Protective Life Insurance 10Q 2007 Q2 Quarterly report



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 June 30, 2007
or
[ ] 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 No.)
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. 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 ý Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Number of shares of Common Stock, $1.00 par value, outstanding as of August 13, 2007: 5,000,000 shares

PROTECTIVE LIFE INSURANCE COMPANY Quarterly Report on Form 10-Q For Quarter Ended June 30, 2007 INDEX

Part I.	Financial Information:
Item 1.	Financial Statements (unaudited):
Consolidated Condensed Statements of Income for the
Three and Six Months ended June 30, 2007 and 2006
Consolidated Condensed Balance Sheets as of June 30, 2007
and December 31, 2006
Consolidated Condensed Statements of Cash Flows for the
Six Months ended June 30, 2007 and 2006
Notes to Consolidated Condensed Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4T.	Controls and Procedures

Part II.	Other Information:
Item 1A.	Risk Factors

Item 6.	Exhibits

Signature

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Dollars in thousands)

(Unaudited)

Three Months Ended		Six Months Ended
June 30		June 30
2007	2006	2007	2006

Revenues
Gross premiums and policy fees	$	691,276		$	513,839		$	1,348,744		$	1,021,539
Reinsurance ceded		(421,696	)		(310,482	)		(790,780	)		(586,520	)
Net premiums and policy fees		269,580			203,357			557,964			435,019
Net investment income		394,575			284,972			792,330			567,424
Realized investment gains (losses): Derivative financial instruments		86,014			614			82,582			19,938
All other investments		(67,867	)		14,750			(54,623	)		18,765
Other income		23,282			20,982			44,926			38,410
Total revenues		705,584			524,675			1,423,179			1,079,556
Benefits and expenses Benefits and settlement expenses, net of reinsurance ceded: (three months: 2007 - $473,106; 2006 - $287,242 six months: 2007 - $769,283; 2006 - $544,304)		455,609			335,938			920,761			685,546
Amortization of deferred policy acquisition costs and value of businesses acquired		70,451			27,701			138,248			71,792
Other operating expenses, net of reinsurance ceded: (three months: 2007 - $72,029; 2006 - $40,848 six months: 2007 - $135,300; 2006 - $78,117)		75,028			50,585			148,741			102,693
Total benefits and expenses		601,088			414,224			1,207,750			860,031
Income before income tax		104,496			110,451			215,429			219,525
Income tax expense		37,510			37,750			76,373			77,017
Net income	$	66,986		$	72,701		$	139,056		$	142,508

See Notes to Consolidated Condensed Financial Statements

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	June 30	December 31
	2007	2006

Assets Investments: Fixed maturities, at fair market value (amortized cost: 2007 - $21,251,003; 2006 - $20,755,718)	$	21,026,486		$	20,923,891
Equity securities, at fair market value (cost: 2007 - $17,125; 2006 - $73,237)		19,953			80,108
Mortgage loans on real estate		4,119,350			3,880,028
Investment in real estate, net of accumulated depreciation (2007 - $253; 2006 - $5,482)		12,067			37,928
Policy loans		819,387			839,502
Other long-term investments		181,448			306,012
Short-term investments		765,084			1,366,467
Total investments		26,943,775			27,433,936
Cash		355,210			37,419
Accrued investment income		272,526			274,574
Accounts and premiums receivable, net of allowance uncollectible amounts (2007 - $3,606; 2006 - $3,386)		186,266			163,352
Reinsurance receivables		4,848,352			4,596,816
Deferred policy acquisition costs and value of businesses acquired		3,331,048			3,147,806
Goodwill		89,930			75,530
Property and equipment, net		42,411			38,640
Other assets		257,478			205,054
Income tax receivable		117,009			126,738
Assets related to separate accounts Variable annuity		2,929,160			2,750,129
Variable universal life		344,529			307,863
	$	39,717,694		$	39,157,857
Liabilities Policy liabilities and accruals	$	16,689,967		$	15,972,451
Stable value product account balances		4,806,721			5,513,464
Annuity account balances		8,786,272			8,958,089
Other policyholders' funds		371,480			328,136
Securities sold under repurchase agreements		312,000			16,949
Other liabilities		1,268,908			1,230,032
Deferred income taxes		365,314			381,851
Non-recourse funding obligations		600,000			425,000
Liabilities related to variable interest entities		0			20,395
Liabilities related to separate accounts Variable annuity		2,929,160			2,750,129
Variable universal life		344,529			307,863
		36,474,351			35,904,359
Commitments and contingent liabilities – Note 3
Share-owner's equity Preferred Stock, $1 par value, shares authorized and issued: 2,000, liquidation preference $2,000		2			2
Common Stock, $1 par value, shares authorized and issued: 5,000,000		5,000			5,000
Additional paid-in capital		1,114,269			1,114,269
Note receivable from PLC Employee Stock Ownership Plan		(1,445	)		(1,995	)
Retained earnings		2,241,345			2,100,404
Accumulated other comprehensive income (loss): Net unrealized gains on investments, net of income tax: (2007 - $(59,983); 2006 - $22,811)		(107,985	)		41,772
Accumulated gain (loss) – hedging, net of income tax: (2007 - $(4,348); 2006 - $(3,299))		(7,843	)		(5,954	)
		3,243,343			3,253,498
	$	39,717,694		$	39,157,857

See Notes to Consolidated Condensed Financial Statements

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Six Months Ended
	June 30
	2007	2006

Cash flows from operating activities Net income	$	139,056		$	142,508
Adjustments to reconcile net income to net cash provided by operating activities: Realized investment gains		(27,959	)		(38,703	)
Amortization of deferred policy acquisition costs and value of businesses acquired		138,248			82,758
Capitalization of deferred policy acquisition costs		(221,174	)		(210,106	)
Depreciation expense		5,400			6,365
Deferred income tax		93,180			68,830
Accrued income tax		9,654			60,468
Interest credited to universal life and investment products		494,214			379,760
Policy fees assessed on universal life and investment products		(276,383	)		(232,124	)
Change in reinsurance receivables		(251,536	)		(172,550	)
Change in accrued investment income and other receivables		(20,866	)		(44,872	)
Change in policy liabilities and other policyholders' funds of traditional life and health products		206,022			307,979
Change in other liabilities		181,313			40,255
Trading securities:
Maturities and principal reductions of investments		189,255			0
Sale of investments		1,018,086			0
Cost of investments acquired		(1,337,942	)		0
Other net change in trading securities		51,422			0
Other, net		(98,126	)		4,229
Net cash provided by operating activities		291,864			394,797
Cash flows from investing activities Investments available for sale:
Maturities and principal reductions of investments
Fixed maturities		715,505			579,982
Equity securities		0			0
Sale of investments
Fixed maturities		1,358,828			2,498,765
Equity securities		61,141			3,520
Cost of investments acquired
Fixed maturities		(2,429,726	)		(3,086,677	)
Equity securities		(1,323	)		(3,343	)
Mortgage loans:
New borrowings		(470,517	)		(489,928	)
Repayments		230,988			238,972
Change in investment in real estate, net		31,452			28,485
Change in policy loans, net		20,115			4,600
Change in other long-term investments, net		(666	)		19,206
Change in short-term investments, net		519,075			(34,786	)
Purchase of property and equipment		(11,122	)		(3,002	)
Net cash used in investing activities		23,750			(244,206	)
Cash flows from financing activities
Payments on liabilities related to variable interest entities		(20,395	)		(6,624	)
Issuance of non-recourse funding obligations		175,000			75,000
Capital contributions
Net (payments) proceeds from securities sold under repurchase agreements		295,051			0
Investment product deposits and change in universal life deposits		1,310,001			991,537
Investment product withdrawals		(1,747,821	)		(1,229,829	)
Other financing activities, net		(9,659	)		(24,001	)
Net cash provided by (used in) financing activities		2,177			(193,917	)
Change in cash		317,791			(43,326	)
Cash at beginning of period		37,419			52,086
Cash at end of period	$	355,210		$	8,760

See Notes to Consolidated Condensed Financial Statements

PROTECTIVE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Unaudited)

(Dollar amounts in tables are in thousands)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements of Protective Life Insurance Company and subsidiaries (the “Company") have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. 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 U.S. 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 and six-month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. 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, 2006. The Company is a wholly-owned subsidiary of Protective Life Corporation ("PLC").

Accounting Pronouncements Recently Adopted

Statement of Position 05-1. Effective January 1, 2007, the Company adopted Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards (“SFAS”) No. 97 (“SFAS 97”), “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Contract modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. Contract modifications that result in a substantially changed contract should be accounted for as an extinguishment of the replaced contract, and any unamortized DAC, unearned revenue and deferred sales charges must be written off. The Company recorded no cumulative effect adjustment related to this adoption and does not expect it to have a material impact on its ongoing financial position or results of operations.

SFAS No. 155 - Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140. Effective January 1, 2007, the Company adopted SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of Financial Accounting Standards Board (“FASB”) Statements No. 133 and 140” (“SFAS 155”). SFAS 155 (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest only (IO) strips and principal only (PO) strips are not subject to the requirements of SFAS 133, (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (5) amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The adoption of SFAS 155 resulted in a positive cumulative effect adjustment to opening retained earnings of approximately $2.0 million ($1.3 million net of taxes), related to the Company’s equity indexed annuity product line.

FASB Interpretation No. 48. Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition, measurement and disclosure of an income tax position taken or expected to be taken in an income tax return. Additionally, this interpretation requires, in order for the Company to recognize a benefit in its financial statements from a given tax return position, that there must be a greater than 50 percent chance of success with the relevant taxing authority with regard to that tax return position. In making this analysis, the Company must assume that the taxing authority is fully informed of all of the facts regarding this issue. Furthermore, new disclosures regarding the effect of the accounting for uncertain tax positions on the financial statements will be required.

As a result of the implementation of FIN 48, the Company recognized a $0.6 million decrease in the liability for unrecognized income tax benefits, which was accounted for as an increase to the January 1, 2007 retained earnings balance. The Company’s liability for all unrecognized income tax benefits as of January 1, 2007 was $21.8 million. If recognized, approximately $3.2 million would be recorded as a component of income tax expense. Using information available as of June 30, 2007, the Company believes it is reasonably possible that in the next 12 months, $1.7 million of unrecognized tax benefits will be recognized due to the expiration of the relevant statute of limitations.

Any accrued interest and penalties related to unrecognized tax benefits have been included in income tax expense. The Company had approximately $3.1 million of accrued interest associated with unrecognized tax benefits as of January 1, 2007.

There were no significant changes to any of the aforementioned amounts during the six months ended June 30, 2007. The Company’s 2003 through 2005 income tax returns remain open to examination by the Internal Revenue Service and major state income taxing jurisdictions.

Accounting Pronouncements Not Yet Adopted

SFAS No. 157 – Fair Value Measurements. In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective prospectively with a limited form of retrospective application for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company). The Company is currently evaluating the impact, if any, that SFAS 157 will have on its consolidated results of operations and financial position.

SFAS No. 159 - The Fair Value Option for Financial Assets and Financial Liabilities. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). This standard permits entities to choose to measure eligible financial assets and financial liabilities at fair value. SFAS 159 is effective for the Company beginning January 1, 2008. The Company has not yet made a decision as to whether or not it will elect the fair value option for any financial assets or financial liabilities. As a result, the Company does not know what impact, if any, that SFAS 159 will have on its consolidated results of operations and financial position.

Statement of Position 07-1. In June 2007, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AcSEC”) issued Statement of Position (“SOP”) 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide (“AAG”), Audits of Investment Companies. In addition, for such entities, SOP 07-1 provides guidance concerning whether specialized industry accounting principles as set forth in the AAG should be applied by a parent company in consolidation or by an equity method investor in an investment company. SOP 07-1 is effective for the Company beginning January 1, 2008. The Company is currently evaluating the impact, if any, that SOP 07-1 will have on its consolidated results of operations and financial position.

Reclassifications

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 share-owner’s equity. Included in these reclassifications is a change in the Consolidated Condensed Statement of Cash Flows to remove the effects of policy fees assessed on universal life and investment products from financing activities. While this had no effect on total cash flow, for the six months ended June 30, 2006, net cash provided by operating activities was decreased and net cash provided by financing activities was increased by $232.1 million.

2. NON-RECOURSE FUNDING OBLIGATIONS

Non-Recourse Funding Obligations

The Company issued $175.0 million of non–recourse funding obligations during the first six months of 2007, bringing the total amount outstanding to $600.0 million at June 30, 2007. These non-recourse funding obligations bear a floating rate of interest and mature in 2037. The weighted average interest rate as of June 30, 2007, was 6.8%.

3. COMMITMENTS AND CONTINGENT LIABILITIES

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 and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or persons with whom the insurer does business, and other matters. Increasingly 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 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. The Company, like other financial services companies, in the ordinary course of business, is involved in such litigation and arbitration. Although the outcome of any such litigation or arbitration cannot be predicted, the Company believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of the Company.

4. STOCK-BASED COMPENSATION

Performance shares awarded during the first six months of 2007 and 2006, and their estimated fair value at grant date are as follows:

Year Awarded	Performance Shares	Estimated Fair Value	Year Awarded	Performance Shares	Estimated Fair Value

2007	64,700	$2,800	2006	125,430	$6,100

The criteria for payment of 2007 performance awards is based primarily upon a comparison of PLC’s average return on average equity over a four-year period (earlier upon the death, disability, or retirement of the executive, or in certain circumstances, upon a change in control of PLC) to that of a comparison group of publicly held life and multi-line insurance companies. If PLC’s results are below the median of the comparison group (40^thpercentile for 2007 awards), no portion of the award is earned. If PLC’s results are at or above the 90^th percentile, the award maximum is earned. Awards are paid in shares of PLC Common Stock.

During the first quarter of 2007, stock appreciation rights (“SARs”) were granted to certain officers of the Company to provide long-term incentive compensation based solely on the performance of PLC’s Common Stock. The SARs are exercisable in 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, upon 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 for the first six months of 2007 is as follows:

	Weighted Average Base Price		No. of SARs
Balance at December 31, 2006	$	29.33		1,155,946
SARs granted		43.46		218,900
SARs exercised		24.85		(113,142	)
Balance at June 30, 2007	$	32.18		1,261,704

The SARs issued in 2007 had estimated fair values at grant date of $2.4 million. The fair value of the 2007 SARs was estimated using a Black-Scholes option pricing model. The assumptions used in the pricing model varied depending on the vesting period of the awards. Assumptions used in the model for the 2007 SARs were as follows: expected volatility ranged from 16.2% to 31.0%, the risk-free interest rate ranged from 4.5% to 4.6%, a dividend rate of 1.9%, a zero forfeiture rate, and the expected exercise date ranged from 2012 to 2015. 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.

Additionally, during 2007, PLC issued 30,250 restricted stock units at a fair value of $43.46 per unit. These awards, with a total fair value of $1.3 million, vest over a four year period.

5. DEFINED BENEFIT PENSION PLAN AND UNFUNDED EXCESS BENEFITS PLAN

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

	Three Months Ended June 30						Six months Ended June 30
	2007			2006			2007			2006

Service cost – Benefits earned during the period	$	2,016		$	1,726		$	4,641		$	4,302
Interest cost on projected benefit obligations		2,454			2,162			4,994			4,658
Expected return on plan assets		(2,645	)		(2,676	)		(5,538	)		(5,772	)
Amortization of prior service cost		53			54			106			118
Amortization of actuarial losses		761			774			1,610			2,046
Net periodic benefit cost	$	2,639		$	2,040		$	5,813		$	5,352

PLC previously disclosed in its financial statements for the year ended December 31, 2006, that it expected that no funding would be required in 2007. PLC has not yet determined the amount, if any, that it will contribute to its defined benefit pension plan during 2007. As of June 30, 2007, no contributions have been made to the defined benefit pension plan.

In addition to pension benefits, PLC provides limited healthcare benefits and life insurance benefits to eligible retirees. The cost of these plans for the six months ended June 30, 2007 and 2006 was immaterial.

6. COMPREHENSIVE INCOME

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

	Three Months Ended June 30						Six Months Ended June 30
	2007			2006			2007			2006

Net income	$	66,986		$	72,701		$	139,056		$	142,508
Change in net unrealized gains/losses on investments, net of income tax: (three months: 2007 - $(94,546); 2006 - $(57,132) six months: 2007 - $(80,251); 2006 - $(135,277))		(172,417	)		(106,477	)		(146,348	)		(253,449	)
Change in accumulated gain-hedging, net of income tax: (three months: 2007 - $(2,162); 2006 - $(725) six months: 2007 - $(947); 2006 - $1,575)		(3,899	)		(1,352	)		(1,708	)		2,951
Reclassification adjustment for investments amounts included in net income, net of income tax: (three months: 2007 - $(262); 2006 - $(2,072) six months: 2007 - $(1,870); 2006 - $(700))		(479	)		(3,861	)		(3,409	)		(1,312	)
Reclassification adjustment for hedging amounts included in net income, net of income tax: (three months: 2007 - $(136); 2006 - $0 six months: 2007 - $(101); 2006 - $0)		(244	)		0			(181	)		0
Comprehensive income (loss)	$	(110,053	)	$	(38,989	)	$	(12,590	)	$	(109,302	)

7. OPERATING SEGMENTS

The Company operates several business segments each having a strategic focus. An operating segment is generally distinguished by products and/or channels of distribution. A brief description of each segment follows:

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

·	The Annuities segment manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through broker-dealers, but are also sold through 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. Additionally, the segment markets guaranteed investment contracts (“GICs”) to 401(k) and other qualified retirement savings plans.

The Asset Protection segment primarily markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles, watercraft, and recreational vehicles (“RV”). In addition, the segment markets a guaranteed asset protection (“GAP”) product and an inventory protection product (“IPP”).

The Company has an additional segment referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on unallocated capital and interest expense on non-recourse funding obligations). This segment also includes earnings from several non-strategic lines of business (mostly cancer insurance, residual value insurance, surety insurance, and group annuities), various investment-related transactions, and the operations of several small subsidiaries.

The Company uses the same accounting policies and procedures to measure segment operating income and assets as it uses to measure its consolidated net income and assets. Segment operating income is generally income before income tax excluding net realized investment gains and losses (net of the related amortization of DAC/VOBA and participating income from real estate ventures), and the cumulative effect of change in accounting principle. Periodic settlements of derivatives associated with 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. Segment operating income 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.

There are no significant intersegment transactions.

The following tables summarize financial information for the Company’s segments. Asset adjustments represent the inclusion of assets related to discontinued operations.

	Three Months Ended June 30				Six Months Ended June 30
	2007		2006		2007		2006

Revenues
Life Marketing	$	203,921	$	164,065	$	422,840	$	352,295
Acquisitions		227,448		100,505		459,152		201,956
Annuities		77,219		66,993		150,484		130,413
Stable Value Products		70,895		83,060		151,421		160,439
Asset Protection		78,862		74,697		158,729		143,915
Corporate and Other		47,239		35,355		80,553		90,538
Total revenues	$	705,584	$	524,675	$	1,423,179	$	1,079,556

Segment Operating Income (Loss)
Life Marketing	$	36,184		$	52,840		$	84,399		$	92,823
Acquisitions		30,814			18,958			63,063			38,864
Annuities		6,205			5,742			11,355			10,138
Stable Value Products		12,355			11,800			24,541			24,144
Asset Protection		6,845			8,681			14,074			17,224
Corporate and Other		(184	)		7,370			668			12,712
Total segment operating income		92,219			105,391			198,100			195,905

Realized investment gains (losses) – investments⁽¹⁾		(72,404	)		5,033			(63,506	)		3,722
Realized investment gains (losses) – derivatives⁽²⁾		84,681			27			80,835			19,898
Income tax expense		(37,510	)		(37,750	)		(76,373	)		(77,017	)
Net income	$	66,986		$	72,701		$	139,056		$	142,508


(1)Realized investment gains (losses) - investments	$	(67,867	)	$	14,750		$	(54,623	)	$	18,765
Less participating income from real estate ventures		3,707			8,168			6,857			13,494
Less related amortization of DAC		830			1,549			2,026			1,549
	$	(72,404	)	$	5,033		$	(63,506	)	$	3,722

(2)Realized investment gains (losses) - derivatives	$	86,014		$	614		$	82,582		$	19,938
Less settlements on certain interest rate swaps		(18	)		(85	)		142			19
Less derivative losses related to certain annuities		1,351			672			1,605			21
	$	84,681		$	27		$	80,835		$	19,898

Operating Segment Assets

June 30, 2007


	Life Marketing		Acquisitions		Annuities		Stable Value Products

Investments and other assets	$	8,900,747	$	11,482,567	$	7,446,519	$	4,798,446
Deferred policy acquisition costs and value of businesses acquired		2,009,775		1,021,805		210,038		15,855
Goodwill		0		46,406		0		0
Total assets	$	10,910,522	$	12,550,778	$	7,656,557	$	4,814,301


	Asset Protection		Corporate and Other		Adjustments		Total Consolidated

Investments and other assets	$	1,243,095	$	2,400,111	$	25,231	$	36,296,716
Deferred policy acquisition costs and value of businesses acquired		64,915		8,660		0		3,331,048
Goodwill		43,524		0		0		89,930
Total assets	$	1,351,534	$	2,408,771	$	25,231	$	39,717,694

Operating Segment Assets

December 31, 2006


	Life Marketing		Acquisitions		Annuities		Stable Value Products

Investments and other assets	$	8,017,839	$	10,650,928	$	8,138,182	$	5,369,107
Deferred policy acquisition costs and value of businesses acquired		1,846,015		925,218		261,826		16,603
Goodwill		0		32,008		0		0
Total assets	$	9,863,854	$	11,608,154	$	8,400,008	$	5,385,710


	Asset Protection		Corporate and Other		Adjustments		Total Consolidated

Investments and other assets	$	942,574	$	2,782,346	$	33,545	$	35,934,521
Deferred policy acquisition costs and value of businesses acquired		74,618		23,526		0		3,147,806
Goodwill		43,522		0		0		75,530
Total assets	$	1,060,714	$	2,805,872	$	33,545	$	39,157,857

8.	SUBSEQUENT EVENT

On July 10, 2007, Golden Gate II Captive Insurance Company (“Golden Gate II”), a special purpose financial captive insurance company wholly-owned by Protective Life Insurance Company (the “Company”), itself a wholly-owned and consolidated subsidiary of Protective Life Corporation (“PLC”), issued $575 million in aggregate principal amount of floating rate surplus notes due July 15, 2052 (the “Notes”). Golden Gate II has received regulatory approval to issue additional series of its floating rate surplus notes up to an aggregate of $675 million principal amount of surplus notes (including the Notes). The Notes are direct financial obligations of Golden Gate II.

The Notes were issued by Golden Gate II to fund statutory reserves required by the Valuation of Life Insurance Policies Model Regulation (“Regulation XXX”), as clarified by Actuarial Guideline 38 (commonly known as “AXXX”). Golden Gate II has entered into an agreement to reinsure from the Company certain universal life insurance policies with secondary guarantees on a combination coinsurance and modified coinsurance basis. PLC has entered into certain support agreements with Golden Gate II obligating PLC to provide support payments to Golden Gate II under certain adverse interest rate conditions and to the extent of any reduction in the reinsurance premiums received by Golden Gate II due to an increase in the premium rates charged to the Company under its third-party yearly renewable term reinsurance agreements that reinsure a portion of the mortality risk of the policies that are ceded to Golden Gate II. In addition, PLC has entered into a support agreement with Golden Gate II obligating PLC to pay or make capital contributions to Golden Gate II in respect of certain of Golden Gate II’s expenses and in certain circumstances to collateralize certain of the PLC’s obligations to Golden Gate II.

The Notes were sold for deposit into certain Delaware trusts (the “Trusts”) that will issue money market securities, term securities resetting to money market securities after a specified period or term securities (the “Securities”). The holders of Notes cannot require repayment from PLC, the company or any of their affiliates, other than Golden Gate II, the direct issuer of the Notes. PLC has agreed, under certain circumstances, to make certain liquidity advances to the Trusts not in excess of specified amounts of assets held in a reinsurance trust of which the Company is the beneficiary and Golden Gate II is the grantor in the event that the Trusts do not have sufficient funds available to fully redeem the Securities at the stated maturity date. PLC’s obligation to make any such liquidity advance is subject to it having a first priority security interest in the residual interest in such reinsurance trust and in the Notes.

Golden Gate II will pay interest on the principal amount of the Notes on a monthly basis, subject to regulatory approval. Any payment of principal of, including by redemption, or interest on the Notes may only be made with the prior approval of the Director of Insurance of the State of South Carolina in accordance with the terms of Golden Gate II’s licensing order and in accordance with applicable law. The holders of the Notes have no rights to accelerate payment of principal on the Notes under any circumstances, including without limitation, for nonpayment or breach of any covenant. Golden Gate II reserves the right to repay the Notes at any time, subject to the terms of the Notes and prior regulatory approval.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(Dollar amounts in tables are in thousands)

This Management’s Discussion and Analysis should be read in its entirety, since it contains detailed information that is important to understanding the Company’s results and financial condition. The Overview below is qualified in its entirety by the full Management’s Discussion and Analysis.

FORWARD-LOOKING STATEMENTS – CAUTIONARY LANGUAGE

This report reviews the Company’s financial condition and results of operations including its liquidity and capital resources. Historical information is presented and discussed. 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 the Company 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.

For a more complete understanding of the Company’s business and its current period results, please read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the Company’s latest Annual Report on Form 10-K and other filings with the SEC.

OVERVIEW

Protective Life Insurance Company (the “Company") is 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, the Company is the largest operating subsidiary of PLC. The Company provides financial services through the production, distribution, and administration of insurance and investment products. Unless the context otherwise requires, the “Company" refers to the consolidated group of Protective Life Insurance Company and its subsidiaries.

The Company operates several business segments each having a strategic focus. An operating segment is generally distinguished by products and/or channels of distribution. The Company's operating segments are Life Marketing, Acquisitions, Annuities, Stable Value Products, and Asset Protection. The Company has an additional segment referred to as Corporate and Other which consists of net investment income on unallocated capital, interest expense on non-recourse funding obligations, earnings from various investment-related transactions, and the operations of several non-strategic lines of business. The Company periodically evaluates its operating segments in light of the segment reporting requirements prescribed by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” and makes adjustments to its segment reporting as needed.

KNOWN TRENDS AND UNCERTAINTIES

The factors which could affect the Company's future results include, but are not limited to, general economic conditions and the following known trends and uncertainties: we are exposed to the risks of natural disasters, pandemics, malicious and terrorist acts that could adversely affect our operations; 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; a ratings downgrade could adversely affect our ability to compete; our policy claims fluctuate from period to period resulting in earnings volatility; our results may be negatively affected should actual experience differ from management's assumptions and estimates; the use of reinsurance introduces variability in our statements of income; we could be forced to sell investments at a loss to cover policyholder withdrawals; interest rate fluctuations could negatively affect our spread income or otherwise impact our business; equity market volatility could negatively impact our business; insurance companies are highly regulated and subject to numerous legal restrictions and regulations; changes to tax law or interpretations of existing tax law could adversely affect the Company and its 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; publicly held companies in general and the financial services industry in particular are sometimes the target of law enforcement investigations and the focus of increased regulatory scrutiny; our ability to maintain competitive unit costs is dependent upon the level of new sales and persistency of existing business; our investments are subject to market and credit risks; we may not realize our anticipated financial results from our acquisitions strategy; we may not be able to achieve the expected results from our recent acquisition; we are dependent on the performance of others; our reinsurers could fail to meet assumed obligations, increase rates or be subject to adverse developments that could affect us; computer viruses or network security breaches could affect our data processing systems or those of our business partners and could damage our business and adversely affect our financial condition and results of operations; our ability to grow depends in large part upon the continued availability of capital; new accounting rules or changes to existing accounting rules could negatively impact us; and our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business or result in losses. Please refer to Exhibit 99 about these factors that could affect future results.

The Company’s results may fluctuate from period to period due to fluctuations in mortality, persistency, claims, expenses, interest rates, and other factors. Therefore, it is management's opinion that quarterly operating results for an insurance company are not necessarily indicative of results to be achieved in future periods, and that a review of operating results over a longer period is necessary to assess an insurance company's performance.

RESULTS OF OPERATIONS

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

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

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
Segment Operating Income (Loss)
Life Marketing	$	36,184		$	52,840			(31.5	)%	$	84,399		$	92,823			(9.1	)%
Acquisitions		30,814			18,958			62.5			63,063			38,864			62.3
Annuities		6,205			5,742			8.1			11,355			10,138			12.0
Stable Value Products		12,355			11,800			4.7			24,541			24,144			1.6
Asset Protection		6,845			8,681			(21.1	)		14,074			17,224			(18.3	)
Corporate and Other		(184	)		7,370			(102.5	)		668			12,712			(94.7	)
Total segment operating income		92,219			105,391			(12.5	)		198,100			195,905			1.1

Realized investment gains (losses) – investments⁽¹⁾		(72,404	)		5,033						(63,506	)		3,722
Realized investment gains (losses) – derivatives⁽²⁾		84,681			27						80,835			19,898
Income tax expense		(37,510	)		(37,750	)					(76,373	)		(77,017	)
Net income	$	66,986		$	72,701			(7.9	)%	$	139,056		$	142,508			(2.4	)%

⁽¹⁾Realized investment gains (losses) - investments	$	(67,867	)	$	14,750					$	(54,623	)	$	18,765
Less participating income from real estate ventures		3,707			8,168						6,857			13,494
Less related amortization of DAC		830			1,549						2,026			1,549
	$	(72,404	)	$	5,033					$	(63,506	)	$	3,722

⁽²⁾Realized investment gains (losses) - derivatives	$	86,014		$	614					$	82,582		$	19,938
Less settlements on certain interest rate swaps		(18	)		(85	)					142			19
Less derivative gains related to certain annuities		1,351			672						1,605			21
	$	84,681		$	27					$	80,835		$	19,898

Net income for the first six months of 2007 reflects a 1.1% increase in segment operating income compared to the same period of 2006. The largest item contributing to this increase is a $24.2 million increase in operating earnings in the Acquisitions segment resulting primarily from the prior year acquisition of the Chase Insurance Group. This favorable item was partially offset by a year-to-date decline in operating earnings for the Corporate & Other segment of $12.0 million resulting primarily from higher interest expense. Net realized investment gains were $17.3 million for the first six months of 2007 compared to $23.6 million for the same period of 2006, a decrease of $6.3 million.

Life Marketing segment operating income was $36.2 million and $84.4 million for the current quarter and year-to-date, respectively, representing a quarterly decrease of 31.5% and a year-to-date decrease of 9.1% over the same periods of the prior year. This second quarter decrease was primarily due to $14.1 million of favorable DAC unlocking that occurred in the second quarter of 2006. The year-to-date decrease was primarily due to a favorable DAC unlocking variance of $16.9 million, offset by favorable mortality in 2007 compared to 2006. The increases in the Acquisitions segment’s operating income for the current quarter and year-to-date are due to the acquisition of the Chase Insurance Group completed in the third quarter of 2006. This acquisition contributed $27.6 million to the Acquisition segment’s operating income for the first six months of 2007.

Favorable results in the market value adjusted annuity line, partially offset by unfavorable mortality results in the single premium immediate annuity line, resulted in a 12.0% increase in operating income for the Annuities segment for the first six months of 2007. A general improvement in the equity markets and increasing account balances contributed to the increase in operating earnings during the first six months of 2007 for the segment. Declines in average account values offset by increases in operating spreads resulted in slightly higher operating income for the second quarter and first six months of 2007 in the Stable Value Products segment compared to the same periods of 2006.

The Asset Protection segment’s operating income decreases of 21.1% and 18.3% for the second quarter and first six months of 2007, respectively, compared to the same periods of 2006 as a result of the sale during the fourth quarter of 2006 to PLC of all of the outstanding stock of First Protection Corporation (“FPC”.) FPC generated operating income of $3.2 million for the second quarter and $4.7 million for the first six months of 2006. Offsetting this were improvements in the segment’s service contract line.

The decline in operating income for the Corporate and Other segment is primarily the result of increases in interest expense from the increased balance of non-recourse funding obligations, partially offset by higher net investment income. The increase in interest expense is primarily due to the issuance of non-recourse funding obligations to support the Company’s Regulation XXX redundant reserves.

RESULTS BY BUSINESS SEGMENT

In the following segment discussions, various statistics and other key data the Company uses to evaluate its segments are presented. Sales statistics are used by the Company to measure the relative progress in its marketing efforts, but may or may not have an immediate impact on reported segment operating income. Sales data for traditional life insurance are based on annualized premiums, while universal life sales are based on annualized planned (target) premiums plus 6% of amounts received in excess of target premiums. Sales of annuities are measured based on the amount of deposits received. Stable value contract sales are measured at the time that the funding commitment is made based on the amount of deposit to be received. Sales within the Asset Protection segment are generally based on the amount of single premium and fees received.

Sales and life insurance in-force amounts are derived from the Company’s various sales tracking and administrative systems, and are not derived from the Company’s financial reporting systems or financial statements. Mortality variances are derived from actual claims compared to expected claims. These variances do not represent the net impact to earnings due to the interplay of reserves and DAC amortization.

Life Marketing

The Life Marketing segment markets level premium term insurance (“traditional life”), universal life (“UL”), variable universal life, 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. Segment results were as follows:

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
REVENUES
Gross premiums and policy fees	$	361,624		$	325,496			11.1	%	$	707,309		$	650,860			8.7	%
Reinsurance ceded		(239,702	)		(237,148	)		1.1			(447,316	)		(445,779	)		0.3
Net premiums and policy fees		121,922			88,348			38.0			259,993			205,081			26.8
Net investment income		81,724			75,502			8.2			162,286			148,106			9.6
Other income		275			215			27.9			561			(892	)		(162.9	)
Total operating revenues		203,921			164,065			24.3			422,840			352,295			20.0

BENEFITS AND EXPENSES
Benefits and settlement expenses		152,147			122,432			24.3			301,476			258,331			16.7
Amortization of deferred policy acquisition costs		25,564			1,637			1461.6			54,262			21,103			157.1
Other operating expenses		(9,974	)		(12,844	)		(22.3	)		(17,297	)		(19,962	)		(13.4	)
Total benefits and expenses		167,737			111,225			50.8			338,441			259,472			30.4

OPERATING INCOME		36,184			52,840			(31.5	)		84,399			92,823			(9.1	)

INCOME BEFORE INCOME TAX	$	36,184		$	52,840			(31.5	)%	$	84,399		$	92,823			(9.1	)%

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

	Three Months Ended June 30								Six Months Ended June 30
	2007		2006			Change			2007		2006			Change
	(Dollars in thousands)								(Dollars in thousands)
Sales By Product
Traditional	$	43,955	$	35,733			23.0	%	$	77,447	$	73,209			5.8	%
Universal life		18,515		16,109			14.9			32,712		47,597			(31.3	)
Variable universal life		2,181		1,628			34.0			4,009		2,913			37.6
	$	64,651	$	53,470			20.9		$	114,168	$	123,719			(7.7	)

Sales By Distribution Channel
Brokerage general agents	$	41,210	$	32,644			26.2		$	71,089	$	70,823			0.4
Independent agents		10,629		9,216			15.3			18,957		23,016			(17.6	)
Stockbrokers/banks		9,452		8,082			17.0			17,945		21,649			(17.1	)
BOLI / other		3,360		3,528			(4.8	)		6,177		8,231			(25.0	)
	$	64,651	$	53,470			20.9		$	114,168	$	123,719			(7.7	)

Average Life Insurance In-Force⁽¹⁾
Traditional	$	425,847,790	$	374,705,974			13.6		$	418,070,072	$	368,990,677			13.3
Universal life		51,028,227		50,337,452			1.4			51,135,756		49,726,677			2.8
	$	476,876,017	$	425,043,426			12.2		$	469,205,828	$	418,717,354			12.1

Average Account Values
Universal life	$	4,927,779	$	4,746,318			3.8		$	4,904,775	$	4,677,818			4.9
Variable universal life		332,251		272,397			22.0			324,121		265,374			22.1
	$	5,260,030	$	5,018,715			4.8	%	$	5,228,896	$	4,943,192			5.8	%

Mortality Experience ⁽²⁾	$	1,188	$	(392	)				$	8,951	$	(40	)
(1) Amounts are not adjusted for reinsurance ceded. (2) Represents a favorable (unfavorable) variance as compared to pricing assumptions. Excludes results related to Chase Insurance Group which was acquired in the third quarter of 2006.

During 2005, the Company reduced its reliance on reinsurance (see additional comments below) and entered into a securitization structure to fund the additional statutory reserves required as a result of these changes in the Company’s reinsurance arrangements. The securitization structure results in a reduction of current taxes and a corresponding increase in deferred taxes as compared to the previous result obtained in using traditional reinsurance. The benefit of reduced current taxes is attributed to the applicable life products and is an important component of the profitability of these products. In addition to the fluctuations in premiums and benefits and settlement expenses discussed below, earnings emerge more slowly under a securitization structure relative to the previous reinsurance structure utilized by the Company.

Operating income declined 31.5% and 9.1% from the second quarter and first six months of 2006, respectively. The second quarter decline is primarily due to $14.1 million favorable DAC unlocking that occurred in the second quarter of 2006, while the year-to-date decrease is primarily the result of a $16.9 million favorable DAC unlocking variance, offset by favorable mortality results compared to 2006. Total revenues increased 20.0% on a year-to-date basis compared to the same period of 2006. These increases are the result of growth of life insurance in-force and average account values, and are partially offset by higher benefits and settlement expenses (24.3% and 16.7% higher for the second quarter and first six months of 2007, respectively, as compared to the same periods of 2006).

Net premiums and policy fees grew by 38.0% in the current quarter and by 26.8% year-to-date due in part to the growth in life insurance in-force achieved over the last several quarters combined with an increase in retention levels on certain traditional life products. Beginning in the second quarter of 2005, the Company reduced its reliance on reinsurance by changing from coinsurance to yearly renewable term reinsurance agreements and increased the maximum amount retained on any one life from $500,000 to $1,000,000 on certain of its newly written traditional life products (products written during the second quarter of 2005 and later.) In addition to increasing net premiums, this change results in higher benefits and settlement expenses, and causes greater variability in financial results due to fluctuations in mortality results. The Company’s maximum retention level for newly issued universal life products is $1,000,000.

Net investment income in the segment increased 8.2% for the quarter and 9.6% year-to-date, reflecting the growth of the segment’s assets caused by the increase in life reserves.

Benefits and settlement expenses were 24.3% and 16.7% higher than the second quarter and first six months of 2006, respectively, due to growth in life insurance in-force, increased retention levels on certain newly written traditional life products and higher credited interest on UL products resulting from increases in account values, partially offset year-to-date by favorable fluctuations in mortality experience. The gross mortality variance (actual results compared to pricing) for the second quarter and first six months of 2007 was $1.6 million and $9.0 million more favorable, respectively, than the same periods of 2006. The estimated mortality impact on earnings for the second quarter and first six months of 2007 was an unfavorable $1.6 million and a favorable $5.8 million, respectively, which was approximately $0.4 million less favorable and $7.5 million more favorable, respectively, than estimated mortality impact on earnings for the same periods of 2006.

The increase in DAC amortization for the second quarter of 2007 compared to the prior year was primarily due to favorable DAC unlocking during the second quarter of 2006. An evaluation of DAC, including a review of the underlying assumptions of future mortality, expenses, lapses, premium persistency, investment yields, and interest spreads was performed by the Company on its West Coast Life UL product during the second quarter of 2006. As a result of this review, assumptions were updated based on actual experience and/or expectations for the future. This change in assumptions, and resulting adjustment to DAC, referred to as “unlocking”, resulted in a favorable adjustment of approximately $14.1 million during the second quarter of 2006. The year-to-date increase in DAC amortization compared to the same period of 2006 was primarily due to the 2006 DAC unlocking discussed above, combined with the increase in the Company’s block of term business not subject to reinsurance and overall growth in average life insurance in-force.

Other operating expenses for the segment were as follows:

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
First year commissions	$	79,607		$	76,429			4.2	%	$	150,013		$	170,696			(12.1	)%
Renewal commissions		10,459			8,973			16.6			20,020			17,377			15.2
Marketing company commissions		18			0			n/a			310			0			n/a
First year ceding allowances		(14,091	)		(28,033	)		(49.7	)		(30,006	)		(60,865	)		(50.7	)
Renewal ceding allowances		(59,921	)		(55,129	)		8.7			(114,512	)		(101,460	)		12.9
General & administrative		47,105			40,500			16.3			91,300			83,443			9.4
Taxes, licenses and fees		8,872			7,364			20.5			17,732			15,437			14.9
Other operating expenses incurred		72,049			50,104			43.8			134,857			124,628			8.2

Less commissions, allowances & expenses capitalized		(82,023	)		(62,948	)		30.3			(152,154	)		(144,590	)		5.2

Total other operating expenses	$	(9,974	)	$	(12,844	)		(22.3	)%	$	(17,297	)	$	(19,962	)		(13.4	)%

The Company utilizes reinsurance for most of its products, with the terms of the reinsurance agreed upon before products are made available for sale. The Company determines its pricing, and analyzes its financial performance, on a net of reinsurance basis with the objective of achieving an attractive return on investment for its shareholders. Generally, the Company’s profits emerge as a level percentage of premium for Statement of Financial Accounting Standards No. 60 (“SFAS 60”) products and as a level percentage of estimated gross profits for Statement of Financial Accounting Standards No. 97 (“SFAS 97”) products. Under both SFAS 60 and 97, the amount of earnings and investment will vary with the utilization of reinsurance. In addition, the utilization of reinsurance can cause fluctuations in individual income and expense line items from year to year. Consideration of all components of the segment’s income statement, including amortization of deferred acquisition costs (“DAC”), is required to assess the impact of reinsurance on segment operating income.

Reinsurance allowances represent the amount the reinsurer is willing to pay for reimbursement of acquisition and other costs incurred by the direct writer of the business. The amount and timing of these allowances are negotiated by the Company and each reinsurer. The Company receives allowances according to the prescribed schedules in the reinsurance contracts, which may or may not bear a relationship to actual operating expenses incurred by the Company. First year commissions paid by the Company may be higher than first year allowances paid by the reinsurer, and reinsurance allowances may be higher in later years than renewal commissions paid by the Company. However, the pattern of reinsurance allowances does not impact the pattern of earnings from year to year. While the recognition of reinsurance allowances is consistent with U.S. GAAP, non-deferred allowances often exceed the segment’s non-deferred direct costs, causing net other operating expenses to be negative. However, consistent with SFAS 60 and SFAS 97, fluctuations in non-deferred allowances tend to be offset by changes in DAC amortization with the resulting profits emerging as a level percentage of premiums for SFAS 60 products and as a level percentage of estimated gross profits for SFAS 97 products.

Reinsurance allowances tend to be highest in the first year of a policy and subsequently decline. Ultimate reinsurance allowances are defined as the level of allowances at the end of a policy’s term. The Company's practice is to defer as a component of DAC, reinsurance allowances in excess of the ultimate allowance. This practice is consistent with the Company's practice of deferring direct commissions.

The following table summarizes reinsurance allowances for each period presented, including the portion deferred as a part of DAC and the portion recognized immediately as a reduction of other operating expenses. As the non-deferred portion of reinsurance allowances reduce operating expenses in the period received, these amounts represent a net increase to operating income during that period. The amounts capitalized and earned are quantified below:

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
Allowances received	$	74,012		$	83,162			(11.0	)%	$	144,518		$	162,325			(11.0	)%
Less amount deferred		(39,310	)		(48,605	)		(19.1	)		(77,890	)		(96,862	)		(19.6	)
Allowances recognized (reduction in other operating expenses)	$	34,702		$	34,557			0.4	%	$	66,628		$	65,463			1.8	%

Non-deferred reinsurance allowances of $34.7 million and $34.6 million were recognized in the second quarters of 2007 and 2006, respectively, resulting in reductions in operating expenses by these amounts in the same periods. Non-deferred reinsurance allowances increased 0.4% and 1.8% in the second quarter and first six months of 2007 compared to the same periods of 2006, primarily as the result of the increases in the Company’s life insurance in-force.

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 SFAS 97 products 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 SFAS 97 DAC amortization. Deferred reinsurance allowances on SFAS 60 policies are recorded as ceded DAC, which is amortized over estimated ceded premiums of the policies in force. Thus, deferred reinsurance allowances on SFAS 60 policies impact SFAS 60 DAC amortization.

The amounts of ceded premium paid by the Company and allowances reimbursed by the reinsurer are reflected in the table below:

	Three Months Ended June 30							Six Months Ended June 30
	2007		2006		Change			2007		2006		Change
	(Dollars in thousands)							(Dollars in thousands)
Ceded premiums	$	239,702	$	237,148		1.1	%	$	447,316	$	445,779		0.3	%
Allowances received		74,012		83,162		(11.0	)		144,518		162,325		(11.0	)
Net ceded premiums	$	165,690	$	153,986		7.6	%	$	302,798	$	283,454		6.8	%

The net ceded premium increased 7.6% and 6.8% in the second quarter and first six months of 2007 compared to the same periods of the prior year, primarily due to the decreases in allowances received. The Company’s move during 2005 to reduce its reliance on reinsurance by entering into a securitization structure to fund certain statutory reserves will ultimately result in a reduction in both ceded premiums and reinsurance allowances received. As reinsurance allowances tend to be highest in the first year of a policy and subsequently decline, for a period of time, the decrease in allowances received will outpace the decrease in ceded premiums, resulting in an increase in net ceded premiums.

Claim liabilities and policy benefits are calculated consistently for all policies in accordance with U.S. GAAP, regardless of whether or not the policy is reinsured. Once the claim liabilities and policy benefits for the underlying policies are estimated, the amounts recoverable from the reinsurers are estimated based on a number of factors including the terms of the reinsurance contracts, historical payment patterns of reinsurance partners, and the financial strength and credit worthiness of its reinsurance partners. Liabilities for unpaid reinsurance claims are produced from claims and reinsurance system records, which contain the relevant terms of the individual reinsurance contracts. The Company monitors claims due from reinsurers to ensure that balances are settled on a timely basis. Incurred but not reported (“IBNR”) claims are reviewed by the Company’s actuarial staff to ensure that appropriate amounts are ceded. Ceded policy reserves are calculated by various administrative systems based on the nature of the specific reinsurance transactions and terms of the contracts.

The Company analyzes and monitors the credit worthiness of each of its reinsurance partners to ensure collectibility and minimize collection issues. For reinsurance companies that do not meet predetermined standards, the Company requires collateral such as assets held in trusts or letters of credit.

Other operating expenses increased in both the second quarter and first six months of 2007 compared to the prior year. Amounts capitalized as DAC generally include first year commissions, reinsurance allowances, and other deferrable acquisition expenses. The changes in these amounts generally reflect the trends in sales.

Sales for the segment declined 7.7% in the first six months of 2007 versus 2006, primarily due to a 31.3% decline in UL sales. This decline in UL sales is the expected result of pricing adjustments on certain UL products in response to the higher reserve levels required under Actuarial Guideline 38 (“AG38”). See additional discussion of AG38 and its impact on certain UL products in the “Recent Developments” section herein. Traditional life sales increased 5.8% in the first six months of 2007 compared to the prior year. There has been intense competition in the market for these products during the past several quarters. The Company continually reviews its product features and pricing in an effort to maintain or improve its competitive position. Sales of BOLI business have declined in 2007 compared to the prior year. BOLI sales can vary widely between periods as the segment responds to opportunities for these products only when required returns can be achieved.

The Company has reduced its reliance on reinsurance for newly written traditional life products by moving towards a securitization structure under which profitability is not expected to emerge immediately after the business is written. In addition, older, more profitable traditional life policies continue to run off in the ordinary course. These two factors combined with financing costs in connection with the securitization structure and the Company’s pricing actions to remain competitive in the market are expected to put pressure on the profitability of this segment.

Acquisitions

The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment's primary focus is on life insurance policies sold to individuals. Segment results were as follows:

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
REVENUES
Gross premiums and policy fees	$	214,464		$	63,203			239.3	%	$	408,946		$	126,189			224.1	%
Reinsurance ceded		(137,370	)		(16,617	)		726.7			(255,612	)		(33,259	)		668.5
Net premiums and policy fees		77,094			46,586			65.5			153,334			92,930			65.0
Net investment income		145,263			53,626			170.9			294,249			108,116			172.2
Other income		2,525			293			761.8			4,773			910			424.5
Total operating revenues		224,882			100,505			123.8			452,356			201,956			124.0
Realized gains (losses) - investments		(69,216	)		0						(61,283	)		0
Realized gains (losses) - derivatives		71,782			0						68,079			0
Total revenues		227,448			100,505			126.3			459,152			201,956			127.4

BENEFITS AND EXPENSES
Benefits and settlement expenses		158,284			66,984			136.3			320,188			134,438			138.2
Amortization of deferred policy acquisition costs and value of businesses acquired		19,200			6,809			182.0			39,148			13,144			197.8
Other operating expenses		16,584			7,754			113.9			29,957			15,510			93.1
Operating benefits and expenses		194,068			81,547			138.0			389,293			163,092			138.7
Amortization of DAC/VOBA related to realized gains (losses) - investment		777			0						1,383			0
Total benefits and expenses		194,845			81,547						390,676			163,092

INCOME BEFORE INCOME TAX		32,603			18,958			72.0			68,476			38,864			76.2

Less realized gains (losses)		2,566			0						6,796			0
Less related amortization of DAC		(777	)		0						(1,383	)		0
OPERATING INCOME	$	30,814		$	18,958			62.5	%	$	63,063		$	38,864			62.3	%

The following table summarizes key data for the Acquisitions segment:

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
Average Life Insurance In-Force⁽¹⁾
Traditional	$	227,101,220		$	9,949,178			2182.6	%	$	228,343,004		$	10,056,356			2170.6	%
Universal life		32,052,947			16,192,682			97.9			32,258,739			16,325,474			97.6
	$	259,154,167		$	26,141,860			891.3		$	260,601,743		$	26,381,830			887.8

Average Account Values
Universal life	$	3,001,495		$	1,681,697			78.5		$	3,014,433		$	1,685,399			78.9
Fixed annuity⁽²⁾		5,354,811			206,279			2495.9			5,401,199			207,620			2501.5
Variable annuity		199,898			61,455			225.3			197,513			63,192			212.6
	$	8,556,204		$	1,949,431			338.9	%	$	8,613,145		$	1,956,211			340.3	%

Interest Spread – UL & Fixed Annuities
Net investment income yield		6.19	%		6.79	%					6.27	%		6.83	%
Interest credited to policyholders		4.07			5.05						4.10			5.07
Interest spread		2.12	%		1.74	%					2.17	%		1.76	%

Mortality Experience⁽³⁾	$	1,586		$	2,662					$	2,360		$	2,929
(1) Amounts are not adjusted for reinsurance ceded. (2) Includes general account balances held within variable annuity products. (3) Represents a favorable variance as compared to pricing assumptions. Excludes results related to Chase Insurance Group which was acquired in the third quarter of 2006.

In the ordinary course of business, the Acquisitions segment regularly considers acquisitions of blocks of policies or smaller 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 Acquisition segment are typically “closed” blocks of business (no new policies are being marketed). Therefore, earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made. The Company completed its acquisition of the Chase Insurance Group during the third quarter of 2006. This acquisition drove the increases in revenues, expenses, and earnings of the segment for the second quarter of 2007 and first six months of 2007, as compared to the prior year periods. This acquisition also drove the large increases in the segment’s life insurance in-force and UL and annuity account values compared to the prior year period.

Net premiums and policy fees increased 65.5% and 65.0% for the second quarter and first six months of 2007, respectively, compared to the same periods of the prior year, as a result of the Chase Insurance Group acquisition which contributed $32.5 million and $63.4 million to net premiums and policy fees during the second quarter and first six months of 2007, respectively. The increases in net investment income in 2007 compared to 2006 are due to the increase in assets resulting from the 2006 acquisition. The segment continues to review credited rates on UL and annuity business for all blocks of business to minimize the impact of lower earned rates on interest spreads.

Benefits and settlement expenses increased 136.3% and 138.2% for the second quarter and first six months of 2007, respectively, compared to the same periods of the prior year, due to the 2006 Chase Insurance Group acquisition, which contributed $92.0 million and $188.6 million to benefits and settlement expenses during the second quarter and first six months of 2007, respectively. The Chase Insurance Group acquisition resulted in an additional $28.3 million of VOBA amortization for the first six months of 2007, driving the year-to-date increase of 197.8%. The increases in other operating expenses are primarily due to higher commissions resulting from higher net premiums, and operating expenses associated with the Chase Insurance Group acquisition.

Annuities

The Annuities segment manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through broker-dealers, but are also sold through financial institutions and independent agents and brokers. Segment results were as follows:

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
REVENUES
Gross premiums and policy fees	$	8,633		$	8,000			7.9	%	$	16,895		$	16,144			4.7	%
Reinsurance ceded		0			0			0.0			0			0			0.0
Net premiums and policy fees		8,633			8,000			7.9			16,895			16,144			4.7
Net investment income		64,875			54,796			18.4			125,725			108,282			16.1
Realized gains (losses) - derivatives		1,351			672						1,605			21
Other income		2,307			1,927			19.7			4,542			4,458			1.9
Operating revenues		77,166			65,395			18.0			148,767			128,905			15.4
Realized gains (losses) - Investments		53			1,598						1,717			1,508
Total revenues		77,219			66,993						150,484			130,413
BENEFITS AND EXPENSES
Benefits and settlement expenses		56,101			46,883			19.7			112,050			94,196			19.0
Amortization of deferred policy acquisition costs		9,856			5,834			68.9			14,394			10,960			31.3
Other operating expenses		5,004			6,936			(27.9	)		10,968			13,611			(19.4	)
Operating benefits and expenses		70,961			59,653			19.0			137,412			118,767			15.7
Amortization of DAC related to realized gains (losses) - investment		53			1,549						643			1,549
Total benefits and expenses		71,014			61,202						138,055			120,316

INCOME BEFORE INCOME TAX		6,205			5,791			7.1			12,429			10,097			23.1

Less realized gains (losses) - investments		53			1,598						1,717			1,508
Less related amortization of DAC		(53	)		(1,549	)					(643	)		(1,549	)
OPERATING INCOME	$	6,205		$	5,742			8.1	%	$	11,355		$	10,138			12.0	%

The following table summarizes key data for the Annuities segment:

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
Sales
Fixed annuity	$	305,554		$	136,579			123.7	%	$	541,745		$	228,669			136.9	%
Variable annuity		123,263			81,206			51.8			202,245			154,937			30.5
	$	428,817		$	217,785			96.9	%	$	743,990		$	383,606			93.9	%

Average Account Values
Fixed annuity⁽¹⁾	$	4,249,579		$	3,449,328			23.2	%	$	4,142,530		$	3,436,125			20.6	%
Variable annuity		2,704,860			2,372,486			14.0			2,642,535			2,365,692			11.7
	$	6,954,439		$	5,821,814			19.5	%	$	6,785,065		$	5,801,817			16.9	%

Interest Spread – Fixed Annuities⁽²⁾
Net investment income yield		6.01	%		6.25	%					5.97	%		6.20	%
Interest credited to policyholders		5.27			5.35						5.25			5.37
Interest spread		0.74	%		0.90	%					0.72	%		0.83	%

										As of June 30
										2007			2006

GMDB – Net amount at risk⁽³⁾										$	81,748		$	134,432			(39.2	)
GMDB – Reserves											3,308			2,408			37.4
S&P 500^® Index											1,503			1,270			18.3
(1) Includes general account balances held within variable annuity products. (2) Interest spread on average general account values. (3) Guaranteed death benefit in excess of contract holder account balance.

Segment operating income increased approximately $0.5 million, or 8.1%, for the second quarter of 2007 compared to the same period of 2006, while year-to-date operating income increased $1.2 million, or 12.0%. The year-to-date improvement is primarily due to favorable results in the market value adjusted annuity line following a favorable DAC unlocking adjustment, and is partially offset by a decrease in operating income in the single premium immediate annuity line, resulting from unfavorable mortality results. Operating income was also favorably impacted for the first six months of 2007 compared to the same period of the prior year by improvement in the equity markets and increasing account values, offset by a tightening of spreads.

Segment operating revenues increased 18.0% and 15.4% in the second quarter and first six months of 2007 compared to the same periods of 2006 primarily due to increases in net investment income. Average account balances grew 19.5% and 16.9% for the second quarter and first six months of 2007, respectively, resulting in higher investment income. The additional income resulting from the larger account balances was partially reduced in 2007 by a year-to-date 11 basis point decline in interest spreads, resulting from a rebalancing of the investment portfolio during the fourth quarter of 2006. The segment continually monitors and adjusts credited rates as appropriate in an effort to maintain or improve its interest spread.

Benefits and settlement expenses increased 19.7% and 19.0% for the second quarter and first six months of 2007, respectively, compared to the same periods of the prior year. These increases are primarily the result of higher credited interest and unfavorable mortality fluctuations, partially offset by reductions in DAC amortization resulting from favorable unlocking. The increases in credited interest are the result of the increase in average account values. Mortality was unfavorable by $2.7 million for the second quarter of 2007, compared to unfavorable mortality of $1.6 million for the same period of 2006, an unfavorable change of $1.1 million. Year-to-date, mortality was unfavorable by $5.1 million compared to unfavorable mortality of $3.2 million for 2006, an unfavorable change of $1.9 million. These unfavorable mortality variances primarily relate to the nonrecurring sales of $122 million of single premium immediate annuities on 28 lives sold in the fourth quarter of 2004 in a structured transaction. Because this block of annuities is large relative to the total amount of annuities in-force, volatility in mortality results are expected.

The increase in DAC amortization in the first six months of 2007 compared to 2006 is primarily the result of an increase in the Equity Indexed Annuity (“EIA”) line due to the impact of rising interest rates, and the corresponding impact on estimated gross profit valuations. This increase was partially offset by DAC unlocking in various lines. The Company periodically reviews and updates as appropriate its key assumptions including future mortality, expenses, lapses, premium persistency, investment yields and interest spreads. Changes to these assumptions result in adjustments which increase or decrease DAC amortization. The periodic review and updating of assumptions is referred to as “unlocking.” During the first six months of 2007, DAC amortization for the Annuities segment was reduced $1.6 million due to favorable DAC unlocking in the market value adjusted annuity line. Favorable DAC unlocking of $0.9 million was recorded by the segment during the first six months of 2006.

Total sales were 93.9% higher for the first six months of 2007 than the same period of the prior year. The Chase Insurance Group acquisition, and the continuation of new annuity sales through the former Chase distribution system, contributed $184.2 million in fixed annuity sales in the first six months of 2007. Excluding the impact of the acquisition, total sales increased 45.9% for the first six months of 2007 compared to the same period of the prior year. Sales of fixed annuities (excluding the impact of the acquisition) increased 56.4% for the first six months of 2007 compared to 2006. The Company launched a new living benefit guaranteed minimum withdrawal benefit rider in its variable annuity product during May 2007, contributing to variable annuity sales growth in the second quarter of 2007. A general improvement in the equity markets reduced the net amount at risk with respect to guaranteed minimum death benefits by 39.2%.

Stable Value Products

	Three Months Ended June 30								Six Months Ended June 30
	2007			2006		Change			2007		2006			Change
	(Dollars in thousands)								(Dollars in thousands)
REVENUES
Net investment income	$	71,478		$	82,350		(13.2	)%	$	150,579	$	164,583			(8.5	)%
Realized gains (losses)		(583	)		710					842		(4,144	)
Total revenues		70,895			83,060					151,421		160,439

BENEFITS AND EXPENSES
Benefits and settlement expenses		57,097			68,415		(16.5	)		121,816		135,878			(10.3	)
Amortization of deferred policy acquisition costs		987			1,136		(13.1	)		2,155		2,365			(8.9	)
Other operating expenses		1,039			999		4.0			2,067		2,196			(5.9	)
Total benefits and expenses		59,123			70,550		(16.2	)		126,038		140,439			(10.3	)

INCOME BEFORE INCOME TAX		11,772			12,510		(5.9	)		25,383		20,000			26.9

Less realized gains (losses)		(583	)		710					842		(4,144	)
OPERATING INCOME	$	12,355		$	11,800		4.7	%	$	24,541	$	24,144			1.6	%

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

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
Sales
GIC	$	75,000		$	111,400			(32.7	)%	$	77,500		$	157,600			(50.8	)%
GFA – Registered Notes – Institutional		50,000			0			n/a			50,000			0			n/a
GFA – Registered Notes – Retail		10,014			13,078			(23.4	)		23,134			53,919			(57.1	)
	$	135,014		$	124,478			8.5		$	150,634		$	211,519			(28.8	)

Average Account Values	$	4,780,565		$	5,853,111			(18.3	)%	$	5,119,688		$	5,914,749			(13.4	)%

Operating Spread
Net investment income yield		5.99	%		5.75	%					5.97	%		5.67	%
Interest credited		4.78			4.78						4.83			4.68
Operating expenses		0.17			0.15						0.17			0.16
Operating spread		1.04	%		0.82	%					0.97	%		0.83	%

Operating income increased 4.7% and 1.6% for the second quarter and first six months of 2007, respectively, compared to the same periods of 2006. Decreases in operating earnings resulting from declines in average account values were more than offset by higher operating spreads. Operating spreads increased 22 basis points for the second quarter and 14 basis points for the first six months due to the scheduled maturity of several, large high-coupon contracts and an improvement in portfolio asset yields. The segment continually reviews its investment portfolio for opportunities to increase the net investment income yield in an effort to maintain or increase interest spreads. Operating spreads for the remainder of 2007 are expected to exceed the spreads achieved for the same periods of the prior year. In general, operating earnings for this segment are expected to stabilize as the Company reenters the institutional funding agreement-backed note market.

Total sales increased 8.5% for the second quarter of 2007 while they declined 28.8% for the first six months of 2007 compared to the same period of 2006, as a result of the timing of GIC and retail sales. Fluctuations in sales in these product lines are expected from quarter to quarter as a result of changing market conditions. The Company reentered the institutional funding agreement-backed note market during the second quarter of 2007 with a $50.0 million sale.

Asset Protection

Segment results were as follows:

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
REVENUES
Gross premiums and policy fees	$	98,096		$	97,860			0.2	%	$	197,967		$	198,556			(0.3	)%
Reinsurance ceded		(44,619	)		(46,739	)		(4.5	)		(87,844	)		(97,500	)		(9.9	)
Net premiums and policy fees		53,477			51,121			4.6			110,123			101,056			9.0
Net investment income		8,366			7,543			10.9			16,440			14,907			10.3
Other income		17,019			16,033			6.1			32,166			27,952			15.1
Total operating revenues		78,862			74,697			5.6			158,729			143,915			10.3

BENEFITS AND EXPENSES
Benefits and settlement expenses		22,773			22,871			(0.4	)		45,955			45,079			1.9
Amortization of deferred policy acquisition costs		13,879			9,867			40.7			25,999			20,848			24.7
Other operating expenses		35,365			33,278			6.3			72,701			60,764			19.6
Total benefits and expenses		72,017			66,016			9.1			144,655			126,691			14.2

OPERATING INCOME (LOSS)		6,845			8,681			(21.1	)		14,074			17,224			(18.3	)
INCOME (LOSS) BEFORE INCOME TAX	$	6,845		$	8,681			(21.1	)	$	14,074		$	17,224			(18.3	)

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

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
Sales
Credit insurance	$	31,579		$	39,952			(21.0	)%	$	59,661		$	71,799			(16.9	)%
Service contracts		76,154			64,236			18.6			146,004			115,622			26.3
Other products		35,796			22,900			56.3			73,826			39,821			85.4
	$	143,529		$	127,088			12.9		$	279,491		$	227,242			23.0

Loss Ratios ⁽¹⁾
Credit insurance		30.3	%		33.1	%					32.4	%		33.7	%
Service contracts		69.0			65.3						65.6			65.7
Other products		32.7			34.5						31.3			33.1
(1) Incurred claims as a percentage of earned premiums.

Operating income declined 21.1% and 18.3% during the second quarter of 2007 and first six months of 2007, respectively, compared to the same periods of 2006 primarily as a result of the sale during the fourth quarter of 2006 to PLC of all of the outstanding stock of First Protection Corporation (“FPC”.) FPC generated operating income of $3.2 million for the second quarter and $4.7 million for the first six months of 2006.

Earnings from core product lines decreased $2.4 million and $3.6 million, respectively, for the second quarter and first six months of 2007 compared to the prior year, while results from lines the segment is no longer marketing improved $0.6 million and $0.4 million, respectively, for the same periods.

Within the segment’s core product lines, service contract earnings declined $0.5 million for the quarter and remained the same year-to-date. The Western General acquisition completed during the third quarter of 2006, contributed $1.1 million and $1.8 million, respectively, to the quarterly and year-to-date increases in the service contract line. The service contract line was also favorably impacted for the second quarter and year-to-date by higher volume and improved loss ratios in marine service contracts. Credit insurance earnings decreased $0.4 million and $0.2 million, respectively, for the second quarter and first six months of 2007, while earnings from other products declined $1.0 million and $1.9 million for the same periods.

Net premiums and policy fees increased $2.4 million and $9.1 million for the current quarter and year-to-date, respectively. These increases are primarily the result of the Western General acquisition. The year-to-date increase in net premiums was partially offset by declines in the credit insurance line and lines the segment is no longer marketing. The declines in both the credit insurance lines and the lines the segment is no longer marketing are expected to continue as the business-in-force continues to decline.

Other income increased 6.1% for the second quarter and 15.1% year-to-date compared to the same periods of the prior year primarily due to increases in administrative fees on service contracts and GAP products resulting from the increased volume of contracts sold in these product lines. The Western General acquisition contributed to the increase, adding $2.6 million and $5.2 million, respectively, to other income for the second quarter and first six months of 2007.

Benefits and settlement expenses slightly increased from the first six months of 2006, as a result of the Western General acquisition, which accounted for a $6.6 million increase in the service contract line. Benefits and settlement expenses increased $3.0 million in the other product lines for the first six months of 2007 compared to the same period of 2006, reflecting the growth in business in these lines over the past several quarters. These increases were partially offset by declines in credit insurance and lines the segment is no longer marketing of $1.8 million for the first six months of 2007, reflecting the decrease in net premiums in these lines as discussed above. Benefits and settlement expenses have also been favorably impacted by the continuing improvement in loss ratios, which are lower year-to-date in all product lines.

Amortization of DAC is $4.0 million and $5.1 million higher for the current quarter and first six months of 2007, respectively, compared to the same periods of 2006, reflecting the increase in earned premiums in the GAP line. The increases for both periods in other operating expenses are primarily due to higher commissions on service contracts and GAP due to increased volume and higher retrospective commissions resulting from improvements in loss ratios, and the Western General acquisition, which contributed $3.9 million and $7.9 million of operating expense to the current period and first six months of 2007, respectively. The current quarter increase in other operating expenses resulting from the Western General acquisition is partially offset by a $1.1 million adjustment during the second quarter of 2006 to the reinsurance bad debt reserve associated with a product line the segment is no longer marketing. There was no such reserve adjustment related to this product line made during the current quarter.

Total segment sales increased 12.9% and 23.0% for the second quarter and first six months of 2007, respectively, compared to the same period of 2006. Service contract sales continue to improve, exceeding the prior year by 26.3% for the first six months of 2007. The decline in credit insurance sales is due to a significant decrease in sales through financial institutions. The bulk of these sales are derived from a third party administrator relationship which is in runoff. We therefore expect these sales to continue to decline during 2007 compared to 2006 amounts. Other product sales are significantly up in the GAP line and were down slightly in the IPP line.

Corporate and Other

The Company has an additional segment referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on unallocated capital and interest on non-recourse funding obligations.) This segment also includes earnings from several non-strategic lines of business (primarily cancer insurance, residual value insurance, surety insurance, and group annuities), various investment-related transactions, and the operations of several small subsidiaries.

The following table summarizes results for this segment:

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
REVENUES
Gross premiums and policy fees	$	8,458		$	9,309			(9.1	)%	$	17,627		$	19,819			(11.1	)%
Reinsurance ceded		(4	)		(7	)		(42.9	)		(8	)		(11	)		(27.3	)
Net premiums and policy fees		8,454			9,302			(9.1	)		17,619			19,808			(11.1	)
Net investment income		22,869			11,155			105.0			43,051			23,430			83.7
Realized gains (losses) - investments		3,707			8,168						6,857			13,494
Realized gains (losses) - derivatives		(18	)		(85	)					142			19
Other income		1,156			2,517			(54.1	)		2,884			5,982			(51.8	)
Total operating revenues		36,168			31,057			16.5			70,553			62,733			12.5
Realized gains (losses) - investments		(567	)		4,370						2,775			8,316
Realized gains (losses) - derivatives		11,638			(71	)					7,225			19,489
Total revenues		47,239			35,356			33.6			80,553			90,538			(11.0	)
BENEFITS AND EXPENSES
Benefits and settlement expenses		9,207			8,354			10.2			19,276			17,625			9.4
Amortization of deferred policy acquisition costs		135			869			(84.5	)		264			1,823			(85.5	)
Other operating expenses		27,010			14,462			86.8			50,345			30,573			64.7
Total benefits and expenses		36,352			23,685			53.5			69,885			50,021			39.7

INCOME (LOSS) BEFORE INCOME TAX		10,887			11,671			(6.7	)		10,668			40,517			(73.7	)

Less realized gains (losses) - investments		(567	)		4,372						2,775			8,316
Less realized gains (losses) - derivatives		11,638			(71	)					7,225			19,489
OPERATING INCOME (LOSS)	$	(184	)	$	7,370			(102.5	)%	$	668		$	12,712			(94.7	)%

Operating income decreased $7.6 million and $12.0 million for the second quarter and first six months of 2007, respectively, compared to the same periods of the prior year, primarily due to higher interest expenses, lower participating mortgage income, higher corporate overhead, and lower net premiums, policy fees and other income, partially offset by increases in net investment income. Operating revenues for the Corporate and Other segment are primarily comprised of net investment income on unallocated capital and net premiums and policy fees related to several non-strategic lines of business. Net investment income for the Corporate and Other segment increased $11.7 million and $19.6 million for the second quarter and first six months of 2007, respectively, compared to 2006, while net premiums and policy fees declined $0.8 million and $2.2 million, respectively, for these same periods. The declines in net premiums and policy fees are the expected result of the runoff of business in the non-strategic lines of business which are no longer being marketed by the Company. The increases in net investment income are primarily the result of increases in unallocated capital and investment income from proceeds of non-recourse funding obligations compared to the prior year.

Benefits and settlement expenses increased 10.2% during the second quarter of 2007 compared to the same period of 2006 due primarily to a $1.1 million reserve strengthening related to the discontinued Residual Value line. The 9.4% year-to-date increase in benefits and settlement expenses is the result of this second quarter reserve strengthening combined with a change in reserves in the cancer insurance line. The cancer insurance reserves increased $0.7 million during the first six months of 2007, while they decreased $0.4 million during the same period of 2006, an unfavorable change of $1.1 million.

Other operating expenses increased 86.8% and 64.7% for the second quarter and first six months of 2007, respectively, compared to the same periods of 2006. These increases are primarily due to increases in interest expense of $9.1 million and $16.4 million for the second quarter and first six months of 2007, respectively, compared to 2006. The higher interest expense is the result of additional issuances of non-recourse funding obligations.

Realized Gains and Losses

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

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
Fixed maturity gains - sales	$	1,661		$	6,797		$	(5,136	)	$	3,760		$	23,012		$	(19,252	)
Fixed maturity losses - sales		(1,380	)		(857	)		(523	)		(4,392	)		(21,228	)		16,836
Equity gains - sales		460			0			460			5,911			235			5,676
Equity losses - sales		0			(7	)		7			0			(7	)		7
Impairments on fixed maturity securities		0			0			0			0			0			0
Impairments on equity securities		0			0			0			0			0			0
Mark to market – Modco trading portfolio		(70,765	)		0			(70,765	)		(65,269	)		0			(65,269	)
Other		2,157			8,817			(6,660	)		5,367			16,753			(11,386	)
Total realized gains (losses) - investments	$	(67,867	)	$	14,750		$	(82,617	)	$	(54,623	)	$	18,765		$	(73,388	)

Foreign currency swaps	$	396		$	1,635		$	(1,239	)	$	4,972		$	2,561		$	2,411
Foreign currency adjustments on stable value contracts		(366	)		(1,600	)		1,234			(809	)		(2,344	)		1,535
Derivatives related to mortgage loan commitments		0			0			0			0			19,698			(19,698	)
Embedded derivatives related to reinsurance		73,246			542			72,704			70,409			609			69,800
Other derivatives		12,738			37			12,701			8,010			(586	)		8,596
Total realized gains (losses) - derivatives	$	86,014		$	614		$	85,400		$	82,582		$	19,938		$	62,644

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 for the current quarter, excluding impairments, reflects the normal operation of the Company’s asset/liability program within the context of the changing interest rate environment. There were no impairments for the first six months of either 2007 or 2006. At June 30, 2007, mark to market losses of $65.3 million to the Company’s modco trading portfolios associated with the Chase Insurance Group acquisition are also included in realized gains and losses. Additional details on the Company’s investment performance and evaluation are provided in the “Consolidated Investments” section below.

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. The Company has entered into foreign currency swaps to mitigate the risk of changes in the value of principal and interest payments to be made on certain of its foreign currency denominated stable value contracts. The Company recorded an immaterial gain and net realized gains of $4.2 million from these securities during the second quarter and first six months of 2007, respectively. These gains were the result of swap and contract maturities and differences in the related foreign currency spot and forward rates used to value the stable value contracts and foreign currency swaps. The Company has taken short positions in U.S. Treasury futures to mitigate interest rate risk related to the Company’s mortgage loan commitments. There was no activity in futures during the first six months of 2007.

The Company is also involved in various modified coinsurance and funds withheld arrangements that, in accordance with DIG B36 (“Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments”), contain embedded derivatives. The gains on these embedded derivatives were due to increasing interest rates during the quarter. The investment portfolios that support the related modified coinsurance reserves and funds withheld had mark-to-market losses that substantially offset the gains on these embedded derivatives.

The Company also uses various swaps, options, and swaptions to mitigate risk related to other interest rate exposures of the Company. The company realized gains of $11.7 million and $6.4 million on swaptions for the second quarter and first six months of 2007, respectively. Equity call options generated gains of $1.1 million and $1.3 million for the second quarter and first six months of 2007, respectively. Embedded derivatives associated with the GMWB (Guaranteed Minimum Withdrawal Benefit) rider on the variable deferred annuity had realized gains of $0.3 million for the second quarter and first six months of 2007.

CONSOLIDATED INVESTMENTS

Portfolio Description

The Company's investment portfolio consists primarily of fixed maturity securities (bonds and redeemable preferred stocks) and commercial mortgage loans. Within its fixed maturity securities, the Company maintains portfolios classified as “available for sale” and “trading”. The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, the Company may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, the Company has classified $17.4 billion or 82.8% of its fixed maturities as “available for sale”. These securities are carried at fair value on the Consolidated Balance Sheets. Changes in fair value, net of related DAC and VOBA, are charged or credited directly to shareholders’ equity. Changes in fair value that are other than temporary are recorded as realized losses in the Consolidated Statements of Income.

The Company’s trading portfolio accounts for $3.6 billion or 17.2% of the Company’s fixed maturities. At June 30, 2007, the Company holds fixed maturities with a market value of $3.6 billion and short-term investments with a market value of $245.6 million, which were added as part of the Chase Insurance Group acquisition. Investment results for these portfolios, including gains and losses from sales, are passed to the reinsurers through the contractual terms of the reinsurance arrangements. Trading securities are carried at fair value and changes in fair value are recorded in net income as they occur. Offsetting these amounts are corresponding changes in the fair value of the embedded derivative liability associated with the underlying reinsurance arrangement.

The Company’s investments in debt and equity securities are reported at market value, and investments in mortgage loans are reported at amortized cost. At June 30, 2007, the Company’s fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $21.0 billion, which is 1.1% below amortized cost of $21.3 billion. The Company had $4.1 billion in mortgage loans at June 30, 2007. While the Company’s mortgage loans do not have quoted market values, at June 30, 2007, the Company estimates the market value of its mortgage loans to be $4.1 billion (using discounted cash flows from the next call date), which is the same as the amortized cost. Most of the Company’s mortgage loans have significant prepayment fees. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market fluctuations are not expected to adversely affect liquidity.

The following table shows the reported values of the Company's invested assets.

	June 30, 2007				December 31, 2006
	(Dollars in thousands)
Publicly-issued bonds	$	18,519,136	68.7	%	$	18,809,094	68.6	%
Privately-issued bonds		2,507,303	9.3			2,114,713	7.7
Redeemable preferred stock		47	0.0			84	0.0
Fixed maturities		21,026,486	78.0			20,923,891	76.3
Equity securities		19,953	0.1			80,108	0.3
Mortgage loans		4,119,350	15.3			3,880,028	14.1
Investment real estate		12,067	0.0			37,928	0.1
Policy loans		819,387	3.1			839,502	3.1
Other long-term investments		181,448	0.7			306,012	1.1
Short-term investments		765,084	2.8			1,366,467	5.0
Total investments	$	26,943,775	100.0	%	$	27,433,936	100.0	%

Included in the preceding table are $3.6 billion and $3.5 billion of fixed maturities and $245.6 million and $302.7 million of short-term investments classified by the Company as trading securities at June 30, 2007 and December 31, 2006, respectively.

Market values for private, non-traded securities are determined as follows: 1) the Company obtains estimates from independent pricing services or 2) the Company estimates market value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics. The market value of private, non-traded securities was $2.5 billion at June 30, 2007, representing 9.3% of the Company’s total invested assets.

The Company participates in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned to third parties for short periods of time. The Company requires 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, with additional collateral obtained as necessary. At June 30, 2007, securities with a market value of $424 million were loaned under these agreements. As collateral for the loaned securities, the Company receives short-term investments, which are recorded in “short-term investments” with a corresponding liability recorded in “other liabilities” to account for the Company’s obligation to return the collateral.

The Company reviews its positions on a monthly basis for possible credit concerns and feels comfortable with the current exposure, their credit enhancement, and delinquency experience. At June 30, 2007, the Company had a total of approximately $124.2 million invested in securities that are supported by collateral classified as sub-prime. This represents approximately 0.5% of the Company’s total invested assets. Approximately $121 million, or 98%, of these securities have been rated as AAA.

Risk Management and Impairment Review

The Company monitors the overall credit quality of its portfolio within general guidelines. The following table shows the Company's available for sale fixed maturities by credit rating at June 30, 2007.

S&P or Equivalent Designation	Market Value		Percent of Market Value
	(Dollars in thousands)
AAA	$	7,299,051		41.9	%
AA		1,389,495		8.0
A		3,311,807		19.0
BBB		4,914,009		28.2
Investment grade		16,914,362		97.1
BB		409,991		2.4
B		78,583		0.4
CCC or lower		15,358		0.1
In or near default		86		0.0
Below investment grade		504,018		2.9
Redeemable preferred stock		47		0.0
Total	$	17,418,427		100.0	%

The table above excludes $3.6 billion of investment grade and $36.2 million of less than investment grade fixed maturities classified by the Company as trading securities.

Limiting bond exposure to any creditor group is another way the Company manages credit risk. The following table summarizes the Company's ten largest fixed maturity exposures to an individual creditor group as of June 30, 2007.

Creditor	Market Value
	(Dollars in millions)
AT&T	$	177.3
Citigroup		131.6
American International Group		123.5
Conoco Phillips		123.2
Wachovia		120.4
Bank of America		116.1
Comcast		114.5
Toyota Motor Company		110.7
General Electric		106.2
Goldman Sachs		104.2

The Company's management considers a number of factors when determining the impairment status of individual securities. These include the economic condition of various industry segments and geographic locations and other areas of identified risks. Although it is possible for the impairment of one investment to affect other investments, the Company engages in ongoing risk management to safeguard against and limit any further risk to its investment portfolio. Special attention is given to correlated risks within specific industries, related parties and business markets.

The Company generally considers 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) the intent and ability of the Company to hold the investment until recovery, 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 impairment. Although no set formula is used in this process, the investment performance, collateral position and continued viability of the issuer are significant measures considered.

The Company generally considers a number of factors relating to the issuer in determining the financial strength, liquidity, and recoverability of an issuer. These include but are not limited to: available collateral, assets that might be available to repay debt, operating cash flows, financial ratios, access to capital markets, quality of management, market position, exposure to litigation or product warranties, and the effect of general economic conditions on the issuer. Once management has determined that a particular investment has suffered an other than temporary impairment, the asset is written down to its estimated fair value.

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. The Company continuously monitors these factors as they relate to the investment portfolio in determining the status of each investment. Provided below are additional facts concerning the potential effect upon the Company's earnings should circumstances lead management to conclude that some of the current declines in market value are other than temporary.

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 June 30, 2007, 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. As indicated above, the Company’s management considers a number of factors in determining if an unrealized loss is other than temporary, including its ability and intent to hold the security until recovery. 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. At June 30, 2007, the Company had an overall pretax net unrealized loss of $221.7 million.

For traded and private fixed maturity and equity securities held by the Company that are in an unrealized loss position at June 30, 2007, the estimated market 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.

	Estimated Market Value		% Market Value			Amortized Cost		% Amortized Cost			Unrealized Loss			% Unrealized Loss
	(Dollars in thousands)
<= 90 days	$	4,772,393		43.5	%	$	4,872,998		42.8	%	$	(100,605	)		24.8	%
>90 days but <= 180 days		1,200,328		10.9			1,252,959		11.0			(52,631	)		12.9
>180 days but <= 270 days		152,376		1.4			161,050		1.4			(8,674	)		2.0
>270 days but <= 1 year		24,346		0.2			26,229		0.2			(1,883	)		0.5
>1 year but <= 2 years		4,292,818		39.1			4,493,858		39.5			(201,040	)		49.5
>2 years but <= 3 years		295,868		2.7			314,794		2.8			(18,926	)		4.7
>3 years but <= 4 years		168,477		1.5			181,446		1.6			(12,969	)		3.2
>4 years but <= 5 years		53,577		0.5			57,920		0.5			(4,343	)		1.1
>5 years		19,382		0.2			24,563		0.2			(5,181	)		1.3
Total	$	10,979,565		100.0	%	$	11,385,817		100.0	%	$	(406,252	)		100.0	%

The unrealized losses as of June 30, 2007, primarily relate to the rising interest rate environment experienced over the past several quarters. At June 30, 2007, securities with a market value of $42.5 million and $6.2 million of unrealized losses were issued in Company-sponsored commercial mortgage loan securitizations, including $4.7 million of unrealized losses greater than five years. The Company does not consider these unrealized positions to be other than temporary because the underlying mortgage loans continue to perform consistently with the Company’s original expectations.

The Company has no material concentrations of issuers or guarantors of fixed maturity securities. The industry segment composition of all securities in an unrealized loss position held by the Company at June 30, 2007, is presented in the following table.

	Estimated Market Value		% Market Value			Amortized Cost		% Amortized Cost			Unrealized Loss			% Unrealized Loss
	(Dollars in thousands)
Agency Mortgages	$	1,760,180		16.0	%	$	1,840,911		16.2	%	$	(80,731	)		19.9	%
Banking		965,984		8.8			999,488		8.8			(33,504	)		8.2
Basic Industrial		317,337		2.9			335,506		2.9			(18,169	)		4.5
Brokerage		300,049		2.7			309,035		2.7			(8,986	)		2.2
Canadian Govt Agencies		10,635		0.1			11,044		0.1			(409	)		0.1
Capital Goods		129,758		1.2			135,248		1.2			(5,490	)		1.4
Communications		339,681		3.1			365,771		3.2			(26,090	)		6.4
Consumer Cyclical		207,220		1.9			222,727		2.0			(15,507	)		3.8
Consumer Noncyclical		232,945		2.1			244,325		2.2			(11,380	)		2.8
Electric		958,733		8.7			1,009,874		8.9			(51,141	)		12.6
Energy		309,930		2.8			321,334		2.8			(11,404	)		2.8
Finance Companies		177,144		1.6			187,141		1.6			(9,997	)		2.5
Insurance		423,109		3.9			442,007		3.9			(18,898	)		4.7
Municipal Agencies		5,521		0.1			5,604		0.0			(83	)		0.0
Natural Gas		499,388		4.6			528,770		4.6			(29,382	)		7.2
Non-Agency Mortgages		3,306,082		30.1			3,353,379		29.5			(47,297	)		11.7
Other Finance		576,998		5.3			596,255		5.2			(19,257	)		4.7
Other Industrial		71,289		0.7			74,927		0.7			(3,638	)		0.9
Other Utility		14,385		0.1			15,044		0.1			(659	)		0.2
Real Estate		9,094		0.1			9,118		0.1			(24	)		0.0
Technology		69,422		0.6			71,985		0.6			(2,563	)		0.6
Transportation		235,418		2.1			245,977		2.2			(10,559	)		2.6
U.S. Government		48,530		0.4			49,431		0.4			(901	)		0.2
U.S. Govt Agencies		10,733		0.1			10,916		0.1			(183	)		0.0
Total	$	10,979,565		100.0	%	$	11,385,817		100.0	%	$	(406,252	)		100.0	%

The range of maturity dates for securities in an unrealized loss position at June 30, 2007 varies, with 7.5% maturing in less than 5 years, 25.1% maturing between 5 and 10 years, and 67.4% maturing after 10 years. The following table shows the credit rating of securities in an unrealized loss position at June 30, 2007.

S&P or Equivalent Designation	Estimated Market Value		% Market Value			Amortized Cost		% Amortized Cost			Unrealized Loss			% Unrealized Loss
	(Dollars in thousands)
AAA/AA/A	$	7,909,610		72.1	%	$	8,139,328		71.5	%	$	(229,718	)		56.5	%
BBB		2,717,153		24.7			2,856,385		25.1			(139,232	)		34.3
Investment grade		10,626,763		96.8			10,995,713		96.6			(368,950	)		90.8
BB		266,493		2.4			293,275		2.5			(26,782	)		6.6
B		70,802		0.6			78,547		0.7			(7,745	)		1.9
CCC or lower		15,507		0.2			18,282		0.2			(2,775	)		0.7
Below investment grade		352,802		3.2			390,104		3.4			(37,302	)		9.2
Total	$	10,979,565		100.0	%	$	11,385,817		100.0	%	$	(406,252	)		100.0	%

At June 30, 2007, securities in an unrealized loss position that were rated as below investment grade represented 3.2% of the total market value and 9.2% of the total unrealized loss. Unrealized losses related to below investment grade securities that had been in an unrealized loss position for more than twelve months were $28.2 million. Securities in an unrealized loss position rated less than investment grade were 1.3% of invested assets. The Company generally purchases its investments with the intent to hold to maturity. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities.

The following table shows the estimated market 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.

	Estimated Market Value		% Market Value			Amortized Cost		% Amortized Cost			Unrealized Loss			% Unrealized Loss
	(Dollars in thousands)
<= 90 days	$	120,518		34.2	%	$	128,235		32.9	%	$	(7,717	)		20.7	%
>90 days but <= 180 days		21,504		6.1			22,867		5.9			(1,363	)		3.6
>180 days but <= 270 days		403		0.1			443		0.1			(40	)		0.1
>270 days but <= 1 year		0		0.0			0		0.0			0			0.0
>1 year but <= 2 years		132,849		37.7			148,209		38.0			(15,360	)		41.2
>2 years but <= 3 years		26,394		7.5			29,407		7.5			(3,013	)		8.1
>3 years but <= 4 years		33,435		9.4			38,667		9.9			(5,232	)		14.0
>4 years but <= 5 years		137		0.0			167		0.0			(30	)		0.1
>5 years		17,562		5.0			22,109		5.7			(4,547	)		12.2
Total	$	352,802		100.0	%	$	390,104		100.0	%	$	(37,302	)		100.0	%

At June 30, 2007, below investment grade securities with a market value of $17.8 million and $4.4 million of unrealized losses were issued in Company sponsored commercial mortgage loan securitizations, including securities in an unrealized loss position greater than five years with a market value of $15.6 million and $4.1 million of unrealized losses. The Company does not consider these unrealized positions to be other than temporary because the underlying mortgage loans continue to perform consistently with the Company’s original expectations.

Realized Losses

Realized losses are comprised of both write-downs for other than temporary impairments and actual sales of investments. The Company did not record any pretax other than temporary impairments in its investments for the first six months of 2007 or 2006.

As previously discussed, the Company’s management considers several factors when determining other than temporary impairments. Although the Company generally intends to hold securities until maturity, the Company may change its position as a result of a change in circumstances. Any such decision is consistent with the Company’s classification of its investment portfolio as available for sale. During the six months ended June 30, 2007, the Company sold securities in an unrealized loss position with a market value of $837.4 million resulting in a realized loss of $4.2 million. The Company also engaged in taxable exchanges resulting in a loss of $0.2 million during the first six months of 2007. The securities were sold as a result of normal portfolio rebalancing activity and tax planning. For such securities, the proceeds, realized loss, and total time period that the security had been in an unrealized loss position are presented in the table below.

	Proceeds		% Proceeds			Realized Loss			% Realized Loss
	(Dollars in thousands)
<= 90 days	$	764,452		91.3	%	$	(3,061	)		72.6	%
>90 days but <= 180 days		11,377		1.3			(110	)		2.6
>180 days but <= 270 days		598		0.1			(2	)		0.0
>270 days but <= 1 year		0		0.0			0			0.0
> 1 year		60,953		7.3			(1,046	)		24.8
Total	$	837,380		100.0	%	$	(4,219	)		100.0	%

Mortgage Loans

The Company records mortgage loans net of an allowance for credit losses. This allowance is calculated through analysis of specific loans that are believed to be at a higher risk of becoming impaired in the near future. At June 30, 2007 and December 31, 2006, the Company's allowance for mortgage loan credit losses was $0.5 million and $0.5 million, respectively.

For several years the Company has offered a type of commercial mortgage loan under which the Company will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate. As of June 30, 2007, approximately $550.8 million of the Company’s mortgage loans have this participation feature.

At June 30, 2007, delinquent mortgage loans and foreclosed properties 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.

LIABILITIES

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

At June 30, 2007, the Company had policy liabilities and accruals of $16.7 billion. The Company's interest-sensitive life insurance policies have a weighted average minimum credited interest rate of approximately 3.74%.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Company meets its liquidity requirements primarily through positive cash flows from its insurance operations. 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.

While the Company generally anticipates that its cash flows will be sufficient to meet its investment commitments and operating cash needs, the Company recognizes that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, the Company has established repurchase agreement programs for certain of its insurance subsidiaries to provide liquidity when needed. The Company expects that the rate received on its investments will equal or exceed its borrowing rate. At June 30, 2007, the Company established a liability of $312 million related to these borrowings. Additionally, the Company may, from time to time, sell short-duration stable value products to complement its cash management practices. The Company has also used securitization transactions involving its commercial mortgage loans to increase liquidity.

The Company’s positive cash flows from operations are used to fund an investment portfolio that provides for future benefit payments. The Company employs a formal asset/liability program to manage the cash flows of its investment portfolio relative to its long-term benefit obligations.

The Company was committed at June 30, 2007, to fund mortgage loans in the amount of $1.0 billion. The Company held $1.1 billion in cash and short-term investments at June 30, 2007.

The states in which the Company and its insurance subsidiaries are domiciled impose certain restrictions on the ability to pay dividends to PLC. These restrictions are generally based in part on the prior year’s statutory income and surplus. Generally, these restrictions pose no short-term liquidity concerns for PLC. The Company plans to retain substantial portions of its earnings and the earnings of its subsidiaries primarily to support future growth.

Capital Resources

Golden Gate Captive Insurance Company (“Golden Gate”), a special purpose financial captive insurance company wholly owned by the Company, has $600 million of non–recourse funding obligations outstanding at June 30, 2007, the maximum amount available under a surplus notes facility established with certain purchasers. These non-recourse funding obligations bear a floating rate of interest and mature in 2037. As the block of business grows and ages, unless additional funding mechanisms are put into place, reserving increases will reduce the Company’s available statutory capital and surplus.

A life insurance company's statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners ("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 law. Statutory accounting rules are different from U.S. GAAP and are intended to reflect a more conservative view by, 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 the Company and its insurance subsidiaries. The Company may secure additional statutory capital through various sources, such as retained statutory earnings or equity contributions by PLC.

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 commitments, liabilities related to variable interest entities and policyholder obligations.

As a result of the adoption of FIN 48, the company recorded a $24.5 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 (see Note 1 to the Consolidated Condensed Financial Statements for additional discussion).

			Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(Dollars in thousands)
Non-recourse funding obligations^(a)	$	1,858,290	$	40,920	$	81,840	$	81,840	$	1,653,690
Stable value products^(b)		5,726,794		1,605,695		1,725,450		1,176,368		1,219,281
Operating leases^(c)		35,790		6,622		11,960		8,625		8,583
Home office lease^(d)		104,536		4,525		9,050		9,050		81,911
Mortgage loan commitments		1,040,048		1,040,048
Liabilities related to variable interest entities^(e)		470,590		21,720		43,440		405,430
Policyholder obligations^(f)		19,507,282		1,387,817		2,305,505		2,570,421		13,243,539
(a) Non-recourse funding obligations include all principal amounts owed on note agreements, and include expected interest payments due over the term of the notes. (b) Anticipated stable value products cash flows, including interest. (c) Includes all lease payments required under operating lease agreements. (d) The lease payments shown assume the Company exercises its option to purchase the building at the end of the lease term. (e) Liabilities related to variable interest entities are not the legal obligations of the Company, but will be repaid with cash flows generated by the variable interest entities. The amounts represent scheduled principal and expected interest payments. (f) Estimated contractual policyholder obligations are based on mortality, morbidity, and lapse assumptions comparable to the Company’s 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 separate account obligations are legally insulated from general account obligations, the separate account obligations will be fully funded by cash flows from separate account assets. The Company expects to fully fund the general account obligations from cash flows from general account investments.

MARKET RISK EXPOSURES AND OFF-BALANCE SHEET ARRANGEMENTS

The Company’s 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. The Company analyzes and manages the risks arising from market exposures of financial instruments, as well as other risks, through an integrated asset/liability management process. The Company’s 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 the Company’s exposure to interest rate risk, inflation risk, currency exchange risk, and equity market risk.

The primary focus of the Company’s 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 the Company as a whole. It is the Company’s policy to generally maintain asset and liability durations within one-half year of one another, although, from time to time, a broader interval may be allowed.

Derivative instruments that are currently 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 require 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 denominated stable value contracts. The Company also uses S&P 500^® options to mitigate its exposure to the value of equity indexed annuity contracts.

The Company has sold credit derivatives to enhance the return on our investment portfolio. The credit default swaps create credit exposure similar to an investment in publicly-issued fixed maturity cash investments.

Derivative instruments expose the Company to credit and market risk and could result in material changes from quarter-to-quarter. The Company minimizes its credit risk by entering into transactions with highly rated counterparties. The Company manages the market risk associated with interest rate and foreign exchange contracts 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 procedures.

In the ordinary course of its commercial mortgage lending operations, the Company 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 the Company's 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. At June 30, 2007, the Company had outstanding mortgage loan commitments of $1.0 billion at an average rate of 6.28%.

The Company believes its asset/liability management programs and procedures and certain product features provide protection for the Company against the effects of changes in interest rates under various scenarios. Additionally, the Company believes its asset/liability management programs and procedures provide sufficient liquidity to enable it to fulfill its obligation to pay benefits under its various insurance and deposit contracts. However, the Company’s 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 and other factors, and the effectiveness of the Company’s asset/liability management programs and procedures may be negatively affected whenever actual results differ from those assumptions.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 1 to the Consolidated Condensed Financial Statements for information regarding recently issued accounting standards.

RECENT DEVELOPMENTS

A proposal to amend Actuarial Guideline 38 (promulgated by the NAIC and part of the codification of statutory accounting principles) was approved by the NAIC, with an effective date of July 1, 2005. Actuarial Guideline 38, also known as AXXX, sets forth the reserve requirements for universal life insurance with secondary guarantees (“ULSG”). The changes to Actuarial Guideline 38 increase the reserve levels required for many ULSG products, and potentially make those products more expensive and less competitive as compared to other products including term and whole life products. The changes to Actuarial Guideline 38 affect only policies with an issue date of July 1, 2005 and later, and reduce the competitiveness and/or profitability of newly written ULSG products compared to traditional whole life or other high cash value insurance products or other products supported by relatively inexpensive capital (such as reinsurance of redundant reserves). To the extent that the additional reserves are generally considered to be economically redundant, capital market or other solutions may emerge to reduce the impact of the amendment. See Note 8 to the Consolidated Condensed Financial Statements for information regarding a recent capital market transaction designed to fund statutory reserves required by AXXX. The ability of the Company to implement such solutions is at least partially dependent on factors such as the ratings of the Company, the size of the blocks of business affected, the mortality experience of the Company and other factors. The Company cannot predict the continued availability of such solutions to the Company or the form that the market may dictate. The NAIC is continuing to study this issue and has issued additional changes to AG38 and Regulation XXX, which will have the effect of modestly decreasing the reserves required for term and universal life policies that are issued on January 1, 2007, and later. In addition, accounting and actuarial groups within the NAIC have studied whether to change the accounting standards that relate to certain reinsurance credits, and whether, if changes are made, they are to be applied retrospectively, prospectively only, or in a phased-in manner; a requirement to reduce the reserve credit on ceded business, if applied retroactively, would have a negative impact on the statutory capital of the Company. The NAIC is also currently working to reform state regulation in various areas, including comprehensive reforms relating to life insurance reserves.

During 2006, the NAIC made the determination that certain securities previously classified as “preferred securities” had both debt and equity characteristics and because of this, required unique reporting treatment. Under a short-term solution, NAIC guidance mandates that certain of these securities (meeting established criteria) may have to carry a lower rating for asset valuation reserve and risk based capital calculations. As a result, certain securities will receive a lower rating classification for asset valuation reserve and risk based capital calculations. The Company’s insurance subsidiaries currently invest in these securities. As of June 30, 2007, the Company (including both insurance and non-insurance subsidiaries) holds approximately $814 million (statutory carrying value) in securities that meet the aforementioned “notch-down” criteria, depending on evaluation of the underlying characteristics of the securities. This reporting change is expected to have an immaterial effect on the insurance subsidiaries’ capital and surplus position, but will increase the capital required to hold these assets. A working group of the NAIC made up of accounting, actuarial and investment parties continue to investigate so as to determine what the appropriate long-term capital treatment should be for these securities. The Company cannot predict what impact a change in this guidance may have.

During 2006, the NAIC’s Reinsurance Task Force adopted a proposal suggesting broad changes to the United States reinsurance market, with the stated intent to establish a regulatory system that distinguishes financially strong reinsurers from weak reinsurers, without relying exclusively on their state or country of domicile, with collateral to be determined as appropriate. The task force recommended that regulation of reinsurance procedures be amended to focus on broad based risk and credit criteria and not solely on U.S. licensure status. Evaluation of this proposal will be taken under consideration by the NAIC’s Financial Condition (E) Committee, the Reinsurance Task Force’s parent committee, as one of its charges during 2007. The Company cannot provide any assurance as to what impact such changes to the United States reinsurance industry will have on the availability, cost, or collateral restrictions associated with ongoing or future reinsurance transactions.

The NAIC is currently in the process of reviewing amendment(s) to the Unfair Trade Practices Act regarding the use of travel in insurance underwriting. The most recent amendment states that the denial of life insurance based upon an individual’s past lawful travel experiences or future lawful travel plans, is prohibited unless such action is the result of the application of sound underwriting and actuarial principles related to actual or reasonably anticipated loss experience. The Company cannot predict what form the final proposal may take and therefore cannot predict what impact, if any, such changes would have to the Company.

The financial services industry has become the focus of increased scrutiny by regulatory and law enforcement authorities relating to allegations of improper special payments, price-fixing, bid-rigging, and other alleged misconduct, including payments made by insurers and other financial service providers to brokers and the practices surrounding the placement of insurance business and sales of other financial products, as well as practices related to finite reinsurance. Some publicly held companies have been the subject of enforcement or other actions relating to corporate governance and the integrity of financial statements, most recently relating to the issuance of stock options. Such publicity may generate inquiries to or litigation against publicly held companies and/or financial service providers, even those who do not engage in the business lines or practices currently at issue. It is impossible to predict the outcome of these investigations or proceedings, whether they will expand into other areas not yet contemplated, whether they will result in changes in insurance regulation, whether activities currently thought to be lawful will be characterized as unlawful, or the impact, if any, of this increased regulatory and law enforcement scrutiny of the financial services industry on the Company. As some inquiries appear to encompass a large segment of the financial services industry, it would not be unusual for large numbers of companies in the financial services industry to receive subpoenas, requests for information from regulatory authorities, or other inquiries relating to these and similar matters. From time to time, the Company receives subpoenas, requests, or other inquiries and responds to them in the ordinary course of business.

The California Department of Insurance has promulgated proposed regulations that would characterize some life insurance agents as brokers and impose certain obligations on those agents that may conflict with the interests of insurance carriers or require the agent to, among other things, advise the client with respect to the best available insurer. The Company cannot predict the outcome of this regulatory proposal or whether any other state will propose or adopt similar actions.

In connection with the Company's discontinued Lender's Indemnity product, the Company has discovered facts and circumstances that support allegations by the Company against third parties (including policyholders), and the Company has instituted litigation to establish the rights and liabilities of the various parties; the Company has received at least one claim seeking to assert liability against the Company for policies for which premiums were not received by the Company, and the litigation encompasses such claims. In addition, the Company is defending a class action lawsuit relating to the calculation of certain benefits under the policies. Although the Company cannot predict the outcome of any litigation, the Company does not believe that the outcome of these matters will have a material impact on the financial condition or results of operations of the Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change from the disclosures in the Company's Annual Report on Form 10-K for the year ended December 31, 2006.

Item 4T. Controls and Procedures

(a)

Disclosure controls and procedures

Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our 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 (“the Exchange Act”) as of the end of the period covered by this report and concluded that our disclosure controls and procedures were effective as of such date. 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.

(b)

Changes in internal control over financial reporting

As a result of the 2006 acquisitions of the Chase Insurance Group and Western General, the Company is in the process of making a number of significant changes in its internal controls over financial reporting beginning in the third quarter of 2006. The changes involve combining and centralizing the financial reporting process and the attendant personnel, and system changes. The Company expects this process to continue as we continue to integrate the new businesses into our existing corporate structure. Except as described above, no change in our internal control over financial reporting occurred during the quarter ended June 30, 2007, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. Our 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

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 the 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, 2006, which could materially affect the Company’s business, financial condition, or future results of operations.

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 § 906 of the Sarbanes-Oxley Act of 2002.

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

Exhibit 99	-Safe Harbor for Forward-looking Statements.

SIGNATURE

Pursuant to the requirements 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: August 14, 2007 /s/ Steven G. Walker

Steven G. Walker

Senior Vice President, Controller and

Chief Accounting Officer

(Duly authorized officer)

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Protective Life Insurance 10-Q2007 Q2 Quarterly report

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