto sales over the prior year and increased market share.

For The Six Months Ended June 30, 2011 as compared to The Six Months Ended June 30, 2010

Segment operating income

Operating income was $7.6 million, representing a decrease of $8.4 million, or 52.5%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010. Earnings from other products, including the GAP product and non-core lines, decreased $5.7 million, or 52.8%, for the six months ended June 30, 2011, primarily due to a $7.8 million excess reserve release related to the runoff Lender’s Indemnity line of business in the first

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quarter of 2010. This decrease was partially offset by a ~~$0.8~~$1.8 million, or 53.5%, increase in earnings from the GAP product ~~line, as compared to the same quarter last year.~~line. Higher volume and favorable loss experience contributed to the increase. Service contract earnings decreased $3.5 million, or 58.5%, as compared to the six months ended June 30, 2010. The decrease primarily resulted from higher expenses attributable to increased contingent commissions and expenses related to new initiatives. Credit insurance earnings increased $0.9 million as compared to the six months ended June 30, 2010, primarily due to lower loss ratios and lower expenses.

Net premiums and policy fees

Net premiums and policy fees decreased ~~$2.5~~$4.0 million, or ~~5.5%~~4.4%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010. ~~Credit~~Service contract premiums decreased $3.1 million and credit insurance premiums decreased ~~$0.5~~$1.4 million, or ~~8.5%~~12.4%, as compared to the ~~quarter in 2010. Service contract premiums decreased $2.1 million, or 5.7%, as compared to the three~~six months ended ~~March 31, 2010. Net premiums within the other product lines remained consistent as compared to the three months ended March 31,~~June 30, 2010. The decreases were ~~mainly~~primarily the result of ~~decreasing~~decreased sales in prior years and the related impact on earned premiums. Within the other product lines, net premiums increased $0.5 million, or 6.2%.

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Other income

Other income increased ~~$5.6~~$10.5 million, or ~~38.4%~~33.7%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010, primarily due to ~~increased sales~~an increase in 2011 ~~as a result of~~sales, reflecting improvement in U.S. auto ~~sales.~~sales and increased market share.

Benefits and settlement expenses

Benefits and settlement expenses increased ~~$5.6~~$4.2 million, or ~~35.5%~~10.7%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31, 2010. Credit insurance claims decreased $0.6 million, or 25.9%, for the three months ended March 31, 2011, as compared to the three months ended March 31,~~June 30, 2010. Service contract claims decreased ~~$1.1~~$2.4 million, credit insurance claims decreased $0.8 million, or ~~5.5%. Other~~20.7%, and other products claims increased ~~$7.3 million for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.~~$7.4 million. The first quarter of 2010 included a $7.8 million excess reserve release related to the runoff Lender’s Indemnity line of business. The increase was partially offset by ~~a lower loss ratio~~$0.4 million decrease in the GAP product ~~line.~~line primarily due to a lower loss ratio.

Amortization of DAC and Other operating expenses

Amortization of DAC was ~~$0.1~~$1.0 million, or ~~2.0%~~6.6%, lower for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010, primarily due to ~~lower earned premiums.~~reduced amortization in the credit insurance product line. Other operating expenses increased ~~$3.9~~$10.5 million, or ~~11.8%~~16.3%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, mainly due to higher commission expense ~~in certain service contract lines primarily~~ resulting from an increase in ~~sales.~~sales and expenses related to new initiatives.

Sales

Total segment sales increased ~~$16.7~~$37.2 million, or ~~24.3%~~24.4%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010. This increase was primarily due to a $23.6 million increase in service contract sales and a $12.5 million increase in sales in other products as compared to the six months ended June 30, 2010. Credit insurance sales increased ~~$1.1~~$1.0 million, or ~~14.0%~~5.9%, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010. ~~Service contract sales increased $9.8 million, or 19.8%, as compared to the three months ended March 31, 2010. Sales in other products increased $5.8 million, or 50.5%, all in the GAP product line.~~ Increases in all product lines are ~~partly~~ attributable to the improvement in U.S. auto sales over the prior ~~year.~~year and increased market share.

Reinsurance

The majority of the Asset Protection segment’s reinsurance activity relates to the cession of single premium credit life and credit accident and health insurance, vehicle service contracts, and guaranteed asset protection insurance to producer affiliated reinsurance companies (“PARCs”). These arrangements are coinsurance contracts ceding the business on a first dollar quota share basis at levels ranging from 50% to 100% to limit our exposure and allow the PARCs to share in the underwriting income of the product. Reinsurance contracts do not relieve us from our obligations to our policyholders.

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Reinsurance impacted the Asset Protection segment line items as shown in the following table:

Asset Protection Segment

Line Item Impact of Reinsurance

	For The						For The						For The
	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2011			2010			2011			2010			2011			2010
	(Dollars In Thousands)						(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(24,422	)	$	(29,991	)	$	(24,608	)	$	(27,850	)	$	(49,030	)	$	(57,841	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(16,426		)	(20,716		)	(16,661		)	(20,373		)	(33,087		)	(41,089		)
Amortization of deferred policy acquisition costs	(6,645		)	(9,428		)	(6,128		)	(7,870		)	(12,773		)	(17,298		)
Other operating expenses	(2,582		)	(1,805		)	(2,751		)	(2,719		)	(5,333		)	(4,524		)
Total benefits and expenses	(25,653		)	(31,949		)	(25,540		)	(30,962		)	(51,193		)	(62,911		)

NET IMPACT OF REINSURANCE(1)	$	1,231		$	1,958		$	932		$	3,112		$	2,163		$	5,070

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

For The Three Months Ended ~~March 31,~~June 30, 2011 as compared to The Three Months Ended ~~March 31,~~June 30, 2010

Reinsurance premiums ceded decreased ~~$5.6~~$3.2 million, or ~~18.6%~~11.6%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010. The decrease was primarily due to a decline in ceded ~~service contract~~GAP premiums and ~~ceded GAP~~dealer credit insurance premiums due to lower sales in prior years.

Benefits and settlement expenses ceded decreased ~~$4.3~~$3.7 million, or ~~20.7%~~18.2%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010. The decrease was primarily due to lower losses in the service contract and ~~GAP~~dealer credit lines.

Amortization of DAC ceded decreased ~~$2.8~~$1.7 million, or ~~29.5%~~22.1%, for the three months ended ~~March 31,~~June 30, 2011, as compared to the three months ended ~~March 31,~~June 30, 2010, primarily as the result of decreases in ceded activity in the dealer credit and GAP product lines. Other operating expenses ceded ~~increased $0.8 million for the three months ended March 31, 2011,~~were unchanged as compared to the three months ended ~~March 31,~~June 30, 2010.

Net investment income has no direct impact on reinsurance cost. However, by ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed which will increase the assuming companies’ profitability on business we cede. The net investment income impact to us and the assuming companies has not been quantified as it is not reflected in our consolidated financial statements.

57For The Six Months Ended June 30, 2011 as compared to The Six Months Ended June 30, 2010

Reinsurance premiums ceded decreased $8.8 million, or 15.2%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010. The decrease was primarily due to a decline in ceded GAP and dealer credit insurance premiums due to lower sales in prior years.

Benefits and settlement expenses ceded decreased $8.0 million, or 19.5%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010. The decrease was primarily due to lower losses in the service contract and GAP lines.

Amortization of DAC ceded decreased $4.5 million, or 26.2%, for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, primarily as the result of decreases in ceded activity in the dealer credit and GAP product lines. Other operating expenses ceded increased $0.8 million for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010 mainly due to increases in the GAP line.

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Corporate and Other

Segment results of operations

Segment results were as follows:

	For The								For The								For The
	Three Months Ended								Three Months Ended								Six Months Ended
	March 31,								June 30,								June 30,
	2011			2010			Change		2011			2010			Change		2011			2010			Change
	(Dollars In Thousands)								(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	5,655		$	6,371		(11.2	)%	$	5,445		$	6,168		(11.7	)%	$	11,100		$	12,539		(11.5	)%
Reinsurance ceded	(94		)	—			n/m		(5		)	(2		)	n/m		(99		)	(2		)	n/m
Net premiums and policy fees	5,561			6,371			(12.7	)	5,440			6,166			(11.8	)	11,001			12,537			(12.3	)
Net investment income	36,597			22,719			61.1		18,426			26,522			(30.5	)	55,023			49,241			11.7
Realized gains (losses) - derivatives	—			42					—			42					—			84
Other income	10,231			2			n/m		19,580			4			n/m		29,811			6			n/m
Total operating revenues	52,389			29,134			79.8		43,446			32,734			32.7		95,835			61,868			54.9
Realized gains (losses) - investments	1,192			(8,029		)			14,688			(1,151		)			15,880			(9,180		)
Realized gains (losses) - derivatives	494			(4,365		)			(3,374		)	(6,682		)			(2,880		)	(11,047		)
Total revenues	54,075			16,740			n/m		54,760			24,901			n/m		108,835			41,641			n/m
BENEFITS AND EXPENSES
Benefits and settlement expenses	5,823			6,537			(10.9	)	5,824			6,442			(9.6	)	11,647			12,979			(10.3	)
Amortization of deferred policy acquisition costs	358			448			(20.1	)	352			452			(22.1	)	710			900			(21.1	)
Other operating expenses	34,372			25,932			32.5		31,950			26,553			20.3		66,322			52,485			26.4
Total benefits and expenses	40,553			32,917			23.2		38,126			33,447			14.0		78,679			66,364			18.6
INCOME (LOSS) BEFORE INCOME TAX	13,522			(16,177		)	n/m		16,634			(8,546		)	n/m		30,156			(24,723		)	n/m
Less: realized gains (losses) - investments	1,192			(8,029		)			14,688			(1,151		)			15,880			(9,180		)
Less: realized gains (losses) - derivatives	494			(4,365		)			(3,374		)	(6,682		)			(2,880		)	(11,047		)
OPERATING INCOME (LOSS)	$	11,836		$	(3,783	)	n/m		$	5,320		$	(713	)	n/m		$	17,156		$	(4,496	)	n/m

For The Three Months Ended ~~March 31,~~June 30, 2011 as compared to The Three Months Ended ~~March 31,~~June 30, 2010

Segment operating income (loss)

Corporate and Other segment operating income was ~~$11.8~~$5.3 million for the three months ended ~~March 31,~~June 30, 2011, as compared to a loss of ~~$3.8~~$0.7 million for the three months ended ~~March 31,~~June 30, 2010. The ~~improvement~~variance was primarily due to ~~the growth in net investment income due to deploying liquidity and yield improvements and~~ a ~~$10.1~~$19.7 million pre-tax gain on the repurchase of non-recourse funding obligations in the second quarter of 2011, as compared to no gains recorded in the second quarter of 2010. In addition, a favorable variance of $4.9 million related to a portfolio of securities designated for trading as compared to the same period in the prior year. Partially offsetting these increases was a decline in the segment’s core net investment income.

Operating revenues

Net investment income for the segment decreased $8.1 million, or 30.5%, for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, and net premiums and policy fees decreased $0.7 million, or 11.8%. The decrease in net investment income was primarily the result of lower core investment income, partially offset by a favorable variance related to a portfolio of securities designated for trading. Other income increased $19.6 million for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, as a result of a $19.7 million favorable variance related to the repurchase of non-recourse funding obligations.

Total benefits and expenses

Total benefits and expenses increased $4.7 million, or 14.0%, for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, primarily due to an increase in interest expense of $3.6 million and an increase of $0.8 million in general expenses, partially offset by a $0.6 million decrease in policy benefits on non-core lines of business.

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For The Six Months Ended June 30, 2011 as compared to The Six Months Ended June 30, 2010

Segment operating income (loss)

Corporate and Other segment operating income was $17.2 million for the six months ended June 30, 2011, as compared to a loss of $4.5 million for the six months ended June 30, 2010. The improvement was primarily due to a $29.8 million pre-tax gain on the repurchase of non-recourse funding obligations generated in the first six months of 2011, as compared to no gains recorded in the first six months of 2010. In addition, during the first quarter of 2011, we recorded $8.5 million of pre-tax earnings in the segment relating to the settlement of a dispute with respect to certain investments. Partially offsetting ~~the increase~~these increases, was a ~~decrease~~$13.8 million increase in other operating expenses, which includes an increase in interest expense of ~~$7.5 million related to a portfolio of securities designated for trading compared to the same period in the prior year.~~$10.4 million.

Operating revenues

Net investment income for the segment increased ~~$13.9~~$5.8 million, or ~~61.1%~~11.7%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010, and net premiums and policy fees decreased ~~$0.8~~$1.5 million, or ~~12.7%~~12.3%. The increase in net investment income was primarily the result of ~~deploying liquidity, yield improvements and~~ $8.5 million of pre-tax earnings relating to the settlement of a dispute with respect to certain investments. ~~These increases were partially offset by a~~The decrease in net premiums and policy fees related to ~~mark-to-market adjustments on a portfolio~~the expected runoff of ~~securities designated for trading.~~the block of business.

Total benefits and expenses

Total benefits and expenses increased ~~$7.6~~$12.3 million, or ~~23.2%~~18.6%, for the ~~three~~six months ended ~~March 31,~~June 30, 2011, as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2010, primarily due to ana $13.8 million increase ~~of $8.4 million~~ in other operating expenses, which includes an increase in interest expense of ~~$6.9~~$10.4 million, partially offset by a decrease ~~of $0.7 million~~ in policy ~~benefits.~~benefits on non-core lines of business.

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CONSOLIDATED INVESTMENTS

Certain reclassifications have been made in the previously reported financial statements and accompanying tables to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income, shareowner’s equity, or the totals reflected in the accompanying tables.

Portfolio Description

As of ~~March 31,~~June 30, 2011, our investment portfolio was approximately ~~$31.3~~$33.1 billion. The types of assets in which we may invest are influenced by various state laws which prescribe qualified investment assets. Within the parameters of these laws, we invest in assets giving consideration to such factors as liquidity and capital needs, investment quality, investment return, matching of assets and liabilities, and the overall composition of the investment portfolio by asset type and credit exposure.

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

	As of								As of
	March 31, 2011				December 31, 2010				June 30, 2011				December 31, 2010
	(Dollars In Thousands)								(Dollars In Thousands)
Publicly issued bonds (amortized cost: 2011 - $19,429,707; 2010 - $19,732,704)	$	20,029,354	64.0	%	$	20,314,417	64.9	%
Privately issued bonds (amortized cost: 2011 - $4,494,663; 2010 - $4,234,952)	4,614,979		14.7		4,329,770		13.8
Publicly issued bonds (amortized cost: 2011 - $20,313,247; 2010 - $19,732,704)									$	21,135,407	63.9	%	$	20,314,417	64.9	%
Privately issued bonds (amortized cost: 2011 - $4,810,579; 2010 - $4,234,952)									4,968,640		15.0		4,329,770		13.8
Fixed maturities	24,644,333		78.7		24,644,187		78.7		26,104,047		78.9		24,644,187		78.7
Equity securities (cost: 2011 - $301,256; 2010 - $307,971)	309,901		1.0		317,255		1.0
Equity securities (cost: 2011 - $301,464; 2010 - $307,971)									304,913		0.9		317,255		1.0
Mortgage loans	4,864,249		15.5		4,883,400		15.6		5,344,514		16.2		4,883,400		15.6
Investment real estate	7,636		0.0		7,196		0.0		12,498		0.0		7,196		0.0
Policy loans	784,320		2.5		793,448		2.5		881,757		2.7		793,448		2.5
Other long-term investments	282,550		0.9		283,002		0.9		304,004		0.9		283,002		0.9
Short-term investments	405,419		1.4		349,245		1.3		134,686		0.4		349,245		1.3
Total investments	$	31,298,408	100.0	%	$	31,277,733	100.0	%	$	33,086,419	100.0	%	$	31,277,733	100.0	%

Included in the preceding table are $2.9 billion and $3.0 billion of fixed maturities and ~~$155.4~~$102.2 million and $114.3 million of short-term investments classified as trading securities as of ~~March 31,~~June 30, 2011 and December 31, 2010, respectively. The trading portfolio includes invested assets of ~~$2.8 billion and~~ $2.9 billion as of ~~March 31,~~June 30, 2011 and December 31, 2010, ~~respectively,~~ held pursuant to modified coinsurance (“Modco”) arrangements under which the economic risks and benefits of the investments are passed to third party reinsurers.

Fixed Maturity Investments

As of ~~March 31,~~June 30, 2011, our fixed maturity investment holdings were approximately ~~$24.6~~$26.1 billion. The approximate percentage distribution of our fixed maturity investments by quality rating is as follows:

	As of				As of
Rating	March 31, 2011		December 31, 2010		June 30, 2011		December 31, 2010
AAA	16.8	%	17.0	%	17.2	%	17.0	%
AA	4.9		4.8		5.4		4.8
A	18.3		17.9		21.1		17.9
BBB	47.9		47.9		46.0		47.9
Below investment grade	12.1		12.4		10.3		12.4
	100.0	%	100.0	%	100.0	%	100.0	%

During the ~~three~~six months ended ~~March 31,~~June 30, 2011 and for the year ended December 31, 2010, we did not actively purchase securities below the BBB level.

We do not have material exposure to financial guarantee insurance companies with respect to our investment portfolio. As of ~~March 31,~~June 30, 2011, based upon amortized cost, ~~$42.5~~$40.3 million of our securities were guaranteed either directly or indirectly by third parties out of a total of ~~$23.8~~$25.0 billion fixed maturity securities held by us ~~(0.2%~~(0.16% of total fixed maturity securities).

Declines in fair value for our available-for-sale portfolio, net of related DAC and VOBA, are charged or credited directly to ~~shareowner’s~~shareowners’ equity. Declines in fair value that are other-than-temporary are recorded as realized

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losses in the consolidated condensed statements of income, net of any applicable non-credit component of the loss, which is recorded as an adjustment to other comprehensive income (loss).

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

	As of				As of
Type	March 31, 2011		December 31, 2010		June 30, 2011		December 31, 2010
	(Dollars In Millions)				(Dollars In Millions)
Residential mortgage-backed securities	$	2,689.1	$	2,970.3	$	2,832.2	$	2,970.3
Commercial mortgage-backed securities	315.3		311.6		456.5		311.6
Other asset-backed securities	952.5		927.1		905.8		927.1
U.S. government-related bonds	1,622.3		1,571.9		1,532.0		1,571.9
Other government-related bonds	277.2		327.8		253.5		327.8
States, municipals, and political subdivisions	1,140.6		1,123.8		1,383.1		1,123.8
Corporate bonds	17,647.3		17,411.7		18,740.9		17,411.7
Total fixed income portfolio	$	24,644.3	$	24,644.2	$	26,104.0	$	24,644.2

Within our fixed maturity investments, we maintain portfolios classified as “available-for-sale” and “trading”. We purchase our investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, we may sell any of our investments to maintain proper matching of assets and liabilities. Accordingly, we classified ~~$21.8~~$23.2 billion, or ~~88.4%~~88.9%, of our fixed maturities as “available-for-sale” as of ~~March 31,~~June 30, 2011. These securities are carried at fair value on our consolidated condensed balance sheets.

Trading securities are carried at fair value and changes in fair value are recorded on the income statement as they occur. Our trading portfolio accounts for $2.9 billion, or ~~11.6%~~11.1%, of our fixed maturities as of ~~March 31,~~June 30, 2011. Fixed maturities with a market value of ~~$2.8~~$2.9 billion and short-term investments with a market value of ~~$155.4~~$102.2 million in the trading portfolio, including gains and losses from sales, are passed to the reinsurers through the contractual terms of the reinsurance arrangements. Partially offsetting these amounts are corresponding changes in the fair value of the embedded derivative associated with the underlying reinsurance arrangement. The total Modco trading portfolio fixed maturities by rating is as follows:

	As of				As of
Rating	March 31, 2011		December 31, 2010		June 30, 2011		December 31, 2010
	(Dollars In Thousands)				(Dollars In Thousands)
AAA	$	806,829	$	816,064	$	803,594	$	816,064
AA	207,900		177,419		225,958		177,419
A	557,881		584,408		615,619		584,408
BBB	964,454		1,008,943		989,964		1,008,943
Below investment grade	242,412		269,710		221,857		269,710
Total Modco trading fixed maturities	$	2,779,476	$	2,856,544	$	2,856,992	$	2,856,544

A portion of our bond portfolio is invested in residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), and other asset-backed securities (collectively referred to as asset-backed securities “ABS”). ABS are securities that are backed by a pool of assets from the investee. These holdings as of ~~March 31,~~June 30, 2011, were approximately ~~$4.0~~$4.2 billion. Mortgage-backed securities (“MBS”) are constructed from pools of mortgages and may have cash flow volatility as a result of changes in the rate at which prepayments of principal occur with respect to the underlying loans. Excluding limitations on access to lending and other extraordinary economic conditions, prepayments of principal on the underlying loans can be expected to accelerate with decreases in market interest rates and diminish with increases in interest rates.

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Residential mortgage-backed securities - The tables below include a breakdown of our RMBS portfolio by type and rating as of ~~March 31,~~June 30, 2011. As of ~~March 31,~~June 30, 2011, these holdings were approximately ~~$2.7~~$2.8 billion. Sequential securities receive payments in order until each class is paid off. Planned amortization class securities (“PACs”) pay down according to a schedule. Pass through securities receive principal as principal of the underlying mortgages is received.

	Percentage of
	Residential
	Mortgage-Backed
Type	Securities
Sequential	~~58.7~~52.1	%
PAC	~~18.6~~22.8
Pass Through	~~7.2~~7.6
Other	~~15.5~~17.5
	100.0	%

	Percentage of
	Residential
	Mortgage-Backed
Rating	Securities
AAA	~~35.6~~47.0	%
AA	~~3.9~~2.3
A	~~0.7~~2.7
BBB	~~3.5~~2.8
Below investment grade	~~56.3~~45.2
	100.0	%

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As of ~~March 31,~~June 30, 2011, we held securities with a fair value of ~~$379.2~~$378.8 million, or ~~1.2%~~1.1% of invested assets, ~~of securities~~ supported by collateral classified as Alt-A. As of December 31, 2010, we held securities with a fair value of $401.0 million of securities supported by collateral classified as Alt-A.

The following table includes the percentage of our collateral classified as Alt-A, grouped by rating category, as of ~~March 31,~~June 30, 2011:

	Percentage of
	Alt-A
Rating	Securities
AAA	~~1.5~~0.4	%
A	~~0.2~~1.0
BBB	~~1.9~~4.7
Below investment grade	~~96.4~~93.9
	100.0	%

The following tables categorize the estimated fair value and unrealized gain/(loss) of our mortgage-backed securities collateralized by Alt-A mortgage loans by rating as of ~~March 31,~~June 30, 2011:

Alt-A Collateralized Holdings

	Estimated Fair Value of Security by Year of Security Origination														Estimated Fair Value of Security by Year of Security Origination
	2007 and														2007 and
Rating	Prior			2008		2009		2010		2011		Total			Prior		2008		2009		2010		2011		Total
	(Dollars In Millions)														(Dollars In Millions)
AAA	$	4.1		$	—	$	—	$	1.6	$	—	$	5.7		$	0.2	$	—	$	—	$	1.4	$	—	$	1.6
AA															0.1		—		—		—		—		0.1
A	0.7			—		—		—		—		0.7			3.8		—		—		—		—		3.8
BBB	7.2			—		—		—		—		7.2			17.7		—		—		—		—		17.7
Below investment grade	365.6			—		—		—		—		365.6			355.6		—		—		—		—		355.6
Total mortgage-backed securities collateralized by Alt-A mortgage loans	$	377.6		$	—	$	—	$	1.6	$	—	$	379.2		$	377.4	$	—	$	—	$	1.4	$	—	$	378.8

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2007 and
Rating	Prior			2008		2009		2010		2011		Total
	(Dollars In Millions)
AAA	$	—		$	—	$	—	$	—	$	—	$	—
A	—			—		—		—		—		—
BBB	0.8			—		—		—		—		0.8
Below investment grade	(37.0		)	—		—		—		—		(37.0		)
Total mortgage-backed securities collateralized by Alt-A mortgage loans	$	(36.2	)	$	—	$	—	$	—	$	—	$	(36.2	)

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2007 and
Rating	Prior			2008		2009		2010		2011		Total
	(Dollars In Millions)
AAA	$	—		$	—	$	—	$	—	$	—	$	—
AA	—			—		—		—		—		—
A	—			—		—		—		—		—
BBB	2.0			—		—		—		—		2.0
Below investment grade	(38.2		)	—		—		—		—		(38.2		)
Total mortgage-backed securities collateralized by Alt-A mortgage loans	$	(36.2	)	$	—	$	—	$	—	$	—	$	(36.2	)

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As of ~~March 31,~~June 30, 2011, we had RMBS with a total fair value of ~~$39.3~~$63.4 million, or ~~0.1%~~0.2%, of total invested assets, that were supported by collateral classified as sub-prime. As of December 31, 2010, we held securities with a fair value of $42.1 million that were supported by collateral classified as sub-prime.

The following table includes the percentage of our collateral classified as sub-prime, grouped by rating category, as of ~~March 31,~~June 30, 2011:

	Percentage of
	Sub-prime
Rating	Securities
AAA	~~0.2~~0.1	%
AA	~~5.0~~10.6
A	~~9.7~~9.9
BBB	~~2.5~~18.5
Below investment grade	~~82.6~~60.9
	100.0	%

The following tables categorize the estimated fair value and unrealized gain/(loss) of our mortgage-backed securities collateralized by sub-prime mortgage loans by rating as of ~~March 31,~~June 30, 2011:

Sub-prime Collateralized Holdings

	Estimated Fair Value of Security by Year of Security Origination														Estimated Fair Value of Security by Year of Security Origination
	2007 and														2007 and
Rating	Prior			2008		2009		2010		2011		Total			Prior		2008		2009		2010		2011		Total
	(Dollars In Millions)														(Dollars In Millions)
AAA	$	0.1		$	—	$	—	$	—	$	—	$	0.1		$	0.1	$	—	$	—	$	—	$	—	$	0.1
AA	1.9			—		—		—		—		1.9			6.7		—		—		—		—		6.7
A	3.8			—		—		—		—		3.8			6.3		—		—		—		—		6.3
BBB	1.0			—		—		—		—		1.0			11.7		—		—		—		—		11.7
Below investment grade	32.5			—		—		—		—		32.5			38.6		—		—		—		—		38.6
Total mortgage-backed securities collateralized by sub-prime mortgage loans	$	39.3		$	—	$	—	$	—	$	—	$	39.3		$	63.4	$	—	$	—	$	—	$	—	$	63.4

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2007 and
Rating	Prior			2008		2009		2010		2011		Total
	(Dollars In Millions)
AAA	$	—		$	—	$	—	$	—	$	—	$	—
AA	(0.1		)	—		—		—		—		(0.1		)
A	(0.2		)	—		—		—		—		(0.2		)
BBB	(0.1		)	—		—		—		—		(0.1		)
Below investment grade	(22.6		)	—		—		—		—		(22.6		)
Total mortgage-backed securities collateralized by sub-prime mortgage loans	$	(23.0	)	$	—	$	—	$	—	$	—	$	(23.0	)

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2007 and
Rating	Prior			2008		2009		2010		2011		Total
	(Dollars In Millions)
AAA	$	—		$	—	$	—	$	—	$	—	$	—
AA	(0.1		)	—		—		—		—		(0.1		)
A	(0.3		)	—		—		—		—		(0.3		)
BBB	(0.3		)	—		—		—		—		(0.3		)
Below investment grade	(25.3		)	—		—		—		—		(25.3		)
Total mortgage-backed securities collateralized by sub-prime mortgage loans	$	(26.0	)	$	—	$	—	$	—	$	—	$	(26.0	)

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As of ~~March 31,~~June 30, 2011, we had RMBS collateralized by prime mortgage loans (including agency mortgages) with a total fair value of ~~$2.3~~$2.4 billion, or ~~7.3%~~7.2%, of total invested assets. As of December 31, 2010, we held securities with a fair value of $2.5 billion of RMBS collateralized by prime mortgage loans (including agency mortgages).

The following table includes the percentage of our collateral classified as prime, grouped by rating category, as of ~~March 31,~~June 30, 2011:

	Percentage of
	Prime
Rating	Securities
AAA	~~42.0~~55.6	%
AA	~~4.5~~2.4
A	~~0.6~~2.8
BBB	~~3.8~~2.1
Below investment grade	~~49.1~~37.1
	100.0	%

The following tables categorize the estimated fair value and unrealized gain/(loss) of our mortgage-backed securities collateralized by prime mortgage loans (including agency mortgages) by rating as of ~~December 31, 2010:~~June 30, 2011:

Prime Collateralized Holdings

	Estimated Fair Value of Security by Year of Security Origination															Estimated Fair Value of Security by Year of Security Origination
	2007 and															2007 and
Rating	Prior			2008		2009		2010			2011		Total			Prior		2008		2009		2010		2011		Total
	(Dollars In Millions)															(Dollars In Millions)
AAA	$	802.2		$	—	$	—	$	141.6		$	8.8	$	952.6		$	808.9	$	—	$	70.1	$	250.4	$	200.3	$	1,329.7
AA	103.1			—		—		—			—		103.1			57.4		—		—		—		—		57.4
A	13.5			—		—		—			—		13.5			67.6		—		—		—		—		67.6
BBB	86.7			—		—		—			—		86.7			51.0		—		—		—		—		51.0
Below investment grade	1,114.7			—		—		—			—		1,114.7			884.3		—		—		—		—		884.3
Total mortgage-backed securities collateralized by prime mortgage loans	$	2,120.2		$	—	$	—	$	141.6		$	8.8	$	2,270.6		$	1,869.2	$	—	$	70.1	$	250.4	$	200.3	$	2,390.0

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2007 and
Rating	Prior			2008		2009		2010			2011		Total
	(Dollars In Millions)
AAA	$	47.4		$	—	$	—	$	(1.7	)	$	—	$	45.7
AA	0.6			—		—		—			—		0.6
A	0.4			—		—		—			—		0.4
BBB	1.8			—		—		—			—		1.8
Below investment grade	(20.5		)	—		—		—			—		(20.5		)
Total mortgage-backed securities collateralized by prime mortgage loans	$	29.7		$	—	$	—	$	(1.7	)	$	—	$	28.0

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2007 and
Rating	Prior			2008		2009		2010		2011			Total
	(Dollars In Millions)
AAA	$	52.5		$	—	$	1.4	$	0.3	$	(0.1	)	$	54.1
AA	0.6			—		—		—		—			0.6
A	0.1			—		—		—		—			0.1
BBB	0.1			—		—		—		—			0.1
Below investment grade	(28.2		)	—		—		—		—			(28.2		)
Total mortgage-backed securities collateralized by prime mortgage loans	$	25.1		$	—	$	1.4	$	0.3	$	(0.1	)	$	26.7

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Commercial mortgage-backed securities - Our CMBS portfolio consists of commercial mortgage-backed securities issued in securitization transactions. As of ~~March 31,~~June 30, 2011, the CMBS holdings were approximately ~~$315.3~~$456.5 million. As of December 31, 2010, the CMBS holdings were approximately $311.6 million.

The following table includes the percentages of our CMBS holdings, grouped by rating category, as of ~~March 31,~~June 30, 2011:

	Percentage of
	Commercial
	Mortgage-Backed
Rating	Securities
AAA	~~95.3~~89.6	%
AA	~~4.7~~4.3
A	6.1
	100.0	%

The following tables categorize the estimated fair value and unrealized gain/(loss) of our CMBS as of ~~March 31,~~June 30, 2011:

Commercial Mortgage-Backed Securities

	Estimated Fair Value of Security by Year of Security Origination																Estimated Fair Value of Security by Year of Security Origination
	2007 and																2007 and
Rating	Prior			2008		2009			2010			2011		Total			Prior		2008		2009		2010		2011		Total
	(Dollars In Millions)																(Dollars In Millions)
AAA	$	158.0		$	45.7	$	3.8		$	93.1		$	—	$	300.6		$	170.2	$	45.5	$	5.7	$	104.8	$	82.7	$	408.9
AA	2.7			—		—			3.0			9.0		14.7			7.5		—		—		2.9		9.3		19.7
A																	5.5		—		—		—		22.4		27.9
Total commercial mortgage-backed securities	$	160.7		$	45.7	$	3.8		$	96.1		$	9.0	$	315.3		$	183.2	$	45.5	$	5.7	$	107.7	$	114.4	$	456.5

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2007 and
Rating	Prior			2008		2009			2010			2011		Total
	(Dollars In Millions)
AAA	$	4.5		$	2.5	$	(0.1	)	$	(1.3	)	$	—	$	5.6
AA	(0.1		)	—		—			—			—		(0.1		)
Total commercial mortgage-backed securities	$	4.4		$	2.5	$	(0.1	)	$	(1.3	)	$	—	$	5.5

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2007 and
Rating	Prior			2008		2009		2010		2011			Total
	(Dollars In Millions)
AAA	$	4.1		$	2.4	$	—	$	0.4	$	(0.9	)	$	6.0
AA	(0.4		)	—		—		—		0.1			(0.3		)
A	—			—		—		—		—			—
Total commercial mortgage-backed securities	$	3.7		$	2.4	$	—	$	0.4	$	(0.8	)	$	5.7

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Other asset-backed securities — Other asset-backed securities pay down based on cash flow received from the underlying pool of assets, such as receivables on auto loans, student loans, credit cards, etc. As of ~~March 31,~~June 30, 2011, these holdings were approximately ~~$952.5~~$905.8 million. As of December 31, 2010, these holdings were approximately $927.1 million.

The following table includes the percentages of our other asset-backed holdings, grouped by rating category, as of ~~March 31,~~June 30, 2011:

	Percentage of
	Other Asset-Backed
Rating	Securities
AAA	~~94.7~~91.0	%
AA	~~2.8~~3.1
A	~~0.6~~4.1
BBB	0.6
Below investment grade	~~1.3~~1.2
	100.0	%

The following tables categorize the estimated fair value and unrealized gain/(loss) of our asset-backed securities as of ~~March 31,~~June 30, 2011:

Other Asset-Backed Securities

	Estimated Fair Value of Security by Year of Security Origination														Estimated Fair Value of Security by Year of Security Origination
	2007 and														2007 and
Rating	Prior			2008		2009		2010		2011		Total			Prior		2008		2009		2010		2011		Total
	(Dollars In Millions)														(Dollars In Millions)
AAA	$	809.3		$	—	$	19.8	$	32.0	$	41.4	$	902.5		$	763.7	$	—	$	19.7	$	32.0	$	9.1	$	824.5
AA	26.9			—		—		—		—		26.9			28.1		—		—		—		—		28.1
A	6.0			—		—		—		—		6.0			4.4		—		—		—		33.0		37.4
BBB	5.7			—		—		—		—		5.7			5.3		—		—		—		—		5.3
Below investment grade	11.4			—		—		—		—		11.4			10.5		—		—		—		—		10.5
Total other asset-backed securities	$	859.3		$	—	$	19.8	$	32.0	$	41.4	$	952.5		$	812.0	$	—	$	19.7	$	32.0	$	42.1	$	905.8

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2007 and
Rating	Prior			2008		2009		2010		2011		Total
	(Dollars In Millions)
AAA	$	(17.9	)	$	—	$	—	$	—	$	—	$	(17.9	)
AA	2.8			—		—		—		—		2.8
A	0.4			—		—		—		—		0.4
BBB	(0.3		)	—		—		—		—		(0.3		)
Below investment grade	(10.5		)	—		—		—		—		(10.5		)
Total other asset-backed securities	$	(25.5	)	$	—	$	—	$	—	$	—	$	(25.5	)

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2007 and
Rating	Prior			2008		2009		2010		2011		Total
	(Dollars In Millions)
AAA	$	(19.6	)	$	—	$	—	$	—	$	—	$	(19.6	)
AA	2.7			—		—		—		—		2.7
A	0.3			—		—		—		—		0.3
BBB	(0.2		)	—		—		—		—		(0.2		)
Below investment grade	(11.2		)	—		—		—		—		(11.2		)
Total other asset-backed securities	$	(28.0	)	$	—	$	—	$	—	$	—	$	(28.0	)

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We obtained ratings of our fixed maturities from Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Corporation (“S&P”), and/or Fitch Ratings (“Fitch”). If a fixed maturity is not rated by Moody’s, S&P, or Fitch, we use ratings from the National Association of Insurance Commissioners (“NAIC”), or we rate the fixed maturity based upon a comparison of the unrated issue to rated issues of the same issuer or rated issues of other issuers with similar risk characteristics. As of ~~March 31,~~June 30, 2011, over 99.0% of our fixed maturities were rated by Moody’s, S&P, Fitch, and/or the NAIC.

The industry segment composition of our fixed maturity securities is presented in the following table:

	As of		% Fair		As of		% Fair		As of		% Fair		As of		% Fair
	March 31, 2011		Value		December 31, 2010		Value		June 30, 2011		Value		December 31, 2010		Value
	(Dollars In Thousands)								(Dollars In Thousands)
Banking	$	2,117,850	8.6	%	$	2,046,515	8.3	%	$	2,353,195	9.0	%	$	2,046,515	8.3	%
Other finance	229,622		0.9		162,157		0.7		250,170		1.0		162,157		0.7
Electric	3,128,603		12.7		3,145,491		12.8		3,306,506		12.7		3,145,491		12.8
Natural gas	2,186,382		8.9		2,153,935		8.7		2,198,296		8.4		2,153,935		8.7
Insurance	1,877,999		7.6		1,874,015		7.6		1,980,200		7.6		1,874,015		7.6
Energy	1,477,878		6.0		1,408,963		5.7		1,547,207		5.9		1,408,963		5.7
Communications	1,187,640		4.8		1,178,727		4.8		1,237,332		4.7		1,178,727		4.8
Basic industrial	1,123,593		4.6		1,110,947		4.5		1,125,455		4.3		1,110,947		4.5
Consumer noncyclical	1,111,998		4.5		1,146,240		4.7		1,229,846		4.7		1,146,240		4.7
Consumer cyclical	524,906		2.1		566,808		2.3		558,287		2.1		566,808		2.3
Finance companies	230,478		0.9		214,102		0.9		223,845		0.9		214,102		0.9
Capital goods	735,549		3.0		732,975		3.0		780,400		3.0		732,975		3.0
Transportation	546,952		2.2		551,088		2.2		587,078		2.2		551,088		2.2
Other industrial	150,198		0.6		148,819		0.6		165,405		0.6		148,819		0.6
Brokerage	509,490		2.1		484,111		2.0		546,774		2.1		484,111		2.0
Technology	416,306		1.7		405,187		1.6		542,696		2.1		405,187		1.6
Real estate	65,688		0.3		55,424		0.2		81,041		0.3		55,424		0.2
Other utility	26,005		0.1		26,233		0.1		27,263		0.1		26,233		0.1
Commercial mortgage-backed securities	315,333		1.3		311,564		1.3		456,486		1.7		311,564		1.3
Other asset-backed securities	952,564		3.9		927,108		3.8		905,843		3.5		927,108		3.8
Residential mortgage-backed non-agency securities	1,895,570		7.7		2,144,419		8.7		1,593,443		6.1		2,144,419		8.7
Residential mortgage-backed agency securities	793,592		3.2		825,869		3.4		1,238,712		4.7		825,869		3.4
U.S. government-related securities	1,622,326		6.6		1,571,965		6.4		1,531,974		5.9		1,571,965		6.4
Other government-related securities	277,204		1.1		327,760		1.3		253,461		1.0		327,760		1.3
States, municipals, and political divisions	1,140,607		4.6		1,123,765		4.4		1,383,132		5.4		1,123,765		4.4
Total	$	24,644,333	100.0	%	$	24,644,187	100.0	%	$	26,104,047	100.0	%	$	24,644,187	100.0	%

Our investments in debt and equity securities are reported at fair value and investments in mortgage loans are reported at amortized cost. As of ~~March 31,~~June 30, 2011, our fixed maturity investments (bonds and redeemable preferred stocks) had a market value of ~~$24.6~~$26.1 billion, which was ~~3.4%~~4.4% above amortized cost of ~~$23.8~~$25.0 billion. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market fluctuations are not expected to adversely affect liquidity.

Market values for private, non-traded securities are determined as follows: 1) we obtain estimates from independent pricing services and 2) we estimate market value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics. We analyze the independent pricing services valuation methodologies and related inputs, including an assessment of the observability of market inputs. Upon obtaining this information related to market value, management makes a determination as to the appropriate valuation amount.

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Mortgage Loans

We invest a portion of our investment portfolio in commercial mortgage loans. As of ~~March 31,~~June 30, 2011, our mortgage loan holdings were approximately ~~$4.9~~$5.3 billion. We have specialized in making loans on either credit-oriented commercial properties or credit-anchored strip shopping centers and apartments. Our underwriting procedures relative to our commercial loan portfolio are based, in our view, on a conservative and disciplined approach. We concentrate on a small number of commercial real estate asset types associated with the necessities of life (retail, multi-family, professional office buildings, and warehouses). We believe these asset types tend to weather economic downturns better than other commercial asset classes in which we have chosen not to participate. We believe this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout our history.

We record mortgage loans net of an allowance for credit losses. This allowance is calculated through analysis of specific loans that have indicators of potential impairment based on current information and events. As of ~~March 31,~~June 30, 2011 and December 31, 2010, our allowance for mortgage loan credit losses was ~~$4.3~~$3.8 million and $11.7 million, respectively. While our mortgage loans do not have quoted market values, as of ~~March 31,~~June 30, 2011, we estimated the fair value of our mortgage loans to be ~~$5.2~~$5.9 billion (using discounted cash flows from the next call date), which was ~~7.2%~~8.9% greater than the amortized cost, less any related loan loss reserve.

At the time of origination, our mortgage lending criteria targets that the loan-to-value ratio on each mortgage is 75% or less. We target projected rental payments from credit anchors (i.e., excluding rental payments from smaller local tenants) of 70% of the property’s projected operating expenses and debt service. We also offer a commercial loan product under which we will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate. As of ~~March 31,~~June 30, 2011, approximately ~~$888.6~~$879.1 million of our mortgage loans had this participation feature. Exceptions to these loan-to-value measures may be made if we believe the mortgage has an acceptable risk profile.

Many of our mortgage loans have call options or interest rate reset option provisions between 3 and 10 years. However, if interest rates were to significantly increase, we may be unable to exercise the call options or increase the interest rates on our existing mortgage loans commensurate with the significantly increased market rates.

As of March 31, 2011, delinquent mortgage loans, foreclosed properties, and restructured loans pursuant to a pooling and servicing agreement totaled $19.6 million, and were less than 0.1% of invested assets. We do not expect these investments to adversely affect our liquidity or ability to maintain proper matching of assets and liabilities. Our mortgage loan portfolio consists of two categories of loans: 1) those not subject to a pooling and servicing agreement and 2) those previously a part of variable interest entity securitizations and thus subject to a contractual pooling and servicing agreement. The loans subject to a pooling and servicing agreement have been included on our consolidated balance sheet ~~(“balance sheet”)~~ beginning in the first quarter of 2010 in accordance with ASU 2009-17.

For loans not subject to a pooling and servicing agreement, as of ~~March 31,~~June 30, 2011, ~~$3.0~~$13.4 million, or ~~0.1%,~~0.4% of the mortgage loan portfolio was nonperforming. ~~In addition, as~~As of ~~March 31,~~June 30, 2011, ~~$16.6 million, 0.3%, of the~~delinquent mortgage ~~loan portfolio that is subject~~loans, foreclosed properties, and restructured loans pursuant to a pooling and servicing agreement totaled $20.2 million, and were less than 0.1% of invested assets. This amount pursuant to a pooling and servicing agreement includes $19.7 million, or 0.4%, that was either nonperforming or has been restructured under the terms and conditions of the pooling and service agreement.

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

It is our policy to cease to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. For loans subject to a pooling and servicing agreement, there are certain additional restrictions and/or requirements related to workout proceedings, and as such, these loans may have different attributes and/or circumstances affecting the status of delinquency or categorization of those in nonperforming status.

Securities Lending

~~We participate~~In prior quarters, we participated in securities lending, primarily as an enhancement to our investment ~~yield enhancement, whereby securities~~yield. Securities that ~~are~~we held as investments ~~are~~were loaned to third parties for short periods of time. We require initial collateral of 102% of the market value of the loaned securities to be separately maintained. The loaned securities’ market value is monitored on a daily basis. As of March 31, 2011, securities with a market value of $96.4 million were loaned under this program. As collateral for the loaned securities, we receive short-term investments, which are recorded in “short-term investments” with a corresponding liability recorded in “other liabilities” to account for our obligation torequired

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~~return~~initial collateral, in the ~~collateral. As~~form of ~~March 31, 2011,~~short-term investments, which equaled 102% of the ~~fair~~market value of the ~~collateral related to this program was $97.7 million and we have an obligation to return $99.0 million of collateral to the securities borrowers.~~loaned securities.

AtDuring the ~~end~~second quarter of ~~the period,~~2011, we ~~decided to discontinue~~discontinued this program. ~~We believed that certain debt securities that were part~~Certain collateral assets, which we previously intended to ultimately dispose of ~~this program’s collateral,~~ and ~~were in an unrealized loss position, will be sold prior to their respective maturities. Therefore,~~on which we recorded aan other-than-temporary impairment of $1.3 million ~~other-than-temporary impairment loss on~~in the first quarter of 2011, were instead retained by us and are included in our fixed maturities as of June 30, 2011. We currently do not have any intent to sell these securities ~~during the period.~~.

Risk Management and Impairment Review

We monitor the overall credit quality of our portfolio within established guidelines. The following table includes our available-for-sale fixed maturities by credit rating as of ~~March 31,~~June 30, 2011:

			Percent of				Percent of
S&P or Equivalent Designation	Market Value		Market Value		Market Value		Market Value
	(Dollars In Thousands)				(Dollars In Thousands)
AAA	$	3,319,484	15.2	%	$	3,683,409	15.9	%
AA	1,010,213		4.6		1,188,749		5.1
A	3,953,151		18.1		4,897,873		21.1
BBB	10,822,988		49.7		11,020,107		47.5
Investment grade	19,105,836		87.6		20,790,138		89.6
BB	1,210,614		5.6		1,102,053		4.7
B	562,166		2.6		438,409		1.9
CCC or lower	916,353		4.2		886,794		3.8
Below investment grade	2,689,133		12.4		2,427,256		10.4
Total	$	21,794,969	100.0	%	$	23,217,394	100.0	%

Not included in the table above are $2.6 billion of investment grade and ~~$290.5~~$242.6 million of below investment grade fixed maturities classified as trading securities.

Limiting ~~bond~~ exposure to any creditor group is another way that we manage credit risk. The following table includes ~~securities held~~all positions, regardless of whether such positions are in our available for sale portfolios, our Modco ~~portfolio and summarizes~~portfolios, or our derivative portfolios. During the second quarter of 2011, to mitigate the risk related to certain guaranteed minimum benefits within our variable annuity products, we wrote credit default swaps where the referenced entities were certain financial institutions. The notional of such contracts has been included in the following table, whereby when combined with the fair market value of our investment in the same financial institutions’ securities, such overall position is among the ten largest ~~fixed maturity~~credit exposures ~~to an individual creditor group~~that we hold as of ~~March 31,~~June 30, 2011:

~~Creditor~~	~~Market Value~~
	~~(Dollars In Millions)~~
~~Verizon Communications Inc.~~	$	~~170.2~~
~~Bershire Hathaway Inc.~~	~~156.3~~
~~Firstenergy Corp.~~	~~135.1~~
~~Time Warner Cable~~	~~127.5~~
~~Rio Tinto~~	~~126.4~~
~~Enterprise Products Partners~~	~~124.3~~
~~Nextera Energy Inc.~~	~~120.3~~
~~Bank of American Corporation~~	~~120.0~~
~~PNC Financial Services Group~~	~~119.7~~
~~American Electric Power~~	~~116.5~~

	Market		Notional		Total
Creditor	Value		of Swaps		Value
	(Dollars In Millions)
Comcast Corporation	$	179.3	$	—	$	179.3
Verizon Communications Inc.	169.7		—		169.7
Berkshire Hathaway Inc.	160.3		—		160.3
Firstenergy Corp.	148.8		—		148.8
Wells Fargo & Co.	83.9		55.0		138.9
Morgan Stanley	106.7		30.0		136.7
Rio Tinto	135.0		—		135.0
AT&T Inc.	132.4		—		132.4
Time Warner Cable	131.3		—		131.3
Prudential Financial Inc.	108.8		20.0		128.8

Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value is both objective and subjective, and can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets. We review our positions on a monthly basis for possible credit concerns and review our current exposure, credit enhancement, and delinquency experience.

Management considers a number of factors when determining the impairment status of individual securities. These include the economic condition of various industry segments and geographic locations and other

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areas of identified risks. Since it is possible for the impairment of one investment to affect other investments, we engage in ongoing risk management to safeguard against and limit any further risk to our investment portfolio. Special attention is given to correlative risks within specific industries, related parties, and business markets.

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For certain securitized financial assets with contractual cash flows, including RMBS, CMBS, and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”), GAAP requires us to periodically update our best estimate of cash flows over the life of the security. If the fair value of a securitized financial asset is less than its cost or amortized cost and there has been a decrease in the present value of the expected cash flows since the last revised estimate, considering both timing and amount, an other-than-temporary impairment charge is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. Projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral. In addition, we consider our intent and ability to retain a temporarily depressed security until recovery.

The FASB has issued guidance related to other-than-temporary impairments for debt securities. This guidance addresses the timing of impairment recognition and provides greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. Impairments will continue to be measured at fair value with credit losses recognized in earnings and non-credit losses recognized in other comprehensive income. This guidance also requires disclosures regarding measurement techniques, credit losses, and an aging of securities with unrealized losses. For the three and six months ended ~~March 31,~~June 30, 2011, we recorded total other-than-temporary impairments of approximately ~~$16.0~~$15.6 million and $31.6 million, respectively, with ~~$10.3~~$6.2 million and $16.5 million, respectively, of this amount recorded in other comprehensive income (loss).

Securities in an unrealized loss position are reviewed at least quarterly to determine if an other-than-temporary impairment is present based on certain quantitative and qualitative factors. We consider a number of factors in determining whether the impairment is other-than-temporary. These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) an assessment of our intent to sell the security (including a more likely than not assessment of whether we will be required to sell the security) before recovering the security’s amortized cost, 5) the time period during which the decline has occurred, 6) an economic analysis of the issuer’s industry, and 7) the financial strength, liquidity, and recoverability of the issuer. Management performs a security-by-security review each quarter in evaluating the need for any other-than-temporary impairments. Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures considered, along with an analysis regarding our expectations for recovery of the security’s entire amortized cost basis through the receipt of future cash flows. Based on our analysis, for the three and six months ended ~~March 31,~~June 30, 2011, we concluded that approximately ~~$5.7~~$9.4 million and $15.1 million, respectively, of investment securities in an unrealized loss position was other-than-temporarily impaired, due to credit-related factors, resulting in a charge to earnings. Additionally, we recognized ~~$10.3~~$6.2 million and $16.5 million of non-credit losses in other comprehensive income (loss) for the securities where an other-than-temporary impairment was recorded for the three and six months ended ~~March 31, 2011.~~June 30, 2011, respectively.

There are certain risks and uncertainties associated with determining whether declines in market values are other-than-temporary. These include significant changes in general economic conditions and business markets, trends in certain industry segments, interest rate fluctuations, rating agency actions, changes in significant accounting estimates and assumptions, commission of fraud, and legislative actions. We continuously monitor these factors as they relate to the investment portfolio in determining the status of each investment.

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

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Realized Gains and Losses

The following table sets forth realized investment gains and losses for the periods shown:

	For The									For The									For The
	Three Months Ended									Three Months Ended									Six Months Ended
	March 31,									June 30,									June 30,
	2011			2010			Change			2011			2010			Change			2011			2010			Change
	(Dollars In Thousands)									(Dollars In Thousands)
Fixed maturity gains - sales	$	5,456		$	9,841		$	(4,385	)	$	31,963		$	35,367		$	(3,404	)	$	37,419		$	45,208		$	(7,789	)
Fixed maturity losses - sales	(194		)	(1,378		)	1,184			(1,545		)	(29,480		)	27,935			(1,739		)	(30,858		)	29,119
Equity gains - sales	9,100			—			9,100			21			13			8			9,121			13			9,108
Equity losses - sales	—			—			—			—			—			—			—			—			—
Impairments on fixed maturity securities	(5,662		)	(11,869		)	6,207			(9,435		)	(16,770		)	7,335			(15,098		)	(28,639		)	13,541
Impairments on equity securities	—			—			—			—			—			—			—			—			—
Modco trading portfolio	(5,649		)	44,093			(49,742		)	33,603			63,967			(30,364		)	27,954			108,060			(80,106		)
Other	1,827			(2,919		)	4,746			412			(1,137		)	1,549			2,240			(4,056		)	6,296
Total realized gains (losses) - investments	$	4,878		$	37,768		$	(32,890	)	$	55,019		$	51,960		$	3,059		$	59,897		$	89,728		$	(29,831	)

Derivatives related to interest rate futures	$	(5,670	)	$	—		$	(5,670	)	$	9,039		$	—		$	9,039		$	3,369		$	—		$	3,369
Derivatives related to equity futures	(17,843		)	—			(17,843		)	(1,503		)	—			(1,503		)	(19,346		)	—			(19,346		)
Derivatives related to equity options and volatility swaps	(6,094		)	—			(6,094		)
Derivatives related to currency futures										(199		)	—			(199		)	(199		)	—			(199		)
Derivatives related to volatility swaps										(917		)	—			(917		)	(3,734		)	—			(3,734		)
Derivatives related to equity options										(3,982		)	—			(3,982		)	(7,259		)	—			(7,259		)
Embedded derivatives related to reinsurance	7,842			(31,094		)	38,936			(29,214		)	(63,063		)	33,849			(21,372		)	(94,157		)	72,785
Interest rate swaps	532			(2,392		)	2,924			(2,989		)	(6,382		)	3,393			(2,457		)	(8,774		)	6,317
Credit default swaps										915			—			915			915			—			915
Interest rate floors/YRT(1) premium support arrangements	(401		)	(900		)	499			(50		)	(600		)	550			(451		)	(1,500		)	1,049
GMWB embedded derivatives	8,195			9,124			(929		)	(5,533		)	(49,326		)	43,793			2,662			(40,202		)	42,864
Other derivatives	575			785			(210		)	(612		)	25			(637		)	(37		)	810			(847		)
Total realized gains (losses) - derivatives	$	(12,864	)	$	(24,477	)	$	11,613		$	(35,045	)	$	(119,346	)	$	84,301		$	(47,909	)	$	(143,823	)	$	95,914

(1) YRT - yearly renewable term

Realized gains and losses on investments reflect portfolio management activities designed to maintain proper matching of assets and liabilities and to enhance long-term investment portfolio performance. The change in net realized investment gains (losses), excluding impairments and Modco trading portfolio activity ~~and related embedded derivatives related to corporate debt,~~ during the three and six months ended ~~March 31,~~June 30, 2011, primarily reflects the normal operation of our asset/liability program within the context of the changing interest rate and spread environment, as well as tax planning strategies designed to utilize capital loss carryforwards.

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Realized losses are comprised of both write-downs of other-than-temporary impairments and actual sales of investments. For the three and six months ended ~~March 31,~~June 30, 2011, we recognized pre-tax other-than-temporary impairments of ~~$5.7~~$9.4 million and $15.1 million, respectively, due to credit-related factors, resulting in a charge to earnings. Additionally, we recognized ~~$10.3~~$6.2 million and $16.5 million, respectively, of non-credit losses in other comprehensive income (loss) for the securities where an other-than-temporary impairment was recorded. ~~For~~Other-than-temporary impairments of $36.5 million and $58.4 million, respectively, for the three and six months ended ~~March 31, 2010, we recognized pre-tax other-than-temporary impairments of $11.9 million.~~June 30, 2010. These other-than-temporary impairments resulted from our analysis of circumstances and our belief that credit events, loss severity, changes in credit enhancement, and/or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to these investments. These other-than-temporary impairments, net of Modco recoveries, are presented in the chart below:

	For The		For The		For The
	Three Months Ended		Three Months Ended		Six Months Ended
	March 31, 2011		June 30, 2011		June 30, 2011
	(Dollars In Millions)		(Dollars In Millions)
Alt-A MBS	$	4.0	$	3.9	$	7.9
Other MBS	0.5		5.5		6.0
Other corporate bonds	—		—		—
Sub-prime bonds	1.2		—		1.2
Total	$	5.7	$	9.4	$	15.1

As previously discussed, management considers several factors when determining other-than-temporary impairments. Although we purchase securities with the intent to hold securities until maturity, we may change our position as a result of a change in circumstances. Any such decision is consistent with our classification of all but a specific portion of our investment portfolio as available-for-sale. For the ~~three~~six months ended ~~March 31,~~June 30, 2011, we sold securities in an unrealized loss position with a fair value of ~~$20.0~~$161.9 million. For such securities, the proceeds, realized loss, and total time period that the security had been in an unrealized loss position are presented in the table below:

	Proceeds		% Proceeds		Realized Loss			% Realized Loss		Proceeds		% Proceeds		Realized Loss			% Realized Loss
	(Dollars In Thousands)									(Dollars In Thousands)
<= 90 days	$	7,530	37.7	%	$	(82	)	42.0	%	$	117,406	72.5	%	$	(745	)	42.9	%
>90 days but <= 180 days	2,416		12.1		(81		)	41.8		2,416		1.5		(81		)	4.7
>180 days but <= 270 days	—		—		—			—		—		—		—			—
>270 days but <= 1 year	—		—		—			—		23,452		14.5		(438		)	25.2
>1 year	10,050		50.2		(31		)	16.2		18,675		11.5		(475		)	27.2
Total	$	19,996	100.0	%	$	(194	)	100.0	%	$	161,949	100.0	%	$	(1,739	)	100.0	%

For the three and six months ended ~~March 31,~~June 30, 2011, we sold securities in an unrealized loss position with a fair value (proceeds) of ~~$20.0 million.~~$141.9 million and $161.9 million, respectively. The loss realized on the sale of these securities was ~~$0.2 million.~~$1.5 million and $1.7 million, respectively.

For the three and six months ended ~~March 31,~~June 30, 2011, we sold securities in an unrealized gain position with a fair value of ~~$235.7 million.~~$1.3 billion and $1.5 billion, respectively. The gain realized on the sale of these securities was ~~$14.6 million.~~$31.9 million and $46.5 million, respectively.

The ~~$1.8~~$0.4 million of other realized ~~losses~~gains recognized for the three months ended ~~March 31,~~June 30, 2011, consists of ~~a reduction~~the decrease in the mortgage loan loss ~~reserve~~reserves of ~~$7.4~~$0.4 million.

The $2.2 million of other realized gains recognized for the six months ended June 30, 2011, consists of the decrease in the mortgage loan loss reserves of $7.8 million and mortgage loan losses of $5.6 million.

For the three and six months ended ~~March 31,~~June 30, 2011, net ~~losses~~gains of ~~$5.6~~$33.6 million and $28.0 million, respectively, primarily related to mark-to-market changes on our Modco trading portfolios associated with the Chase Insurance Group acquisition were also included in realized gains and losses. Of this amount, approximately ~~$4.0~~$3.1 million and $7.1 million, respectively, of gains ~~was~~were realized through the sale of certain securities, which will be reimbursed to our reinsurance partners over time through the reinsurance settlement process for this block of business. Additional details on our investment performance and evaluation are provided in the sections below.

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

~~During the third quarter of 2010, we began a program of transacting in~~We use equity and interest rate futures to mitigate the risk related to certain guaranteed minimum benefits, including guaranteed minimum withdrawal

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benefits, within our variable annuity products. During the second quarter of 2011, we extended this program to include the use of foreign equity and foreign currency futures. In general, the cost of such benefits varies with the level of equity and interest rate markets and overall volatility. The equity futures resulted in a net pre-tax loss of ~~$17.8~~$1.5 million and $19.3 million, interest rate futures resulted in a pre-tax gain of $9.0 million and $3.4 million, and currency futures resulted in a net pre-tax loss of ~~$5.7~~$0.2 million for the three and six months ended ~~March 31,~~June 30, 2011, respectively. Such positions were not held during the ~~three~~six months ended ~~March 31,~~June 30, 2010.

~~During the fourth quarter of 2010, we began a program of transacting in~~We also use equity options and volatility swaps to mitigate the risk related to certain guaranteed minimum benefits, including guaranteed minimum withdrawal benefits, within our variable annuity products. In general, the cost of such benefits varies with the level of equity and interest rate markets and overall volatility. The equity options resulted in net pre-tax losses of $4.0 million and $7.3 million and volatility swaps resulted in net pre-tax losses of ~~$6.1~~$0.9 million and $3.7 million for the three and six months ended ~~March 31, 2011.~~June 30, 2011, respectively. Such positions were not held during the ~~three~~six months ended ~~March 31,~~June 30, 2010.

We also have in place various modified coinsurance and funds withheld arrangements that contain embedded derivatives. The ~~$7.8~~$29.2 million and $21.4 million of pre-tax ~~gains~~losses on these embedded derivatives for the three and six months ended ~~March 31,~~June 30, 2011, respectively, was the result of ~~increased~~spread tightening and a decline in treasury yields. For the three and six months ended ~~March 31,~~June 30, 2011, the investment portfolios that support the related modified coinsurance reserves and funds withheld arrangements had mark-to-market gains that substantially offset the losses on these embedded derivatives.

We use certain interest rate swaps to mitigate the price volatility of fixed maturities. These positions resulted in net pre-tax losses of $3.0 million and $2.5 million for the three and six months ended June 30, 2011, respectively. The net losses were the result of $1.7 million in realized losses due to interest settlements and $1.3 million in unrealized losses during the second quarter.

We reported net pre-tax gains of $0.9 million related to credit default swaps for the three and six months ended June 30, 2011. The net pre-tax gains for the three and six months ended June 30, 2011, were primarily the result of $0.8 million of mark-to-market gains during the period. The credit default swaps held at June 30, 2011 related to new positions entered during the second quarter of 2011 as part of a program to mitigate the risk related to certain guaranteed minimum benefits, including guaranteed minimum withdrawal benefits, within our variable annuity products.

We have an interest rate floor agreement and an YRT premium support arrangement with PLC. We recognized a pre-tax loss ~~of $0.4 million~~that was immaterial for the three months ended ~~March 31,~~June 30, 2011 and a pre-tax loss of $0.5 million for the six months ended June 30, 2011, related to the interest rate floor agreement. There are no YRT premium support arrangement gains or losses for the three and six months ended ~~March 31,~~June 30, 2011.

We use certain interest rate swaps to mitigate the price volatility of fixed maturities. These positions resulted in net pre-tax gains of $0.5 million for the three months ended March 31, 2011. The net gains were primarily the result of $1.6 million in unrealized gains during the period.

The GMWB rider embedded derivatives on certain variable deferred annuities had net unrealized losses of $5.5 million and gains of ~~$8.2~~$2.7 million for the three and six months ended ~~March 31,~~June 30, 2011.

We also use various ~~other types of derivatives~~swaps and options to mitigate risk related to other exposures. These contracts generated net pre-tax ~~gains~~losses of $0.6 million for the three months ended ~~March 31,~~June 30, 2011, and a loss that was immaterial for the six months ended June 30, 2011.

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Unrealized Gains and Losses — Available-for-Sale Securities

The information presented below relates to investments at a certain point in time and is not necessarily indicative of the status of the portfolio at any time after ~~March 31,~~June 30, 2011, the balance sheet date. Information about unrealized gains and losses is subject to rapidly changing conditions, including volatility of financial markets and changes in interest rates. Management considers a number of factors in determining if an unrealized loss is other-than-temporary, including the expected cash to be collected and the intent, likelihood, and/or ability to hold the security until recovery. Consistent with our long-standing practice, we do not utilize a “bright line test” to determine other-than-temporary impairments. On a quarterly basis, we perform an analysis on every security with an unrealized loss to determine if an other-than-temporary impairment has occurred. This analysis includes reviewing several metrics including collateral, expected cash flows, ratings, and liquidity. Furthermore, since the timing of recognizing realized gains and losses is largely based on management’s decisions as to the timing and selection of investments to be sold, the tables and information provided below should be considered within the context of the overall unrealized gain/(loss) position of the portfolio. As of ~~March 31,~~June 30, 2011, we had an overall net unrealized gain of ~~$728.6~~$983.7 million, prior to tax and DAC offsets, and a net unrealized gain of $685.8 million as of December 31, 2010.

Credit and RMBS markets have experienced volatility across numerous asset classes over the past few years, primarily as a result of marketplace uncertainty arising from the failure or near failure of a number of large financial services companies resulting in intervention by the United States Federal Government, downgrades in ratings, interest rate changes, higher defaults in sub-prime and Alt-A residential mortgage loans, and a weakening of the overall economy. In connection with this uncertainty, we believe investors have departed from many investments in other asset-backed securities, including those associated with sub-prime and Alt-A residential mortgage loans, as well as types of debt investments with fewer lender protections or those with reduced transparency and/or complex features which may hinder investor understanding.

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For fixed maturity and equity securities held that are in an unrealized loss position as of ~~March 31,~~June 30, 2011, the fair value, amortized cost, unrealized loss, and total time period that the security has been in an unrealized loss position are presented in the table below:

	Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized		Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized
	Value		Value		Cost		Cost		Loss			Loss		Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)													(Dollars In Thousands)
<= 90 days	$	1,640,594	27.2	%	$	1,665,945	26.2	%	$	(25,351	)	7.9	%	$	2,105,995	41.7	%	$	2,141,480	40.1	%	$	(35,485	)	12.1	%
>90 days but <= 180 days	1,953,298		32.4		2,026,786		31.9		(73,488		)	23.0		194,642		3.9		205,454		3.8		(10,812		)	3.7
>180 days but <= 270 days	234,006		3.9		261,321		4.1		(27,315		)	8.6		732,993		14.5		766,747		14.4		(33,754		)	11.5
>270 days but <= 1 year	77,544		1.3		88,064		1.4		(10,520		)	3.3		152,655		3.0		177,547		3.3		(24,892		)	8.5
>1 year but <= 2 years	62,871		1.0		64,857		1.0		(1,986		)	0.6		77,005		1.5		88,533		1.7		(11,528		)	3.9
>2 years but <= 3 years	675,175		11.2		721,391		11.4		(46,216		)	14.5		91,508		1.8		105,750		2.0		(14,242		)	4.9
>3 years but <= 4 years	1,070,399		17.7		1,171,140		18.4		(100,741		)	31.5		1,248,313		24.7		1,361,586		25.5		(113,273		)	38.7
>4 years but <= 5 years	76,656		1.3		88,762		1.4		(12,106		)	3.8		224,989		4.5		253,611		4.7		(28,622		)	9.8
>5 years	245,060		4.0		266,670		4.2		(21,610		)	6.8		220,523		4.4		240,665		4.5		(20,142		)	6.9
Total	$	6,035,603	100.0	%	$	6,354,936	100.0	%	$	(319,333	)	100.0	%	$	5,048,623	100.0	%	$	5,341,373	100.0	%	$	(292,750	)	100.0	%

The majority of the unrealized loss as of ~~March 31,~~June 30, 2011 for both investment grade and below investment grade securities, is attributable to a widening in credit and mortgage spreads for certain securities. The negative impact of spread levels for certain securities was partially offset by lower treasury yield levels and their associated positive effect on security prices. Spread levels have improved since December 31, 2010. However, certain types of securities, including tranches of RMBS and ABS, continue to be priced at a level which has caused the unrealized losses noted above. We believe spread levels on these RMBS and ABS are largely due to the continued effects of the economic recession and the economic and market uncertainties regarding future performance of the underlying mortgage loans and/or assets.

As of ~~March 31,~~June 30, 2011, the Barclays Investment Grade Index was priced at ~~132 basis points (“bps”)~~141 bps versus a 10 year average of ~~159~~168 bps. Similarly, the Barclays High Yield Index was priced at ~~465~~570 bps versus a 10 year average of ~~608~~650 bps. As of ~~March 31,~~June 30, 2011, the five, ten, and thirty-year U.S. Treasury obligations were trading at levels of ~~2.28%~~1.76%, ~~3.47%~~3.16%, and ~~4.51%~~4.37%, as compared to 10 year averages of ~~3.38%~~3.33%, ~~4.08%~~4.07%, and ~~4.69%~~4.74%, respectively.

As of ~~March 31,~~June 30, 2011, ~~45.4%~~36.9% of the unrealized loss was associated with securities that were rated investment grade. We have examined the performance of the underlying collateral and cash flows and expect that our

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investments will continue to perform in accordance with their contractual terms. Factors such as credit enhancements within the deal structures and the underlying collateral performance/characteristics support the recoverability of the investments. Based on the factors discussed, we do not consider these unrealized loss positions to be other-than-temporary. However, from time to time, we may sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield enhancement, asset/liability management, and liquidity requirements.

Expectations that investments in mortgage-backed and asset-backed securities will continue to perform in accordance with their contractual terms are based on assumptions a market participant would use in determining the current fair value. It is reasonably possible that the underlying collateral of these investments will perform worse than current market expectations and that such event may lead to adverse changes in the cash flows on our holdings of these types of securities. This could lead to potential future write-downs within our portfolio of mortgage-backed and asset-backed securities. Expectations that our investments in corporate securities and/or debt obligations will continue to perform in accordance with their contractual terms are based on evidence gathered through our normal credit surveillance process. Although we do not anticipate such events, it is reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate securities. It is also possible that such unanticipated events would lead us to dispose of those certain holdings and recognize the effects of any market movements in our financial statements.

As of ~~March 31,~~June 30, 2011, there were estimated gross unrealized losses of ~~$43.7~~$44.5 million and ~~$22.2~~$25.3 million, related to our mortgage-backed securities collateralized by Alt-A mortgage loans and sub-prime mortgage loans, respectively. Gross unrealized losses in our securities collateralized by sub-prime and Alt-A residential mortgage loans as of ~~March 31,~~June 30, 2011, were primarily the result of continued widening spreads, representing marketplace uncertainty arising from higher defaults in sub-prime and Alt-A residential mortgage loans and rating agency downgrades of securities collateralized by sub-prime and Alt-A residential mortgage loans.

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For the three and six months ended ~~March 31,~~June 30, 2011, we recorded ~~$5.7~~$9.4 million and $15.1 million, respectively, of pre-tax other-than-temporary impairments related to estimated credit losses. These other-than-temporary impairments resulted from our analysis of circumstances and our belief that credit events, loss severity, changes in credit enhancement, and/or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to these investments. Excluding the securities on which other-than-temporary impairments were recorded, we expect these investments to continue to perform in accordance with their original contractual terms. We have the ability and intent to hold these investments until maturity or until the fair values of the investments have recovered, which may be at maturity. Additionally, we do not expect these investments to adversely affect our liquidity or ability to maintain proper matching of assets and liabilities.

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We have no material concentrations of issuers or guarantors of fixed maturity securities. The industry segment composition of all securities in an unrealized loss position held as of ~~March 31,~~June 30, 2011, is presented in the following table:

	Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized		Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized
	Value		Value		Cost		Cost		Loss			Loss		Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)													(Dollars In Thousands)
Banking	$	663,676	11.0	%	$	703,819	11.1	%	$	(40,143	)	12.6	%	$	685,377	13.6	%	$	728,637	13.6	%	$	(43,260	)	14.8	%
Other finance	78,525		1.3		80,791		1.3		(2,266		)	0.7		44,185		0.9		44,970		0.8		(785		)	0.3
Electric	518,954		8.6		546,258		8.6		(27,304		)	8.6		360,841		7.1		383,493		7.2		(22,652		)	7.7
Natural gas	291,952		4.8		302,839		4.8		(10,887		)	3.4		141,447		2.8		148,811		2.8		(7,364		)	2.5
Insurance	379,167		6.3		400,919		6.3		(21,752		)	6.8		326,342		6.5		345,408		6.5		(19,066		)	6.5
Energy	171,759		2.8		175,950		2.8		(4,191		)	1.3		130,115		2.6		132,373		2.5		(2,258		)	0.8
Communications	183,641		3.0		191,068		3.0		(7,427		)	2.3		117,857		2.3		123,236		2.3		(5,379		)	1.8
Basic industrial	182,019		3.0		187,246		2.9		(5,227		)	1.6		156,446		3.1		160,509		3.0		(4,063		)	1.4
Consumer noncyclical	156,411		2.6		162,289		2.6		(5,878		)	1.8		128,983		2.6		132,893		2.5		(3,910		)	1.3
Consumer cyclical	183,636		3.0		191,209		3.0		(7,573		)	2.4		99,523		2.0		105,183		2.0		(5,660		)	1.9
Finance companies	90,310		1.5		94,390		1.5		(4,080		)	1.3		58,325		1.2		61,769		1.2		(3,444		)	1.2
Capital goods	137,173		2.3		144,063		2.3		(6,890		)	2.2		105,691		2.1		113,181		2.1		(7,490		)	2.6
Transportation	96,244		1.6		99,268		1.6		(3,024		)	0.9		110,296		2.2		112,542		2.1		(2,246		)	0.8
Other industrial	72,889		1.2		77,582		1.2		(4,693		)	1.5		49,662		1.0		53,475		1.0		(3,813		)	1.3
Brokerage	81,773		1.4		86,736		1.4		(4,963		)	1.6		70,209		1.4		74,672		1.4		(4,463		)	1.5
Technology	112,987		1.9		115,919		1.8		(2,932		)	0.9		86,001		1.7		89,002		1.7		(3,001		)	1.0
Real estate	—		0.0		—		0.0		—			0.0		1,401		0.0		1,431		0.0		(30		)	0.0
Other utility	21		0.0		44		0.0		(23		)	0.0		22		0.0		44		0.0		(22		)	0.0
Commercial mortgage-backed securities	33,147		0.5		34,253		0.5		(1,106		)	0.3		109,354		2.2		111,399		2.1		(2,045		)	0.7
Other asset-backed securities	669,282		11.1		699,787		11.0		(30,505		)	9.6		663,139		13.1		696,046		13.0		(32,907		)	11.2
Residential mortgage-backed non-agency securities	935,491		15.5		1,036,340		16.3		(100,849		)	31.6		936,341		18.5		1,044,501		19.6		(108,160		)	36.9
Residential mortgage-backed agency securities	119,680		2.0		120,637		1.9		(957		)	0.3		196,732		3.9		197,350		3.7		(618		)	0.2
U.S. government-related securities	272,367		4.5		277,915		4.4		(5,548		)	1.7		214,222		4.2		216,484		4.1		(2,262		)	0.8
Other government-related securities	43,848		0.7		43,894		0.7		(46		)	0.0		—		0.0		—		0.0		—			0.0
States, municipals, and political divisions	560,651		9.4		581,720		9.0		(21,069		)	6.6		256,112		5.0		263,964		4.8		(7,852		)	2.8
Total	$	6,035,603	100.0	%	$	6,354,936	100.0	%	$	(319,333	)	100.0	%	$	5,048,623	100.0	%	$	5,341,373	100.0	%	$	(292,750	)	100.0	%

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

	As of
	March 31, 2011		December 31, 2010		As of
					June 30, 2011		December 31, 2010
Banking	12.6	%	14.1	%	14.8	%	14.1	%
Other finance	0.7		0.4		0.3		0.4
Electric	8.6		7.5		7.7		7.5
Natural gas	3.4		3.2		2.5		3.2
Insurance	6.8		7.0		6.5		7.0
Energy	1.3		0.4		0.8		0.4
Communications	2.3		1.6		1.8		1.6
Basic industrial	1.6		1.3		1.4		1.3
Consumer noncyclical	1.8		1.1		1.3		1.1
Consumer cyclical	2.4		2.1		1.9		2.1
Finance companies	1.3		1.8		1.2		1.8
Capital goods	2.2		1.8		2.6		1.8
Transportation	0.9		0.7		0.8		0.7
Other industrial	1.5		1.0		1.3		1.0
Brokerage	1.6		2.3		1.5		2.3
Technology	0.9		1.2		1.0		1.2
Real estate	0.0		0.0		0.0		0.0
Other utility	0.0		0.0		0.0		0.0
Commercial mortgage-backed securities	0.3		0.2		0.7		0.2
Other asset-backed securities	9.6		7.8		11.2		7.8
Residential mortgage-backed non-agency securities	31.6		37.2		36.9		37.2
Residential mortgage-backed agency securities	0.3		0.5		0.2		0.5
U.S. government-related securities	1.7		0.8		0.8		0.8
Other government-related securities	0.0		0.0		0.0		0.0
States, municipals, and political divisions	6.6		6.0		2.8		6.0
Total	100.0	%	100.0	%	100.0	%	100.0	%

The range of maturity dates for securities in an unrealized loss position as of ~~March 31,~~June 30, 2011, varies, with ~~15.0%~~16.6% maturing in less than 5 years, ~~21.5%~~18.9% maturing between 5 and 10 years, and ~~63.5%~~64.5% maturing after 10 years. The following table shows the credit rating of securities in an unrealized loss position as of ~~March 31,~~June 30, 2011:

S&P or Equivalent	Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized		Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized
Designation	Value		Value		Cost		Cost		Loss			Loss		Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)													(Dollars In Thousands)
AAA/AA/A	$	2,385,435	39.5	%	$	2,461,138	38.7	%	$	(75,703	)	23.7	%	$	2,279,253	45.1	%	$	2,336,593	43.7	%	$	(57,340	)	19.6	%
BBB	2,089,284		34.6		2,158,448		34.0		(69,164		)	21.7		1,330,532		26.4		1,381,046		25.9		(50,514		)	17.3
Investment grade	4,474,719		74.1		4,619,586		72.7		(144,867		)	45.4		3,609,785		71.5		3,717,639		69.6		(107,854		)	36.9
BB	294,440		4.9		317,142		5.0		(22,702		)	7.1		303,424		6.0		326,539		6.1		(23,115		)	7.9
B	464,929		7.7		500,609		7.9		(35,680		)	11.2		398,194		7.9		429,207		8.0		(31,013		)	10.6
CCC or lower	801,515		13.3		917,599		14.4		(116,084		)	36.3		737,220		14.6		867,988		16.3		(130,768		)	44.6
Below investment grade	1,560,884		25.9		1,735,350		27.3		(174,466		)	54.6		1,438,838		28.5		1,623,734		30.4		(184,896		)	63.1
Total	$	6,035,603	100.0	%	$	6,354,936	100.0	%	$	(319,333	)	100.0	%	$	5,048,623	100.0	%	$	5,341,373	100.0	%	$	(292,750	)	100.0	%

As of ~~March 31,~~June 30, 2011, we held ~~180~~177 positions of below investment grade securities with a fair value of ~~$1.6~~$1.4 billion that were in an unrealized loss position. Total unrealized losses related to below investment grade securities were ~~$174.5~~$184.9 million, of which ~~$136.6~~$139.9 million had been in an unrealized loss position for more than twelve months. Below investment grade securities in an unrealized loss position were ~~5.0%~~4.3% of invested assets.

As of ~~March 31,~~June 30, 2011, securities in an unrealized loss position that were rated as below investment grade represented ~~25.9%~~28.5% of the total market value and ~~54.6%~~63.1% of the total unrealized loss. We have the ability and intent to hold these securities to maturity. After a review of each security and its expected cash flows, we believe the decline in market value to be temporary. Total unrealized losses for all securities in an unrealized loss position for more than

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twelve months were ~~$182.7~~$187.8 million. A widening of credit spreads is estimated to account for unrealized losses of ~~$288.6~~$264.7 million, with changes in treasury rates offsetting this loss by an estimated ~~$105.9~~$76.9 million.

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In addition, market disruptions in the RMBS market negatively affected the market values of our non-agency RMBS securities. The majority of our RMBS holdings as of ~~March 31,~~June 30, 2011, were super senior or senior bonds in the capital structure. Our total non-agency portfolio has a weighted-average life of ~~1.88~~2.51 years. The following table categorizes the weighted-average life for our non-agency portfolio, by category, as of ~~March 31,~~June 30, 2011:

		Weighted-Average
Non-agency portolio		Life

Prime		~~1.25~~1.95
Alt-A		~~3.69~~3.77
Sub-prime		~~5.40~~4.01

The following table includes the fair value, amortized cost, unrealized loss, and total time period that the security has been in an unrealized loss position for all below investment grade securities as of ~~March 31,~~June 30, 2011:

	Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized		Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized
	Value		Value		Cost		Cost		Loss			Loss		Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)													(Dollars In Thousands)
<= 90 days	$	145,765	9.3	%	$	151,131	8.7	%	$	(5,366	)	3.1	%	$	220,104	15.3	%	$	232,082	14.3	%	$	(11,978	)	6.5	%
>90 days but <= 180 days	124,801		8.0		134,158		7.7		(9,357		)	5.4		94,935		6.6		102,339		6.3		(7,404		)	4.0
>180 days but <= 270 days	77,860		5.0		92,399		5.3		(14,539		)	8.3		82,927		5.8		93,409		5.8		(10,482		)	5.7
>270 days but <= 1 year	28,319		1.8		36,897		2.1		(8,578		)	4.9		35,751		2.5		50,915		3.1		(15,164		)	8.2
>1 year but <= 2 years	20,382		1.3		22,162		1.3		(1,780		)	1.0		38,772		2.7		48,126		3.0		(9,354		)	5.1
>2 years but <= 3 years	195,438		12.5		227,191		13.1		(31,753		)	18.2		83,471		5.8		97,692		6.0		(14,221		)	7.7
>3 years but <= 4 years	774,798		49.6		856,255		49.3		(81,457		)	46.7		645,830		44.9		731,604		45.1		(85,774		)	46.4
>4 years but <= 5 years	42,175		2.7		50,135		2.9		(7,960		)	4.6		101,661		7.1		117,908		7.3		(16,247		)	8.8
>5 years	151,346		9.8		165,022		9.6		(13,676		)	7.8		135,387		9.3		149,659		9.1		(14,272		)	7.6
Total	$	1,560,884	100.0	%	$	1,735,350	100.0	%	$	(174,466	)	100.0	%	$	1,438,838	100.0	%	$	1,623,734	100.0	%	$	(184,896	)	100.0	%

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity refers to a company’s ability to generate adequate amounts of cash to meet its needs. We meet our liquidity requirements primarily through positive cash flows from our operating activities. Primary sources of cash are premiums, deposits for policyholder accounts, investment sales and maturities, and investment income. Primary uses of cash include benefit payments, withdrawals from policyholder accounts, investment purchases, policy acquisition costs, and other operating expenses. We believe that we have sufficient liquidity to fund our cash needs under normal operating scenarios.

In the event of significant unanticipated cash requirements beyond our normal liquidity requirements, we have additional sources of liquidity available depending on market conditions and the amount and timing of the liquidity need. These additional sources of liquidity include cash flows from operations, the sale of liquid assets, accessing our credit facility, and other sources described herein.

Our decision to sell investment assets could be impacted by accounting rules, including rules relating to the likelihood of a requirement to sell securities before recovery of our cost basis. Under stressful market and economic conditions, liquidity may broadly deteriorate which could negatively impact our ability to sell investment assets. If we require on short notice significant amounts of cash in excess of normal requirements, we may have difficulty selling investment assets in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both.

While we anticipate that our operating cash flows will be sufficient to meet our investment commitments and operating cash needs in a normal credit market environment, we recognize that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, we have established repurchase agreement programs for certain of our insurance subsidiaries to provide liquidity when needed. We

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expect that the rate received on our investments will equal or exceed our borrowing rate. As of ~~March 31,~~June 30, 2011, we had no outstanding balance related to such borrowings. For the ~~three~~six months ended

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~~March 31,~~ June 30, 2011, we had a maximum balance outstanding of ~~$245.5~~$348.2 million related to these programs. The average daily balance was ~~$104.3~~$144.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2011.

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

During the fourth quarter of 2010, we completed the acquisition of United Investors Life Insurance Company (“United Investors”). The transaction required a cash outlay by us of approximately $342.9 million, and an additional payment of $20.4 million was made in the first quarter of 2011.

Credit Facility

Under a revolving line of credit arrangement, we have the ability to borrow on an unsecured basis up to an aggregate principal amount of $500 million (the “Credit Facility”). We have the right in certain circumstances to request that the commitment under the Credit Facility be increased up to a maximum principal amount of $600 million. Balances outstanding under the Credit Facility accrue interest at a rate equal to (i) either the prime rate or the London Interbank Offered Rate (“LIBOR”), plus (ii) a spread based on the ratings of PLC’s senior unsecured long-term debt. The Credit Agreement provides that we are liable for the full amount of any obligations for borrowings or letters of credit, excluding those of PLC, under the Credit Facility. The maturity date on the Credit Facility is April 16, 2013. We did not have an outstanding balance under the Credit Facility as of ~~March 31,~~June 30, 2011. PLC had an outstanding balance of ~~$125.0~~$135.0 million at an interest rate of LIBOR plus 0.40% under the Credit Facility as of ~~March 31,~~June 30, 2011. We were not aware of any non-compliance with the financial debt covenants of the Credit Facility as of ~~March 31,~~June 30, 2011.

Sources and Use of Cash

Our primary sources of funding are from our insurance operations and revenues from investments. The states in which we and our insurance subsidiaries are domiciled impose certain restrictions on the ability to pay dividends. These restrictions are based in part on the prior year’s statutory income and surplus. Generally, these restrictions pose no short-term liquidity concerns.

We are a member of the FHLB of Cincinnati. FHLB advances provide an attractive funding source for short-term borrowing and for the sale of funding agreements. Membership in the FHLB requires that we purchase FHLB capital stock based on a minimum requirement and a percentage of the dollar amount of advances outstanding. Our borrowing capacity is determined by the following factors: 1) total advance capacity is limited to the lower of 50% of total assets or 100% of mortgage-related assets of Protective Life Insurance Company, 2) ownership of appropriate capital and activity stock to support continued membership in the FHLB and current and future advances, and 3) the availability of adequate eligible mortgage or treasury/agency collateral to back current and future advances.

We held ~~$62.7~~$64.6 million of FHLB common stock as of ~~March 31,~~June 30, 2011, which is included in equity securities. In addition, our obligations under the advances must be collateralized. We maintain control over any such pledged assets, including the right of substitution. As of ~~March 31,~~June 30, 2011, we had $976.0 million of funding agreement-related advances and accrued interest outstanding under the FHLB program.

As of ~~March 31,~~June 30, 2011, we reported approximately ~~$639.4~~$637.7 million (fair value) of Auction Rate Securities (“ARS”) in non-Modco portfolios. All of these ARS were rated AAA. While the auction rate market has experienced liquidity constraints, we believe that based on our current liquidity position and our operating cash flows, any lack of liquidity in the ARS market will not have a material impact on our liquidity, financial condition, or cash flows.

All of the auction rate securities held, on a consolidated basis, in non-Modco portfolios as of ~~March 31,~~June 30, 2011, were student loan-backed auction rate securities, for which the underlying collateral is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). As there is no current active market for these auction rate securities, we use a valuation model, which incorporates, among other inputs, the contractual terms of each indenture and current valuation information from actively-traded asset-backed securities with comparable underlying assets (i.e. FFELP-backed student loans) and vintage.

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We use an income approach valuation model to determine the fair value of our student loan-backed auction rate securities. Specifically, a discounted cash flow method is used. The expected yield on the auction rate securities

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is estimated for each coupon date, based on the contractual terms on each indenture. The estimated market yield is based on comparable securities with observable yields and an additional yield spread for illiquidity of auction rate securities in the current market.

The auction rate securities held in non-Modco portfolios are classified as a Level 3 valuation. An unrealized loss of ~~$18.0~~$19.7 million and $16.7 million was recorded as of ~~March 31,~~June 30, 2011 and December 31, 2010, respectively, and we have not recorded any other-than-temporary impairment because the underlying collateral for each of the auction rate securities is at least 97% guaranteed by the FFELP and there are subordinate tranches within each of these auction rate security issuances that would support the senior tranches in the event of default. In the event of a complete and total default by all underlying student loans, the principal shortfall, in excess of the 97% FFELP guarantee, would be absorbed by the subordinate tranches. Our non-performance exposure is to the FFELP guarantee, not the underlying student loans. At this time, we have no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary. In addition, we have the ability and intent to hold these securities until their values recover or maturity. Therefore, we believe that no other-than-temporary impairment has been experienced.

Our liquidity requirements primarily relate to the liabilities associated with our various insurance and investment products, operating expenses, and income taxes. Liabilities arising from insurance and investment products include the payment of policyholder benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans, and obligations to redeem funding agreements.

We maintain investment strategies intended to provide adequate funds to pay benefits and expected surrenders, withdrawals, loans, and redemption obligations without forced sales of investments. In addition, we hold highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund our expected operating expenses, surrenders, and withdrawals. We were committed as of ~~March 31,~~June 30, 2011, to fund mortgage loans in the amount of ~~$238.5~~$221.1 million.

Our positive cash flows from operations are used to fund an investment portfolio that provides for future benefit payments. We employ a formal asset/liability program to manage the cash flows of our investment portfolio relative to our long-term benefit obligations. As of ~~March 31,~~June 30, 2011, we held cash and short-term investments of ~~$605.3~~$505.1 million.

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

	For The						For The
	Three Months Ended						Six Months Ended
	March 31,						June 30,
	2011			2010			2011			2010
	(Dollars In Thousands)						(Dollars In Thousands)

Net cash provided by operating activities	$	82,163		$	176,885		$	205,618		$	329,833
Net cash provided by (used in) investing activities	26,871			(180,232		)	26,529			(481,207		)
Net cash used in financing activities	(146,164		)	(16,917		)
Net cash (used in) provided by financing activities							(98,714		)	114,336
Total	$	(37,130	)	$	(20,264	)	$	133,433		$	(37,038	)

For The ~~Three~~Six Months Ended ~~March 31,~~June 30, 2011 as compared to The ~~Three~~Six Months Ended ~~March 31,~~June 30, 2010

Net cash provided by operating activities - Cash flows from operating activities are affected by the timing of premiums received, fees received, investment income, and expenses paid. Principal sources of cash include sales of our products and services. As an insurance business, we typically generate positive cash flows from operating activities, as premiums and deposits collected from our insurance and investment products exceed benefits paid and redemptions, and we invest the excess. Accordingly, in analyzing our cash flows we focus on the change in the amount of cash available and used in investing activities.

Net cash provided by (used in) investing activities - Changes in cash from investing activities primarily related to the activity in our investment ~~portfolio, a $20.4 million payment in~~portfolio. In addition, during the second quarter of 2011, ~~for~~PLICO completed the ~~United Investors acquisition, and changes in other long-term and short-term investments.~~reinsurance transaction with Liberty Life.

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Net cash ~~used in~~(used in) provided by financing activities - Changes in cash from financing activities primarily related to the repurchase of ~~$35.7~~$90.7 million of non-recourse funding obligations during 2011, as compared to $180.0 million during 2010 and investment product and universal life net activity, which reflected ~~$72.9~~$257.4 million more outflows in 2011, as compared to the prior year.

Capital Resources

To give us flexibility in connection with future acquisitions and other funding needs, PLC has debt securities, preferred and common stock, and additional preferred securities of special purpose finance subsidiaries registered under the Securities Act of 1933 on a delayed (or shelf) basis.

We have a $500 million revolving line of credit (the “Credit Facility”), under which we could borrow funds with balances due April 16, 2013. PLC had an outstanding balance of ~~$125.0~~$135.0 million as of ~~March 31,~~June 30, 2011, under the Credit Facility at an interest rate of LIBOR plus 0.40%.

Golden Gate II Captive Insurance Company (“Golden Gate II”), a wholly owned special purpose financial captive insurance company, had $575.0 million of non-recourse funding obligations outstanding as of ~~March 31,~~June 30, 2011. These outstanding non-recourse funding obligations were issued to special purpose trusts, which in turn issued securities to third parties. Certain of our affiliates purchased a portion of these securities during 2010 and 2011. As a result of these purchases, as of ~~March 31,~~June 30, 2011, securities related to ~~$496.7~~$438.3 million of the outstanding balance of the non-recourse funding obligations was held by external parties, securities related to ~~$28.4~~$31.8 million of the non-recourse funding obligations was held by a nonconsolidated ~~affiliate,~~affiliates, and ~~$49.9~~$104.9 million was held by a consolidated ~~subsidiary~~subsidiaries of the Company. These non-recourse funding obligations mature in 2052. $275 million of this amount is currently accruing interest at a rate of LIBOR plus 30 basis points. We have experienced higher borrowing costs than were originally expected associated with $300 million of our non-recourse funding obligations supporting the business reinsured to Golden Gate II. These higher costs are the result of higher spread component interest costs associated with the illiquidity of the current market for auction rate securities, as well as a rating downgrade of our guarantor by certain rating agencies. The current rate associated with these obligations is LIBOR plus 200 basis points, which is the maximum rate we can be required to pay under these obligations. We have contingent approval to issue an additional $100 million of obligations. Under the terms of the surplus notes, the holders of the surplus notes cannot require repayment from PLC, us, or any of our subsidiaries, other than Golden Gate II, the direct issuers of the surplus notes, although PLC has agreed to indemnify Golden Gate II for certain costs and obligations (which obligations do not include payment of principal and interest on the surplus notes). In addition, PLC has entered into certain support agreements with Golden Gate II obligating it to make capital contributions or provide support related to certain of Golden Gate II’s expenses and in certain circumstances, to collateralize certain of PLC’s obligations to Golden Gate II.

Golden Gate III Vermont Captive Insurance Company (“Golden Gate III”), a Vermont special purpose financial captive insurance company and wholly owned subsidiary, has an outstanding Letter of Credit (“LOC”) issued under a Reimbursement Agreement with UBS AG, Stamford Branch (“UBS”), with a total outstanding balance of ~~$505~~$560.0 million as of ~~March 31,~~June 30, 2011. The LOC was issued to a trust for the benefit of our wholly owned subsidiary, West Coast Life Insurance Company (“WCL”). Subject to certain conditions, the amount of the LOC will be periodically increased up to a maximum of $610 million in 2013. The term of the LOC is expected to be eight years, subject to certain conditions including capital contributions made to Golden Gate III by us or one of our affiliates. The LOC was issued to support certain obligations of Golden Gate III to WCL under an indemnity reinsurance agreement effective April 1, 2010.

Golden Gate IV Vermont Captive Insurance Company (“Golden Gate IV”), a Vermont special purpose financial captive insurance company and wholly owned subsidiary, has an outstanding twelve-year LOC issued under a Reimbursement Agreement with UBS, with a total outstanding balance of ~~$315.0~~$365.0 million as of ~~March 31,~~June 30, 2011. The term of the LOC is 12 years. The LOC was issued to a trust for the benefit of WCL. Subject to certain conditions, the amount of the LOC will be periodically increased up to a maximum of $790 million in 2016. The

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LOC was issued to support certain obligations of Golden Gate IV to WCL for a portion of reserves related to level

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premium term life insurance policies reinsured by Golden Gate IV from WCL under an indemnity reinsurance agreement effective October 1, 2010.

During the fourth quarter of 2010, we completed the acquisition of United Investors Life Insurance Company. Additionally, during the fourth quarter of 2010, in an unrelated transaction, we signed an agreement to reinsure a life insurance block from Liberty Life Insurance Company. This transaction was closed onOn April 29, 2011, in conjunction with Athene Holding Ltd’s acquisition of Liberty Life Insurance Company (“Liberty Life”) from an affiliate of Royal Bank of ~~Canada.~~Canada, we reinsured a life and health insurance block from Liberty Life. The capital invested by us in the transaction at closing was ~~$313~~$321 million, including a ~~$222~~$225 million ceding commission ~~paid to Liberty Life. The final amount of the ceding commission~~which has been recorded and is subject to adjustment upon completion of the final Liberty Life closing statutory balance sheet. In conjunction with closing, we invested $40 million in a surplus note issued by Athene Life Re.

A life insurance company’s statutory capital is computed according to rules prescribed by NAIC, as modified by state law. Generally speaking, other states in which a company does business defer to the interpretation of the domiciliary state with respect to NAIC rules, unless inconsistent with the other state’s regulations. Statutory accounting rules are different from GAAP and are intended to reflect a more conservative view, for example, requiring immediate expensing of policy acquisition costs. The NAIC’s risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The achievement of long-term growth will require growth in the statutory capital of our insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or our equity contributions. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner.

State insurance regulators and the NAIC have adopted risk-based capital (“RBC”) requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus appropriate for an insurance company to support its overall business operations based on its size and risk profile. A company’s risk-based statutory surplus is calculated by applying factors and performing calculations relating to various asset, premium, claim, expense, and reserve items. Regulators can then measure the adequacy of a company’s statutory surplus by comparing it to the RBC. Under RBC requirements, regulatory compliance is determined by the ratio of a company’s total adjusted capital, as defined by the insurance regulators, to its company action level of RBC (known as the RBC ratio), also as defined by insurance regulators.

We cede material amounts of insurance and transfer related assets to other insurance companies through reinsurance. However, notwithstanding the transfer of related assets, we remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations that ~~such reinsurer~~it assumed. We evaluate the financial condition of our reinsurers and monitor the associated concentration of credit risk. For the three and six months ended ~~March 31,~~June 30, 2011, we ceded premiums to third party reinsurers amounting to ~~$324.4 million.~~$356.6 million and $681.0 million, respectively. In addition, we had receivables from reinsurers amounting to $5.6 billion as of ~~March 31,~~June 30, 2011. We review reinsurance receivable amounts for collectability and establish bad debt reserves if deemed appropriate.

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Ratings

Various Nationally Recognized Statistical Rating Organizations (“rating organizations”) review the financial performance and condition of insurers, including us and our insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations. These ratings are important to maintaining public confidence in an insurer’s products, its ability to market its products and its competitive position. The following table summarizes the financial strength ratings of our significant member companies from the major independent rating organizations as of ~~March 31,~~June 30, 2011:

			Standard &
Ratings	A.M. Best	Fitch	Poor’s	Moody’s

Insurance ~~companies~~company financial strength ~~ratings:~~rating:
Protective Life Insurance Company	A+	A	AA-	A2
West Coast Life Insurance Company	A+	A	AA-	A2
Protective Life and Annuity Insurance Company	A+	A	AA-	—
Lyndon Property Insurance Company	A-	—	—	—

Our ratings are subject to review and change by the rating organizations at any time and without notice. A downgrade or other negative action by a ratings organization with respect to our financial strength ratings or those of our insurance subsidiaries could adversely affect sales, relationships with distributors, the level of policy surrenders and withdrawals, competitive position in the marketplace, and the cost or availability of reinsurance.

Liabilities

Many of our products contain surrender charges and other features that are designed to reward persistency and penalize the early withdrawal of funds. Certain stable value and annuity contracts have market-value adjustments that protect us against investment losses if interest rates are higher at the time of surrender than at the time of issue.

As of ~~March 31,~~June 30, 2011, we had policy liabilities and accruals of approximately ~~$19.9~~$21.8 billion. Our interest-sensitive life insurance policies have a weighted average minimum credited interest rate of approximately ~~3.65%~~3.64%.

Contractual Obligations

The table below sets forth future maturities of non-recourse funding obligations, stable value products, operating lease obligations, other property lease obligations, mortgage loan and investment commitments, and policyholder obligations.

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

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As of ~~March 31,~~June 30, 2011, we carried a ~~$10.1~~$10.2 million liability for uncertain tax positions, including interest on unrecognized tax benefits. These amounts are not included in the long-term contractual obligations table because of the difficulty in making reasonably reliable estimates of the occurrence or timing of cash settlements with the respective taxing authorities.

			Payments due by period										Payments due by period
			Less than						More than				Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years		Total		1 year		1-3 years		3-5 years		5 years
	(Dollars In Thousands)										(Dollars In Thousands)
Non-recourse funding obligations(1)	$	3,276,480	$	70,034	$	140,068	$	140,068	$	2,926,310	$	3,153,099	$	68,793	$	137,586	$	137,586	$	2,809,134
Stable value products(2)	2,808,545		860,276		1,119,952		737,413		90,904		2,744,949		753,761		1,135,839		788,945		66,404
Operating leases(3)	16,144		4,009		6,469		4,599		1,067		37,004		10,707		16,089		8,658		1,550
Home office lease(4)	76,900		755		76,145		—		—		76,900		755		76,145		—		—
Mortgage loan commitments	238,549		238,549		—		—		—
Mortgage loan and investment commitments											232,088		232,088		—		—		—
Policyholder obligations(5)	24,265,470		2,629,052		2,895,413		2,626,294		16,114,711		25,780,310		2,609,395		3,016,086		2,762,971		17,391,858
Total	$	30,682,088	$	3,802,675	$	4,238,047	$	3,508,374	$	19,132,992	$	32,024,350	$	3,675,499	$	4,381,745	$	3,698,160	$	20,268,946

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

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

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

(4)The lease payments shown assume we exercise our option to purchase the building at the end of the lease term. Additionally, the payments due by period above were computed based on the terms of the renegotiated lease agreement, which was entered in January 2007.

(5)Estimated contractual policyholder obligations are based on mortality, morbidity, and lapse assumptions comparable to our historical experience, modified for recent observed trends. These obligations are based on current balance sheet values and include expected interest crediting, but do not incorporate an expectation of future market growth, or future deposits. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. As variable separate account obligations are legally insulated from general account obligations, the variable separate account obligations will be fully funded by cash flows from variable separate account assets. We expect to fully fund the general account obligations from cash flows from general account investments.

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FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB guidance defines fair value for GAAP and establishes a framework for measuring fair value as well as a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. The term “fair value” in this document is defined in accordance with GAAP. The standard describes three levels of inputs that may be used to measure fair value. For more information, see Note ~~12,~~ 13, Fair Value of Financial Instruments.

Available-for-sale securities and trading account securities are recorded at fair value, which is primarily based on actively traded markets where prices are based on either direct market quotes or observed transactions. Liquidity is a significant factor in the determination of the fair value for these securities. Market price quotes may not be readily available for some positions or for some positions within a market sector where trading activity has slowed significantly or ceased. These situations are generally triggered by the market’s perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer’s financial position, changes in credit ratings, and cash flows on the investments. As of ~~March 31,~~June 30, 2011, ~~$833.5~~$857.4 million of available-for-sale and trading account assets, excluding other long-term investments, were classified as Level 3 fair value assets.

The fair values of derivative assets and liabilities include adjustments for market liquidity, counterparty credit quality, and other deal specific factors, where appropriate. The fair values of derivative assets and liabilities traded in the over-the-counter market are determined using quantitative models that require the use of multiple market inputs including interest rates, prices, and indices to generate continuous yield or pricing curves and volatility factors, which are used to value the position. The predominance of market inputs are actively quoted and can be validated through external sources. Estimation risk is greater for derivative asset and liability positions that are either option-based or have longer maturity dates where observable market inputs are less readily available or are unobservable, in which case quantitative based extrapolations of rate, price, or index scenarios are used in determining fair values. As of ~~March 31,~~June 30, 2011, the Level 3 fair values of derivative assets and liabilities determined by these quantitative models were ~~$32.4~~$33.8 million and ~~$178.4~~$213.7 million, respectively.

The liabilities of certain of our annuity account balances are calculated at fair value using actuarial valuation models. These models use various observable and unobservable inputs including projected future cash flows, policyholder behavior, our credit rating, and other market conditions. As of ~~March 31,~~June 30, 2011, the Level 3 fair value of these liabilities was ~~$143.0~~$142.5 million.

For securities that are priced via non-binding independent broker quotations, we assess whether prices received from independent brokers represent a reasonable estimate of fair value through an analysis using internal and external cash flow models developed based on spreads and, when available, market indices. We use a market-based cash flow analysis to validate the reasonableness prices received from independent brokers. These analytics, which are updated daily, incorporate various metrics (yield curves, credit spreads, prepayment rates, etc.) to determine the valuation of such holdings. As a result of this analysis, if we determine there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly.

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Of our ~~$865.9~~$961.4 million of total assets (measured at fair value on a recurring basis) classified as Level 3 assets, ~~$681.1~~$678.8 million were ABS. Of this amount, ~~$649.7~~$646.7 million were student loan related ABS and ~~$31.4~~$32.1 million were non-student loan related ABS. The years of issuance of the ABS are as follows:

Year of Issuance	Amount		Amount
	(In Millions)		(In Millions)

2002	$	304	$	303
2003	111		109
2004	122		121
2005	14		12
2006	27		31
2007	103		103
Total	$	681	$	679

The ABS was rated as follows: ~~$652.4~~$650.2 million were AAA rated, ~~$22.7~~$24.2 million were AA rated, and ~~$6.0~~$4.4 million were A rated. We do not expect any downgrade in the ratings of the securities related to student loans since the underlying collateral of the student loan asset-backed securities is guaranteed by the U.S. Department of Education.

MARKET RISK EXPOSURES AND OFF-BALANCE SHEET ARRANGEMENTS

Our financial position and earnings are subject to various market risks including changes in interest rates, changes in the yield curve, changes in spreads between risk-adjusted and risk-free interest rates, changes in foreign currency rates, changes in used vehicle prices, and equity price risks and issuer defaults. We analyze and manage the risks arising from market exposures of financial instruments, as well as other risks, through an integrated asset/liability management process. Our asset/liability management programs and procedures involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, risk, and cash flow characteristics. These programs also incorporate the use of derivative financial instruments primarily to reduce our exposure to interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk.

The primary focus of our asset/liability program is the management of interest rate risk within the insurance operations. This includes monitoring the duration of both investments and insurance liabilities to maintain an appropriate balance between risk and profitability for each product category, and for us as a whole. It is our policy to maintain asset and liability durations within one-half year of one another, although, from time to time, a broader interval may be allowed.

At the beginning of the third quarter of 2010, we began a program of transacting in equity options, volatility swaps, and equity and interest rate futures to mitigate the risk related to certain guaranteed minimum benefits, including guaranteed minimum withdrawal benefits, within our variable annuity products. In general, the cost of such benefits varies with the level of equity and interest rate markets and overall volatility.

We are exposed to credit risk within our investment portfolio and through derivative counterparties. Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the instrument or contract. We manage credit risk through established investment policies which attempt to address quality of obligors and counterparties, credit concentration limits, diversification requirements, and acceptable risk levels under expected and stressed scenarios. Derivative counterparty credit risk is measured as the amount owed to us based upon current market conditions and potential payment obligations between us and our counterparties. We minimize the credit risk in derivative instruments by entering into transactions with high quality counterparties, (A-rated or higher at the time we enter into the contract) and we ~~typically~~ maintain collateral support agreements with certain of those counterparties.

We transact in equity options, volatility swaps, equity and interest rate futures, credit default swaps and foreign currency hedges to mitigate the risk related to certain guaranteed minimum benefits, including guaranteed minimum withdrawal benefits, within our variable annuity products. The credit default swaps entitle us to receive periodic payments in exchange for the obligation to compensate the counterparty should the reference security experience a credit event. In general, the cost of such benefits varies with the level of equity and interest rate markets and overall volatility.

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

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variance swaps to mitigate our exposure to the value of equity indexed annuity contracts and guaranteed benefits related to variable annuity contracts.

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Derivative instruments expose us to credit and market risk and could result in material changes from quarter-to-quarter. We minimize our credit risk by entering into transactions with highly rated counterparties. We manage the market risk by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. We monitor our use of derivatives in connection with our overall asset/liability management programs and procedures. In addition, all derivative programs are monitored by our risk management department.

We believe our asset/liability management programs and procedures and certain product features provide protection against the effects of changes in interest rates under various scenarios. Additionally, we believe our asset/liability management programs and procedures provide sufficient liquidity to enable us to fulfill our obligation to pay benefits under our various insurance and deposit contracts. However, our asset/liability management programs and procedures incorporate assumptions about the relationship between short-term and long-term interest rates (i.e., the slope of the yield curve), relationships between risk-adjusted and risk-free interest rates, market liquidity, spread movements, implied volatility, and other factors, and the effectiveness of our asset/liability management programs and procedures may be negatively affected whenever actual results differ from those assumptions.

In the ordinary course of our commercial mortgage lending operations, we will commit to provide a mortgage loan before the property to be mortgaged has been built or acquired. The mortgage loan commitment is a contractual obligation to fund a mortgage loan when called upon by the borrower. The commitment is not recognized in our financial statements until the commitment is actually funded. The mortgage loan commitment contains terms, including the rate of interest, which may be different than prevailing interest rates. As of ~~March 31,~~June 30, 2011, we had outstanding mortgage loan commitments of ~~$238.5~~$221.1 million at an average rate of ~~5.84%~~5.75%.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 2, Summary of Significant Accounting Policies, to the consolidated condensed financial statements for information regarding recently issued accounting standards.

RECENT DEVELOPMENTS

During the fourth quarter of 2010, we completed the acquisition of United Investors Life Insurance Company. The transaction required a cash outlay by us of approximately $342.9 million, and an additional payment of $20.4 million was made in the first quarter of 2011.

In addition, during the fourth quarter of 2010, we entered into an agreement to reinsure a life insurance block from Liberty Life Insurance Company, subject to the acquisition of Liberty Life by Athene Holding. This transaction was closed on April 29, 2011, in conjunction with Athene Holding Ltd’s acquisition of Liberty Life from an affiliate of Royal Bank of Canada. The capital invested by us in the transaction at closing was $313million, including a $222 million ceding commission paid to Liberty Life. The final amount of the ceding commission is subject to adjustment upon completion of the final Liberty Life closing statutory balance sheet. In conjunction with closing, we invested $40 million in a surplus note issued by Athene Life Re.

The NAIC has approved regulatory changes in 2009 that impacted our insurance subsidiaries and their competitors in 2010 and will continue to do so in 2011. The NAIC approved changes to the measurements used to determine the amount of deferred tax assets (“DTAs”) an insurance company may claim as admitted assets on its statutory financial statements. These changes had the effect of increasing the amount of DTAs an insurance company was permitted to claim as an admitted asset for purposes of insurance company statutory financial statements filed for calendar years 2009, 2010, and 2011. The NAIC continues to study the measurements used to determine the amount of DTAs an insurance company may claim as admitted assets on its statutory financial statements and further changes are possible. In March 2011, the NAIC issued proposed Statement of Statutory Accounting Principles No. 101 — Income Taxes, which may become effective on January 1, 2012. When compared to the rules that have been in effect in 2009, 2010, and 2011, additional restrictions on the admittance of DTAs would apply, thereby reducing capital and surplus and risk-based ~~capital.~~capital ratio. Also in 2010, the NAIC approved changes to the Model Holding Company System Regulatory Act that, if enacted by the legislatures of the states in which ~~our~~the Company and its insurance subsidiaries are domiciled, will subject the Company and such subsidiaries to increased reporting requirements.

The NAIC is also considering various initiatives to change and modernize its financial and solvency regulations. It is considering changing to a principles-based reserving method for life insurance and annuity reserves, changes to the accounting and risk-based capital regulations, changes to the governance practices of

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insurers, and other items. Some of these proposed changes would require the approval of state legislatures. We cannot provide any estimate as to what impact these proposed changes, if they occur, will have on our reserve and capital requirements.

During the fourth quarter of 2010, the Federal Housing Finance Agency issued an Announced Notice of Proposed Rulemaking (“ANPR”). The purpose of the ANPR is to seek comment on several possible changes to the requirements applicable to members of the FHLB. Any changes to such requirements that eliminate ~~our~~the Company’s eligibility for continued FHLB membership or limit ~~our~~the Company’s borrowing capacity pursuant to ~~our~~its FHLB

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membership could have a material adverse effect on the Company. WeThe Company can give no assurance as to the outcome of the ANPR.

On April 15, 2011, Scottish Re Group Limited (“Scottish Re”) announced that it had entered into an agreement and plan of merger (the “Merger Agreement”), pursuant to which an affiliate of certain investors will be merged into Scottish Re and Scottish Re will continue as the surviving entity. Scottish Re is a significant reinsurer of certain blocks of our business. For additional information on our reinsurance exposure to Scottish Re, refer to our Form 10-K for the period ended December 31, 2010.

IMPACT OF INFLATION

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

See Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Executive Summary” and “Liquidity and Capital Resources”, and Part II, Item 1A, Risk Factors of this Report for market risk disclosures in light of the current difficult conditions in the financial and credit markets, and the economy generally.

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Item 4. Controls and Procedures

(a) Disclosure controls and procedures

In order to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis, the Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))., except as otherwise noted below. Based on their evaluation as of the end of the period covered by this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective. It should be noted that any system of controls, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of any control system is based in part upon certain judgments, including the costs and benefits of controls and the likelihood of future events. Because of these and other inherent limitations of control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been detected.

As described in Note 3 to the consolidated financial statements set forth in this periodic report on Form 10-Q, the Company acquired UILIC and a block of insurance policies from Liberty Life effective December 31, 2010 and April 29, 2011, respectively. The Company performed due diligence on these businesses before completing the acquisitions and developed a reasonable level of assurance that the disclosure controls and procedures relating to the administrative systems and processes of these businesses were effective. As of June 30, 2011, however, the Company has not completed its own evaluation of the design and operation of disclosure controls and procedures relating to the administrative systems and processes, including those currently being provided by third parties, for these acquired businesses.

(b) Changes in internal control over financial reporting

There have been no changes in the Company’s internal control over financial reporting during the period ended ~~March 31,~~June 30, 2011, that have materially affected, or are reasonably likely to materially affect, the Company’s

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internal control over financial reporting. The Company’s internal controls exist within a dynamic environment and the Company continually strives to improve its internal controls and procedures to enhance the quality of its financial reporting.

PART II

Item 1A. Risk Factors and Cautionary Factors that may Affect Future Results

The operating results of companies in the insurance industry have historically been subject to significant fluctuations. The factors which could affect the Company’s future results include, but are not limited to, general economic conditions and known trends and uncertainties. In addition to other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, Risk Factors and Cautionary Factors that may Affect Future Results in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect the Company’s business, financial condition, or future results of operations.

The Company is highly regulated and subject to numerous legal restrictions and regulations.

The Company isand its subsidiaries are subject to government regulation in each of the states in which ~~it conducts~~they conduct business. Such regulation is vested in state agencies having broad administrative and in some instances discretionary power dealing with many aspects of the Company’s business, which may include, among other things, premium rates and increases thereto, underwriting practices, reserve requirements, marketing practices, advertising, privacy, policy forms, reinsurance reserve requirements, acquisitions, mergers, ~~and~~ capital adequacy, claims practices and the remittance of unclaimed property, and is concerned primarily with the protection of policyholders, other customers, beneficiaries and other ~~customers~~parties rather than shareowners. In addition, some state insurance departments may enact rules or regulations with extra-territorial application, effectively extending their jurisdiction to areas such as permitted insurance company investments that are normally the province of an insurance company’s domiciliary state regulator. At any given time, a number of financial and/or market conduct examinations of the Company may be ongoing. From time to time, regulators raise issues during examinations or audits ~~of the Company~~ that could, if determined

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adversely, have a material impact on the Company. The Company is required to obtain state regulatory approval for rate increases for certain health insurance products, and the Company’s profits may be adversely affected if the requested rate increases are not approved in full by regulators in a timely ~~fashion~~.fashion.

Under insurance guaranty fund laws in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company cannot predict the amount or timing of any future assessments.

The purchase of life insurance products is limited by state insurable interest laws, which in most jurisdictions require that the purchaser of life insurance name a beneficiary that has some interest in the sustained life of the insured. To some extent, the insurable interest laws present a barrier to the life settlement, or “stranger-owned” industry, in which a financial entity acquires an interest in life insurance proceeds, and efforts have been made in some states to liberalize the insurable interest laws. To the extent these laws are relaxed, the Company’s lapse assumptions may prove to be ~~incorrect~~.incorrect.

Although the Company ~~and its subsidiaries are~~is subject to state regulation, in many instances the state regulatory models emanate from the National Association of Insurance Commissioners (“NAIC”). State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, are often made for the benefit of the consumer and at the expense of the insurer and, thus, could have a material adverse effect on the Company’s financial condition and results of operations. The NAIC may also be influenced by the initiatives and regulatory structures or schemes of international regulatory bodies, and those initiatives or regulatory structures or schemes may not translate readily into the regulatory structures or schemes or the legal system (including the interpretation or application of standards by juries) under which U.S. insurers must operate. Application of such initiatives or regulatory structures or schemes to the Company could have a material adverse effect on the Company’s financial condition and results of operations.

The Company is also subject to the risk that compliance with any particular regulator’s interpretation of a legal, accounting or actuarial issue may not result in compliance with another regulator’s interpretation of the same issue, particularly when compliance is judged in hindsight. There is an additional risk that any particular regulator’s interpretation of a legal, accounting or actuarial issue may change over time to the Company’s detriment, or that

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changes to the overall legal or market environment may cause the Company to change its practices in ways that may, in some cases, limit its growth or ~~profitability~~.profitability.

Some of the NAIC pronouncements, particularly as they affect accounting issues, take effect automatically in the various states without affirmative action by the states. Although some NAIC pronouncements may take effect automatically without affirmative action by the states, the NAIC is not a governmental entity and its processes and procedures do not comport with those to which governmental entities typically adhere. Therefore, it is possible that actions could be taken by the NAIC that are effective immediately without the procedural safeguards that would be present if governmental action was required. Statutes, regulations, and interpretations may be applied with retroactive impact, particularly in areas such as accounting and reserve requirements. Also, regulatory actions with prospective impact can potentially have a significant impact on currently sold products. The NAIC continues to work to reform state regulation in various areas, including comprehensive reforms relating to life insurance reserves.

At the federal level, bills are routinely introduced in both chambers of the United States Congress (“Congress”) which could affect life insurers. In the past, Congress has considered legislation that would impact insurance companies in numerous ~~ways, such as providing for an optional federal charter.~~ways. The Company cannot predict whether or in what form reforms will be enacted and, if so, whether the enacted reforms will positively or negatively affect the Company or whether any effects will be material.

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act of 2010 (the “Healthcare Act”) into law. The Healthcare Act makes significant changes to the regulation of health insurance, imposing various conditions and requirements on the Company. The Healthcare Act may affect the small blocks of business the Company has offered or acquired over the years that is, or is deemed to be health insurance. The Healthcare Act may also affect the benefit plans the Company sponsors for employees or retirees and their dependents, the Company’s expense to provide such benefits, the tax liabilities of the Company in connection with the provision of such benefits, the deductibility of certain compensation, and the Company’s ability to attract or retain employees. In addition, the Company may be subject to regulations, guidance or determinations emanating from the various regulatory authorities authorized under the Healthcare Act. The Company cannot predict the effect

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that the Healthcare Act, or any regulatory pronouncement made thereunder, will have on its results of operations or financial condition.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) makes sweeping changes to the regulation of financial services entities, products and markets. Certain provisions of the Reform Act are or may become applicable to the Company, its competitors or those entities with which the Company does business, including but not limited to: the establishment of federal regulatory authority over ~~derivatives,~~certain derivative financial instruments, the establishment of consolidated federal regulation and resolution authority over systemically important financial services firms, the establishment of the Federal Insurance Office, changes to the regulation of broker dealers and investment advisors, changes to the regulation of reinsurance, changes to regulations affecting the rights of shareholders, the imposition of additional regulation over credit rating agencies, and the imposition of concentration limits on financial institutions that restrict the amount of credit that may be extended to a single person or entity. The Reform Act also creates the Consumer Financial Protection Bureau (“CFPB”), an independent division of the Department of Treasury with jurisdiction over credit, savings, payment, and other consumer financial products and services, other than investment products already regulated by the United States Securities and Exchange Commission (the “SEC”) or the U.S. Commodity Futures Trading Commission. Certain of the ~~Company and its~~Company’s subsidiaries sell products that may be regulated by the CFPB. Numerous provisions of the Reform Act require the adoption of implementing rules and/or regulations. In addition, the Reform Act mandates multiple studies, which could result in additional legislation or regulation applicable to the insurance industry, the Company, its competitors or the entities with which the Company does business. Legislative or regulatory requirements imposed by or promulgated in connection with the Reform Act may impact the Company in many ways, including but not limited to: placing the Company at a competitive disadvantage relative to its competition or other financial services entities, changing the competitive landscape of the financial services sector and/or the insurance industry, making it more expensive for the Company to conduct its business, requiring the reallocation of significant company resources to government affairs, legal and compliance-related activities, or otherwise have a material adverse effect on the overall business climate as well as the Company’s financial condition and results of operations.

The Company ~~and its subsidiaries~~ may also be subject to regulation by the United States Department of Labor when providing a variety of products and services to employee benefit plans governed by the Employee Retirement Income Security Act (“ERISA”). Severe penalties are imposed for breach of duties under ERISA.

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The Company may be subject to regulation by governments of the countries in which it currently, or may in the future, do business, as well as regulation by the U.S. Government with respect to its operations in foreign countries, such as the Foreign Corrupt Practices Act.

Certain policies, contracts, and annuities offered by the Company ~~and its subsidiaries~~ are subject to regulation under the federal securities laws administered by the SEC. The federal securities laws contain regulatory restrictions and criminal, administrative, and private remedial provisions.

Other types of regulation that could affect the Company ~~and its subsidiaries~~ include insurance company investment laws and regulations, state statutory accounting practices, anti-trust laws, minimum solvency requirements, state securities laws, federal privacy laws, insurable interest laws, federal anti-money laundering and anti-terrorism laws, and because the Company owns and operates real property, state, federal, and local environmental laws.

The Company cannot predict what form any future changes to laws and/or regulations affecting participants in the financial services sector and/or insurance industry, including the Company and its competitors or those entities with which it does business, may take, or what effect, if any, such changes may have.

The Company’s use of derivative financial instruments within its risk management strategy may not be effective or sufficient.

The Company uses derivative financial instruments within its risk management strategy to mitigate risks to which it is exposed, including the adverse affects of domestic and/or international credit, equity market and/or interest rate levels or volatility on its variable annuity products with guaranteed benefit features. These derivative financial instruments may not effectively offset the changes in the carrying value of the guarantees due to, among other things, the time lag between changes in the value of such guarantees and the changes in the value of the derivative financial instruments purchased by the Company, extreme credit, equity market and/or interest rate levels or volatility, contract holder behavior different from the Company’s expectations, and divergence between the

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performance of the underlying funds of such variable annuity products with guaranteed benefit features and the indices utilized by the Company in estimating its exposure to such guarantees.

The Company may also choose not to hedge, in whole or in part, these or other risks that it has identified, due to, for example, the availability and/or cost of a suitable derivative financial instrument or, in reaction to extreme credit, equity market and/or interest rate levels or volatility, a decision to not purchase a derivative financial instrument that fully hedges certain risks. Additionally, the Company’s estimates and assumptions made in connection with its use of any derivative financial instrument may fail to reflect or correspond to its actual long-term exposure in respect to identified risks. Derivative financial instruments held or purchased by the Company may also otherwise be insufficient to hedge the risks in relation to the Company’s obligations. In addition, the Company may fail to identify risks, or the magnitude thereof, to which it is exposed. The above factors, either alone or in combination, may have a material adverse effect on the Company’s financial condition and results of operations.

Financial services companies are frequently the targets of litigation, including class action litigation, which could result in substantial judgments.

A number of civil jury verdicts have been returned against insurers, broker-dealers, and other providers of financial services involving sales, underwriting practices, product design, product disclosure, administration, denial or delay of benefits, charging excessive or impermissible fees, recommending unsuitable products to customers, breaching fiduciary or other duties to customers, refund or claims practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or other persons with whom the insurer does business, payment of sales or other contingent commissions, and other matters. Often these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages, which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments.

Group health coverage issued through associations and credit insurance coverages have received some negative publicity in the media as well as increased regulatory consideration and review and litigation. The Company has a small closed block of group health insurance coverage that was issued to members of an association; a purported class action lawsuit is currently pending against the Company in connection with this business.

A number of lawsuits and investigations regarding the method of paying claims have been initiated against life insurers. The Company offers payment methods that may be similar to those that have been the subject of such lawsuits and investigations.

The Company, like other financial services companies in the ordinary course of business, is involved in litigation and arbitration. The Company may be unable to predict the outcome of such litigation and arbitration and may be unable to provide a reasonable range of potential losses. Given the inherent difficulty in predicting the outcome of such legal proceedings, it is possible that an adverse outcome in certain matters could be material to the Company’s results for any particular reporting period.

The Company’s investments are subject to market and credit risks. These risks could be heightened during periods of extreme volatility or disruption in financial and credit markets.

The Company’s invested assets and derivative financial instruments are subject to risks of credit defaults and changes in market values. These risks could be heightened during periods of extreme volatility or disruption in the financial and credit markets. A widening of credit spreads will increase the unrealized losses in the Company’s investment portfolio. The factors affecting the financial and credit markets could lead to other-than-temporary impairments of assets in the Company’s investment portfolio.

The value of the Company’s commercial mortgage loan portfolio depends in part on the financial condition of the tenants occupying the properties that the Company has financed. The value of the Company’s investment portfolio, including its portfolio of government debt obligations, debt obligations of those entities with an express or implied governmental guarantee and debt obligations of other issuers holding a large amount of such obligations,

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depends in part on the ability of the issuers or guarantors of such debt to maintain their credit ratings and meet their contractual obligations. Factors that may affect the overall default rate on, and market value of, the Company’s invested assets, derivative financial instruments, and mortgage loans include interest rate levels, financial market performance, and general economic conditions as well as particular circumstances affecting the individual tenants, borrowers, issuers and guarantors.

Significant continued financial and credit market volatility, changes in interest rates and credit spreads, credit defaults, real estate values, market illiquidity, declines in equity prices, acts of corporate malfeasance, ratings downgrades of the issuers or guarantors of these investments, and declines in general economic conditions, either alone or in combination, could have a material adverse impact on the Company’s results of operations, financial condition, or cash flows through realized losses, impairments, changes in unrealized loss positions, and increased demands on capital, including obligations to post additional capital and collateral. In addition, market volatility can make it difficult for the Company to value certain of its assets, especially if trading becomes less frequent. Valuations may include assumptions or estimates that may have significant period-to-period changes that could have an adverse impact on the Company’s results of operations or financial condition.

The amount of statutory capital that the Company has and the amount of statutory capital that it must hold to maintain its financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors outside of the Company’s control.

The Company primarily conducts business through licensed insurance company subsidiaries. Insurance regulators have established regulations that provide minimum capitalization requirements based on risk-based capital (“RBC”) formulas for life and property and casualty companies. The RBC formula for life insurance companies establishes capital requirements relating to insurance, business, asset, interest rate, and certain other risks.

In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors; the amount of statutory income or losses generated by the Company’s insurance subsidiaries (which itself is sensitive to equity market and credit market conditions), the amount of additional capital its insurance subsidiaries must hold to support business growth, changes in the Company’s reserve requirements, the Company’s ability to secure capital market solutions to provide reserve relief, changes in equity market levels, the value of certain fixed-income and equity securities in its investment portfolio, the credit ratings of investments held in its portfolio, including those issued by, or explicitly or implicitly guaranteed by, a government, the value of certain derivative instruments, changes in interest rates and foreign currency exchange rates, credit market volatility, changes in consumer behavior, as well as changes to the NAIC RBC formula. Most of these factors are outside of the Company’s control. The Company’s financial strength and credit ratings are significantly influenced by the statutory surplus amounts and RBC ratios of its insurance company subsidiaries. Rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of statutory capital the Company must hold in order to maintain its current ratings. In addition, rating agencies may downgrade the investments held in the Company’s portfolio, which could result in a reduction of the Company’s capital and surplus and/or its RBC ratio.

In scenarios of equity market declines, the amount of additional statutory reserves the Company is required to hold for its variable product guarantees may increase at a rate greater than the rate of change of the markets. Increases in reserves could result in a reduction to the Company’s capital, surplus, and/or RBC ratio. Also, in environments where there is not a correlative relationship between interest rates and spreads, the Company’s market value adjusted annuity product can have a material adverse effect on the Company’s statutory surplus position.

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Item 6. Exhibits

Exhibit 12		-	Consolidated Earnings Ratios.

Exhibit 31(a)		-	Certification Pursuant to §302 of the Sarbanes Oxley Act of 2002.

Exhibit 31(b)		-	Certification Pursuant to §302 of the Sarbanes Oxley Act of 2002.

Exhibit 32(a)		-	Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the
		Sarbanes Oxley Act of 2002.

Exhibit 32(b)		-	Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the
		Sarbanes Oxley Act of 2002.

Exhibit 101	-	Financial statements from the quarterly report on Form 10-Q of Protective Life Insurance Company for the quarter ended June 30, 2011, filed on August 12, 2011, formatted in XBRL: (i) the Consolidated Condensed Statements of Income, (ii) the Consolidated Condensed Balance Sheets, (iii) the Consolidated Condensed Statements of Shareowners’ Equity, (iv) the Consolidated Condensed Statement of Cash Flows, and (v) the Notes to Consolidated Condensed Financial Statements tagged as blocks of text.

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PROTECTIVE LIFE INSURANCE COMPANY


Date: ~~May 13,~~August 12, 2011	By:	/s/ Steven G. Walker

		Steven G. Walker
		Senior Vice President, Controller
		and Chief Accounting Officer

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