Protective Life Insurance 10-Q 2013 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2013

or

oTransition 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	63-0169720
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

2801 HIGHWAY 280 SOUTH

BIRMINGHAM, ALABAMA 35223

(Address of principal executive offices and zip code)

(205) 268-1000

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer o	Accelerated Filer o
Non-accelerated filer x	Smaller Reporting Company o

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

Number of shares of Common Stock, $1.00 Par Value, outstanding as of August 1, 2013:  5,000,000

PROTECTIVE LIFE INSURANCE COMPANY

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED JUNE 30, 2013

TABLE OF CONTENTS

PART I

		Page
Item 1.	Financial Statements (unaudited):
	Consolidated Condensed Statements of Income For The Three and Six Months Ended June 30, 2013 and 2012	3
	Consolidated Condensed Statements of Comprehensive Income (Loss) For The Three and Six Months Ended June 30, 2013 and 2012	4
	Consolidated Condensed Balance Sheets as of June 30, 2013 and December 31, 2012	5
	Consolidated Condensed Statement of Shareowner’s Equity For The Six Months Ended June 30, 2013	7
	Consolidated Condensed Statements of Cash Flows For The Six Months Ended June 30, 2013 and 2012	8
	Notes to Consolidated Condensed Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	57
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	119
Item 4.	Controls and Procedures	119

	PART II
Item 1A.	Risk Factors and Cautionary Factors that may Affect Future Results	120
Item 6.	Exhibits	128
	Signature	129

2

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

	For The Three Months Ended June 30,						For The Six Months Ended  June 30,
	2013			2012			2013			2012
	(Dollars In Thousands)
Revenues
Premiums and policy fees	$	752,752		$	707,720		$	1,475,952		$	1,400,118
Reinsurance ceded	(396,777		)	(336,119		)	(722,617		)	(632,414		)
Net of reinsurance ceded	355,975			371,601			753,335			767,704
Net investment income	447,064			438,648			886,076			882,180
Realized investment gains (losses):
Derivative financial instruments	66,591			(47,768		)	70,198			(77,677		)
All other investments	(110,227		)	67,879			(114,473		)	103,362
Other-than-temporary impairment losses	(1,789		)	(13,582		)	(3,129		)	(47,681		)
Portion recognized in other comprehensive income (before taxes)	(2,211		)	140			(5,455		)	15,643
Net impairment losses recognized in earnings	(4,000		)	(13,442		)	(8,584		)	(32,038		)
Other income	60,638			50,121			115,072			125,263
Total revenues	816,041			867,039			1,701,624			1,768,794
Benefits and expenses
Benefits and settlement expenses, net of reinsurance ceded: (three months: 2013 - $371,758; 2012 - $307,012; six months: 2013 - $678,336; 2012 - $589,788)	555,894			565,414			1,136,870			1,152,423
Amortization of deferred policy acquisition costs and value of business acquired	49,688			64,150			99,727			117,837
Other operating expenses, net of reinsurance ceded: (three months: 2013 - $51,018; 2012 - $46,931; six months: 2013 - $92,764; 2012 - $94,682)	131,532			120,410			276,286			240,401
Total benefits and expenses	737,114			749,974			1,512,883			1,510,661
Income before income tax	78,927			117,065			188,741			258,133
Income tax expense	25,923			35,438			61,859			80,650
Net income	$	53,004		$	81,627		$	126,882		$	177,483

See Notes to Consolidated Condensed Financial Statements

3

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	For The Three Months Ended June 30,						For The Six Months Ended June 30,
	2013			2012			2013			2012
	(Dollars In Thousands)
Net income	$	53,004		$	81,627		$	126,882		$	177,483
Other comprehensive income (loss):
Change in net unrealized gains (losses) on investments, net of income tax: (three months: 2013 - $(419,820); 2012 - $172,765; six months: 2013 - $(496,154); 2012 - $178,003)	(779,665		)	320,849			(921,427		)	330,576
Reclassification adjustment for investment amounts included in net income, net of income tax : (three months: 2013 - $(6,180); 2012 - $(1,093); six months: 2013 - $(8,880); 2012 - $(1,472))	(11,478		)	(2,030		)	(16,493		)	(2,733		)
Change in net unrealized gains (losses) relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (three months 2013 - $(1,293); 2012 - $1,363; six months: 2013 - $2.926; 2012 - $2,934)	(2,402		)	2,533			5,435			5,451
Change in accumulated (loss) gain - derivatives, net of income tax: (three months: 2013 - $(1,606); 2012 - $(2,475); six months: 2013 - $(63); 2012 - $397)	(2,983		)	(4,596		)	(117		)	737
Reclassification adjustment for derivative amounts included in net income, net of income tax: (three months: 2013 - $203; 2012 - $341; six months: 2013 - $377; 2012 - $576)	377			631			700			1,069
Total other comprehensive income (loss)	(796,151		)	317,387			(931,902		)	335,100
Total comprehensive income (loss)	$	(743,147	)	$	399,014		$	(805,020	)	$	512,583

See Notes to Consolidated Condensed Financial Statements

4

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

	As of
	June 30, 2013		December 31, 2012
	(Dollars In Thousands)
Assets
Fixed maturities, at fair value (amortized cost: 2013 - $27,364,950; 2012 - $26,661,310)	$	28,904,876	$	29,769,978
Fixed maturities, at amortized cost (fair value: 2013 - $333,771; 2012 - $319,163)	335,000		300,000
Equity securities, at fair value (cost: 2013 - $411,048; 2012 - $371,827)	405,855		373,715
Mortgage loans (2013 and 2012 includes: $699,267 and $765,520 related to securitizations)	4,772,134		4,948,625
Investment real estate, net of accumulated depreciation (2013 - $838; 2012 - $771)	6,450		6,517
Policy loans	855,780		865,391
Other long-term investments	377,670		378,821
Short-term investments	171,010		216,787
Total investments	35,828,775		36,859,834
Cash	130,860		269,582
Accrued investment income	362,695		350,804
Accounts and premiums receivable, net of allowance for uncollectible amounts (2013 - $4,373; 2012 - $4,191)	109,046		67,891
Reinsurance receivables	5,681,028		5,682,841
Deferred policy acquisition costs and value of business acquired	3,308,394		3,225,356
Goodwill	82,224		83,773
Property and equipment, net of accumulated depreciation (2013 - $107,045; 2012 - $103,625)	49,108		47,391
Other assets	388,581		343,925
Income tax receivable	3,264		61,952
Assets related to separate accounts
Variable annuity	11,162,856		9,601,417
Variable universal life	620,429		562,817
Total assets	$	57,727,260	$	57,157,583

See Notes to Consolidated Condensed Financial Statements

5

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED BALANCE SHEETS

(continued)

(Unaudited)

	As of
	June 30, 2013			December 31, 2012
	(Dollars In Thousands)
Liabilities
Future policy benefits and claims	$	21,931,674		$	21,626,065
Unearned premiums	1,407,933			1,352,872
Total policy liabilities and accruals	23,339,607			22,978,937
Stable value product account balances	2,579,172			2,510,559
Annuity account balances	10,509,829			10,658,463
Other policyholders’ funds	577,821			566,985
Other liabilities	997,086			1,210,579
Deferred income taxes	1,327,598			1,783,713
Non-recourse funding obligations	1,476,900			1,446,900
Repurchase program borrowings	340,000			150,000
Liabilities related to separate accounts
Variable annuity	11,162,856			9,601,417
Variable universal life	620,429			562,817
Total liabilities	52,931,298			51,470,370
Commitments and contingencies - Note 7
Shareowner’s equity
Preferred Stock; $1 par value, shares authorized: 2,000; Liquidation preference: $2,000	2			2
Common Stock, $1 par value, shares authorized and issued: 2013 and 2012 - 5,000,000	5,000			5,000
Additional paid-in-capital	1,363,258			1,363,258
Retained earnings	2,548,480			2,507,829
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on investments, net of income tax: (2013 - $474,217; 2012 - $979,251)	880,688			1,818,608
Net unrealized (losses) gains relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (2013 - $779; 2012 - $(2,147))	1,447			(3,988		)
Accumulated loss - derivatives, net of income tax: (2013 - $(1,569); 2012 - $(1,883))	(2,913		)	(3,496		)
Total shareowner’s equity	4,795,962			5,687,213
Total liabilities and shareowner’s equity	$	57,727,260		$	57,157,583

See Notes to Consolidated Condensed Financial Statements

6

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNER’S EQUITY

(Unaudited)

	Preferred Stock		Common Stock		Additional Paid-In- Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareowner’s Equity
	(Dollars In Thousands)
Balance, December 31, 2012	$	2	$	5,000	$	1,363,258	$	2,507,829		$	1,811,124		$	5,687,213
Net income for the six months ended June 30, 2013							126,882						126,882
Other comprehensive income (loss)										(931,902		)	(931,902		)
Comprehensive income (loss) for the six months ended June 30, 2013													(805,020		)
Dividends to the parent company							(86,231		)				(86,231		)
Balance, June 30, 2013	$	2	$	5,000	$	1,363,258	$	2,548,480		$	879,222		$	4,795,962

See Notes to Consolidated Condensed Financial Statements

7

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	For The Six Months Ended June 30,
	2013			2012
	(Dollars In Thousands)
Cash flows from operating activities
Net income	$	126,882		$	177,483
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Realized investment losses (gains)	52,859			6,353
Amortization of deferred policy acquisition costs and value of business acquired	99,727			117,837
Capitalization of deferred policy acquisition costs	(167,634		)	(130,571		)
Depreciation expense	4,315			4,275
Deferred income tax	60,062			(36,558		)
Accrued income tax	58,688			2,802
Interest credited to universal life and investment products	448,223			485,550
Policy fees assessed on universal life and investment products	(442,576		)	(379,426		)
Change in reinsurance receivables	1,813			(65,174		)
Change in accrued investment income and other receivables	(38,973		)	8,182
Change in policy liabilities and other policyholders’ funds of traditional life and health products	62,585			59,965
Trading securities:
Maturities and principal reductions of investments	101,838			151,362
Sale of investments	167,872			332,332
Cost of investments acquired	(245,520		)	(470,663		)
Other net change in trading securities	13,544			32,547
Change in other liabilities	(14,797		)	(150,034		)
Other income - gains on repurchase of non-recourse funding obligations	(1,250		)	(29,344		)
Other, net	(24,957		)	58,767
Net cash provided by operating activities	262,701			175,685
Cash flows from investing activities
Maturities and principal reductions of investments, available-for-sale	489,364			629,569
Sale of investments, available-for-sale	1,340,066			1,184,342
Cost of investments acquired, available-for-sale	(2,682,496		)	(2,068,162		)
Change in investments, held-to-maturity	(35,000		)	—
Mortgage loans:
New lendings	(171,997		)	(142,221		)
Repayments	345,704			288,402
Change in investment real estate, net	67			1,920
Change in policy loans, net	9,611			9,044
Change in other long-term investments, net	(156,213		)	(43,229		)
Change in short-term investments, net	17,662			(29,369		)
Net unsettled security transactions	51,883			59,803
Purchase of property and equipment	(10,563		)	(3,623		)
Net cash used in investing activities	(801,912		)	(113,524		)
Cash flows from financing activities
Issuance (repayment) of non-recourse funding obligations	30,000			(91,700		)
Repurchase program borrowings	190,000			200,000
Dividends paid to the parent company	(44,963		)	(117,000		)
Investment product deposits and change in universal life deposits	1,718,353			1,711,087
Investment product withdrawals	(1,492,901		)	(1,809,786		)
Other financing activities, net	—			(5,752		)
Net cash provided by (used in) financing activities	400,489			(113,151		)
Change in cash	(138,722		)	(50,990		)
Cash at beginning of period	269,582			169,775
Cash at end of period	$	130,860		$	118,785

See Notes to Consolidated Condensed Financial Statements

8

PROTECTIVE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.BASIS OF PRESENTATION

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements of Protective Life Insurance Company (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair statement of the results for the interim periods presented. Operating results for the three and six month periods ended June 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The year-end consolidated condensed financial data was derived from audited financial statements but does not include all disclosures required by GAAP. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The Company is a wholly owned subsidiary of Protective Life Corporation (“PLC”).

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

Reclassifications and Accounting Changes

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

Entities Included

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

9

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant Accounting Policies

For a full description of significant accounting policies, see Note 2 to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. There were no significant changes to the Company’s accounting policies during the six months ended June 30, 2013 other than those discussed below.

Investment Products

The Company establishes liabilities for fixed indexed annuity (“FIA”) products. These products are deferred fixed annuities with a guaranteed minimum interest rate plus a contingent return based on equity market performance. The FIA product is considered a hybrid financial instrument under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or “Codification”) Topic 815 — Derivatives and Hedging which allows the Company to make the election to value the liabilities of these FIA products at fair value. This election was made for the FIA products issued prior to 2010 as the policies were issued. These products are no longer being marketed. The changes in the fair value of the liability for these FIA products are recorded in Benefit and settlement expenses with the liability being recorded in Annuity account balances. For more information regarding the determination of fair value of annuity account balances please refer to Note 13, Fair Value of Financial Instruments. Premiums and policy fees for these FIA products consist of fees that have been assessed against the policy account balances for surrenders. Such fees are recognized when assessed and earned.

During 2013, the Company began marketing a new FIA product. These products are also deferred fixed annuities with a guaranteed minimum interest rate plus a contingent return based on equity market performance and are considered hybrid financial instruments under the FASB’s ASC Topic 815 — Derivatives and Hedging. The Company did not elect to value these FIA products at fair value, as a result the Company accounts for the provision that provides for a contingent return based on equity market performance as an embedded derivative. The embedded derivative is bifurcated from the host contract and recorded at fair value in Other liabilities. Changes in the embedded derivative are recorded in Realized investment gains (losses) — Derivative financial instruments. For more information regarding the determination of fair value of the FIA embedded derivative refer to Note 13, Fair Value of Financial Instruments. The host contract is accounted for as a debt instrument in accordance with ASC Topic 944 —  Financial Services — Insurance and is recorded in Annuity account balances with any discount to the minimum account value being accreted using the effective yield method. Benefits and settlement expenses include accreted interest and benefit claims incurred during the period.

Accounting Pronouncements Recently Adopted

ASU No. 2011-11—Balance Sheet—Disclosures about Offsetting Assets and Liabilities. This Update contains new disclosure requirements regarding the nature of an entity’s rights of offset and related arrangements associated with its financial and derivative instruments. The new disclosures are designed to make financial statements that are prepared under GAAP more comparable to those prepared under IFRSs. Generally, it is more difficult to qualify for offsetting under IFRSs than it is under GAAP. As a result, entities with significant financial instrument and derivative portfolios that report under IFRSs typically present positions on their balance sheets that are significantly larger than those of entities with similarly sized portfolios whose financial statements are prepared in accordance with GAAP. To facilitate comparison between financial statements prepared under GAAP and IFRSs, the new disclosures will give financial statement users information about both gross and net exposures. In January 2013, the FASB issued ASU No. 2013-01, which clarifies that application of ASU No. 2011-11 is limited to certain derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions. Both Updates were effective January 1, 2013. Neither Update had an impact on the Company’s results of operations or financial position.

ASU No. 2012-02—Intangibles—Goodwill and Other—Testing Indefinite-Lived Intangible Assets for Impairment. This Update is intended to reduce the complexity and cost of performing an impairment test for indefinite-lived intangible assets by allowing an entity the option to make a qualitative evaluation about the likelihood of impairment prior to the quantitative calculation required by current guidance. Under the amendments to Topic 350, an entity has the option to first assess qualitative factors to determine whether it is more likely than not that an

10

indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. If an entity determines it is not more likely than not that impairment exists, quantitative impairment testing is not required. However, if an entity concludes otherwise, the impairment test outlined in current guidance is required to be completed. The Update does not change the current requirement that indefinite-lived intangible assets be reviewed for impairment at least annually. This Update was effective January 1, 2013. This Update did not have an impact on the Company’s results of operations or financial position.

ASU No. 2013-02—Comprehensive Income—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this Update supersede the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU No. 2011-05, Comprehensive Income—Presentation of Comprehensive Income, and ASU No. 2011-12, Comprehensive Income—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, for all entities. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. The Update requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The Company has added the Accumulated Other Comprehensive Income footnote to disclose the required information beginning in the first quarter of 2013. This Update was effective January 1, 2013. This Update did not have an impact on the Company’s results of operations or financial position.

Accounting Pronouncements Not Yet Adopted

ASU No. 2013-10—Derivatives and Hedging—Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. This Update provides for the inclusion of the Fed Funds Effective Swap Rate (“OIS”) as a U.S. benchmark interest rate for hedge accounting purposes, in addition to U.S. Treasury rates and LIBOR. The amendments in the Update also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for transactions entered into on or after July 17, 2013. The Company is currently evaluating the impact of the Update on its policies and processes.

ASU No. 2013-11 — Income Taxes — Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  The objective of this Update is to eliminate diversity in practice related to the presentation of certain unrecognized tax benefits. The Update provides that unrecognized tax benefits should be presented as a reduction of a deferred tax asset for a net operating loss or other tax credit carryforward when settlement in this manner is available under the tax law. The amendments are effective for annual periods beginning after December 15, 2013 and interim periods therein. The Update does not require new recurring disclosures, and is not expected to have an impact on the Company’s results of operations or financial position.

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3.INVESTMENT OPERATIONS

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

	For The						For The
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(Dollars In Thousands)
Fixed maturities	$	19,292		$	16,417		$	31,590		$	36,095
Equity securities	2,366			148			2,367			148
Impairments on fixed maturity securities	(2,910		)	(13,442		)	(6,497		)	(32,038		)
Impairments on equity securities	(1,090		)	—			(2,087		)	—
Modco trading portfolio	(126,694		)	56,063			(142,022		)	74,162
Other investments	(5,191		)	(4,749		)	(6,408		)	(7,043		)
Total realized gains (losses) - investments	$	(114,227	)	$	54,437		$	(123,057	)	$	71,324

For the three and six months ended June 30, 2013, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $23.9 million and $36.8 million and gross realized losses were $6.1 million and $11.0 million, including $3.8 million and $8.2 million of impairment losses, respectively.

For the three and six months ended June 30, 2012, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $16.7 million and $39.5 million and gross realized losses were $13.4 million and $35.1 million, including $13.4 million and $31.9 million of impairment losses, respectively.

For the three and six months ended June 30, 2013, the Company sold securities in an unrealized gain position with a fair value (proceeds) of $409.9 million and $797.7 million, respectively. The gain realized on the sale of these securities was $23.9 million and $36.8 million, respectively.

For the three and six months ended June 30, 2012, the Company sold securities in an unrealized gain position with a fair value (proceeds) of $411.8 million and $906.9 million, respectively. The gain realized on the sale of these securities was $16.7 million and $39.5 million, respectively.

For the three and six months ended June 30, 2013, the Company sold securities in an unrealized loss position with a fair value (proceeds) of $53.2 million and $57.2 million, respectively. The losses realized on the sale of these securities were $2.3 million and $2.8 million, respectively.

For the three and six months ended June 30, 2012, the Company sold securities in an unrealized loss position with a fair value (proceeds) of $0.3 million and $17.5 million, respectively. The losses realized on the sale of these securities were $0.1 million and $3.2 million, respectively.

Certain European countries have experienced varying degrees of financial stress. Risks from the continued debt crisis in Europe could continue to disrupt the financial markets which could have a detrimental impact on global economic conditions and on sovereign and non-sovereign obligations. There remains considerable uncertainty as to future developments in the European debt crisis and the impact on financial markets.

12

The amortized cost and fair value of the Company’s investments classified as available-for-sale as of June 30, 2013 and December 31, 2012, are as follows:

			Gross		Gross					Total OTTI
	Amortized		Unrealized		Unrealized			Fair		Recognized
	Cost		Gains		Losses			Value		in OCI(1)
	(Dollars In Thousands)
2013
Fixed maturities:
Bonds
Residential mortgage-backed securities	$	1,532,089	$	55,244	$	(15,094	)	$	1,572,239	$	3,124
Commercial mortgage-backed securities	937,514		27,360		(22,070		)	942,804		—
Other asset-backed securities	947,236		14,798		(39,122		)	922,912		(112		)
U.S. government-related securities	1,160,068		41,132		(25,033		)	1,176,167		—
Other government-related securities	62,795		2,891		(1		)	65,685		—
States, municipals, and political subdivisions	1,191,740		149,937		(3,987		)	1,337,690		—
Corporate bonds	18,680,975		1,648,181		(294,310		)	20,034,846		—
	24,512,417		1,939,543		(399,617		)	26,052,343		3,012
Equity securities	388,664		7,906		(13,098		)	383,472		(786		)
Short-term investments	79,445		—		—			79,445		—
	$	24,980,526	$	1,947,449	$	(412,715	)	$	26,515,260	$	2,226
2012
Fixed maturities:
Bonds
Residential mortgage-backed securities	$	1,766,260	$	92,417	$	(19,347	)	$	1,839,330	$	(406	)
Commercial mortgage-backed securities	797,844		72,577		(598		)	869,823		—
Other asset-backed securities	1,023,649		12,788		(61,424		)	975,013		(241		)
U.S. government-related securities	1,097,501		71,536		(591		)	1,168,446		—
Other government-related securities	93,565		7,258		(45		)	100,778		—
States, municipals, and political subdivisions	1,188,019		255,898		(264		)	1,443,653		—
Corporate bonds	17,687,164		2,726,858		(48,395		)	20,365,627		(5,488		)
	23,654,002		3,239,332		(130,664		)	26,762,670		(6,135		)
Equity securities	352,272		11,881		(9,993		)	354,160		—
Short-term investments	97,852		—		—			97,852		—
	$	24,104,126	$	3,251,213	$	(140,657	)	$	27,214,682	$	(6,135	)

(1)These amounts are included in the gross unrealized gains and gross unrealized losses columns above.

The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of June 30, 2013 and December 31, 2012, are as follows:

			Gross		Gross					Total OTTI
	Amortized		Unrealized		Unrealized			Fair		Recognized
	Cost		Gains		Losses			Value		in OCI
	(Dollars In Thousands)
2013
Fixed maturities:
Other	$	335,000	$	—	$	(1,229	)	$	333,771	$	—
	$	335,000	$	—	$	(1,229	)	$	333,771	$	—
2012
Fixed maturities:
Other	$	300,000	$	19,163	$	—		$	319,163	$	—
	$	300,000	$	19,163	$	—		$	319,163	$	—

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As of June 30, 2013 and December 31, 2012, the Company had an additional $2.9 billion and $3.0 billion of fixed maturities, $22.4 million and $19.6 million of equity securities, and $91.6 million and $118.9 million of short-term investments classified as trading securities, respectively.

The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of June 30, 2013, by expected maturity, are shown below. Expected maturities of securities without a single maturity date are allocated based on estimated rates of prepayment that may differ from actual rates of prepayment.

	Available-for-sale				Held-to-maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(Dollars In Thousands)				(Dollars In Thousands)
Due in one year or less	$	543,650	$	550,573	$	—	$	—
Due after one year through five years	4,158,767		4,525,841		—		—
Due after five years through ten years	6,813,502		7,070,266		—		—
Due after ten years	12,996,498		13,905,663		335,000		333,771
	$	24,512,417	$	26,052,343	$	335,000	$	333,771

During the three and six months ended June 30, 2013, the Company recorded pre-tax other-than-temporary impairments of investments of $1.8 million and $3.1 million, of which $0.7 million and $1.0 million related to debt securities and $1.1 million and $2.1 million related to equity securities, respectively. Credit impairments recorded in earnings during the three and six months ended June 30, 2013 were $4.0 million and $8.6 million, respectively. During the three and six months ended June 30, 2013, $2.2 million and $5.5 million of non-credit losses previously recorded in other comprehensive income were recorded in earnings as credit losses, respectively. For the three and six months ended June 30, 2013, there were no other-than-temporary impairments related to debt securities or equity securities that the Company intended to sell or expected to be required to sell.

During the three and six months ended June 30, 2012, the Company recorded pre-tax other-than-temporary impairments of investments of $13.6 million and $47.7 million, respectively, all of which were related to debt securities. Of the $13.6 million of impairments for the three months ended June 30, 2012, $13.4 million was recorded in earnings and $0.2 million was recorded in other comprehensive income (loss). Of the $47.7 million of impairments for the six months ended June 30, 2012, $32.0 million was recorded in earnings and $15.7 million was recorded in other comprehensive income (loss).

There were no impairments related to equity securities for the three and six months ended June 30, 2012, and there were no other-than-temporary impairments related to debt securities that the Company intended to sell or expected to be required to sell.

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

	For The					For The
	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013			2012		2013			2012
	(Dollars In Thousands)
Beginning balance	$	62,914		$	87,942	$	121,237		$	69,476
Additions for newly impaired securities	618			3,619		1,615			19,307
Additions for previously impaired securities	1,568			9,333		3,054			12,111
Reductions for previously impaired securities due to a change in expected cash flows	(6,049		)	—		(66,855		)	—
Reductions for previously impaired securities that were sold in the current period	(7,237		)	—		(7,237		)	—
Ending balance	$	51,814		$	100,894	$	51,814		$	100,894

The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2013:

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(Dollars In Thousands)
Residential mortgage-backed securities	$	212,558	$	(8,635	)	$	132,257	$	(6,459	)	$	344,815	$	(15,094	)
Commercial mortgage-backed securities	465,172		(21,794		)	6,816		(276		)	471,988		(22,070		)
Other asset-backed securities	119,661		(7,234		)	548,015		(31,888		)	667,676		(39,122		)
U.S. government-related securities	594,696		(25,033		)	—		—			594,696		(25,033		)
Other government-related securities	20,000		(1		)	—		—			20,000		(1		)
States, municipalities, and political subdivisions	65,302		(3,987		)	—		—			65,302		(3,987		)
Corporate bonds	4,016,559		(273,005		)	180,442		(21,305		)	4,197,001		(294,310		)
Equities	191,639		(6,159		)	23,296		(6,939		)	214,935		(13,098		)
	$	5,685,587	$	(345,848	)	$	890,826	$	(66,867	)	$	6,576,413	$	(412,715	)

RMBS have a gross unrealized loss greater than twelve months of $6.5 million as of June 30, 2013. Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.

The other asset-backed securities have a gross unrealized loss greater than twelve months of $31.9 million as of June 30, 2013. This category predominately includes student-loan backed auction rate securities, the underlying collateral, of which is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). These unrealized losses have occurred within the Company’s auction rate securities (“ARS”) portfolio since the market collapse during 2008. At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary.

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The corporate bonds category has gross unrealized losses less than and greater than twelve months of $273.0 million and $21.3 million, respectively, as of June 30, 2013. These declines were primarily related to changes in interest rates during the period. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information.

The equities category has a gross unrealized loss greater than twelve months of $6.9 million as of June 30, 2013. The aggregate decline in market value of these securities was deemed temporary due to factors supporting the recoverability of the respective investments. Positive factors include credit ratings, the financial health of the issuer, the continued access of the issuer to the capital markets, and other pertinent information.

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

The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2012:

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(Dollars In Thousands)
Residential mortgage-backed securities	$	100,412	$	(9,578	)	$	166,000	$	(9,769	)	$	266,412	$	(19,347	)
Commercial mortgage-backed securities	50,506		(598		)	—		—			50,506		(598		)
Other asset-backed securities	479,223		(28,179		)	242,558		(33,245		)	721,781		(61,424		)
U.S. government-related securities	106,806		(591		)	—		—			106,806		(591		)
Other government-related securities	14,955		(45		)	—		—			14,955		(45		)
States, municipalities, and political subdivisions	11,526		(264		)	—		—			11,526		(264		)
Corporate bonds	775,593		(23,630		)	363,128		(24,765		)	1,138,721		(48,395		)
Equities	35,059		(5,150		)	21,754		(4,843		)	56,813		(9,993		)
	$	1,574,080	$	(68,035	)	$	793,440	$	(72,622	)	$	2,367,520	$	(140,657	)

RMBS had a gross unrealized loss greater than twelve months of $9.8 million as of December 31, 2012. The non-agency RMBS market experienced improvements during the year, but these losses represented securities where credit concerns were more pronounced. Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.

The other asset-backed securities had a gross unrealized loss greater than twelve months of $33.2 million as of December 31, 2012. This category predominately includes student-loan backed auction rate securities, the underlying collateral, of which is at least 97% guaranteed by the FFELP. These unrealized losses have occurred within the Company’s ARS portfolio since the market collapse during 2008. At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary.

The corporate bonds category had gross unrealized losses greater than twelve months of $24.8 million as of December 31, 2012. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information.

The equities category had a gross unrealized loss greater than twelve months of $4.8 million as of December 31, 2012. The aggregate decline in market value of these securities was deemed temporary due to factors supporting the recoverability of the respective investments. Positive factors include credit ratings, the financial health of the issuer, the continued access of the issuer to the capital markets, and other pertinent information.

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

As of June 30, 2013, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.4 billion and had an amortized cost of $1.4 billion. In addition, included in the Company’s trading portfolio, the Company held $356.5 million of securities which were rated below investment grade. Approximately $422.3 million of the below investment grade securities were not publicly traded.

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

	For The						For The
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(Dollars In Thousands)
Fixed maturities	$	(852,157	)	$	340,397		$	(1,019,682	)	$	359,860
Equity securities	(8,391		)	(1,411		)	(4,602		)	3,695

Variable Interest Entities

The Company holds certain investments in entities in which its ownership interests could possibly be considered variable interests under Topic 810 of the FASB ASC (excluding debt and equity securities held as trading, available-for-sale, or held-to-maturity). The Company reviews the characteristics of each of these applicable entities and compares those characteristics to applicable criteria to determine whether the entity is a Variable Interest Entity (“VIE”).  If the entity is determined to be a VIE, the Company then performs a detailed review to determine whether the interest would be considered a variable interest under the guidance. The Company then performs a qualitative review of all variable interests with the entity and determines whether the Company is the primary beneficiary. ASC 810 provides that an entity is the primary beneficiary of a VIE if the entity has 1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and 2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

Based on this analysis, the Company had an interest in one wholly owned subsidiary, Red Mountain, LLC (“Red Mountain”), that continued to be classified as a VIE as of June 30, 2013. The activity most significant to Red Mountain is the issuance of a note in connection with a financing transaction involving Golden Gate V Vermont Captive Insurance Company (“Golden Gate V”) and the Company in which Golden Gate V issued non-recourse funding obligations to Red Mountain and Red Mountain issued the note to Golden Gate V. Credit enhancement on the Red Mountain Note is provided by an unrelated third party. For details of this transaction, see Note 6, Debt and Other Obligations. The Company had the power, via its 100% ownership through an affiliate, to direct the activities of the VIE, but did not have the obligation to absorb losses related to the primary risks or sources of variability to the VIE. The variability of loss would be borne primarily by the third party in its function as provider of credit enhancement on the Red Mountain Note. Accordingly, it was determined that the Company is not the primary beneficiary of the VIE. The Company’s risk of loss related to the VIE is limited to its investment of $10,000. Additionally, PLC has guaranteed the VIE’s payment obligation for the credit enhancement fee to the unrelated third party provider.

4.MORTGAGE LOANS

Mortgage Loans

The Company invests a portion of its investment portfolio in commercial mortgage loans. As of June 30, 2013, the Company’s mortgage loan holdings were approximately $4.8 billion. The Company has specialized in making loans on either credit-oriented commercial properties or credit-anchored strip shopping centers and apartments. The

17

Company’s underwriting procedures relative to its commercial loan portfolio are based, in the Company’s view, on a conservative and disciplined approach. The Company concentrates on a small number of commercial real estate asset types associated with the necessities of life (retail, multi-family, professional office buildings, and warehouses). The Company believes these asset types tend to weather economic downturns better than other commercial asset classes in which it has chosen not to participate. The Company believes this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout its history.

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

Many of the mortgage loans have call options or interest rate reset options between 3 and 10 years. However, if interest rates were to significantly increase, we may be unable to exercise the call options or increase the interest rates on our existing mortgage loans commensurate with the significantly increased market rates. Assuming the loans are called at their next call dates, approximately $106.1 million would become due for the remainder of 2013, $1.3 billion in 2014 through 2018, $581.3 million in 2019 through 2023, and $173.7 million thereafter.

The Company offers a type of commercial mortgage loan under which the Company will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate. As of June 30, 2013 and December 31, 2012, approximately $705.7 million and $817.3 million, respectively, of the Company’s mortgage loans have this participation feature. Cash flows received as a result of this participation feature are recorded as interest income. During the three and six month period ended June 30, 2013, the Company recognized $5.8 million and $9.2 million of participating mortgage loan income, respectively.

As of June 30, 2013, approximately $16.0 million, or 0.04%, of invested assets consisted of nonperforming, restructured or mortgage loans that were foreclosed and were converted to real estate properties. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities. The Company’s mortgage loan portfolio consists of two categories of loans: (1) those not subject to a pooling and servicing agreement and (2) those subject to a contractual pooling and servicing agreement.

As of June 30, 2013, $13.8 million of mortgage loans not subject to a pooling and servicing agreement were nonperforming. The Company did not foreclose any nonperforming loans during the six months ended June 30, 2013.

As of June 30, 2013, $2.2 million of loans subject to a pooling and servicing agreement were nonperforming. None of these nonperforming loans have been restructured during the six months ended June 30, 2013. The Company did not foreclose on any nonperforming loans during the six months ended June 30, 2013.

As of June 30, 2013 and December 31, 2012, the Company had an allowance for mortgage loan credit losses of $7.0 million and $2.9 million, respectively. Due to the Company’s loss experience and nature of the loan portfolio, the Company believes that a collectively evaluated allowance would be inappropriate. The Company believes an allowance calculated through an analysis of specific loans that are believed to have a higher risk of credit impairment provides a more accurate presentation of expected losses in the portfolio and is consistent with the applicable guidance for loan impairments in ASC Subtopic 310. Since the Company uses the specific identification method for calculating the allowance, it is necessary to review the economic situation of each borrower to determine those that have higher risk of credit impairment. The Company has a team of professionals that monitors borrower conditions such as payment practices, borrower credit, operating performance, and property conditions, as well as ensuring the timely payment of property taxes and insurance. Through this monitoring process, the Company assesses the risk of each loan. When issues are identified, the severity of the issues are assessed and reviewed for possible credit impairment. If a loss is probable, an expected loss calculation is performed and an allowance is established for that loan based on the expected loss. The expected loss is calculated as the excess carrying value of a loan over either the present value of expected future cash flows discounted at the loan’s original effective interest rate, or the current estimated fair value of the loan’s underlying collateral. A loan may be subsequently charged off at such point that the Company no longer expects to receive cash payments, the present value of future expected payments of the renegotiated loan is less than the current

18

principal balance, or at such time that the Company is party to foreclosure or bankruptcy proceedings associated with the borrower and does not expect to recover the principal balance of the loan.

A charge off is recorded by eliminating the allowance against the mortgage loan and recording the renegotiated loan or the collateral property related to the loan as investment real estate on the balance sheet, which is carried at the lower of the appraised fair value of the property or the unpaid principal balance of the loan, less estimated selling costs associated with the property:

	As of
	June 30, 2013			December 31, 2012
	(Dollars In Thousands)
Beginning balance	$	2,875		$	4,975
Charge offs	(2,292		)	(8,340		)
Recoveries	(374		)	(628		)
Provision	6,826			6,868
Ending balance	$	7,035		$	2,875

It is the Company’s policy to cease to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is the Company’s general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. For loans subject to a pooling and servicing agreement, there are certain additional restrictions and/or requirements related to workout proceedings, and as such, these loans may have different attributes and/or circumstances affecting the status of delinquency or categorization of those in nonperforming status. An analysis of the delinquent loans is shown in the following chart as of June 30, 2013.

					Greater
	30-59 Days		60-89 Days		than 90 Days		Total
	Delinquent		Delinquent		Delinquent		Delinquent
	(Dollars In Thousands)
Commercial mortgage loans	$	28,707	$	1,406	$	14,642	$	44,755
Number of delinquent commercial mortgage loans	7		1		5		13

The Company’s commercial mortgage loan portfolio consists of mortgage loans that are collateralized by real estate. Due to the collateralized nature of the loans, any assessment of impairment and ultimate loss given a default on the loans is based upon a consideration of the estimated fair value of the real estate. The Company limits accrued interest income on impaired loans to ninety days of interest. Once accrued interest on the impaired loan is received, interest income is recognized on a cash basis. For information regarding impaired loans, please refer to the following chart as of June 30, 2013 and December 31, 2012:

			Unpaid				Average		Interest		Cash Basis
	Recorded		Principal		Related		Recorded		Income		Interest
	Investment		Balance		Allowance		Investment		Recognized		Income
	(Dollars In Thousands)
2013
Commercial mortgage loans:
With no related allowance recorded	$	14,840	$	14,797	$	—	$	2,473	$	—	$	17
With an allowance recorded	35,145		35,166		7,035		5,021		561		489
2012
Commercial mortgage loans:
With no related allowance recorded	$	13,044	$	14,419	$	—	$	2,609	$	53	$	69
With an allowance recorded	13,927		13,927		2,875		3,482		154		154

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5.GOODWILL

During the six months ended June 30, 2013, the Company decreased its goodwill balance by approximately $1.5 million. The decrease was due to adjustments in the Acquisitions segment related to tax benefits realized during 2013 on the portion of tax goodwill in excess of GAAP basis goodwill. As of June 30, 2013, the Company had an aggregate goodwill balance of $82.2 million.

Accounting for goodwill requires an estimate of the future profitability of the associated lines of business to assess the recoverability of the capitalized acquisition goodwill. The Company evaluates the carrying value of goodwill at the segment (or reporting unit) level at least annually and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: 1) a significant adverse change in legal factors or in business climate, 2) unanticipated competition, or 3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company first determines through qualitative analysis whether relevant events and circumstances indicate that it is more likely than not that segment goodwill balances are impaired as of the testing date. If it is determined that it is more likely than not that impairment exists, the Company compares its estimate of the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The Company utilizes a fair value measurement (which includes a discounted cash flows analysis) to assess the carrying value of the reporting units in consideration of the recoverability of the goodwill balance assigned to each reporting unit as of the measurement date. The Company’s material goodwill balances are attributable to certain of its operating segments (which are each considered to be reporting units). The cash flows used to determine the fair value of the Company’s reporting units are dependent on a number of significant assumptions. The Company’s estimates, which consider a market participant view of fair value, are subject to change given the inherent uncertainty in predicting future results and cash flows, which are impacted by such things as policyholder behavior, competitor pricing, capital limitations, new product introductions, and specific industry and market conditions. Additionally, the discount rate used is based on the Company’s judgment of the appropriate rate for each reporting unit based on the relative risk associated with the projected cash flows. As of December 31, 2012, the Company performed its annual evaluation of goodwill and determined that no adjustment to impair goodwill was necessary. During the six months ended June 30, 2013, no events occurred which indicate an impairment should be recorded or which would invalidate the previous results of the Company’s impairment assessment.

While adverse market conditions for certain businesses may have a significant impact on the fair value of the Company’s reporting units, in the Company’s view, the key assumptions used in its estimates of fair value of its reporting units continue to be adequate.

6.DEBT AND OTHER OBLIGATIONS

The Company has access to a Credit Facility that provides the Company and PLC the ability to borrow on an unsecured basis up to an aggregate principal amount of $750 million. The Company has the right in certain circumstances to request that the commitment under the Credit Facility be increased up to a maximum principal amount of $1.0 billion. Balances outstanding under the Credit Facility accrue interest at a rate equal to, at the option of the Borrowers, (i)  LIBOR plus a spread based on the ratings of PLC’s senior unsecured long-term debt (“Senior Debt”), or (ii) the sum of (A) a rate equal to the highest of (x) the Administrative Agent’s prime rate, (y) 0.50% above the Federal Funds rate, or (z) the one-month LIBOR plus 1.00% and (B) a spread based on the ratings of PLC’s Senior Debt. The Credit Facility also provides for a facility fee at a rate that varies with the ratings of PLC’s Senior Debt and that is calculated on the aggregate amount of commitments under the Credit Facility, whether used or unused. The maturity date on the Credit Facility is July 17, 2017. The Company is not aware of any non-compliance with the financial debt covenants of the Credit Facility as of June 30, 2013. The Company did not have an outstanding balance under the Credit Facility as of June 30, 2013. PLC had an outstanding balance of $360.0 million at an interest rate of LIBOR plus 1.20% under the Credit Facility as of June 30, 2013.

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Non-Recourse Funding Obligations

Golden Gate Captive Insurance Company

Golden Gate Captive Insurance Company (“Golden Gate”), a South Carolina special purpose financial captive insurance company and wholly owned subsidiary, had three series of Surplus Notes with a total outstanding balance of $800 million as of June 30, 2013. PLC holds the entire outstanding balance of Surplus Notes. The Series A1 Surplus Notes have a balance of $400 million and accrue interest at a fixed rate of 7.375%, the Series A2 Surplus Notes have a balance of $100 million and accrue interest at a fixed rate of 8%, and the Series A3 Surplus Notes have a balance of $300 million and accrue interest at a fixed rate of 8.45%.

Golden Gate II Captive Insurance Company

Golden Gate II Captive Insurance Company (“Golden Gate II”), a wholly owned special purpose financial captive insurance company, had $575.0 million of non-recourse funding obligations outstanding as of June 30, 2013. These outstanding non-recourse funding obligations were issued to special purpose trusts, which in turn issued securities to third parties. Certain of our affiliates own a portion of these securities. As of June 30, 2013, securities related to $269.9 million of the outstanding balance of the non-recourse funding obligations was held by external parties, securities related to $72.0 million of the non-recourse funding obligations was held by nonconsolidated affiliates, and $233.1 million was held by consolidated subsidiaries of the Company. These non-recourse funding obligations mature in 2052. $275 million of this amount is currently accruing interest at a rate of LIBOR plus 30 basis points. We have experienced higher borrowing costs than were originally expected associated with $300 million of our non-recourse funding obligations supporting the business reinsured to Golden Gate II. These higher costs are the result of higher spread component of interest expense associated with the illiquidity of the current market for auction rate securities, as well as a rating downgrade of our guarantor by certain rating agencies. The current rate associated with these obligations is LIBOR plus 200 basis points, which is the maximum rate we can be required to pay under these obligations. We have contingent approval to issue an additional $100 million of obligations. Under the terms of the non-recourse funding obligations, the holders of the non-recourse funding obligations cannot require repayment from PLC, us, or any of our subsidiaries, other than Golden Gate II, the direct issuers of the non-recourse funding obligations, although PLC has agreed to indemnify Golden Gate II for certain costs and obligations (which obligations do not include payment of principal and interest on the non-recourse funding obligations). In addition, PLC has entered into certain support agreements with Golden Gate II obligating it to make capital contributions or provide support related to certain of Golden Gate II’s expenses and in certain circumstances, to collateralize certain of PLC’s obligations to Golden Gate II.

Golden Gate V Vermont Captive Insurance Company

On October 10, 2012, Golden Gate V and Red Mountain, wholly owned subsidiaries of the Company, entered into a 20-year transaction to finance up to $945 million of “AXXX” reserves related to a block of universal life insurance policies with secondary guarantees issued by the Company and its subsidiary, West Coast Life Insurance Company (“WCL”). Golden Gate V issued non-recourse funding obligations to Red Mountain, and Red Mountain issued a note with an initial principal amount of $275 million, increasing to a maximum of $945 million in 2027, to Golden Gate V for deposit to a reinsurance trust supporting Golden Gate V’s obligations under a reinsurance agreement with WCL, pursuant to which WCL cedes liabilities relating to the policies of WCL and retrocedes liabilities relating to the policies of the Company. Through the structure, Hannover Life Reassurance Company of America (“Hannover Re”), the ultimate risk taker in the transaction, provides credit enhancement to the Red Mountain note for the 20-year term in exchange for a fee. The transaction is “non-recourse” to Golden Gate V, Red Mountain, WCL, PLC and the Company, meaning that none of these companies are liable for the reimbursement of any credit enhancement payments required to be made. As of June 30, 2013, the principal balance of the Red Mountain note was $335 million. In connection with the transaction, PLC has entered into certain support agreements under which it guarantees or otherwise supports certain obligations of Golden Gate V or Red Mountain.

In connection with the transaction outlined above, Golden Gate V had a $335 million outstanding non-recourse funding obligation as of June 30, 2013. This non-recourse funding obligation matures in 2037, has scheduled increases in principal to a maximum of $945 million, and accrues interest at a fixed annual rate of 6.25%.

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Non-recourse funding obligations outstanding as of June 30, 2013, on a consolidated basis, are shown in the following table:

				Year-to-Date
			Maturity	Weighted-Avg
Issuer	Balance		Year	Interest Rate
	(Dollars In Thousands)
Golden Gate Captive Insurance Company(1)	$	800,000	2037	n/m
Golden Gate II Captive Insurance Company	341,900		2052	1.13	%
Golden Gate V Vermont Captive Insurance Company	335,000		2037	6.25	%
Total	$	1,476,900

(1)  The weighted average rate is not meaningful as these are fixed rate obligations.

During the six months ended June 30, 2013, the Company repurchased $5.0 million of its outstanding non-recourse funding obligations, at a discount. These repurchases resulted in a $1.3 million pre-tax gain for the Company. During the six months ended June 30, 2012, the Company repurchased $91.7 million of its outstanding non-recourse funding obligations, at a discount.  These repurchases resulted in a $29.3 million pre-tax gain. These gains are recorded in other income in the consolidated condensed statements of income.

Repurchase Program Borrowings

While the Company anticipates that the cash flows of its operating subsidiaries will be sufficient to meet its investment commitments and operating cash needs in a normal credit market environment, 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. Under this program, the Company may, from time to time, sell an investment security at a specific price and agree to repurchase that security at another specified price at a later date. These borrowings are for a term less than ninety days. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities, and the agreements provided for net settlement in the event of default or on termination of the agreements. As of June 30, 2013, the fair value of securities pledged under the repurchase program was $356.1 million and the repurchase obligation of $340.0 million was included in the Company’s consolidated condensed balance sheets (at an average borrowing rate of 8 basis points). During the six months ended June 30, 2013, the maximum balance outstanding at any one point in time related to these programs was $645.1 million. The average daily balance was $423.9 million (at an average borrowing rate of 12 basis points) during the six months ended June 30, 2013. As of December 31, 2012, the Company had a $150.0 million outstanding balance related to such borrowings. During 2012, the maximum balance outstanding at any one point in time related to these programs was $425.0 million. The average daily balance was $266.3 million (at an average borrowing rate of 14 basis points) during the year ended December 31, 2012.

7.             COMMITMENTS AND CONTINGENCIES

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

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

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are subject to very limited appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. Companies in the financial services and insurance industries are also sometimes the target of law enforcement and regulatory investigations relating to the numerous laws and regulations that govern such companies. Some companies have been the subject of law enforcement or regulatory actions or other actions resulting from such investigations. The Company, in the ordinary course of business, is involved in such matters.

The Company establishes liabilities for litigation and regulatory actions when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For matters where a loss is believed to be reasonably possible, but not probable, no liability is established. For such matters, the Company may provide an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. The Company reviews relevant information with respect to litigation and regulatory matters on a quarterly and annual basis and updates its established liabilities, disclosures and estimates of reasonably possible losses or range of loss based on such reviews.

Although the Company cannot predict the outcome of any litigation or regulatory action, the Company does not believe that any such outcome will have an impact, either individually or in the aggregate, on its financial condition or results of operations that differs materially from the Company’s established liabilities. Given the inherent difficulty in predicting the outcome of such matters, however, it is possible that an adverse outcome in certain such matters could be material to the Company’s financial condition or results of operations for any particular reporting period.

In the IRS audit that concluded during the prior year, the IRS proposed favorable and unfavorable adjustments to the Company’s 2003 through 2007 reported taxable incomes. The Company protested certain unfavorable adjustments and is seeking resolution at the IRS’ Appeals Division. If the IRS prevails on every issue that it identified in this audit, and the Company does not litigate these issues, then the Company will make an income tax payment of approximately $24.3 million. However, this payment, if it were to occur, would not materially impact the Company or its effective tax rate.

The Company has received notice from two third party auditors that the Company, as well as certain of its insurance affiliates and certain other insurance companies for which the Company has co-insured blocks of life insurance and annuity products, will be audited for compliance with the unclaimed property laws of a number of states. The audits are being conducted on behalf of the treasury departments in such states. The focus of the audits is on whether there have been unreported deaths, maturities, or policies that have exceeded limiting age with respect to which death benefits or other payments under life insurance or annuity policies should be treated as unclaimed property that should be escheated to the state. The Company has recorded a reserve with respect to life insurance policies and certain co-insured blocks of life insurance policies issued by other companies in connection with these pending audits. The Company does not consider the amount of this reserve to be material to the Company’s financial condition or results of operations. With respect to a separate block of life insurance policies that is co-insured by the Company, the Company is presently unable to estimate the reasonably possible loss or range of loss due to a number of factors, including uncertainty as to the legal theory or theories that may give rise to liability, uncertainty as to whether the Company or other companies are responsible for the liabilities, if any, arising in connection with such policies, the distinct characteristics of this co-insured block of policies which differentiate it from the blocks of life insurance policies for which the Company has recorded a reserve, and the early stages of the audits being conducted. The Company will continue to monitor the matter for any developments that would make the loss contingency associated with this block of co-insured policies probable or reasonably estimable.

The Company has received notice that it and its affiliated life insurance companies are subject to a targeted multi-state examination with respect to their claims paying practices and their use of the U.S. Social Security Administration’s Death Master File or similar databases (a “Death Database”) to identify unreported deaths in their life insurance policies, annuity contracts and retained asset accounts. There is no clear basis in previously existing law for requiring a life insurer to search for unreported deaths in order to determine whether a benefit is owed, and substantial legal authority exists to support the position that the prevailing industry practice was lawful. A number of life insurers, however, have entered into settlement or consent agreements with state insurance regulators under which the life insurers agreed to implement procedures for periodically comparing their life insurance and annuity contracts and retained asset accounts against a Death Database, treating confirmed deaths as giving rise to a death benefit under their policies, locating beneficiaries and paying them the benefits and interest, and escheating the benefits and interest as well as penalties to the state if the beneficiary could not be found.  It has been publicly reported that the life insurers

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have paid substantial administrative and/or examination fees to the insurance regulators in connection with the settlement or consent agreements. The Company believes it is reasonably possible that insurance regulators could demand from the Company administrative and/or examination fees relating to the targeted multi-state examination. Based on publicly reported payments by other life insurers, the Company estimates the range of such fees to be from $0 to $3.5 million.

8.STOCK-BASED COMPENSATION

During the six months ended June 30, 2013, 298,500 performance shares with an estimated fair value of $9.3 million were awarded. The criteria for payment of the 2013 performance awards is based primarily on PLC’s average operating return on average equity (“ROE”) over a three-year period. If PLC’s ROE is below 10.0%, no award is earned. If PLC’s ROE is at or above 11.5%, the award maximum is earned. Awards are paid in shares of PLC’s common stock.

Restricted stock units are awarded to participants and include certain restrictions relating to vesting periods. PLC issued 141,000 restricted stock units for the six months ended June 30, 2013. These awards had a total fair value at grant date of $4.4 million. Approximately half of these restricted stock units vest in 2016, and the remainder vest in 2017. These awards have been recorded as equity-classified awards for the period ended June 30, 2013.

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

	Weighted-Average
	Base Price per share		No. of SARs
Balance at December 31, 2012	$	22.15	1,641,167
SARs granted	—		—
SARs exercised / forfeited	25.68		(132,849	)
Balance at June 30, 2013	$	21.84	1,508,318

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. There were no SARs issued for the six months ended June 30, 2013.

9.EMPLOYEE BENEFIT PLANS

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

	For The						For The
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(Dollars In Thousands)
Service cost — benefits earned during the period	$	2,708		$	2,561		$	5,416		$	5,122
Interest cost on projected benefit obligation	2,553			2,604			5,106			5,208
Expected return on plan assets	(2,759		)	(2,673		)	(5,518		)	(5,346		)
Amortization of prior service cost/(credit)	(95		)	(95		)	(190		)	(190		)
Amortization of actuarial losses	2,729			2,175			5,458			4,350
Total benefit cost	$	5,136		$	4,572		$	10,272		$	9,144

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During the six months ended June 30, 2013, PLC contributed $2.3 million to its defined benefit pension plan for the 2013 plan year. During July of 2013, PLC contributed an additional $2.3 million to the defined benefit pension plan for the 2013 plan year. PLC will continue to make contributions in future periods as necessary to at least satisfy minimum funding requirements. PLC may also make additional contributions in future periods to maintain an adjusted funding target attainment percentage (“AFTAP”) of at least 80%.

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

In addition to pension benefits, PLC provides life insurance benefits to eligible retirees and limited healthcare benefits to eligible retirees who are not yet eligible for Medicare. For a closed group of retirees over age 65, PLC provides a prescription drug benefit. The cost of these plans for the six months ended June 30, 2013, was immaterial to the Company’s financial statements.

10.          ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in the accumulated balances for each component of accumulated other comprehensive income (loss) (“AOCI”) as of June 30, 2013.

Changes in Accumulated Other Comprehensive Income (Loss) by Component

							Total
							Accumulated
	Unrealized			Accumulated			Other
	Gains and Losses			Gain and Loss			Comprehensive
	on Investments			Derivatives			Income (Loss)
	(Dollars In Thousands, Net of Tax)
Beginning Balance, December 31, 2012	$	1,814,620		$	(3,496	)	$	1,811,124
Other comprehensive income (loss) before reclassifications	(921,427		)	(117		)	(921,544		)
Other comprehensive income relating to other- than-temporary impaired investments for which a portion has been recognized in earnings	5,435			—			5,435
Amounts reclassified from accumulated other comprehensive income (loss)(1)	(16,493		)	700			(15,793		)
Net current-period other comprehensive income (loss)	(932,485		)	583			(931,902		)
Ending Balance, June 30, 2013	$	882,135		$	(2,913	)	$	879,222

(1) See Reclassification table below for details.

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The following table summarizes the reclassifications amounts out of AOCI for the three and six months ended June 30, 2013.

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

	Amount
	Reclassified
	from Accumulated
	Other Comprehensive			Affected Line Item in the
	Income (Loss)			Consolidated Condensed Statements of Income
	(Dollars In Thousands)
Accumulated Other Comprehensive Income (Loss) Components
For The Three Months Ended June 30, 2013
Gains and losses on derivative instruments
Net settlement (expense)/benefit(1)	$	(580	)	Benefits and settlement expenses, net of reinsurance ceded
	(580		)	Total before tax
	203			Tax (expense) or benefit
	$	(377	)	Net of tax
Unrealized gains and losses on available-for-sale securities
Net investment gains/(losses)	$	21,658		Realized investment gains (losses): All other investments
Impairments recognized in earnings	(4,000		)	Net impairment losses recognized in earnings
	17,658			Total before tax
	(6,180		)	Tax (expense) or benefit
	$	11,478		Net of tax

(1) See Note 14, Derivative Financial Instruments, for additional information.

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

	Amount
	Reclassified
	from Accumulated
	Other Comprehensive			Affected Line Item in the
	Income (Loss)			Consolidated Condensed Statements of Income
	(Dollars In Thousands)
Accumulated Other Comprehensive Income (Loss) Components
For The Six Months Ended June 30, 2013
Gains and losses on derivative instruments
Net settlement (expense)/benefit(1)	$	(1,077	)	Benefits and settlement expenses, net of reinsurance ceded
	(1,077		)	Total before tax
	377			Tax (expense) or benefit
	$	(700	)	Net of tax
Unrealized gains and losses on available-for-sale securities
Net investment gains/(losses)	$	33,957		Realized investment gains (losses): All other investments
Impairments recognized in earnings	(8,584		)	Net impairment losses recognized in earnings
	25,373			Total before tax
	(8,880		)	Tax (expense) or benefit
	$	16,493		Net of tax

(1) See Note 14, Derivative Financial Instruments, for additional information.

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11.INCOME TAXES

There have been no material changes to the balance of unrecognized tax benefits where such benefits impacted earnings for the six months ended June 30, 2013.

In the IRS audit that concluded during the prior year, the IRS proposed favorable and unfavorable adjustments to the Company’s 2003 through 2007 reported taxable incomes. The Company protested certain unfavorable adjustments and is seeking resolution at the IRS’ Appeals Division. If the IRS prevails at Appeals, and the Company does not litigate these issues, then an acceleration of tax payments will occur. However, if these payments were to occur, they would not materially impact the Company or its effective tax rate.

The Company believes that it is possible that in the next 12 months approximately $16 million of these unrecognized tax benefits will be reduced due to the expected closure of the aforementioned Appeals process. In general, this closure would represent the Company’s possible successful negotiation of certain issues, coupled with its payment of the assessed taxes on the remaining issues.

The Company used its estimate of its annual 2013 and 2012 income in computing its effective income tax rates for the three and six months ended June 30, 2013 and 2012. The effective tax rates for the three and six months ended June 30, 2013 were 32.8% and 32.8%, respectively, and 30.3% and 31.2% for the three and six months ended June 30, 2012, respectively.

In general, the Company is no longer subject to U.S. federal, state, and local income tax examinations by taxing authorities for tax years that began before 2003.

Based on the Company’s current assessment of future taxable income, including available tax planning opportunities, the Company anticipates that it is more likely than not that it will generate sufficient taxable income to realize all of its material deferred tax assets. The Company did not record a valuation allowance against its material deferred tax assets as of June 30, 2013.

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12.          RELATED PARTY TRANSACTIONS

As of March 31, 2013, Shades Creek Captive Insurance Company (“Shades Creek”) was a direct wholly owned insurance subsidiary of the Company. On April 1, 2013, the Company paid to its parent, PLC, a dividend that consisted of all outstanding stock of Shades Creek. The Company will continue to reinsure certain guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum death benefits (“GMDB”) riders to Shades Creek, which includes a funds withheld account that is considered a derivative. For more information related to the derivative, refer to Note 13, Fair Value of Financial Instruments and Note 14, Derivative Financial Instruments. For cash flow purposes, portions of the dividend were treated as non-cash transactions.

The following balances from Shades Creek’s balance sheet as of March 31, 2013, with the exception of cash, were excluded from the Company’s cash flow statement for the six months ended June 30, 2013.

	As of
	March 31, 2013
	(Dollars In Thousands)
Assets
Other long-term investments	$	34,093
Short-term investments	745
Total investments	34,838
Cash	44,963
Accounts and premiums receivable	16,036
Deferred policy acquisition cost	123,847
Other assets	48,953
Total assets	$	268,637
Liabilities
Future policy benefits and claims	$	1,626
Other liabilities	178,321
Deferred income taxes	2,459
Total liabilities	182,406
Total equity	86,231
Total liabilities and equity	$	268,637

13.FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

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

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

c)Inputs other than quoted market prices that are observable

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

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

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The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of June 30, 2013:

	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	1,558,177	$	14,062	$	1,572,239
Commercial mortgage-backed securities	—		942,804		—		942,804
Other asset-backed securities	—		346,516		576,396		922,912
U.S. government-related securities	1,027,622		148,545		—		1,176,167
State, municipalities, and political subdivisions	—		1,333,415		4,275		1,337,690
Other government-related securities	—		45,685		20,000		65,685
Corporate bonds	206		19,839,745		194,895		20,034,846
Total fixed maturity securities - available-for-sale	1,027,828		24,214,887		809,628		26,052,343
Fixed maturity securities - trading
Residential mortgage-backed securities	—		333,246		1,582		334,828
Commercial mortgage-backed securities	—		171,011		—		171,011
Other asset-backed securities	—		89,622		168,851		258,473
U.S. government-related securities	204,785		1,581		—		206,366
State, municipalities, and political subdivisions	—		263,675		3,500		267,175
Other government-related securities	—		57,155		—		57,155
Corporate bonds	—		1,552,433		5,092		1,557,525
Total fixed maturity securities - trading	204,785		2,468,723		179,025		2,852,533
Total fixed maturity securities	1,232,613		26,683,610		988,653		28,904,876
Equity securities	305,309		35,019		65,527		405,855
Other long-term investments (1)	69,584		58,499		47,838		175,921
Short-term investments	161,989		9,021		—		171,010
Total investments	1,769,495		26,786,149		1,102,018		29,657,662
Cash	130,860		—		—		130,860
Assets related to separate accounts
Variable annuity	11,162,856		—		—		11,162,856
Variable universal life	620,429		—		—		620,429
Total assets measured at fair value on a recurring basis	$	13,683,640	$	26,786,149	$	1,102,018	$	41,571,807
Liabilities:
Annuity account balances(2)	$	—	$	—	$	114,614	$	114,614
Other liabilities (1)	5,482		182,450		256,776		444,708
Total liabilities measured at fair value on a recurring basis	$	5,482	$	182,450	$	371,390	$	559,322

(1) Includes certain freestanding and embedded derivatives.

(2) Represents liabilities related to fixed indexed annuities.

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The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2012:

	Level 1		Level 2		Level 3		Total
	(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	$	—	$	1,839,326	$	4	$	1,839,330
Commercial mortgage-backed securities	—		869,823		—		869,823
Other asset-backed securities	—		378,870		596,143		975,013
U.S. government-related securities	909,988		258,458		—		1,168,446
State, municipalities, and political subdivisions	—		1,439,378		4,275		1,443,653
Other government-related securities	—		80,767		20,011		100,778
Corporate bonds	207		20,197,528		167,892		20,365,627
Total fixed maturity securities - available-for-sale	910,195		25,064,150		788,325		26,762,670
Fixed maturity securities - trading
Residential mortgage-backed securities	—		357,803		—		357,803
Commercial mortgage-backed securities	—		171,073		—		171,073
Other asset-backed securities	—		87,395		70,535		157,930
U.S. government-related securities	304,704		1,169		—		305,873
State, municipalities, and political subdivisions	—		278,898		—		278,898
Other government-related securities	—		63,444		—		63,444
Corporate bonds	—		1,672,172		115		1,672,287
Total fixed maturity securities - trading	304,704		2,631,954		70,650		3,007,308
Total fixed maturity securities	1,214,899		27,696,104		858,975		29,769,978
Equity securities	273,072		35,116		65,527		373,715
Other long-term investments (1)	23,639		58,134		48,655		130,428
Short-term investments	214,295		2,492		—		216,787
Total investments	1,725,905		27,791,846		973,157		30,490,908
Cash	269,582		—		—		269,582
Other assets	—		—		—		—
Assets related to separate accounts
Variable annuity	9,601,417		—		—		9,601,417
Variable universal life	562,817		—		—		562,817
Total assets measured at fair value on a recurring basis	$	12,159,721	$	27,791,846	$	973,157	$	40,924,724
Liabilities:
Annuity account balances (2)	$	—	$	—	$	129,468	$	129,468
Other liabilities (1)	19,187		27,250		611,437		657,874
Total liabilities measured at fair value on a recurring basis	$	19,187	$	27,250	$	740,905	$	787,342

(1) Includes certain freestanding and embedded derivatives.

(2) Represents liabilities related to fixed indexed annuities.

Determination of fair values

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

The fair value of fixed maturity, short-term, and equity securities is determined by management after considering one of three primary sources of information: third party pricing services, non-binding independent broker quotations, or pricing matrices. Security pricing is applied using a “waterfall” approach whereby publicly available

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

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

For securities that are priced via non-binding independent broker quotations, the Company assesses whether prices received from independent brokers represent a reasonable estimate of fair value through an analysis using internal and external cash flow models developed based on spreads and, when available, market indices. The Company uses a market-based cash flow analysis to validate the reasonableness of prices received from independent brokers. These analytics, which are updated daily, incorporate various metrics (yield curves, credit spreads, prepayment rates, etc.) to determine the valuation of such holdings. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly. The Company did not adjust any quotes or prices received from brokers during the six months ended June 30, 2013.

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

Asset-Backed Securities

This category mainly consists of residential mortgage-backed securities, commercial mortgage-backed securities, and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”). As of June 30, 2013, the Company held $3.4 billion of ABS classified as Level 2. These securities are priced from information provided by a third party pricing service and independent broker quotes. The third party pricing services and brokers mainly value securities using both a market and income approach to valuation. As part of this valuation process they consider the following characteristics of the item being measured to be relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, and 7) credit ratings of the securities.

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

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

As of June 30, 2013, the Company held $760.9 million of Level 3 ABS, which included $170.4 million of other asset-backed securities classified as trading. These securities are predominantly ARS whose underlying collateral is at least 97% guaranteed by the FFELP. As a result of the ARS market collapse during 2008, the Company prices its ARS using an income approach valuation model. As part of the valuation process the Company reviews the following characteristics of the ARS in determining the relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, 7) credit ratings of the securities, 8) liquidity premium, and 9) paydown rate.

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

As of June 30, 2013, the Company classified approximately $23.2 billion of corporate bonds, U.S. government-related securities, states, municipals, and political subdivisions, and other government-related securities as Level 2. The fair value of the Level 2 bonds and securities is predominantly priced by broker quotes and a third party pricing service. The Company has reviewed the valuation techniques of the brokers and third party pricing service and has determined that such techniques used Level 2 market observable inputs. The following characteristics of the bonds and securities are considered to be the primary relevant inputs to the valuation: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) seniority, and 4) credit ratings.

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

As of June 30, 2013, the Company classified approximately $227.8 million of bonds and securities as Level 3 valuations. Level 3 bonds and securities primarily represent investments in illiquid bonds for which no price is readily available. To determine a price, the Company uses a discounted cash flow model with both observable and unobservable inputs. These inputs are entered into an industry standard pricing model to determine the final price of the security. These inputs include: 1) principal and interest payments, 2) coupon rate, 3) sector and issuer level spread over treasury, 4) underlying collateral, 5) credit ratings, 6) maturity, 7) embedded options, 8) recent new issuance, 9) comparative bond analysis, and 10) an illiquidity premium.

Equities

As of June 30, 2013, the Company held approximately $100.5 million of equity securities classified as Level 2 and Level 3. Of this total, $64.6 million represents Federal Home Loan Bank (“FHLB”) stock. The Company believes that the cost of the FHLB stock approximates fair value. The remainder of these equity securities is primarily made up of holdings we have obtained through bankruptcy proceedings or debt restructurings.

Other long-term investments and Other liabilities

Other long-term investments and other liabilities consist entirely of free-standing and embedded derivative financial instruments. Refer to Note 14, Derivative Financial Instruments for additional information related to derivatives. Derivative financial instruments are valued using exchange prices, independent broker quotations, or pricing valuation models, which utilize market data inputs. Excluding embedded derivatives, as of June 30, 2013, 71.9% of derivatives based upon notional values were priced using exchange prices or independent broker quotations. The remaining derivatives were priced by pricing valuation models, which predominantly utilize observable market data inputs. Inputs used to value derivatives include, but are not limited to, interest swap rates, credit spreads, interest rate and equity market volatility indices, equity index levels, and treasury rates. The Company performs monthly analysis on derivative valuations that includes both quantitative and qualitative analyses.

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

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

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

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

The embedded derivatives are carried at fair value in “other long-term investments” and “other liabilities” on the Company’s consolidated balance sheet. The changes in fair value are recorded in earnings as “Realized investment gains (losses) — Derivative financial instruments”. Refer to Note 14, Derivative Financial Instruments for more information related to each embedded derivatives gains and losses.

The fair value of the guaranteed minimum withdrawal benefits (“GMWB”) embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using multiple risk neutral stochastic equity scenarios and policyholder behavior assumptions. The risk neutral scenarios are generated using the current swap curve and projected equity volatilities and correlations. The projected equity volatilities are based on a blend of historical volatility and near-term equity market implied volatilities. The equity correlations are based on historical price observations. For policyholder behavior assumptions, expected lapse and utilization assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality that is consistent with 57% of the National Association of Insurance Commissioners 1994 Variable Annuity MGDB Mortality Table. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR plus a credit spread (to represent the Company’s non-performance risk). As a result of using significant unobservable inputs, the GMWB embedded derivative is categorized as Level 3. These assumptions are reviewed on a quarterly basis.

The fair value of the FIA embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using  current index values and volatility, the hedge budget used to price the product, and policyholder assumptions (both elective and non-elective).  For policyholder behavior assumptions, expected lapse and withdrawal assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the 1994 Variable Annuity MGDB mortality table modified for company experience. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR up to one year and constant maturity treasury rates plus a credit spread (to represent the Company’s non-performance risk) thereafter.  Policyholder assumptions are reviewed on an annual basis.  As a result of using significant unobservable inputs, the FIA embedded derivative is categorized as Level 3.

The Company has assumed and ceded certain blocks of policies under modified coinsurance agreements in which the investment results of the underlying portfolios inure directly to the reinsurers. As a result, these agreements contain embedded derivatives that are reported at fair value. Changes in their fair value are reported in earnings. The investments supporting these agreements are designated as “trading securities”; therefore changes in their fair value are also reported in earnings. The fair value of the embedded derivative is the difference between the policy liabilities (net of policy loans) of $2.6 billion and the fair value of the trading securities of $2.9 billion. As a result, changes in the fair value of the embedded derivatives are largely offset by the changes in fair value of the related investments and each are reported in earnings. The fair value of the embedded derivative is considered a Level 3 valuation due to the unobservable nature of the policy liabilities.

Certain of the Company’s subsidiaries have entered into interest support, a yearly renewable term (“YRT”) premium support, and portfolio maintenance agreements with PLC.  These agreements meet the definition of a

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derivative and are accounted for at fair value and are considered Level 3 valuations. The fair value of these derivatives as of June 30, 2013 was $3.5 million and is included in Other long-term investments. For information regarding realized gains on these derivatives please refer to Note 14, Derivative Financial Instruments.

The Interest Support Agreement provides that PLC will make payments to Golden Gate II if actual investment income on certain of Golden Gate II’s asset portfolios falls below a calculated investment income amount as defined in the Interest Support Agreement. The calculated investment income amount is a level of investment income deemed to be sufficient to support certain of Golden Gate II’s obligations under a reinsurance agreement with the Company, dated July 1, 2007. The derivative is valued using an internal valuation model that assumes a conservative projection of investment income under an adverse interest rate scenario and the probability that the expectation falls below the calculated investment income amount. The fair value of this derivative as of June 30, 2013 was $1.4 million. The assessment of required payments from PLC under the Interest Support Agreement occurs annually.

The YRT Premium support agreement provides that PLC will make payments to Golden Gate II in the event that YRT premium rates increase. The derivative is valued using an internal valuation model. The valuation model is a probability weighted discounted cash flow model. The value is primarily a function of the likelihood and severity of future YRT premium increases. The fair value of this derivative as of June 30, 2013 was $1.7 million.

The portfolio maintenance agreements provide that PLC will make payments to Golden Gate V and WCL in the event of other-than-temporary impairments on investments that exceed defined thresholds. The derivatives are valued using an internal discounted cash flow model. The significant unobservable inputs are the projected probability and severity of credit losses used to project future cash flows on the investment portfolios. The fair value of the portfolio maintenance agreements as of June 30, 2013, was approximately $0.4 million.

The Funds Withheld derivative results from a reinsurance agreement with Shades Creek where the economic performance of certain hedging instruments held by the Company is ceded to Shades Creek. The value of the Funds Withheld derivative is directly tied to the value of the hedging instruments held in the funds withheld account. The hedging instruments predominantly consist of derivative instruments the fair values of which are classified as a Level 2 measurement; as such, the fair value of the Funds Withheld derivative has been classified as a Level 2 measurement.

Annuity account balances

The Company records certain of its FIA reserves at fair value. The fair value is considered a Level 3 valuation. The FIA valuation model calculates the present value of future benefit cash flows less the projected future profits to quantify the net liability that is held as a reserve. This calculation is done using multiple risk neutral stochastic equity scenarios. The cash flows are discounted using LIBOR plus a credit spread. Best estimate assumptions are used for partial withdrawals, lapses, expenses and asset earned rate with a risk margin applied to each. These assumptions are reviewed at least annually as a part of the formal unlocking process. If an event were to occur within a quarter that would make the assumptions unreasonable, the assumptions would be reviewed within the quarter.

The discount rate for the fixed indexed annuities is based on an upward sloping rate curve which is updated each quarter. The discount rates for June 30, 2013, ranged from a one month rate of 0.39%, a 5 year rate of 2.65%, and a 30 year rate of 4.91%. A credit spread component is also included in the calculation to accommodate non-performance risk.

Separate Accounts

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

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Valuation of Level 3 Financial Instruments

The following table presents the valuation method for material financial instruments included in Level 3, as well as the unobservable inputs used in the valuation of those financial instruments:

	Fair Value
	As of		Valuation	Unobservable	Range
	June 30, 2013		Technique	Input	(Weighted Average)
	(Dollars In Thousands)
Assets:
Other asset-backed securities	$	576,396	Discounted cash flow	Liquidity premium Paydown rate	0.43% - 1.46% (0.68%) 8.24% - 14.48% (12.41%)
Other government-related securities	20,000		Discounted cash flow	Spread over treasury	(0.22%)
Corporate bonds	199,987		Discounted cash flow	Spread over treasury	0.37% - 7.25% (2.94%)
Embedded derivatives - GMWB(1)	14,556		Actuarial cash flow model	Mortality Lapse Utilization Nonperformance risk	57% of 1994 MGDB table 0% - 24%, depending on product/duration/funded status of guarantee 93% - 100% 0.20% - 1.46%
Liabilities:
Annuity account balances(2)	$	114,614	Actuarial cash flow model	Asset earned rate Expenses Withdrawal rate Mortality Lapse Return on assets Nonperformance risk	5.81%  $88 - $108 per policy 2.20% 57% of 1994 MGDB table 2.2% - 45.0%, depending on duration/surrender charge period 1.50% - 1.85% depending on surrender charge period 0.20% - 1.46%
Embedded derivative - FIA	1,126		Actuarial cash flow model	Expenses Withdrawal rate Mortality	0.20%  1.1% - 4.5% depending on duration and tax qualification 51% - 80% of 1994 MGDB table
				Lapse	2.5% - 40.0%, depending on duration/surrender charge period
				Nonperformance risk	0.20% - 1.46%

(1)The fair value for the GMWB embedded derivative is presented as a net asset for the purposes of this chart. Excludes modified coinsurance agreements.

(2)Represents liabilities related to fixed indexed annuities.

The chart above excludes Level 3 financial instruments that are valued using broker quotes and those which book value approximates fair value.

The Company has considered all reasonably available quantitative inputs as of June 30, 2013, but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $168.8 million of financial instruments, all asset backed securities, being classified as Level 3 as of June 30, 2013.

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In certain cases the Company has determined that book value materially approximates fair value. As of June 30, 2013, the Company held $88.9 million of financial instruments where book value approximates fair value.  Of the $88.9 million, $65.5 million represents equity securities, which are predominantly FHLB stock, and $23.4 million of other fixed maturity securities.

The following table presents the valuation method for material financial instruments included in Level 3, as well as the unobservable inputs used in the valuation of those financial instruments:

	Fair Value
	As of		Valuation	Unobservable	Range
	December 31, 2012		Technique	Input	(Weighted Average)
	(Dollars In Thousands)
Assets:
Other asset-backed securities	$	596,143	Discounted cash flow	Liquidity premium Paydown rate	0.72% - 1.68% (1.29%) 8.51% - 18.10% (11.40%)
Other government-related securities	20,011		Discounted cash flow	Spread over treasury	(0.30%)
Corporate bonds	168,007		Discounted cash flow	Spread over treasury	0.92% - 7.75% (3.34%)
Liabilities:
Embedded derivatives - GMWB(1)	$	169,041	Actuarial cash flow model	Mortality  Lapse Utilization Nonperformance risk	57% of 1994 MGDB table 0% - 24%, depending on product/duration/funded status of guarantee 93% - 100% 0.09% - 1.34%
Annuity account balances(2)	129,468		Actuarial cash flow model	Asset earned rate Expenses Withdrawal rate Mortality Lapse Return on assets Nonperformance risk	5.81% $88 - $108 per policy 2.20% 57% of 1994 MGDB table 2.2% - 45.0%, depending on duration/surrender charge period 1.50% - 1.85% depending on surrender charge period 0.09% - 1.34%

(1)The fair value for the GMWB embedded derivative is presented as a net liability for the purposes of this chart. Excludes modified coinsurance agreements.

(2)Represents liabilities related to fixed indexed annuities.

The chart above excludes Level 3 financial instruments that are valued using broker quotes and those which book value approximates fair value.

The valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company which resulted in $70.5 million of financial instruments being classified as Level 3 as of December 31, 2012.

In certain cases the Company has determined that book value materially approximates fair value. As of December 31, 2012, the Company held $69.8 million of financial instruments where book value approximates fair value. Of the $69.8 million, $65.5 million represents equity securities, which are predominantly FHLB stock, and $4.3 million of other fixed maturity securities.

The asset-backed securities classified as Level 3 are predominantly ARS. A change in the paydown rate (the projected annual rate of principal reduction) of the ARS can significantly impact the fair value of these securities. A decrease in the paydown rate would increase the projected weighted average life of the ARS and increase the sensitivity of the ARS’ fair value to changes in interest rates. An increase in the liquidity premium would result in a decrease in the fair value of the securities, while a decrease in the liquidity premium would increase the fair value of these securities.

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The fair value of corporate bonds classified as Level 3 is sensitive to changes in the interest rate spread over the corresponding U.S. Treasury rate. This spread represents a risk premium that is impacted by company specific and market factors. An increase in the spread can be caused by a perceived increase in credit risk of a specific issuer and/or an increase in the overall market risk premium associated with similar securities. The fair values of corporate bonds are sensitive to changes in spread. When holding the treasury rate constant, the fair value of corporate bonds increases when spreads decrease, and decreases when spreads increases.

The GMWB liability is sensitive to changes in the discount rate which includes the Company’s nonperformance risk, volatility, lapse, and mortality assumptions. The volatility assumption is an observable input as it is based on market inputs. The Company’s nonperformance risk, lapse, and mortality are unobservable. An increase in the three unobservable assumptions would result in a decrease in the liability and conversely, if there is a decrease in the assumptions the liability would increase. The liability is also dependent on the assumed policyholder utilization of the GMWB where an increase in assumed utilization would result in an increase in the liability and conversely, if there is a decrease in the assumption, the liability would decrease.

The fair value of the FIA account balance liability is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the FIA account balance liability is sensitive to the asset earned rate and required return on assets. The value of the liability increases with an increase in required return on assets and decreases with an increase in the asset earned rate and conversely, the value of the liability decreases with a decrease in required return on assets and an increase in the asset earned rate.

The fair value of the FIA embedded derivative is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the FIA embedded derivative is sensitive to non-performance risk. The value of the liability increases with decreases in the discount rate and non-performance risk and decreases with increases in the discount rate and non-performance risk. The value of the liability increases with increases in equity returns and the liability decreases with a decrease in equity returns.

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The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended June 30, 2013, for which the Company has used significant unobservable inputs (Level 3):

																													Total
																													Gains (losses)
			Total				Total																						included in
			Realized and Unrealized				Realized and Unrealized																						Earnings
			Gains				Losses																						related to
					Included in					Included in																			Instruments
					Other					Other												Transfers							still held at
	Beginning		Included in		Comprehensive		Included in			Comprehensive												in/out of					Ending		the Reporting
	Balance		Earnings		Income		Earnings			Income			Purchases		Sales			Issuances		Settlements		Level 3		Other			Balance		Date
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	4	$	—	$	—	$	—		$	(337	)	$	14,349	$	—		$	—	$	—	$	46	$	—		$	14,062	$	—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	560,668		—		43,744		—			—			13,162		(41,377		)	—		—		—		199			576,396		—
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
States, municipals, and political subdivisions	4,275		—		—		—			—			—		—			—		—		—		—			4,275		—
Other government-related securities	20,003		—		1		—			—			—		—			—		—		—		(4		)	20,000		—
Corporate bonds	124,555		116		81		—			(7,682		)	18,275		(3,113		)	—		—		62,330		333			194,895		—
Total fixed maturity securities - available-for-sale	709,505		116		43,826		—			(8,019		)	45,786		(44,490		)	—		—		62,376		528			809,628		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			1,582		—			—		—		—		—			1,582		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	71,383		1,389		—		(2,610		)	—			105,830		(9,953		)	—		—		2,210		602			168,851		511
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
States, municipals and political subdivisions	—		—		—		—			—			3,500		—			—		—		—		—			3,500		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	5,112		—		—		(23		)	—			—		—			—		—		—		3			5,092		(23		)
Total fixed maturity securities - trading	76,495		1,389		—		(2,633		)	—			110,912		(9,953		)	—		—		2,210		605			179,025		488
Total fixed maturity securities	786,000		1,505		43,826		(2,633		)	(8,019		)	156,698		(54,443		)	—		—		64,586		1,133			988,653		488
Equity securities	65,527		—		—		—			—			—		—			—		—		—		—			65,527		—
Other long-term investments(1)	70,404		21,641		—		(10,114		)	—			—		—			—		—		—		(34,093		)	47,838		11,527
Short-term investments	—		—		—		—			—			—		—			—		—		—		—			—		—
Total investments	921,931		23,146		43,826		(12,747		)	(8,019		)	156,698		(54,443		)	—		—		64,586		(32,960		)	1,102,018		12,015
Total assets measured at fair value on a recurring basis	$	921,931	$	23,146	$	43,826	$	(12,747	)	$	(8,019	)	$	156,698	$	(54,443	)	$	—	$	—	$	64,586	$	(32,960	)	$	1,102,018	$	12,015
Liabilities:
Annuity account balances(2)	$	123,681	$	—	$	—	$	(1,686	)	$	—		$	—	$	—		$	65	$	10,818	$	—	$	—		$	114,614	$	—
Other liabilities(1)	539,814		153,664		—		(5,131		)	—			—		—			—		—		—		134,505			256,776		148,533
Total liabilities measured at fair value on a recurring basis	$	663,495	$	153,664	$	—	$	(6,817	)	$	—		$	—	$	—		$	65	$	10,818	$	—	$	134,505		$	371,390	$	148,533

(1) Represents certain freestanding and embedded derivatives.

(2) Represents liabilities related to fixed indexed annuities.

For the three months ended June 30, 2013, $64.6 million of securities were transferred into Level 3. This amount was transferred from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous periods, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of June 30, 2013.

For the three months ended June 30, 2013, there were no transfers out of Level 3.

For the three months ended June 30, 2013, there were no transfers from Level 2 to Level 1.

For the three months ended June 30, 2013, there were no transfers from Level 1.

39

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended June 30, 2012, for which the Company has used significant unobservable inputs (Level 3):

																													Total
																													Gains (losses)
			Total				Total																						included in
			Realized and Unrealized				Realized and Unrealized																						Earnings
			Gains				Losses																						related to
					Included in					Included in																			Instruments
					Other					Other												Transfers							still held at
	Beginning		Included in		Comprehensive		Included in			Comprehensive												in/out of					Ending		the Reporting
	Balance		Earnings		Income		Earnings			Income			Purchases		Sales			Issuances		Settlements		Level 3		Other			Balance		Date
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	4	$	—	$	—	$	—		$	—		$	—	$	—		$	—	$	—	$	—	$	—		$	4	$	—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	587,613		—		4,026		—			(6,969		)	—		—			—		—		—		(29		)	584,641		—
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
States, municipals, and political subdivisions	4,275		—		—		—			—			—		—			—		—		—		—			4,275		—
Other government-related securities	20,006		—		18		—			—			—		—			—		—		—		(4		)	20,020		—
Corporate bonds	137,940		—		1,666		—			(683		)	—		(1,956		)	—		—		35,058		120			172,145		—
Total fixed maturity securities - available-for-sale	749,838		—		5,710		—			(7,652		)	—		(1,956		)	—		—		35,058		87			781,085		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	54,961		32		—		(588		)	—			13,342		(3,266		)	—		—		—		578			65,059		(555		)
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
States, municipals and political subdivisions	—		—		—		—			—			—		—			—		—		—		—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	1		—		—		—			—			—		—			—		—		113		—			114		—
Total fixed maturity securities - trading	54,962		32		—		(588		)	—			13,342		(3,266		)	—		—		113		578			65,173		(555		)
Total fixed maturity securities	804,800		32		5,710		(588		)	(7,652		)	13,342		(5,222		)	—		—		35,171		665			846,258		(555		)
Equity securities	70,719		—		25		—			(949		)	—		—			—		—		—		—			69,795		—
Other long-term investments(1)	32,176		600		—		(7,461		)	—			—		—			—		—		—		—			25,315		(6,861		)
Short-term investments	—		—		—		—			—			—		—			—		—		—		—			—		—
Total investments	907,695		632		5,735		(8,049		)	(8,601		)	13,342		(5,222		)	—		—		35,171		665			941,368		(7,416		)
Total assets measured at fair value on a recurring basis	$	907,695	$	632	$	5,735	$	(8,049	)	$	(8,601	)	$	13,342	$	(5,222	)	$	—	$	—	$	35,171	$	665		$	941,368	$	(7,416	)
Liabilities:
Annuity account balances(2)	$	137,238	$	—	$	—	$	(1,143	)	$	—		$	—	$	—		$	103	$	3,887	$	—	$	—		$	134,597	$	—
Other liabilities(1)	389,812		8,748		—		(135,523		)	—			—		—			—		—		—		—			516,587		(126,775		)
Total liabilities measured at fair value on a recurring basis	$	527,050	$	8,748	$	—	$	(136,666	)	$	—		$	—	$	—		$	103	$	3,887	$	—	$	—		$	651,184	$	(126,775	)

(1) Represents certain freestanding and embedded derivatives.

(2) Represents liabilities related to fixed indexed annuities.

For the three months ended June 30, 2012, $35.2 million of securities were transferred into Level 3. This amount was transferred from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous periods, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of June 30, 2012. All transfers are recognized as of the end of the period.

For the three months ended June 30, 2012, there were no transfers out of Level 3.

For the three months ended June 30, 2012, there were no transfers from Level 2 to Level 1.

For the three months ended June 30, 2012, there were no transfers out of Level 1.

40

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the six months ended June 30, 2013, for which the Company has used significant unobservable inputs (Level 3):

																													Total
																													Gains (losses)
			Total				Total																						included in
			Realized and Unrealized				Realized and Unrealized																						Earnings
			Gains				Losses																						related to
					Included in					Included in																			Instruments
					Other					Other												Transfers							still held at
	Beginning		Included in		Comprehensive		Included in			Comprehensive												in/out of					Ending		the Reporting
	Balance		Earnings		Income		Earnings			Income			Purchases		Sales			Issuances		Settlements		Level 3		Other			Balance		Date
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	4	$	—	$	—	$	—		$	(337	)	$	14,349	$	—		$	—	$	—	$	46	$	—		$	14,062	$	—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	596,143		—		43,756		—			(27,548		)	13,162		(50,386		)	—		—		1,227		42			576,396		—
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
States, municipals, and political subdivisions	4,275		—		—		—			—			—		—			—		—		—		—			4,275		—
Other government-related securities	20,011		—		1		—			(3		)	—		—			—		—		—		(9		)	20,000		—
Corporate bonds	167,892		116		1,011		—			(10,046		)	18,275		(45,184		)	—		—		62,330		501			194,895		—
Total fixed maturity securities - available-for-sale	788,325		116		44,768		—			(37,934		)	45,786		(95,570		)	—		—		63,603		534			809,628		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			1,582		—			—		—		—		—			1,582		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	70,535		4,797		—		(2,869		)	—			105,830		(12,776		)	—		—		2,210		1,124			168,851		3,779
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
States, municipals and political subdivisions	—		—		—		—			—			3,500		—			—		—		—		—			3,500		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	115		1		—		(23		)	—			—		(17		)	—		—		5,013		3			5,092		6
Total fixed maturity securities - trading	70,650		4,798		—		(2,892		)	—			110,912		(12,793		)	—		—		7,223		1,127			179,025		3,785
Total fixed maturity securities	858,975		4,914		44,768		(2,892		)	(37,934		)	156,698		(108,363		)	—		—		70,826		1,661			988,653		3,785
Equity securities	65,527		—		—		—			—			—		—			—		—		—		—			65,527		—
Other long-term investments(1)	48,655		47,259		—		(13,983		)	—			—		—			—		—		—		(34,093		)	47,838		33,276
Short-term investments	—		—		—		—			—			—		—			—		—		—		—			—		—
Total investments	973,157		52,173		44,768		(16,875		)	(37,934		)	156,698		(108,363		)	—		—		70,826		(32,432		)	1,102,018		37,061
Total assets measured at fair value on a recurring basis	$	973,157	$	52,173	$	44,768	$	(16,875	)	$	(37,934	)	$	156,698	$	(108,363	)	$	—	$	—	$	70,826	$	(32,432	)	$	1,102,018	$	37,061
Liabilities:
Annuity account balances(2)	$	129,468	$	—	$	—	$	(3,686	)	$	—		$	—	$	—		$	201	$	18,741	$	—	$	—		$	114,614	$	—
Other liabilities(1)	611,437		238,210		—		(18,054		)	—			—		—			—		—		—		134,505			256,776		220,156
Total liabilities measured at fair value on a recurring basis	$	740,905	$	238,210	$	—	$	(21,740	)	$	—		$	—	$	—		$	201	$	18,741	$	—	$	134,505		$	371,390	$	220,156

(1) Represents certain freestanding and embedded derivatives.

(2) Represents liabilities related to fixed indexed annuities.

For the six months ended June 30, 2013, $70.8 million of securities were transferred into Level 3. This amount was transferred from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous periods, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of June 30, 2013. All transfers are recognized as of the end of the period.

For the six months ended June 30, 2013, there were no transfers out of Level 3.

For the six months ended June 30, 2013, there were no transfers from Level 2 to Level 1.

For the six months ended June 30, 2013, there were no transfers out of Level 1.

41

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the six months ended June 30, 2012, for which the Company has used significant unobservable inputs (Level 3):

																													Total
																													Gains (losses)
			Total				Total																						included in
			Realized and Unrealized				Realized and Unrealized																						Earnings
			Gains				Losses																						related to
					Included in					Included in																			Instruments
					Other					Other												Transfers							still held at
	Beginning		Included in		Comprehensive		Included in			Comprehensive												in/out of					Ending		the Reporting
	Balance		Earnings		Income		Earnings			Income			Purchases		Sales			Issuances		Settlements		Level 3		Other			Balance		Date
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	7	$	—	$	—	$	—		$	—		$	—	$	(3	)	$	—	$	—	$	—	$	—		$	4	$	—
Commercial mortgage-backed
securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	614,813		294		4,519		—			(20,898		)	—		(13,850		)	—		—		—		(237		)	584,641		—
U.S. government-related securities	15,000		—		—		—			(1		)	—		(15,000		)	—		—		—		1			—		—
States, municipals, and political subdivisions	—		—		—		—			—			4,275		—			—		—		—		—			4,275		—
Other government-related securities	—		—		18		—			(16		)	20,023		—			—		—		—		(5		)	20,020		—
Corporate bonds	119,565		—		1,849		—			(1,910		)	4		(2,095		)	—		—		54,612		120			172,145		—
Total fixed maturity securities - available-for-sale	749,385		294		6,386		—			(22,825		)	24,302		(30,948		)	—		—		54,612		(121		)	781,085		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Commercial mortgage-backed securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Other asset-backed securities	28,343		478		—		(757		)	—			41,047		(5,074		)	—		—		—		1,022			65,059		(278		)
U.S. government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
States, municipals and political subdivisions	—		—		—		—			—			—		—			—		—		—		—			—		—
Other government-related securities	—		—		—		—			—			—		—			—		—		—		—			—		—
Corporate bonds	—		—		—		—			—			1		—			—		—		113		—			114		—
Total fixed maturity securities - trading	28,343		478		—		(757		)	—			41,048		(5,074		)	—		—		113		1,022			65,173		(278		)
Total fixed maturity securities	777,728		772		6,386		(757		)	(22,825		)	65,350		(36,022		)	—		—		54,725		901			846,258		(278		)
Equity securities	70,080		—		661		—			(950		)	4		—			—		—		—		—			69,795		—
Other long-term investments(1)	19,103		13,673		—		(7,461		)	—			—		—			—		—		—		—			25,315		6,212
Short-term investments	—		—		—		—			—			—		—			—		—		—		—			—		—
Total investments	866,911		14,445		7,047		(8,218		)	(23,775		)	65,354		(36,022		)	—		—		54,725		901			941,368		5,934
Total assets measured at fair value on a recurring basis	$	866,911	$	14,445	$	7,047	$	(8,218	)	$	(23,775	)	$	65,354	$	(36,022	)	$	—	$	—	$	54,725	$	901		$	941,368	$	5,934
Liabilities:
Annuity account balances(2)	$	136,462	$	—	$	—	$	(4,217	)	$	—		$	—	$	—		$	428	$	6,510	$	—	$	—		$	134,597	$	—
Other liabilities(1)	437,613		56,549		—		(135,523		)	—			—		—			—		—		—		—			516,587		(78,974		)
Total liabilities measured at fair value on a recurring basis	$	574,075	$	56,549	$	—	$	(139,740	)	$	—		$	—	$	—		$	428	$	6,510	$	—	$	—		$	651,184	$	(78,974	)

(1) Represents certain freestanding and embedded derivatives.

(2) Represents liabilities related to fixed indexed annuities.

For the six months ended June 30, 2012, $54.7 million of securities were transferred into Level 3. This amount was transferred from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous periods, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of June 30, 2012. All transfers are recognized as of the end of the period.

For the six months ended June 30, 2012, there were no transfers out of Level 3.

For the six months ended June 30, 2012, there were no transfers from Level 2 to Level 1.

For the six months ended June 30, 2012, there were no transfers out of Level 1.

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

42

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

The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur.

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

Estimated Fair Value of Financial Instruments

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

		As of
		June 30, 2013				December 31, 2012
	Fair Value	Carrying				Carrying
	Level	Amounts		Fair Values		Amounts		Fair Values
	(Dollars In Thousands)
Assets:
Mortgage loans on real estate	3	$	4,772,134	$	5,308,677	$	4,948,625	$	5,723,579
Policy loans	3	855,780		855,780		865,391		865,391
Fixed maturities, held-to-maturity(1)	3	335,000		333,772		300,000		319,163
Liabilities:
Stable value product account balances	3	$	2,579,172	$	2,579,483	$	2,510,559	$	2,534,094
Annuity account balances	3	10,509,829		10,137,230		10,658,463		10,525,702
Debt:
Non-recourse funding obligations(2)	3	$	1,476,900	$	1,418,178	$	1,446,900	$	1,357,290

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

(1)Security purchased from unconsolidated subsidiary, Red Mountain LLC.

(2)Of this carrying amount $335.0 million, fair value of $297.9 million, as of June 30, 2013, and $300 million, fair value of $297.6 million, as of December 31, 2012,  relates to non-recourse funding obligations issued by Golden Gate V.

Fair Value Measurements

Mortgage loans on real estate

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

Policy loans

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

43

Fixed maturities, held-to-maturity

The Company estimates the fair value of its fixed maturity, held-to-maturity securities using internal discounted cash flow models. The discount rates used in the model were based on a current market yield for similar financial instruments.

Stable value product and Annuity account balances

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

Non-recourse funding obligations

The Company estimates the fair value of its non-recourse funding obligations using internal discounted cash flow models. The discount rates used in the model were based on a current market yield for similar financial instruments.

14.                           ��   DERIVATIVE FINANCIAL INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

The Company utilizes a risk management strategy that incorporates the use of derivative financial instruments to reduce exposure to certain risks, including but not limited to, interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk. These strategies are developed through the Company’s analysis of data from financial simulation models and other internal and industry sources, and are then incorporated into the Company’s risk management program.

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

Derivatives Related to Interest Rate Risk Management

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

Derivatives Related to Risk Mitigation of Variable Annuity Contracts

The Company may use the following types of derivative contracts to mitigate its exposure to certain guaranteed benefits related to variable annuity contracts:

·Foreign Currency Futures

·Variance Swaps

·Interest Rate Futures

·Equity Options

·Equity Futures

·Credit Derivatives

·Interest Rate Swaps

·Interest Rate Swaptions

·Volatility Futures

44

Other Derivatives

Certain of the Company’s subsidiaries have derivatives with PLC. These derivatives consist of an interest support agreement, a YRT premium support agreement, and portfolio maintenance agreements with PLC.

Accounting for Derivative Instruments

The Company records its derivative financial instruments in the consolidated condensed balance sheet in “other long-term investments” and “other liabilities” in accordance with GAAP, which requires that all derivative instruments be recognized in the balance sheet at fair value. The change in the fair value of derivative financial instruments is reported either in the statement of income or in other comprehensive income (loss), depending upon whether it qualified  for and also has been properly identified as being part of a hedging relationship, and also on the type of hedging relationship that exists.

For a derivative financial instrument to be accounted for as an accounting hedge, it must be identified and documented as such on the date of designation. For cash flow hedges, the effective portion of their realized gain or loss is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged item impacts earnings. Any remaining gain or loss, the ineffective portion, is recognized in current earnings. For fair value hedge derivatives, their gain or loss as well as the offsetting loss or gain attributable to the hedged risk of the hedged item is recognized in current earnings. Effectiveness of the Company’s hedge relationships is assessed on a quarterly basis.

The Company reports changes in fair values of derivatives that are not part of a qualifying hedge relationship through earnings in the period of change. Changes in the fair value of derivatives that are recognized in current earnings are reported in “Realized investment gains (losses) - Derivative financial instruments”.

Derivative Instruments Designated and Qualifying as Hedging Instruments

Cash-Flow Hedges

·In connection with the issuance of inflation-adjusted funding agreements, the Company has entered into swaps to convert the floating CPI-linked interest rate on these agreements to a fixed rate. The Company pays a fixed rate on the swap and receives a floating rate primarily determined by the period’s change in the CPI. The amounts that are received on the swaps are equal to the amounts that are paid on the agreements.

Derivative Instruments Not Designated and Not Qualifying as Hedging Instruments

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

Derivatives related to variable annuity contracts

·The Company uses equity, interest rate, currency, and volatility futures to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within its variable annuity products. In general, the cost of such benefits varies with the level of equity and interest rate markets, foreign currency levels, and overall volatility. No volatility future positions were held during the three and six months ended June 30, 2013.

·The Company uses equity options and variance swaps to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within its variable annuity products. In general, the cost of such benefits varies with the level of equity markets and overall volatility.

45

·The Company uses interest rate swaps and interest rate swaptions to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within its variable annuity products.

·The Company markets certain variable annuity products with a GMWB rider. The GMWB component is considered an embedded derivative, not considered to be clearly and closely related to the host contract.

·The Company has a funds withheld account that consists of various derivative instruments held by the Company that are used to hedge the GMWB and GMDB riders. The economic performance of derivatives in the funds withheld account is ceded to Shades Creek. The funds withheld account is accounted for as a derivative financial instrument.

Other Derivatives

·The Company uses certain interest rate swaps to mitigate the price volatility of fixed maturities.

·The Company purchased interest rate caps during 2011 to mitigate its risk with respect to the Company’s LIBOR exposure and the potential impact of European financial market distress.

·Certain of the Company’s subsidiaries have an interest support agreement, YRT premium support agreement, and two portfolio maintenance agreements with PLC. The Company entered into two separate portfolio maintenance agreements in October 2012.

·The Company uses various swaps and other types of derivatives to manage risk related to other exposures.

·The Company recognized insignificant losses for the three and six months ended June 30, 2013 related to the embedded derivative associated with the FIA product. The Company did not hold these products during the three and six months ended June 30, 2012.

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

46

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

Realized investment gains (losses) - derivative financial instruments

	For The						For The
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(Dollars In Thousands)
Derivatives related to variable annuity contracts:
Interest rate futures - VA	$	(7,654	)	$	69,196		$	(24,138	)	$	35,790
Equity futures - VA	(4,036		)	(220		)	(27,261		)	(25,319		)
Currency futures - VA	(112		)	1,764			7,971			780
Volatility futures - VA	—			343			—			(132		)
Variance swaps - VA	2,214			1,063			(8,219		)	(821		)
Equity options - VA	(8,131		)	3,153			(36,537		)	(20,719		)
Interest rate swaptions - VA	1,639			8,831			(2,463		)	5,312
Interest rate swaps - VA	(89,722		)	5,954			(106,278		)	3,826
Embedded derivative - GMWB	25,939			(85,456		)	106,314			(35,289		)
Funds withheld derivative	9,837			—			9,837			—
Total derivatives related to variable annuity contracts	(70,026		)	4,628			(80,774		)	(36,572		)
Embedded derivative - Modco reinsurance treaties	144,998			(48,679		)	161,773			(37,973		)
Embedded derivative - FIA	(41		)	—			(41		)	—
Interest rate swaps	1,909			(2,916		)	2,912			(879		)
Interest rate caps	—			(351		)	—			(2,515		)
Derivatives with PLC(1)	(9,751		)	500			(13,529		)	500
Other derivatives	(498		)	(950		)	(143		)	(238		)
Total realized gains (losses) - derivatives	$	66,591		$	(47,768	)	$	70,198		$	(77,677	)

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

47

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

	As of
	June 30, 2013				December 31, 2012
	Notional		Fair		Notional		Fair
	Amount		Value		Amount		Value
	(Dollars In Thousands)
Other long-term investments
Cash flow hedges:
Inflation	$	—	$	—	$	—	$	—
Derivatives not designated as hedging instruments:
Interest rate swaps	225,000		3,658		355,000		6,532
Variance swaps	1,300		834		500		406
Derivatives with PLC(1)	1,442,128		3,535		1,404,750		17,064
Embedded derivative - Modco reinsurance treaties	45,580		1,069		30,244		1,330
Embedded derivative - GMWB	1,274,129		43,234		1,640,075		30,261
Equity futures	43,543		637		147,581		595
Currency futures	152,545		3,258		15,944		784
Interest rate caps	—		—		3,000,000		—
Equity options	1,211,937		93,124		573,493		61,833
Interest rate swaptions	625,000		26,253		400,000		11,370
Other	224		319		224		253
	$	5,021,386	$	175,921	$	7,567,811	$	130,428
Other liabilities
Cash flow hedges:
Inflation	$	182,965	$	4,429	$	182,965	$	5,027
Derivatives not designated as hedging instruments:
Interest rate swaps	1,500,000		111,748		400,000		10,025
Variance swaps	—		—		2,675		12,198
Embedded derivative - Modco reinsurance treaties	2,610,999		249,873		2,655,134		411,907
Funds withheld derivative	1,107,501		66,273		—		—
Embedded derivative - GMWB	288,009		5,777		5,253,961		199,530
Embedded derivative - FIA	19,547		1,126		—		—
Interest rate futures	246,042		3,674		893,476		13,970
Equity futures	120,665		711		152,364		3,316
Currency futures	—		—		131,979		1,901
Equity options	32,125		1,097		—		—
	$	6,107,853	$	444,708	$	9,672,554	$	657,874

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

48

Gain (Loss) on Derivatives in Cash Flow Relationship

				Amount and Location of
	Amount of Gains (Losses)			Gains (Losses)
	Deferred in			Reclassified from			Amount and Location of
	Accumulated Other			Accumulated Other			(Losses) Recognized in
	Comprehensive Income			Comprehensive Income			Income (Loss) on
	(Loss) on Derivatives			(Loss) into Income (Loss)			Derivatives
	(Effective Portion)			(Effective Portion)			(Ineffective Portion)
				Benefits and settlement			Realized investment
				expenses			gains (losses)
	(Dollars In Thousands)
For The Three Months Ended June 30, 2013
Inflation	$	(4,589	)	$	(580	)	$	(558	)
Total	$	(4,589	)	$	(580	)	$	(558	)
For The Six Months Ended June 30, 2013
Inflation	$	(180	)	$	(1,077	)	$	(190	)
Total	$	(180	)	$	(1,077	)	$	(190	)

Gain (Loss) on Derivatives in Cash Flow Relationship

				Amount and Location of
	Amount of Gains (Losses)			Gains (Losses)
	Deferred in			Reclassified from			Amount and Location of
	Accumulated Other			Accumulated Other			(Losses) Recognized in
	Comprehensive Income			Comprehensive Income			Income (Loss) on
	(Loss) on Derivatives			(Loss) into Income (Loss)			Derivatives
	(Effective Portion)			(Effective Portion)			(Ineffective Portion)
				Benefits and settlement			Realized investment
				expenses			gains (losses)
	(Dollars In Thousands)
For The Three Months Ended June 30, 2012
Interest rate	$	(2	)	$	(858	)	$	—
Inflation	(7,068		)	(113		)	(870		)
Total	$	(7,070	)	$	(971	)	$	(870	)
For The Six Months Ended June 30, 2012
Interest rate	$	(75	)	$	(1,712	)	$	—
Inflation	1,209			67			(224		)
Total	$	1,134		$	(1,645	)	$	(224	)

Based on the expected cash flows of the underlying hedged items, the Company expects to reclassify $2.3 million out of accumulated other comprehensive income (loss) into earnings during the next twelve months.

49

From time to time, the Company is required to post and obligated to return collateral related to derivative transactions. As of June 30, 2013, the Company had posted cash and securities (at fair value) as collateral of approximately $60.3 million and $52.3 million, respectively. As of June 30, 2013, the Company received $1.0 million of cash as collateral. The Company does not net the collateral posted or received with the fair value of the derivative financial instruments for reporting purposes.

Realized investment gains (losses) - all other investments

	For The Three Months Ended June 30,					For The Six Months Ended June 30,
	2013			2012		2013			2012
	(Dollars In Thousands)
Modco trading portfolio(1)	$	(126,694	)	$	56,063	$	(142,022	)	$	74,162

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

50

15.OFFSETTING OF ASSETS AND LIABILITIES

Certain of the Company’s derivative instruments are subject to enforceable master netting arrangements that provide for the net settlement of all derivative contracts between the Company and a counterparty in the event of default or upon the occurrence of certain termination events. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event either minimum thresholds, or in certain cases ratings levels, have been reached. Additionally, certain of the Company’s repurchase agreements provide for net settlement on termination of the agreement. Refer to Note 6, Debt and Other Obligations for details of the Company’s repurchase agreement programs.

The tables below present the derivative instruments by assets and liabilities for the Company as of June 30, 2013.

					Net Amounts
			Gross		of Assets		Gross Amounts Not Offset
			Amounts		Presented in		in the Statement of
	Gross		Offset in the		the		Financial Position
	Amounts of		Statement of		Statement of				Cash
	Recognized		Financial		Financial		Financial		Collateral
	Assets		Position		Position		Instruments		Received		Net Amount
	(Dollars In Thousands)
Offsetting of Derivative Assets
Derivatives:
Free-Standing derivatives	$	127,764	$	—	$	127,764	$	41,823	$	1,000	$	84,941
Embedded derivative - Modco reinsurance treaties	1,069		—		1,069		—		—		1,069
Embedded derivative - GMWB	43,234		—		43,234		—		—		43,234
Total derivatives, subject to a master netting arrangement or similar arrangement	172,067		—		172,067		41,823		1,000		129,244
Total derivatives, not subject to a master netting arrangement or similar arrangement	3,854		—		3,854		—		—		3,854
Total derivatives	175,921		—		175,921		41,823		1,000		133,098
Total Assets	$	175,921	$	—	$	175,921	$	41,823	$	1,000	$	133,098

					Net Amounts
			Gross		of Liabilities		Gross Amounts Not Offset
			Amounts		Presented in		in the Statement of
	Gross		Offset in the		the		Financial Position
	Amounts of		Statement of		Statement of				Cash
	Recognized		Financial		Financial		Financial		Collateral
	Liabilities		Position		Position		Instruments		Paid		Net Amount
	(Dollars In Thousands)
Offsetting of Derivative Liabilities
Derivatives:
Free-Standing derivatives	$	121,659	$	—	$	121,659	$	41,823	$	50,209	$	29,627
Embedded derivative - Modco reinsurance treaties	249,873		—		249,873		—		—		249,873
Funds withheld derivative	66,273				66,273						66,273
Embedded derivative - GMWB	5,777		—		5,777		—		—		5,777
Embedded derivative - FIA	1,126		—		1,126		—		—		1,126
Total derivatives, subject to a master netting arrangement or similar arrangement	444,708		—		444,708		41,823		50,209		352,676
Total derivatives, not subject to a master netting arrangement or similar arrangement	—		—		—		—		—		—
Total derivatives	444,708		—		444,708		41,823		50,209		352,676
Repurchase agreements(1)	340,000		—		340,000		—		—		340,000
Total Liabilities	$	784,708	$	—	$	784,708	$	41,823	$	50,209	$	692,676

(1) Borrowings under repurchase agreements are for a term less than 90 days.

51

The tables below present the derivative instruments by assets and liabilities for the Company as of December 31, 2012.

					Net Amounts
			Gross		of Assets		Gross Amounts Not Offset
			Amounts		Presented in		in the Statement of
	Gross		Offset in the		the		Financial Position
	Amounts of		Statement of		Statement of				Cash
	Recognized		Financial		Financial		Financial		Collateral
	Assets		Position		Position		Instruments		Received		Net Amount
	(Dollars In Thousands)
Offsetting of Derivative Assets
Derivatives:
Free-Standing derivatives	$	81,520	$	—	$	81,520	$	21,565	$	11,280	$	48,675
Embedded derivative - Modco reinsurance treaties	1,330		—		1,330		—		—		1,330
Embedded derivative - GMWB	30,261		—		30,261		—		—		30,261
Total derivatives, subject to a master netting arrangement or similar arrangement	113,111		—		113,111		21,565		11,280		80,266
Total derivatives, not subject to a master netting arrangement or similar arrangement	17,317		—		17,317		—		—		17,317
Total derivatives	130,428		—		130,428		21,565		11,280		97,583
Total Assets	$	130,428	$	—	$	130,428	$	21,565	$	11,280	$	97,583

					Net Amounts
			Gross		of Liabilities		Gross Amounts Not Offset
			Amounts		Presented in		in the Statement of
	Gross		Offset in the		the		Financial Position
	Amounts of		Statement of		Statement of				Cash
	Recognized		Financial		Financial		Financial		Collateral
	Liabilities		Position		Position		Instruments		Paid		Net Amount
	(Dollars In Thousands)
Offsetting of Derivative Liabilities
Derivatives:
Free-Standing derivatives	$	46,437	$	—	$	46,437	$	21,565	$	20,373	$	4,499
Embedded derivative - Modco reinsurance treaties	411,907		—		411,907		—		—		411,907
Embedded derivative - GMWB	199,530		—		199,530		—		—		199,530
Total derivatives, subject to a master netting arrangement or similar arrangement	657,874		—		657,874		21,565		20,373		615,936
Total derivatives, not subject to a master netting arrangement or similar arrangement	—		—		—		—		—		—
Total derivatives	657,874		—		657,874		21,565		20,373		615,936
Repurchase agreements(1)	150,000		—		150,000		—		—		150,000
Total Liabilities	$	807,874	$	—	$	807,874	$	21,565	$	20,373	$	765,936

(1) Borrowings under repurchase agreements are for a term less than 90 days.

52

16.OPERATING SEGMENTS

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

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

·The Acquisitions segment focuses on acquiring, converting, and servicing policies from other companies. The segment’s primary focus is on life insurance policies and annuity products that were sold to individuals. The level of the segment’s acquisition activity is predicated upon many factors, including available capital, operating capacity, potential return on capital, and market dynamics. Policies acquired through the Acquisitions 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 Annuities segment markets fixed and variable annuity products. These products are primarily sold through broker-dealers, financial institutions, and independent agents and brokers.

·The Stable Value Products segment sells fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, money market funds, bank trust departments, and other institutional investors. The segment also issues funding agreements to the FHLB, and markets guaranteed investment contracts (“GICs”) to 401(k) and other qualified retirement savings plans.  Additionally, the Company has contracts outstanding pursuant to a funding agreement-backed notes program registered with the United States Securities and Exchange Commission (the “SEC”) which offered notes to both institutional and retail investors.

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

·The Corporate and Other segment primarily consists of net investment income not assigned to the segments above (including the impact of carrying liquidity) and expenses not attributable to the segments above. This segment includes earnings from several non-strategic or runoff lines of business, various investment-related transactions, the operations of several small subsidiaries, and the repurchase of non-recourse funding obligations.

The Company uses the same accounting policies and procedures to measure segment operating income (loss) and assets as it uses to measure consolidated net income and assets. Segment operating income (loss) is income before income tax, excluding realized gains and losses on investments and derivatives net of the related amortization of deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”). Operating earnings exclude changes in the GMWB embedded derivatives (excluding the portion attributed to economic cost), realized and unrealized gains (losses) on derivatives used to hedge the VA product, actual GMWB incurred claims and the related amortization of DAC attributed to each of these items.

Segment operating income (loss) represents the basis on which the performance of the Company’s business is internally assessed by management. Premiums and policy fees, other income, benefits and settlement expenses, and amortization of DAC/VOBA are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner that most appropriately reflects the operations of that segment. Investments and other assets are allocated based on statutory policy liabilities net of associated statutory policy assets, while DAC/VOBA and goodwill are shown in the segments to which they are attributable.

53

There were no significant intersegment transactions during the three or six months ended June 30, 2013 and 2012.

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

	For The						For The
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(Dollars In Thousands)
Revenues
Life Marketing	$	317,549		$	310,244		$	656,228		$	625,750
Acquisitions	261,693			261,296			512,180			560,805
Annuities	101,062			181,197			265,415			320,259
Stable Value Products	34,608			34,785			66,528			69,441
Asset Protection	76,241			75,123			147,552			147,767
Corporate and Other	24,888			4,394			53,721			44,772
Total revenues	$	816,041		$	867,039		$	1,701,624		$	1,768,794
Segment Operating Income (Loss)
Life Marketing	$	23,870		$	29,796		$	47,347		$	59,793
Acquisitions	29,435			43,615			63,812			82,714
Annuities	33,566			28,364			76,435			63,823
Stable Value Products	22,464			15,958			40,308			28,604
Asset Protection	5,512			4,506			9,982			7,346
Corporate and Other	(8,041		)	(16,257		)	(27,937		)	5,009
Total segment operating income	106,806			105,982			209,947			247,289
Realized investment (losses) gains - investments(1)	(98,474		)	50,496			(108,331		)	72,926
Realized investment (losses) gains - derivatives	70,595			(39,413		)	87,125			(62,082		)
Income tax expense	(25,923		)	(35,438		)	(61,859		)	(80,650		)
Net Income	$	53,004		$	81,627		$	126,882		$	177,483
Investment gains (losses)(2)	$	(114,227	)	$	54,437		$	(123,057	)	$	71,324
Less: related amortization of DAC/VOBA	(15,753		)	3,941			(14,726		)	(1,602		)
Realized investment gains (losses) in investments	$	(98,474	)	$	50,496		$	(108,331	)	$	72,926
Derivative gains (losses)(3)	$	66,591		$	(47,768	)	$	70,198		$	(77,677	)
Less: VA GMWB economic cost	(4,004		)	(8,355		)	(16,927		)	(15,595		)
Realized investment gains (losses) - derivatives	$	70,595		$	(39,413	)	$	87,125		$	(62,082	)

(1)  Includes credit related other-than-temporary impairments of $4.0 million and $8.6 million for the three and six months ended June 30,  2013, respectively, as compared to $13.4 million and $32.0 million for the three and six months ended June 30, 2012, respectively.

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

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

54

	Operating Segment Assets
	As of June 30, 2013
	(Dollars In Thousands)
	Life						Stable Value
	Marketing		Acquisitions		Annuities		Products
Investments and other assets	$	12,645,616	$	11,147,145	$	18,750,589	$	2,577,950
Deferred policy acquisition costs and value of business acquired	2,070,988		674,028		510,305		1,222
Goodwill	—		34,066		—		—
Total assets	$	14,716,604	$	11,855,239	$	19,260,894	$	2,579,172

	Asset		Corporate				Total
	Protection		and Other		Adjustments		Consolidated
Investments and other assets	$	754,909	$	8,442,721	$	17,712	$	54,336,642
Deferred policy acquisition costs and value of business acquired	51,026		825		—		3,308,394
Goodwill	48,158		—		—		82,224
Total assets	$	854,093	$	8,443,546	$	17,712	$	57,727,260

	Operating Segment Assets
	As of December 31, 2012
	(Dollars In Thousands)
	Life						Stable Value
	Marketing		Acquisitions		Annuities		Products
Investments and other assets	$	12,171,384	$	11,312,550	$	17,649,488	$	2,509,160
Deferred policy acquisition costs and value of business acquired	2,001,708		679,746		491,184		1,399
Goodwill	—		35,615		—		—
Total assets	$	14,173,092	$	12,027,911	$	18,140,672	$	2,510,559

	Asset		Corporate				Total
	Protection		and Other		Adjustments		Consolidated
Investments and other assets	$	740,153	$	9,446,057	$	19,662	$	53,848,454
Deferred policy acquisition costs and value of business acquired	50,253		1,066		—		3,225,356
Goodwill	48,158		—		—		83,773
Total assets	$	838,564	$	9,447,123	$	19,662	$	57,157,583

55

17.SUBSEQUENT EVENTS

The Company has evaluated the effects of events subsequent to June 30, 2013, and through the date we filed our consolidated condensed financial statements with the United States Securities and Exchange Commission. All accounting and disclosure requirements related to subsequent events are included in our consolidated condensed financial statements except as described below.

On August 7, 2013, Golden Gate III Vermont Captive Insurance Company (“Golden Gate III”), a wholly owned subsidiary of the Company, entered into a Second Amended and Restated Reimbursement Agreement (the “Second Amended and Restated Reimbursement Agreement”) with UBS AG, Stamford Branch, as issuing lender (“UBS”), which amended and restated the First Amended and Restated Reimbursement Agreement, dated as of November 21, 2011, between Golden Gate III and UBS (the “First Amended and Restated Reimbursement Agreement”) which replaced the original Reimbursement Agreement, dated as of April 23, 2010, between Golden Gate III and UBS.  Under the Second Amended and Restated Reimbursement Agreement, a new letter of credit (the “LOC”) in an initial amount of $710 million was issued by UBS in replacement of the existing letter of credit issued under the First Amended and Restated Reimbursement Agreement.  The term of the LOC was extended from April 1, 2022 to October 1, 2023, subject to certain conditions being satisfied including scheduled capital contributions being made to Golden Gate III by one of its affiliates.  The maximum stated amount of the LOC was increased from $610 million to $720 million in 2015, if certain conditions are met.  The LOC is held in trust for the benefit of the Company’s wholly owned subsidiary, WCL, and supports certain obligations of Golden Gate III to WCL for a portion of the reserves relating to certain level premium term life insurance policies reinsured by Golden Gate III under an indemnity reinsurance agreement originally effective April 1, 2010, as amended and restated on November 21, 2011, and as further amended and restated on August 7, 2013 to include an additional block of policies.  The Second Amended and Restated Reimbursement Agreement continues to be “non-recourse” to WCL, PLC and the Company, meaning that none of these companies are liable to reimburse UBS for any drawn amounts or interest thereon.  Pursuant to the terms of an amended and restated letter agreement with UBS, PLC has continued its agreement to guarantee the payment of fees to UBS. The estimated average annual expense of the LOC issued by UBS pursuant to the Second Amended and Restated Reimbursement Agreement under generally accepted accounting principles is approximately $9 million, after-tax.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our consolidated condensed financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report on Form 10-Q and our audited consolidated financial statements for the year ended December 31, 2012, included in our Annual Report on Form 10-K.

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

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

FORWARD-LOOKING STATEMENTS — CAUTIONARY LANGUAGE

This report reviews our financial condition and results of operations including our liquidity and capital resources. Historical information is presented and discussed, and where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate, or imply future results, performance, or achievements instead of historical facts and may contain words like “believe,” “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,” “shall,” “may,” and other words, phrases, or expressions with similar meaning. Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from the results contained in the forward-looking statements, and we cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. For more information about the risks, uncertainties, and other factors that could affect our future results, please refer to Part I, Item II, Risks and Uncertainties and Part II, Item 1A, Risk Factors and Cautionary Factors that may Affect Future Results, of this report, as well as Part I, Item 1A, Risk Factors and Cautionary Factors that may Affect Future Results, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

OVERVIEW

Our business

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

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

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

·Life Marketing - We market universal life (“UL”), variable universal life, bank-owned life insurance (“BOLI”), and level premium term insurance (“traditional”) products on a national basis

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primarily through networks of independent insurance agents and brokers, stockbrokers, and independent marketing organizations.

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

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

·Stable Value Products - We sell fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, money market funds, bank trust departments, and other institutional investors. The segment also issues funding agreements to the Federal Home Loan Bank (“FHLB”), and markets guaranteed investment contracts (“GICs”) to 401(k) and other qualified retirement savings plans. Additionally, we have contracts outstanding pursuant to a funding agreement-backed notes program registered with the United States Securities and Exchange Commission (the “SEC”) which offered notes to both institutional and retail investors.

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

·Corporate and Other - This segment primarily consists of net investment income not assigned to the segments above (including the impact of carrying liquidity) and expenses not attributable to the segments above. This segment includes earnings from several non-strategic or runoff lines of business, various investment-related transactions, the operations of several small subsidiaries, and the repurchase of non-recourse funding obligations.

RISKS AND UNCERTAINTIES

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

General

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

·a disruption affecting our electronic systems or those on whom we rely could adversely affect our business, financial condition and results of operations;

·confidential information maintained in our systems could be compromised or misappropriated, damaging our business and reputation and adversely affecting its financial condition and results of operations;

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

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

·we may not be able to achieve the expected results from our recently announced acquisition;

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·we are dependent on the performance of others;

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

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

Financial environment

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

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

·equity market volatility could negatively impact our business;

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

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

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

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

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

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

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

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

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

·we could be adversely affected by an inability to access FHLB lending;

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

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

Industry

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

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

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

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

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

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

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

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

Competition

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

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

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

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

CRITICAL ACCOUNTING POLICIES

Our accounting policies require the use of judgments relating to a variety of assumptions and estimates, including, but not limited to expectations of current and future mortality, morbidity, persistency, expenses, and interest rates, as well as expectations around the valuations of securities. Because of the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could be materially different from those reported in the consolidated condensed financial statements. For a complete listing of our critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2012.

RESULTS OF OPERATIONS

We use the same accounting policies and procedures to measure segment operating income (loss) and assets as we use to measure consolidated net income and assets. Segment operating income (loss) is income before income tax, excluding realized gains and losses on investments and derivatives net of the related amortization of deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”). Operating earnings exclude changes in the guaranteed minimum withdrawal benefits (“GMWB”) embedded derivatives (excluding the portion attributed to economic cost), realized and unrealized gains (losses) on derivatives used to hedge the variable annuity (“VA”) product, actual GMWB incurred claims and the related amortization of DAC attributed to each of these items.

Segment operating income (loss) represents the basis on which the performance of our business is internally assessed by management. Premiums and policy fees, other income, benefits and settlement expenses, and amortization of DAC/VOBA are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner that most appropriately reflects the operations of that segment. Investments and other assets are allocated based on statutory policy liabilities net of associated statutory policy assets, while DAC/VOBA and goodwill are shown in the segments to which they are attributable.

However, segment operating income (loss) should not be viewed as a substitute for accounting principles generally accepted in the United States of America (“GAAP”) net income. In addition, our segment operating income (loss) measures may not be comparable to similarly titled measures reported by other companies.

We periodically review and update as appropriate our key assumptions on products using the ASC Financial Services-Insurance Topic, including future mortality, expenses, lapses, premium persistency, investment yields, interest spreads, and equity market returns. Changes to these assumptions result in adjustments which increase or decrease DAC amortization and/or benefits and expenses. The periodic review and updating of assumptions is referred to as “unlocking”. When referring to DAC amortization or unlocking on products covered under the ASC Financial Services-Insurance Topic, the reference is to changes in all balance sheet components amortized over estimated gross profits.

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

	For The								For The
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Segment Operating Income (Loss)
Life Marketing	$	23,870		$	29,796		(19.9	)%	$	47,347		$	59,793		(20.8	)%
Acquisitions	29,435			43,615			(32.5	)	63,812			82,714			(22.9	)
Annuities	33,566			28,364			18.3		76,435			63,823			19.8
Stable Value Products	22,464			15,958			40.8		40,308			28,604			40.9
Asset Protection	5,512			4,506			22.3		9,982			7,346			35.9
Corporate and Other	(8,041		)	(16,257		)	(50.5	)	(27,937		)	5,009			n/m
Total segment operating income	106,806			105,982			0.8		209,947			247,289			(15.1	)
Realized investment gains (losses) - investments(1)	(98,474		)	50,496					(108,331		)	72,926
Realized investment gains (losses) - derivatives	70,595			(39,413		)			87,125			(62,082		)
Income tax expense	(25,923		)	(35,438		)			(61,859		)	(80,650		)
Net Income	$	53,004		$	81,627		(35.1	)	$	126,882		$	177,483		(28.5	)
Investment gains (losses)(2)	$	(114,227	)	$	54,437				$	(123,057	)	$	71,324
Less: related amortization of DAC/VOBA	(15,753		)	3,941					(14,726		)	(1,602		)
Realized investment gains (losses) - investments	$	(98,474	)	$	50,496				$	(108,331	)	$	72,926
Derivative gains (losses) (3)	$	66,591		$	(47,768	)			$	70,198		$	(77,677	)
Less: VA GMWB economic cost	(4,004		)	(8,355		)			(16,927		)	(15,595		)
Realized investment gains (losses) - derivatives	$	70,595		$	(39,413	)			$	87,125		$	(62,082	)

(1)    Includes credit related other-than-temporary impairments of $4.0 million and $8.6 million for the three and six months ended June 30, 2013, respectively, and $13.4 million and $32.0 million for the three and six months ended June 30, 2012, respectively.

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

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

For The Three Months Ended June 30, 2013 as compared to The Three Months Ended June 30, 2012

Net income for the three months ended June 30, 2013, included a $0.8 million, or 0.8%, increase in segment operating income. The increase consisted of a $5.2 million increase in the Annuities segment, a $6.5 million increase in the Stable Value Products segment, a $1.0 million increase in the Asset Protection segment and an $8.2 million improvement in the Corporate and Other segment. These increases were partially offset by a $5.9 million decrease in the Life Marketing segment and a $14.2 million decrease in the Acquisitions segment.

We experienced net realized losses of $47.6 million for the three months ended June 30, 2013, as compared to net realized gains of $6.7 million for the three months ended June 30, 2012. The losses realized for the three months ended June 30, 2013, were primarily related to $4.0 million for other-than-temporary impairment credit-related losses, net losses of $70.0 million of derivatives related to variable annuity contracts, and a $15.5 million loss related to other investment and derivative activity. Partially offsetting these losses were $21.7 million of gains related to investment securities sale activity, $1.9 million of gains on interest rate caps and swaps, and $18.3 million of gains related to the net activity of the modified coinsurance portfolio.

·Life Marketing segment operating income was $23.9 million for the three months ended June 30, 2013, representing a decrease of $5.9 million, or 19.9%, from the three months ended June 30, 2012. The decrease was primarily due to less favorable traditional life mortality, a $4.2 million reinsurance accrual established in the second quarter of 2013, and an increase in non-deferred expenses resulting from higher sales. This decrease was partially offset by higher investment income due to an increase in reserves.

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·Acquisitions segment operating income was $29.4 million for the three months ended June 30, 2013, a decrease of $14.2 million, or 32.5%, as compared to the three months ended June 30, 2012. This variance is primarily attributable to an $8.5 million unfavorable variance related to mortality, interest and other benefits, which includes $5.0 million related to unreported deaths discovered on a block of terminated life policies during the quarter. The remainder of the variance was caused primarily by lower spread income and the expected runoff of business.

·Annuities segment operating income was $33.6 million for the three months ended June 30, 2013, as compared to $28.4 million for the three months ended June 30, 2012, an increase of $5.2 million, or 18.3%. This variance included a favorable change of $9.0 million related to higher net policy fees and other income in the VA line. Favorable changes in benefits and settlement expenses and DAC amortization also contributed to the increase. Partially offsetting these increases were an unfavorable single premium immediate annuity (“SPIA”) mortality variance of $7.2 million and unfavorable changes in non-deferred expenses caused by an unfavorable $3.3 million guaranty fund allocation.

·Stable Value Products segment operating income was $22.5 million and increased $6.5 million, or 40.8%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. The increase in operating earnings resulted from an increase in participating mortgage income and higher operating spreads offset by a decline in average account values. Participating mortgage income for the three months ended June 30, 2013 was $5.5 million, compared to $2.4 million for the three months ended June 30, 2012. The adjusted operating spread, which excludes participating income, increased by 69 basis points for the three months ended June 30, 2013 over the prior year, due primarily to a decline in credited interest.

·Asset Protection segment operating income was $5.5 million, representing an increase of $1.0 million, or 22.3%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. Earnings from the GAP product line increased $0.8 million, or 34.8%, primarily due to higher volume and lower expenses. Credit insurance earnings increased $0.2 million. Service contract earnings remained consistent with the prior year.

·Corporate and Other segment operating loss was $8.0 million for the three months ended June 30, 2013, as compared to an operating loss of $16.3 million for the three months ended June 30, 2012. The increase resulted from an improvement in net investment income primarily due to a $4.0 million favorable variance related to mortgage loan prepayment fee income and $3.8 million related to called securities.  Partially offsetting this variance was an increase in other operating expenses as compared to the second quarter of 2012.

For The Six Months Ended June 30, 2013 as compared to The Six Months Ended June 30, 2012

Net income for the six months ended June 30, 2013, included a $37.3 million, or 15.1%, decrease in segment operating income. The decrease consisted of a $12.4 million decrease in the Life Marketing segment, a $18.9 million decrease in the Acquisitions segment, and a $32.9 million decrease in the Corporate and Other segment. These decreases were partially offset by a $12.6 million increase in the Annuities segment, an $11.7 million increase in the Stable Value Products segment, and a $2.6 million increase in the Asset Protection segment.

We experienced net realized losses of $52.9 million for the six months ended June 30, 2013, as compared to net realized losses of $6.4 million for the six months ended June 30, 2012. The losses realized for the six months ended June 30, 2013, were primarily related to $8.6 million for other-than-temporary impairment credit-related losses, net losses of $80.8 million of derivatives related to variable annuity contracts, and a $20.1 million loss related to other investment and derivative activity.  Partially offsetting these losses were $34.0 million of gains related to investment securities sale activity, $2.9 million of gains on interest rate caps and swaps, and $19.8 million of gains related to the net activity of the modified coinsurance portfolio.

·Life Marketing segment operating income was $47.3 million for the six months ended June 30, 2013, representing a decrease of $12.4 million, or 20.8%, from the six months ended June 30, 2012. The decrease was primarily due to less favorable traditional life mortality, a $4.2 million reinsurance accrual established in the second quarter of 2013, and an increase in non-deferred expenses resulting from higher sales. This decrease was partially offset by higher investment income due to an increase in reserves and lower universal life claims.

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·Acquisitions segment operating income was $63.8 million for the six months ended June 30, 2013, a decrease of $18.9 million, or 22.9%, as compared to the six months ended June 30, 2012. This variance is primarily attributable to a $6.5 million unfavorable variance related to mortality, interest and other benefits, which includes $5.0 million related to unreported deaths discovered on a block of terminated life policies during the quarter. The remainder of the variance was caused primarily by lower spread income and the expected runoff of business.

·Annuities segment operating income was $76.4 million for the six months ended June 30, 2013, as compared to $63.8 million for the six months ended June 30, 2012, an increase of $12.6 million, or 19.8%. This variance included a favorable change of $3.5 million in operating revenue which was attributable to higher policy fees and other income in the VA line. Favorable changes in benefits and settlement expenses and DAC amortization were partially offset by unfavorable changes in non-deferred expenses and increased ceded policy fees.

·Stable Value Products segment operating income was $40.3 million and increased $11.7 million, or 40.9%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. The increase in operating earnings resulted from an increase in participating mortgage income and higher operating spreads offset by a decline in average account values. Participating mortgage income for the six months ended June 30, 2013 was $7.2 million compared to $2.5 million for the six months ended June 30, 2012. The adjusted operating spread, which excludes participating income, increased by 72 basis points for the six months ended June 30, 2013 over the prior year, due primarily to a decline in credited interest.

·Asset Protection segment operating income was $10.0 million, representing an increase of $2.6 million, or 35.9%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. The increase in income was mainly due to a $2.0 million legal settlement accrual in the first quarter of 2012. Credit insurance earnings increased $2.2 million primarily due to the previously mentioned $2.0 million in litigation costs incurred in the first quarter of 2012. Service contract earnings increased $0.2 million, or 5.0%, and GAP earnings increased $0.2 million, or 3.1%.  The increases in both product lines were primarily related to lower expenses somewhat offset by higher loss ratios.

·Corporate and Other segment operating loss was $27.9 million for the six months ended June 30, 2013, as compared to an operating income of $5.0 million for the six months ended June 30, 2012. The decrease was the result of a $28.0 million unfavorable variance related to gains on the repurchase of non-recourse funding obligations. For the six months ended June 30, 2012, $29.3 million of pre-tax gains were generated from the repurchase of non-recourse funding obligations as compared to $1.3 million of pre-tax gains for the six months ended June 30, 2013. In addition, the decrease was driven by higher operating expenses, partially offset by an improvement in net investment income for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012.

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Life Marketing

Segment results of operations

Segment results were as follows:

	For The								For The
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change
	(Dollars In Thousands)								(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	442,338		$	397,645		11.2	%	$	861,043		$	785,762		9.6	%
Reinsurance ceded	(255,180		)	(209,803		)	(21.6	)	(462,842		)	(402,558		)	(15.0	)
Net premiums and policy fees	187,158			187,842			(0.4	)	398,201			383,204			3.9
Net investment income	129,905			121,260			7.1		257,064			240,266			7.0
Other income	486			1,142			(57.4	)	963			2,280			(57.8	)
Total operating revenues	317,549			310,244			2.4		656,228			625,750			4.9
BENEFITS AND EXPENSES
Benefits and settlement expenses	256,073			251,509			1.8		536,839			506,088			6.1
Amortization of deferred policy acquisition costs	27,066			19,454			39.1		41,088			42,048			(2.3	)
Other operating expenses	10,540			9,485			11.1		30,954			17,821			73.7
Total benefits and expenses	293,679			280,448			4.7		608,881			565,957			7.6
INCOME BEFORE INCOME TAX	23,870			29,796			(19.9	)	47,347			59,793			(20.8	)
OPERATING INCOME	$	23,870		$	29,796		(19.9	)	$	47,347		$	59,793		(20.8	)

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

	For The								For The
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Sales By Product
Traditional	$	409		$	307		33.2	%	$	701		$	594		18.0	%
Universal life	44,181			24,142			83.0		91,176			45,104			n/m
BOLI	—			1,376			n/m		—			2,721			n/m
	$	44,590		$	25,825		72.7		$	91,877		$	48,419		89.8
Sales By Distribution Channel
Independent agents	$	31,108		$	14,818		n/m		$	62,645		$	28,758		n/m
Stockbrokers / banks	12,920			9,191			40.6		28,223			16,167			74.6
BOLI / other	562			1,816			(69.1	)	1,009			3,494			(71.1	)
	$	44,590		$	25,825		72.7		$	91,877		$	48,419		89.8
Average Life Insurance In-force(1)
Traditional	$	430,900,880		$	455,686,339		(5.4	)	$	437,069,757		$	458,770,963		(4.7	)
Universal life	101,045,737			76,266,740			32.5		92,721,338			75,085,798			23.5
	$	531,946,617		$	531,953,079		n/m		$	529,791,095		$	533,856,761		(0.8	)
Average Account Values
Universal life	$	6,866,731		$	6,393,984		7.4		$	6,737,609		$	6,362,314		5.9
Variable universal life	446,231			383,082			16.5		418,999			377,487			11.0
	$	7,312,962		$	6,777,066		7.9		$	7,156,608		$	6,739,801		6.2
Traditional Life Mortality Experience(2)	87		%	75		%			89		%	87		%

(1) Amounts are not adjusted for reinsurance ceded.

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

Operating expenses detail

Other operating expenses for the segment were as follows:

	For The								For The
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Insurance companies
First year commissions	$	44,185		$	25,070		76.2	%	$	96,151		$	47,210		n/m	%
Renewal commissions	8,573			8,651			(0.9	)	17,188			17,656			(2.7	)
First year ceding allowances	(1,160		)	(895		)	(29.6	)	(2,095		)	(2,023		)	(3.6	)
Renewal ceding allowances	(42,462		)	(39,335		)	(7.9	)	(80,071		)	(78,372		)	(2.2	)
General & administrative	44,248			36,362			21.7		88,996			70,647			26.0
Taxes, licenses, and fees	9,566			8,731			9.6		20,513			17,090			20.0
Other operating expenses incurred	62,950			38,584			63.2		140,682			72,208			94.8
Less: commissions, allowances & expenses capitalized	(52,410		)	(29,099		)	80.1		(109,728		)	(54,387		)	n/m
Other operating expenses	$	10,540		$	9,485		11.1		$	30,954		$	17,821		73.7

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For The Three Months Ended June 30, 2013 as compared to The Three Months Ended June 30, 2012

Segment operating income

Operating income was $23.9 million for the three months ended June 30, 2013, representing a decrease of $5.9 million, or 19.9%, from the three months ended June 30, 2012. The decrease was primarily due to less favorable traditional life mortality, a $4.2 million reinsurance accrual established in the second quarter of 2013, and an increase in non-deferred expenses resulting from higher sales. This decrease was partially offset by higher investment income due to an increase in reserves.

Operating revenues

Total revenues for the three months ended June 30, 2013, increased $7.3 million, or 2.4%, as compared to the three months ended June 30, 2012. This increase was driven by higher investment income due to increases in net in force reserves.

Net premiums and policy fees

Net premiums and policy fees decreased by $0.7 million, or 0.4%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, due to a decrease in premiums and policy fees associated with decreases in traditional life premiums, largely offset by increased sales in universal life business.

Net investment income

Net investment income in the segment increased $8.6 million, or 7.1%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. Of the increase in net investment income, $5.6 million was the result of a net increase in universal life reserves. Additionally, traditional life investment income increased $2.9 million due to higher reserves.

Other income

Other income decreased $0.7 million, or 57.4%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily due to fees on variable universal life funds.

Benefits and settlement expenses

Benefits and settlement expenses increased by $4.6 million, or 1.8%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, due to growth in retained universal life insurance in-force, an increase in reserves resulting from new sales, higher credited interest on universal life products resulting from increases in account values, and less favorable mortality in the traditional life block.

Amortization of DAC

DAC amortization increased $7.6 million, or 39.1%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily due to the impact of fluctuations in reinsurance premiums, which were offset in the associated reserves within the benefits and settlement expenses.

Other operating expenses

Other operating expenses increased $1.1 million for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. This increase reflects higher new business acquisition costs associated with higher sales, higher general administrative expenses, and a $1.4 million increase in interest expense associated with reserve financing costs.

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Sales

Sales for the segment increased $18.8 million for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. Traditional life sales increased slightly $0.1 million or 33.2%. Universal life sales increased $20.0 million due to more competitive product positioning. BOLI sales decreased by $1.4 million due to less favorable product positioning.

For The Six Months Ended June 30, 2013 as compared to The Six Months Ended June 30, 2012

Segment operating income

Operating income was $47.3 million for the six months ended June 30, 2013, representing a decrease of $12.4 million, or 20.8%, from the six months ended June 30, 2012.  The decrease was primarily due to less favorable traditional life mortality, a $4.2 million reinsurance accrual established in the second quarter of 2013, and an increase in non-deferred expenses resulting from higher sales. This decrease was partially offset by higher investment income due to an increase in reserves and lower universal life claims.

Operating revenues

Total revenues for the six months ended June 30, 2013, increased $30.5 million, or 4.9%, as compared to the six months ended June 30, 2012. This increase was driven by higher premiums and policy fees due to increased sales along with higher investment income due to increases in net in force reserves.

Net premiums and policy fees

Net premiums and policy fees increased by $15.0 million, or 3.9%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, due to an increase in premiums and policy fees associated with increased sales in universal life business, partially offset by decreases in traditional life premiums.

Net investment income

Net investment income in the segment increased $16.8 million, or 7.0%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. Of the increase in net investment income, $10.8 million was the result of a net increase in universal life reserves. Additionally, traditional life investment income increased $5.8 million due to higher reserves.

Other income

Other income decreased $1.3 million, or 57.8%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, primarily due to fees on variable universal life funds.

Benefits and settlement expenses

Benefits and settlement expenses increased by $30.8 million, or 6.1%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, due to growth in retained universal life insurance in-force, an increase in reserves resulting from new sales, higher credited interest on universal life products resulting from increases in account values, and less favorable mortality in the traditional life block.

Amortization of DAC

DAC amortization decreased $1.0 million, or 2.3%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, primarily due to differing impacts of unlocking. In 2013, universal life and BOLI unlocking decreased amortization $2.3 million, as compared to an increase of $2.9 million in 2012.

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Other operating expenses

Other operating expenses increased $13.1 million for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. This increase reflects higher new business acquisition costs associated with higher sales, higher general administrative expenses, and a $2.8 million increase in interest expense associated with reserve financing costs.

Sales

Sales for the segment increased $43.5 million for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. Traditional life sales slightly increased $0.1 million or 18.0%. Universal life sales increased $46.1 million due to more competitive product positioning. BOLI sales decreased by $2.7 million due to less favorable product positioning.

Reinsurance

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

Reinsurance allowances do not affect the methodology used to amortize DAC or the period over which such DAC is amortized. However, they do affect the amounts recognized as DAC amortization. DAC on universal life-type, limited-payment long duration, and investment contracts business is amortized based on the estimated gross profits of the policies in-force. Reinsurance allowances are considered in the determination of estimated gross profits, and therefore, impact DAC amortization on these lines of business. Deferred reinsurance allowances on level term business are recorded as ceded DAC, which is amortized over estimated ceded premiums of the policies in-force. Thus, deferred reinsurance allowances may impact DAC amortization. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

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Impact of reinsurance

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

Life Marketing Segment

Line Item Impact of Reinsurance

	For The						For The
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(255,180	)	$	(209,803	)	$	(462,842	)	$	(402,558	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(266,737		)	(201,828		)	(474,863		)	(407,593		)
Amortization of deferred policy acquisition costs	(16,992		)	(16,075		)	(24,438		)	(28,016		)
Other operating expenses (1)	(37,174		)	(32,904		)	(66,365		)	(65,563		)
Total benefits and expenses	(320,903		)	(250,807		)	(565,666		)	(501,172		)
NET IMPACT OF REINSURANCE (2)	$	65,723		$	41,004		$	102,824		$	98,614
Allowances received	$	(43,622	)	$	(34,129	)	$	(79,166	)	$	(74,294	)
Less: Amount deferred	6,448			1,225			12,801			8,731
Allowances recognized
(ceded other operating expenses) (1)	$	(37,174	)	$	(32,904	)	$	(66,365	)	$	(65,563	)

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

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

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

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

For The Three Months Ended June 30, 2013 as compared to The Three Months Ended June 30, 2012

The higher ceded premiums for 2013 as compared to 2012 were caused primarily by higher ceded traditional life premiums of $29.8 million and higher universal life premiums and policy fees of $16.1 million. Ceded traditional premiums for the three months ended June 30, 2013, increased from the three months ended June 30, 2012, as a number of policies reached their post level premium period. This was offset by increases in ceded premium reserves included in the benefits and settlement expenses line.

69

Ceded benefits and settlement expenses were higher for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, due to higher increases in ceded reserves and higher ceded claims. Traditional ceded benefits increased $36.1 million for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, due to an increase in ceded death benefits and an increase in ceded reserves largely due to policies reaching the end of their post level period. Universal life ceded benefits increased $28.8 million for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, due to higher ceded claims. Ceded universal life claims were $29.2 million higher for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012.

Ceded amortization of deferred policy acquisitions costs increased for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily due to the differences in unlocking between the two periods.

Ceded other operating expenses reflect the impact of reinsurance allowances on net income. Allowances decreased in the traditional line reflecting runoff of business and increased in the universal life line reflecting the allowance pattern on older business and changes in the mix of business.

For The Six Months Ended June 30, 2013 as compared to The Six Months Ended June 30, 2012

The higher ceded premiums for 2013 as compared to 2012 were caused primarily by higher ceded traditional life premiums of $36.3 million and higher universal life premiums and policy fees of $24.8 million. Ceded traditional premiums for the six months ended June 30, 2013, increased from the six months ended June 30, 2012, as a number of policies reached their post level premium period. This was offset by increases in ceded premium reserves included in the benefits and settlement expenses line.

Ceded benefits and settlement expenses were higher for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, due to higher increases in ceded reserves and higher ceded claims. Traditional ceded benefits increased $31.9 million for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, due to an increase in ceded reserves largely due to policies reaching the end of their post level period partially offset by a decrease in ceded death benefits. Universal life ceded benefits increased $34.8 million for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, due to an increase in ceded reserves primarily due to new business and higher ceded claims. Ceded universal life claims were $24.3 million higher for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012.

Ceded amortization of deferred policy acquisitions costs decreased for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, primarily due to the differences in unlocking between the two periods.

Ceded other operating expenses reflect the impact of reinsurance allowances on net income. Allowances decreased in the traditional line reflecting runoff of business and increased in the universal life line reflecting the allowance pattern on older business and changes in the mix of business.

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Acquisitions

Segment results of operations

Segment results were as follows:

	For The								For The
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change
	(Dollars In Thousands)								(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	208,194		$	215,672		(3.5	)%	$	416,920		$	427,830		(2.6	)%
Reinsurance ceded	(102,654		)	(102,644		)	n/m		(199,259		)	(182,945		)	8.9
Net premiums and policy fees	105,540			113,028			(6.6	)	217,661			244,885			(11.1	)
Net investment income	134,686			138,692			(2.9	)	269,355			276,813			(2.7	)
Other income	1,015			2,240			(54.7	)	2,029			3,819			(46.9	)
Total operating revenues	241,241			253,960			(5.0	)	489,045			525,517			(6.9	)
Realized gains (losses) - investments	(124,691		)	55,338					(138,734		)	72,650
Realized gains (losses) - derivatives	145,143			(48,002		)			161,869			(37,362		)
Total revenues	261,693			261,296					512,180			560,805
BENEFITS AND EXPENSES
Benefits and settlement expenses	177,901			180,488			(1.4	)	357,350			374,661			(4.6	)
Amortization of value of business acquired	18,661			17,732			5.2		36,874			40,907			(9.9	)
Other operating expenses	15,244			12,125			25.7		31,009			27,235			13.9
Operating benefits and expenses	211,806			210,345			0.7		425,233			442,803			(4.0	)
Amortization of VOBA related to realized gains (losses) - investments	943			208					1,116			175
Total benefits and expenses	212,749			210,553			1.0		426,349			442,978			(3.8	)
INCOME BEFORE INCOME TAX	48,944			50,743			(3.5	)	85,831			117,827			(27.2	)
Less: realized gains (losses)	20,452			7,336					23,135			35,288
Less: related amortization of VOBA	(943		)	(208		)			(1,116		)	(175		)
OPERATING INCOME	$	29,435		$	43,615		(32.5	)	$	63,812		$	82,714		(22.9	)

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The following table summarizes key data for the Acquisitions segment:

	For The								For The
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Average Life Insurance In-Force(1)
Traditional	$	169,104,486		$	181,086,657		(6.6	)%	$	170,557,494		$	182,519,388		(6.6	)%
Universal life	28,008,775			30,717,827			(8.8	)	28,338,399			31,188,925			(9.1	)
	$	197,113,261		$	211,804,484		(6.9	)	$	198,895,893		$	213,708,313		(6.9	)
Average Account Values
Universal life	$	3,339,818		$	3,432,097		(2.7	)	$	3,345,804		$	3,451,663		(3.1	)
Fixed annuity(2)	3,046,043			3,206,415			(5.0	)	3,064,188			3,224,894			(5.0	)
Variable annuity	576,108			610,911			(5.7	)	576,064			613,439			(6.1	)
	$	6,961,969		$	7,249,423		(4.0	)	$	6,986,056		$	7,289,996		(4.2	)
Interest Spread - UL & Fixed Annuities
Net investment income yield(3)	5.71		%	5.86		%			5.69		%	5.85		%
Interest credited to policyholders	4.02			3.99					3.97			3.96
Interest spread	1.69		%	1.87		%			1.72		%	1.89		%

(1) Amounts are not adjusted for reinsurance ceded.

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

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

For The Three Months Ended June 30, 2013 as compared to The Three Months Ended June 30, 2012

Segment operating income

Operating income was $29.4 million for the three months ended June 30, 2013, a decrease of $14.2 million, or 32.5%, as compared to the three months ended June 30, 2012. This variance is primarily attributable to an $8.5 million unfavorable variance related to mortality, interest and other benefits, which includes $5.0 million related to unreported deaths discovered on a block of terminated life policies during the quarter. The remainder of the variance was caused primarily by lower spread income and the expected runoff of business.

Operating revenues

Net premiums and policy fees decreased $7.5 million, or 6.6%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily due to the expected runoff of business. Net investment income decreased $4.0 million, or 2.9%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, due to the expected runoff of business and lower yields.

Total benefits and expenses

Total benefits and expenses increased $2.2 million, or 1.0%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. The increase was due to increases in operating expenses, higher mortality, interest and other benefits after considering expected runoff of business.

For The Six Months Ended June 30, 2013 as compared to The Six Months Ended June 30, 2012

Segment operating income

Operating income was $63.8 million for the six months ended June 30, 2013, a decrease of $18.9 million, or 22.9%, as compared to the six months ended June 30, 2012. This variance is primarily attributable to a $6.5 million unfavorable variance related to mortality, interest and other benefits, which includes $5.0 million related to unreported

72

deaths discovered on a block of terminated life policies during the quarter. The remainder of the variance was caused primarily by lower spread income and the expected runoff of business.

Operating revenues

Net premiums and policy fees decreased $27.2 million, or 11.1%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, primarily due to the impact of a reinsurance recapture on 2012 results and the expected runoff of business. Net investment income decreased $7.5 million, or 2.7%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, due to the expected runoff of business and lower yields.

Total benefits and expenses

Total benefits and expenses decreased $16.6 million, or 3.8%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. The decrease was due to the impact of a reinsurance recapture on 2012 results and the expected runoff of the in-force business, partially offset by higher mortality, interest and other benefits after considering expected runoff of business.

Reinsurance

The Acquisitions segment currently reinsures portions of both its life and annuity in-force. The cost of reinsurance to the segment is reflected in the chart shown below. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Impact of reinsurance

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

Acquisitions Segment

Line Item Impact of Reinsurance

	For The						For The
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(102,654	)	$	(102,644	)	$	(199,259	)	$	(182,945	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(88,074		)	(88,402		)	(173,453		)	(146,403		)
Amortization of deferred policy acquisition costs	(2,225		)	(7,101		)	(4,589		)	(10,503		)
Other operating expenses	(12,708		)	(12,819		)	(24,446		)	(27,025		)
Total benefits and expenses	(103,007		)	(108,322		)	(202,488		)	(183,931		)
NET IMPACT OF REINSURANCE (1)	$	353		$	5,678		$	3,229		$	986

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

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

73

impact to us and the assuming companies has not been quantified as it is not fully reflected in our consolidated financial statements.

The net impact of reinsurance is less favorable by $5.3 million for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily due to lower amortization of DAC/VOBA.

The net impact of reinsurance is more favorable by $2.2 million for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, primarily due to higher ceded death claims. In the six months ended June 30, 2012, ceded revenues were reduced by $17.2 million and ceded benefits and expenses were reduced by $15.6 million due to a reinsurance recapture.

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Annuities

Segment results of operations

Segment results were as follows:

	For The								For The
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change
	(Dollars In Thousands)								(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	32,965		$	23,252		41.8	%	$	61,517		$	45,180		36.2	%
Reinsurance ceded	(16,779		)	(7		)	n/m		(16,779		)	(20		)	n/m
Net premiums and policy fees	16,186			23,245			(30.4	)	44,738			45,160			(0.9	)
Net investment income	116,792			124,158			(5.9	)	235,348			250,142			(5.9	)
Realized gains (losses) - derivatives	(4,004		)	(8,355		)	52.1		(16,927		)	(15,595		)	(8.5	)
Other income	29,951			18,793			59.4		56,171			36,143			55.4
Total operating revenues	158,925			157,841			0.7		319,330			315,850			1.1
Realized gains (losses) - investments	8,218			10,373					9,991			25,386
Realized gains (losses) - derivatives, net of economic cost	(66,081		)	12,983					(63,906		)	(20,977		)
Total revenues	101,062			181,197			(44.2	)	265,415			320,259			(17.1	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	81,317			88,564			(8.2	)	161,988			178,854			(9.4	)
Amortization of deferred policy acquisition costs and value of business acquired	13,432			16,053			(16.3	)	24,086			25,055			(3.9	)
Other operating expenses	30,610			24,860			23.1		56,821			48,118			18.1
Operating benefits and expenses	125,359			129,477			(3.2	)	242,895			252,027			(3.6	)
Amortization related to benefits and settlement expenses	(255		)	(763		)			(856		)	856
Amortization of DAC related to realized gains (losses) - investments	(16,441		)	4,496					(14,986		)	(2,633		)
Total benefits and expenses	108,663			133,210			(18.4	)	227,053			250,250			(9.3	)
INCOME (LOSS) BEFORE INCOME TAX	(7,601		)	47,987			n/m		38,362			70,009			(45.2	)
Less: realized gains (losses) - investments	8,218			10,373					9,991			25,386
Less: realized gains (losses) - derivatives, net of economic cost	(66,081		)	12,983					(63,906		)	(20,977		)
Less: amortization related to benefits and settlement expenses	255			763					856			(856		)
Less: related amortization of DAC	16,441			(4,496		)			14,986			2,633
OPERATING INCOME	$	33,566		$	28,364		18.3		$	76,435		$	63,823		19.8

75

The following table summarizes key data for the Annuities segment:

	For The								For The
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Sales
Fixed annuity	$	138,098		$	156,051		(11.5	)%	$	253,451		$	308,877		(17.9	)%
Variable annuity	718,884			673,338			6.8		1,298,582			1,240,746			4.7
	$	856,982		$	829,389		3.3		$	1,552,033		$	1,549,623		0.2
Average Account Values
Fixed annuity(1)	$	8,362,307		$	8,575,234		(2.5	)	$	8,379,059		$	8,603,252		(2.6	)
Variable annuity	10,474,221			7,139,223			46.7		10,037,472			6,885,655			45.8
	$	18,836,528		$	15,714,457		19.9		$	18,416,531		$	15,488,907		18.9
Interest Spread - Fixed Annuities(2)
Net investment income yield	5.48		%	5.73		%			5.51		%	5.76		%
Interest credited to policyholders	3.57			3.88					3.56			3.93
Interest spread	1.91		%	1.85		%			1.95		%	1.83		%

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

(2)    Interest spread on average general account values.

	For The									For The
	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2013			2012			Change			2013			2012			Change
	(Dollars In Thousands)									(Dollars In Thousands)
Derivatives related to variable annuity contracts:
Interest rate futures - VA	$	(7,654	)	$	69,196		$	(76,850	)	$	(24,138	)	$	35,790		$	(59,928	)
Equity futures - VA	(4,036		)	(220		)	(3,816		)	(27,261		)	(25,319		)	(1,942		)
Currency futures - VA	(112		)	1,764			(1,876		)	7,971			780			7,191
Volatility futures - VA	—			343			(343		)	—			(132		)	132
Variance swaps - VA	2,214			1,063			1,151			(8,219		)	(821		)	(7,398		)
Equity options - VA	(8,131		)	3,153			(11,284		)	(36,537		)	(20,719		)	(15,818		)
Interest rate swaptions - VA	1,639			8,831			(7,192		)	(2,463		)	5,312			(7,775		)
Interest rate swaps - VA	(89,722		)	5,954			(95,676		)	(106,278		)	3,826			(110,104		)
Embedded derivative - GMWB(1)	25,939			(85,456		)	111,395			106,314			(35,289		)	141,603
Funds withheld derivative	9,837			—			9,837			9,837			—			9,837
Total derivatives related to variable annuity contracts	$	(70,026	)	$	4,628		$	(74,654	)	$	(80,774	)	$	(36,572	)	$	(44,202	)
Economic cost(2)	4,004			8,355			(4,351		)	16,927			15,595			1,332
Derivative - FIA	(59		)	—			(59		)	(59		)	—			(59		)
Realized gains (losses) - derivatives, net of economic cost	$	(66,081	)	$	12,983		$	(79,064	)	$	(63,906	)	$	(20,977	)	$	(42,929	)

(1)Includes impact of nonperformance risk of $3.5 million and $(1.9) million for the three and six months ended June 30, 2013 and $27.1 million and $(14.8) million for the three and six months ended June 30, 2012, respectively.

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

76

	As of
	June 30, 2013		December 31, 2012		Change
	(Dollars In Thousands)
GMDB - Net amount at risk(1)	$	108,014	$	129,309	(16.5	)%
GMDB Reserves	15,141		19,316		(21.6	)
GMWB and GMAB Reserves(1)	8,615		169,269		(94.9	)
Account value subject to GMWB rider	8,501,996		7,165,375		18.7
GMWB Benefit Base	7,943,641		6,888,471		15.3
S&P 500® Index	1,606		1,426		12.6

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

For The Three Months Ended June 30, 2013 as compared to The Three Months Ended June 30, 2012

Segment operating income

Segment operating income was $33.6 million for the three months ended June 30, 2013, as compared to $28.4 million for the three months ended June 30, 2012, an increase of $5.2 million, or 18.3%.  This variance included a favorable change of $9.0 million related to higher net policy fees and other income in the VA line.  Favorable changes in benefits and settlement expenses and DAC amortization also contributed to the increase. Partially offsetting these increases were an unfavorable SPIA mortality variance of $7.2 million and unfavorable changes in non-deferred expenses caused by an unfavorable $3.3 million guaranty fund allocation.

Operating revenues

Segment operating revenues increased $1.1 million, or 0.7%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily due to increases in net policy fees and other income from the VA line of business. Those increases were offset by increased ceded policy fees and lower investment income related to fixed annuity contracts. Average fixed account balances decreased 2.5% and average variable account balances grew 46.7% for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012.

Benefits and settlement expenses

Benefits and settlement expenses decreased $7.2 million, or 8.2%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. This decrease was primarily the result of lower credited interest, lower realized losses in the fixed market value adjusted (“MVA”) annuities line, and favorable changes in VA guaranteed minimum death benefits (“GMDB”) reserves. These favorable changes were partially offset by a $7.2 million unfavorable change in the SPIA mortality variance.

Amortization of DAC

The decrease in DAC amortization for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, was primarily the result of a reinsurance transaction with Shades Creek that occurred in 2013 and a favorable change in unlocking.  DAC unlocking for the three months ended June 30, 2013 was immaterial as compared to $5.7 million unfavorable unlocking for the three months ended June 30, 2012.

Other operating expenses

Other operating expenses increased $5.8 million, or 23.1%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. The increase is due to a guaranty fund allocation of $3.3 million along, with higher commissions and maintenance expenses related to growth of the block of business.

Sales

Total sales increased $27.6 million, or 3.3%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. Sales of variable annuities increased $45.5 million, or 6.8% for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. Sales of fixed annuities decreased by $18.0

77

million, or 11.5% for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, driven by a decrease in single premium deferred annuity sales that was partially offset by an increase in fixed indexed annuities (“FIA”) sales.

For The Six Months Ended June 30, 2013 as compared to The Six Months Ended June 30, 2012

Segment operating income

Segment operating income was $76.4 million for the six months ended June 30, 2013, as compared to $63.8 million for the six months ended June 30, 2012, an increase of $12.6 million, or 19.8%. This variance included a favorable change of $3.5 million in operating revenue which was attributable to higher policy fees and other income in the VA line. Favorable changes in benefits and settlement expenses and DAC amortization were partially offset by unfavorable changes in non-deferred expenses and increased ceded policy fees.

Operating revenues

Segment operating revenues increased $3.5 million, or 1.1%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, primarily due to increases in policy fees and other income from the VA line of business. Those increases were offset by increased ceded policy fees and lower investment income. Average fixed account balances decreased 2.6% and average variable account balances grew 45.8% for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012.

Benefits and settlement expenses

Benefits and settlement expenses decreased $16.9 million, or 9.4%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. This decrease was primarily the result of lower credited interest, lower realized losses in the MVA annuities line, favorable changes in VA GMDB reserves, and a $1.6 million favorable change in FIA fair value adjustments. These favorable changes were partially offset by a $11.7 million unfavorable change in the SPIA mortality variance.

Amortization of DAC

The decrease in DAC amortization for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, was primarily due to ceded amortization as a result of a reinsurance transaction with Shades Creek that occurred in 2013.

Other operating expenses

Other operating expenses increased $8.7 million, or 18.1%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. The increase is due to a guaranty fund allocation of $3.3 million and higher commissions and maintenance expenses related to growth of the business.

Sales

Total sales increased $2.4 million, or 0.2%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. Sales of variable annuities increased $57.8 million, or 4.7% for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. Sales of fixed annuities decreased by $55.4 million, or 17.9%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, driven by a decrease in single premium deferred annuity sales that was partially offset by an increase in FIA sales.

78

Reinsurance

During the three month period ended June 30, 2013, the Annuity segment began reinsuring certain risks associated with the GMWB and GMDB riders to Shades Creek, a subsidiary of PLC.  The cost of reinsurance to the segment is reflected in the chart shown below.  A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Impact of reinsurance

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

Annuities Segment

Line Item Impact of Reinsurance

	For The						For The
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(16,779	)	$	(7	)	$	(16,779	)	$	(20	)
Realized gains (losses) - derivatives	10,583			—			10,583			—
Total operating revenues	(6,196		)	(7		)	(6,196		)	(20		)
Realized gains (losses) - derivatives, net of economic cost	(78,122		)	—			(78,122		)	—
Total revenues	(84,318		)	(7		)	(84,318		)	(20		)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(852		)	—			(852		)	—
Amortization of deferred policy acquisition costs	(2,331		)	—			(2,331		)	—
Other operating expenses	(567		)	—			(567		)	—
Operating benefits and expenses	(3,750		)	—			(3,750		)	—
Amortization of deferred policy acquisition costs related to realized gain (loss) investments	(21,086		)	—			(21,086		)	—
Total benefit and expenses	(24,836		)	—			(24,836		)	—
NET IMPACT OF REINSURANCE	$	(59,482	)	$	(7	)	$	(59,482	)	$	(20	)

The table above does not reflect the impact of reinsurance on our net investment income. The net investment income impact to us and the assuming company has been quantified and is immaterial. The Annuities segment’s reinsurance programs do not materially impact the “other income” line of our income statement.

The net impact of reinsurance is unfavorable by $59.5 million for the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012, primarily due to realized gains on derivatives that were ceded. That was partially offset by favorable changes in DAC amortization.

79

Stable Value Products

Segment results of operations

Segment results were as follows:

	For The							For The
	Three Months Ended							Six Months Ended
	June 30,							June 30,
	2013		2012			Change		2013		2012		Change
	(Dollars In Thousands)							(Dollars In Thousands)
REVENUES
Net investment income	$	33,651	$	34,956		(3.7	)%	$	63,725	$	67,358	(5.4	)%
Other income	—		—			n/m		—		1		n/m
Total operating revenues	33,651		34,956			(3.7	)	63,725		67,359		(5.4	)
Realized gains (losses)	957		(171		)	n/m		2,803		2,082		34.6
Total revenues	34,608		34,785			(0.5	)	66,528		69,441		(4.2	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	10,683		18,221			(41.4	)	22,286		37,178		(40.1	)
Amortization of deferred policy acquisition costs	96		230			(58.3	)	177		426		(58.5	)
Other operating expenses	408		547			(25.4	)	954		1,151		(17.1	)
Total benefits and expenses	11,187		18,998			(41.1	)	23,417		38,755		(39.6	)
INCOME BEFORE INCOME TAX	23,421		15,787			48.4		43,111		30,686		40.5
Less: realized gains (losses)	957		(171		)			2,803		2,082
OPERATING INCOME	$	22,464	$	15,958		40.8		$	40,308	$	28,604	40.9

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

	For The								For The
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Sales
GIC	$	205,284		$	—		n/m	%	$	317,304		$	26,000		n/m	%
GFA - Direct Institutional	—			26,500			n/m		—			176,500			n/m
	$	205,284		$	26,500		n/m		$	317,304		$	202,500		56.7
Average Account Values	$	2,542,096		$	2,737,667		(7.1	)%	$	2,542,987		$	2,760,966		(7.9	)%
Ending Account Values	$	2,579,172		$	2,676,312		(3.6	)%	$	2,579,172		$	2,676,312		(3.6	)%
Operating Spread
Net investment income yield	5.29		%	5.11		%			5.01		%	4.88		%
Interest credited	1.68			2.66					1.75			2.69
Operating expenses	0.08			0.12					0.09			0.11
Operating spread	3.53		%	2.33		%			3.17		%	2.08		%
Adjusted operating spread(1)	2.67		%	1.98		%			2.61		%	1.89		%

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

80

For The Three Months Ended June 30, 2013 as compared to The Three Months Ended June 30, 2012

Segment operating income

Operating income was $22.5 million and increased $6.5 million, or 40.8%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. The increase in operating earnings resulted from an increase in participating mortgage income and higher operating spreads offset by a decline in average account values. Participating mortgage income for the three months ended June 30, 2013 was $5.5 million, compared to $2.4 million for the three months ended June 30, 2012. The adjusted operating spread, which excludes participating income, increased by 69 basis points for the three months ended June 30, 2013 over the prior year, due primarily to a decline in credited interest.

Sales

Total sales were $205.3 million for the three months ended June 30, 2013.

For The Six Months Ended June 30, 2013 as compared to The Six Months Ended June 30, 2012

Segment operating income

Operating income was $40.3 million and increased $11.7 million, or 40.9%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. The increase in operating earnings resulted from an increase in participating mortgage income and higher operating spreads offset by a decline in average account values. Participating mortgage income for the six months ended June 30, 2013 was $7.2 million compared to $2.5 million for the six months ended June 30, 2012. The adjusted operating spread, which excludes participating income, increased by 72 basis points for the six months ended June 30, 2013 over the prior year, due primarily to a decline in credited interest.

Sales

Total sales were $317.3 million for the six months ended June 30, 2013.

81

Asset Protection

Segment results of operations

Segment results were as follows:

	For The								For The
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change
	(Dollars In Thousands)								(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	64,624		$	66,174		(2.3	)%	$	127,163		$	131,203		(3.1	)%
Reinsurance ceded	(22,160		)	(23,660		)	6.3		(43,733		)	(46,870		)	6.7
Net premiums and policy fees	42,464			42,514			(0.1	)	83,430			84,333			(1.1	)
Net investment income	4,749			4,760			(0.2	)	9,564			10,019			(4.5	)
Other income	29,028			27,849			4.2		54,558			53,415			2.1
Total operating revenues	76,241			75,123			1.5		147,552			147,767			(0.1	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	24,845			22,139			12.2		48,599			43,567			11.6
Amortization of deferred policy acquisition costs	5,766			5,791			(0.4	)	11,028			11,319			(2.6	)
Other operating expenses	40,118			42,687			(6.0	)	77,943			85,535			(8.9	)
Total benefits and expenses	70,729			70,617			0.2		137,570			140,421			(2.0	)
INCOME BEFORE INCOME TAX	5,512			4,506			22.3		9,982			7,346			35.9
OPERATING INCOME	$	5,512		$	4,506		22.3		$	9,982		$	7,346		35.9

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

	For The								For The
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Sales
Credit insurance	$	9,852		$	10,066		(2.1	)%	$	17,185		$	18,865		(8.9	)%
Service contracts	92,062			87,312			5.4		168,332			164,377			2.4
GAP	17,453			15,063			15.9		32,219			33,358			(3.4	)
	$	119,367		$	112,441		6.2		$	217,736		$	216,600		0.5
Loss Ratios(1)
Credit insurance	45.0		%	30.3		%			42.4		%	29.4		%
Service contracts	61.5			56.6					60.6			56.0
GAP	52.2			42.3					55.1			43.0

(1) Incurred claims as a percentage of earned premiums.

For The Three Months Ended June 30, 2013 as compared to The Three Months Ended June 30, 2012

Segment operating income

Operating income was $5.5 million, representing an increase of $1.0 million, or 22.3%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. Earnings from the GAP product line increased $0.8 million, or 34.8%, primarily due to higher volume and lower expenses. Credit insurance earnings increased $0.2 million. Service contract earnings remained consistent with the prior year.

82

Net premiums and policy fees

Net premiums and policy fees remained consistent for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. GAP net premiums increased $0.6 million, or 11.8%.  Service contract premiums decreased $0.6 million, or 1.9%.

Other income

Other income increased $1.2 million, or 4.2%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012 primarily due to higher volume.

Benefits and settlement expenses

Benefits and settlement expenses increased $2.7 million, or 12.2%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. Service contract claims increased $1.2 million, or 6.7%, GAP claims increased $0.9 million, or 38.0%, and credit insurance claims increased $0.6 million, or 46.9%, all resulting from higher loss ratios.

Amortization of DAC and Other operating expenses

Amortization of DAC remained consistent for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. Other operating expenses decreased $2.6 million, or 6.0%, for the three months ended June 30, 2013, primarily due to an expense reduction initiative implemented in the first quarter of 2013.

Sales

Total segment sales increased $6.9 million, or 6.2%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. Service contract sales increased $4.8 million, or 5.4%.  Sales in the GAP product line increased $2.4 million, or 15.9%.  Credit insurance sales decreased $0.2 million, or 2.1%.

For The Six Months Ended June 30, 2013 as compared to The Six Months Ended June 30, 2012

Segment operating income

Operating income was $10.0 million, representing an increase of $2.6 million, or 35.9%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. The increase in income was mainly due to a $2.0 million legal settlement accrual in the first quarter of 2012. Credit insurance earnings increased $2.2 million primarily due to the previously mentioned $2.0 million in litigation costs incurred in the first quarter of 2012. Service contract earnings increased $0.2 million, or 5.0%, and GAP earnings increased $0.2 million, or 3.1%.  The increases in both product lines were primarily related to lower expenses somewhat offset by higher loss ratios.

Net premiums and policy fees

Net premiums and policy fees decreased $0.9 million, or 1.1%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. Credit insurance premiums decreased $1.5 million, or 17.3% and service contract premiums decreased $0.6 million, or 1.0%. The decreases were primarily the result of decreasing sales in prior years and the related impact on earned premiums. GAP net premiums increased $1.2 million, or 12.0%.

Other income

Other income increased $1.1 million, or 2.1%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012 due primarily to higher volume in the service contract line.

83

Benefits and settlement expenses

Benefits and settlement expenses increased $5.0 million, or 11.6%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, primarily due to higher loss ratios in all product lines.  Service contract claims increased $2.6 million, or 7.2%, GAP claims increased $1.9 million, or 43.3%, and credit insurance claims increased $0.5 million, or 19.1%.

Amortization of DAC and Other operating expenses

Amortization of DAC was $0.3 million, or 2.6%, lower for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, primarily due to lower earned premiums in the credit product line offset by increases in the service contract  product line. Other operating expenses decreased $7.6 million, or 8.9%, for the six months ended June 30, 2013, primarily due to an expense reduction initiative implemented in the first quarter of 2013 and a  $2.0 million legal settlement accrual in the first quarter of 2012.

Sales

Total segment sales increased $1.1 million, or 0.5%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. Service contract sales increased $4.0 million, or 2.4%.  Sales in the GAP product line decreased $1.1 million, or 3.4% primarily due to lower sales through one large distribution partner and a change in mix of GAP business. Credit insurance sales decreased $1.7 million, or 8.9%, primarily due to an increase in refunds as a result of the 2012 legal settlement.

Reinsurance

The majority of the Asset Protection segment’s reinsurance activity relates to the cession of single premium credit life and credit accident and health insurance, vehicle service contracts, and guaranteed asset protection insurance to producer affiliated reinsurance companies (“PARCs”). These arrangements are coinsurance contracts ceding the business on a first dollar quota share basis at levels ranging from 50% to 100% to limit our exposure and allow the PARCs to share in the underwriting income of the product. Reinsurance contracts do not relieve us from our obligations to our policyholders. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

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

Asset Protection Segment

Line Item Impact of Reinsurance

	For The						For The
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(22,160	)	$	(23,660	)	$	(43,733	)	$	(46,870	)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(13,412		)	(15,174		)	(26,340		)	(30,722		)
Amortization of deferred policy acquisition costs	(3,606		)	(4,992		)	(7,399		)	(10,154		)
Other operating expenses	(1,699		)	(2,474		)	(3,767		)	(4,919		)
Total benefits and expenses	(18,717		)	(22,640		)	(37,506		)	(45,795		)
NET IMPACT OF REINSURANCE (1)	$	(3,443	)	$	(1,020	)	$	(6,227	)	$	(1,075	)

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

84

For The Three Months Ended June 30, 2013 as compared to The Three Months Ended June 30, 2012

Reinsurance premiums ceded decreased $1.5 million, or 6.3%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. The decrease was primarily due to a decline in ceded dealer credit insurance premiums due to lower sales in prior years and a change in mix of business in the GAP line.

Benefits and settlement expenses ceded decreased $1.8 million, or 11.6%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012. The decrease was primarily due to lower losses in the service contract and dealer credit lines.

Amortization of DAC ceded decreased $1.4 million, or 27.8%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily as the result of decreases in ceded activity in the GAP product lines. Other operating expenses ceded decreased $0.8 million, or 31.3%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily as a result of decreases in the GAP line.

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

For The Six Months Ended June 30, 2013 as compared to The Six Months Ended June 30, 2012

Reinsurance premiums ceded decreased $3.1 million, or 6.7%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. The decrease was primarily due to a decline in ceded dealer credit insurance premiums due to lower sales in prior years and a change in mix of business in the GAP line

Benefits and settlement expenses ceded decreased $4.4 million, or 14.3%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012. The decrease was primarily due to lower losses in the service contract and dealer credit lines.

Amortization of DAC ceded decreased $2.8 million, or 27.1%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, primarily as the result of decreases in ceded activity in the GAP product lines. Other operating expenses ceded decreased $1.2 million, or 23.4%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, primarily as a result of decreases in the GAP line.

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

85

Corporate and Other

Segment results of operations

Segment results were as follows:

	For The								For The
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2013			2012			Change		2013			2012			Change
	(Dollars In Thousands)								(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	4,631		$	4,977		(7.0	)%	$	9,309		$	10,143		(8.2	)%
Reinsurance ceded	(4		)	(5		)	(20.0	)	(4		)	(21		)	(81.0	)
Net premiums and policy fees	4,627			4,972			(6.9	)	9,305			10,122			(8.1	)
Net investment income	27,281			14,822			84.1		51,020			37,582			35.8
Other income	158			97			62.9		1,351			29,605			(95.4	)
Total operating revenues	32,066			19,891			61.2		61,676			77,309			(20.2	)
Realized gains (losses) - investments	731			(11,973		)			2,693			(29,018		)
Realized gains (losses) - derivatives	(7,909		)	(3,524		)			(10,648		)	(3,519		)
Total revenues	24,888			4,394			n/m		53,721			44,772			20.0
BENEFITS AND EXPENSES
Benefits and settlement expenses	5,330			5,256			1.4		10,664			11,219			(4.9	)
Amortization of deferred policy acquisition costs	165			186			(11.3	)	344			540			(36.3	)
Other operating expenses	34,612			30,706			12.7		78,605			60,541			29.8
Total benefits and expenses	40,107			36,148			11.0		89,613			72,300			23.9
INCOME (LOSS) BEFORE INCOME TAX	(15,219		)	(31,754		)	(52.1	)	(35,892		)	(27,528		)	30.4
Less: realized gains (losses) - investments	731			(11,973		)			2,693			(29,018		)
Less: realized gains (losses) - derivatives	(7,909		)	(3,524		)			(10,648		)	(3,519		)
OPERATING INCOME (LOSS)	$	(8,041	)	$	(16,257	)	(50.5	)	$	(27,937	)	$	5,009		n/m

For The Three Months Ended June 30, 2013 as compared to The Three Months Ended June 30, 2012

Segment operating income (loss)

Corporate and Other segment operating loss was $8.0 million for the three months ended June 30, 2013, as compared to an operating loss of $16.3 million for the three months ended June 30, 2012. The increase resulted from an improvement in net investment income primarily due to a $4.0 million favorable variance related to mortgage loan prepayment fee income and $3.8 million related to called securities.  Partially offsetting this variance was an increase in other operating expenses as compared to the second quarter of 2012.

Operating revenues

Net investment income for the segment increased $12.5 million, or 84.1%, for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, and net premiums and policy fees decreased $0.3 million, or 6.9%.  The increase in net investment income was primarily due to a $4.0 million favorable variance related to mortgage loan prepayment fee income and $3.8 million related to called securities.  In addition, the segment experienced a $4.2 million increase in interest income associated with a reserve financing transaction which is entirely offset by the increase in interest expense as referred to below.

86

Total benefits and expenses

Total benefits and expenses increased $4.0 million for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012, primarily due to $1.8 million of acquisition related expenses and a $4.2 million increase in interest expense associated with a reserve financing transaction for the three months ended June 30, 2013 which is entirely offset by the increase in interest income as referred to above.  These variances were partially offset by a favorable $3.9 million guaranty fund allocation for the second quarter of 2013.

For The Six Months Ended June 30, 2013 as compared to The Six Months Ended June 30, 2012

Segment operating income (loss)

Corporate and Other segment operating loss was $27.9 million for the six months ended June 30, 2013, as compared to operating income of $5.0 million for the six months ended June 30, 2012. The decrease was the result of a $28.0 million unfavorable variance related to gains on the repurchase of non-recourse funding obligations. For the six months ended June 30, 2012, $29.3 million of pre-tax gains were generated from the repurchase of non-recourse funding obligations as compared to $1.3 million of pre-tax gains for the six months ended June 30, 2013. In addition, the decrease was driven by higher operating expenses, partially offset by an improvement in net investment income for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012.

Operating revenues

Net investment income for the segment increased $13.4 million, or 35.8%, for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, and net premiums and policy fees decreased $0.8 million, or 8.1%. The increase in net investment income was primarily due to $4.8 million related to called securities and a $2.9 million favorable variance related to mortgage loan prepayment fee income.  In addition, the segment experienced a $7.5 million increase in interest income associated with a reserve financing transaction which is entirely offset by the increase in interest expense as referred to below.  Other income decreased $28.3 million for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012, primarily due to a $28.0 million unfavorable variance related to gains generated on the repurchase of non-recourse funding obligations.

Total benefits and expenses

Total benefits and expenses increased $17.3 million for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, primarily due to a $7.5 million increase in interest expense associated with a reserve financing transaction which is entirely offset by the increase in interest income as referred to above. In addition, the segment recorded $3.1 million of acquisition related expenses during the six months ended June 30, 2013 and experienced an increase in non-acquisition related legal fees compared to the six months ended June 30, 2012.

87

CONSOLIDATED INVESTMENTS

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

Portfolio Description

As of June 30, 2013, our investment portfolio was approximately $35.8 billion. The types of assets in which we may invest are influenced by various state insurance laws which prescribe qualified investment assets. Within the parameters of these laws, we invest in assets giving consideration to such factors as liquidity and capital needs, investment quality, investment return, matching of assets and liabilities, and the overall composition of the investment portfolio by asset type and credit exposure.

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

	As of
	June 30, 2013				December 31, 2012
	(Dollars In Thousands)
Publicly issued bonds (amortized cost: 2013 - $21,436,624; 2012 - $21,228,463)	$	22,710,133	63.4	%	$	23,808,542	64.6	%
Privately issued bonds (amortized cost: 2013 - $6,263,326; 2012 - $5,732,847)	6,529,743		18.2		6,261,436		17.0
Fixed maturities	29,239,876		81.6		30,069,978		81.6
Equity securities (cost: 2013 - $411,048; 2012 - $371,827)	405,855		1.1		373,715		1.0
Mortgage loans	4,772,134		13.3		4,948,625		13.4
Investment real estate	6,450		—		6,517		—
Policy loans	855,780		2.4		865,391		2.3
Other long-term investments	377,670		1.1		378,821		1.0
Short-term investments	171,010		0.5		216,787		0.7
Total investments	$	35,828,775	100.0	%	$	36,859,834	100.0	%

Included in the preceding table are $2.9 billion and $3.0 billion of fixed maturities and $91.6 million and $118.9 million of short-term investments classified as trading securities as of June 30, 2013 and December 31, 2012, respectively. The trading portfolio includes invested assets of $2.8 billion and $3.0 billion as of June 30, 2013 and December 31, 2012, respectively, held pursuant to modified coinsurance (“Modco”) arrangements under which the economic risks and benefits of the investments are passed to third party reinsurers. Also included above are $335.0 million and $300.0 million of securities classified as held-to-maturity as of June 30, 2013 and December 31, 2012, respectively.

88

Fixed Maturity Investments

As of June 30, 2013, our fixed maturity investment holdings were approximately $29.2 billion. The approximate percentage distribution of our fixed maturity investments by quality rating is as follows:

	As of
Rating	June 30, 2013		December 31, 2012
AAA	14.4	%	14.7	%
AA	6.9		7.2
A	31.0		30.8
BBB	40.6		39.7
Below investment grade	6.0		6.6
Not rated	1.1		1.0
	100.0	%	100.0	%

We use various Nationally Recognized Statistical Rating Organizations’ (“NRSRO”) ratings when classifying securities by quality ratings. When the various NRSRO ratings are not consistent for a security, we use the second-highest convention in assigning the rating. When there are no such published ratings, we assign a rating based on the statutory accounting rating system if such ratings are available.

We do not have material exposure to financial guarantee insurance companies with respect to our investment portfolio. As of June 30, 2013, based upon amortized cost, $37.2 million of our securities were guaranteed either directly or indirectly by third parties out of a total of $27.4 billion fixed maturity securities held by us (0.1% of total fixed maturity securities).

Changes in fair value for our available-for-sale portfolio, net of related DAC and VOBA, are charged or credited directly to shareowner’s equity, net of tax. Declines in fair value that are other-than-temporary are recorded as realized losses in the consolidated statements of income, net of any applicable non-credit component of the loss, which is recorded as an adjustment to other comprehensive income (loss).

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

	As of
Type	June 30, 2013		December 31, 2012
	(Dollars In Millions)
Corporate bonds	$	21,592.4	$	22,037.9
Residential mortgage-backed securities	1,907.1		2,197.1
Commercial mortgage-backed securities	1,113.8		1,040.9
Other asset-backed securities	1,181.4		1,133.0
U.S. government-related securities	1,382.5		1,474.3
Other government-related securities	122.8		164.2
States, municipals, and political subdivisions	1,604.9		1,722.6
Other	335.0		300.0
Total fixed income portfolio	$	29,239.9	$	30,070.0

Within our fixed maturity investments, we maintain portfolios classified as “available-for-sale”, “trading”, and “held-to-maturity”.  We purchase our available-for-sale investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, we may sell any of our available-for-sale and trading investments to maintain proper matching of assets and liabilities. Accordingly, we classified $26.0 billion, or 89.1%, of our fixed maturities as “available-for-sale” as of June 30, 2013. These securities are carried at fair value on our consolidated condensed balance sheets.

89

Fixed maturities that we have both the positive intent and ability to hold to maturity are classified as “held-to-maturity”. We classified $335.0 million, or 1.1% of our fixed maturities as “held-to-maturity” as of June 30, 2013. These securities are carried at amortized cost on our consolidated condensed balance sheets.

Trading securities are carried at fair value and changes in fair value are recorded on the income statement as they occur. Our trading portfolio accounts for $2.9 billion, or 9.8%, of our fixed maturities and $91.6 million of short-term investments as of June 30, 2013. Changes in fair value on the trading portfolio, including gains and losses from sales, are passed to the reinsurers through the contractual terms of the reinsurance arrangements. Partially offsetting these amounts are corresponding changes in the fair value of the embedded derivative associated with the underlying reinsurance arrangement. The total Modco trading portfolio fixed maturities by rating is as follows:

	As of
Rating	June 30, 2013		December 31, 2012
	(Dollars In Thousands)
AAA	$	440,077	$	559,374
AA	286,028		239,834
A	847,135		801,562
BBB	922,764		1,038,873
Below investment grade	345,495		353,089
Total Modco trading fixed maturities	$	2,841,499	$	2,992,732

A portion of our bond portfolio is invested in residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”). ABS are securities that are backed by a pool of assets. These holdings as of June 30, 2013, were approximately $4.2 billion. Mortgage-backed securities (“MBS”) are constructed from pools of mortgages and may have cash flow volatility as a result of changes in the rate at which prepayments of principal occur with respect to the underlying loans. Excluding limitations on access to lending and other extraordinary economic conditions, prepayments of principal on the underlying loans can be expected to accelerate with decreases in market interest rates and diminish with increases in interest rates.

90

Residential mortgage-backed securities - As of June 30, 2013, our RMBS portfolio was approximately $1.9 billion. Sequential securities receive payments in order until each class is paid off. Planned amortization class securities (“PACs”) pay down according to a schedule. Pass through securities receive principal as principal of the underlying mortgages is received.

The tables below include a breakdown of these holdings by type and rating as of June 30, 2013.

	Percentage of
	Residential
	Mortgage- Backed
Type	Securities
Sequential	23.4	%
PAC	43.7
Pass Through	7.1
Other	25.8
	100.0	%

	Percentage of
	Residential
	Mortgage-Backed
Rating	Securities
AAA	57.1	%
AA	—
A	1.5
BBB	0.3
Below investment grade	41.1
	100.0	%

91

Alt-A Collateralized Holdings

As of June 30, 2013, we held securities with a fair value of $426.3 million, or 1.2% of invested assets, supported by collateral classified as Alt-A. As of December 31, 2012, we held securities with a fair value of $443.6 million supported by collateral classified as Alt-A. We included in this classification certain whole loan securities where such securities had underlying mortgages with a high level of limited loan documentation. As of June 30, 2013, these securities had a fair value of $142.9 million and an unrealized gain of $27.5 million.

The following table includes the percentage of our collateral classified as Alt-A, grouped by rating category, as of June 30, 2013:

	Percentage of
	Alt-A
Rating	Securities
A	0.2	%
Below investment grade	99.8
	100.0	%

The following tables categorize the estimated fair value and unrealized gain/(loss) of our mortgage-backed securities collateralized by Alt-A mortgage loans by rating as of June 30, 2013:

Alt-A Collateralized Holdings

	Estimated Fair Value of Security by Year of Security Origination
	2009 and
Rating	Prior		2010		2011		2012		2013		Total
	(Dollars In Millions)
A	$	0.8	$	—	$	—	$	—	$	—	$	0.8
Below investment grade	425.5		—		—		—		—		425.5
Total mortgage-backed securities collateralized by Alt-A mortgage loans	$	426.3	$	—	$	—	$	—	$	—	$	426.3

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2009 and
Rating	Prior		2010		2011		2012		2013		Total
	(Dollars In Millions)
A	$	—	$	—	$	—	$	—	$	—	$	—
Below investment grade	31.0		—		—		—		—		31.0
Total mortgage-backed securities collateralized by Alt-A mortgage loans	$	31.0	$	—	$	—	$	—	$	—	$	31.0

92

Sub-prime Collateralized Holdings

As of June 30, 2013, we held securities with a total fair value of $2.4 million that were supported by collateral classified as sub-prime. As of December 31, 2012, we held securities with a fair value of $2.7 million that were supported by collateral classified as sub-prime.

Prime Collateralized Holdings

As of June 30, 2013, we had RMBS collateralized by prime mortgage loans (including agency mortgages) with a total fair value of $1.5 billion, or 4.1%, of total invested assets. As of December 31, 2012, we held securities with a fair value of $1.8 billion of RMBS collateralized by prime mortgage loans (including agency mortgages).

The following table includes the percentage of our collateral classified as prime, grouped by rating category, as of June 30, 2013:

	Percentage of
	Prime
Rating	Securities
AAA	73.6	%
AA	—
A	1.9
BBB	0.4
Below investment grade	24.1
	100.0	%

The following tables categorize the estimated fair value and unrealized gain/(loss) of our mortgage-backed securities collateralized by prime mortgage loans (including agency mortgages) by rating as of June 30, 2013:

Prime Collateralized Holdings

	Estimated Fair Value of Security by Year of Security Origination
	2009 and
Rating	Prior		2010		2011		2012		2013		Total
	(Dollars In Millions)
AAA	$	389.7	$	318.2	$	328.7	$	5.3	$	46.9	$	1,088.8
AA	0.3		—		—		—		—		0.3
A	27.5		—		—		—		—		27.5
BBB	6.5		—		—		—		—		6.5
Below investment grade	355.3		—		—		—		—		355.3
Total mortgage-backed securities collateralized by prime mortgage loans	$	779.3	$	318.2	$	328.7	$	5.3	$	46.9	$	1,478.4

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2009 and
Rating	Prior		2010		2011		2012			2013			Total
	(Dollars In Millions)
AAA	$	23.4	$	13.3	$	11.7	$	(0.3	)	$	(1.0	)	$	47.1
AA	—		—		—		—			—			—
A	0.6		—		—		—			—			0.6
BBB	0.7		—		—		—			—			0.7
Below investment grade	10.1		—		—		—			—			10.1
Total mortgage-backed securities collateralized by prime mortgage loans	$	34.8	$	13.3	$	11.7	$	(0.3	)	$	(1.0	)	$	58.5

93

Commercial mortgage-backed securities - Our CMBS portfolio consists of commercial mortgage-backed securities issued in securitization transactions. As of June 30, 2013, the CMBS holdings were approximately $1.1 billion. As of December 31, 2012, the CMBS holdings were approximately $1.0 billion.

The following table includes the percentages of our CMBS holdings, grouped by rating category, as of June 30, 2013:

	Percentage of
	Commercial
	Mortgage-Backed
Rating	Securities
AAA	68.5	%
AA	12.5
A	17.5
BBB	1.5
	100.0	%

The following tables categorize the estimated fair value and unrealized gain/(loss) of our CMBS as of June 30, 2013:

Commercial Mortgage-Backed Securities

	Estimated Fair Value of Security by Year of Security Origination
	2009 and
Rating	Prior		2010		2011		2012		2013		Total
	(Dollars In Millions)
AAA	$	77.6	$	80.7	$	213.6	$	288.5	$	102.5	$	762.9
AA	—		33.2		37.1		41.2		27.8		139.3
A	44.4		33.8		83.6		13.6		19.0		194.4
BBB	17.2		—		—		—		—		17.2
Total commercial mortgage-backed securities	$	139.2	$	147.7	$	334.3	$	343.3	$	149.3	$	1,113.8

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2009 and
Rating	Prior		2010		2011		2012			2013			Total
	(Dollars In Millions)
AAA	$	1.8	$	6.0	$	14.1	$	(11.1	)	$	(6.4	)	$	4.4
AA	—		1.9		2.1		(2.9		)	(2.4		)	(1.3		)
A	1.1		1.2		0.1		(0.7		)	(1.5		)	0.2
BBB	0.5		—		—		—			—			0.5
Total commercial mortgage-backed securities	$	3.4	$	9.1	$	16.3	$	(14.7	)	$	(10.3	)	$	3.8

94

Other asset-backed securities — Other asset-backed securities pay down based on cash flow received from the underlying pool of assets, such as receivables on auto loans, student loans, credit cards, etc. As of June 30, 2013, these holdings were approximately $1.2 billion. As of December 31, 2012, these holdings were approximately $1.1 billion.

The following table includes the percentages of our other asset-backed holdings, grouped by rating category, as of June 30, 2013:

	Percentage of
	Other Asset- Backed
Rating	Securities
AAA	49.8	%
AA	19.7
A	18.7
BBB	0.3
Below investment grade	11.5
	100.0	%

The following tables categorize the estimated fair value and unrealized gain/(loss) of our asset-backed securities as of June 30, 2013:

Other Asset-Backed Securities

	Estimated Fair Value of Security by Year of Security Origination
	2009 and
Rating	Prior		2010		2011		2012		2013		Total
	(Dollars In Millions)
AAA	$	518.8	$	7.1	$	26.0	$	33.7	$	2.2	$	587.8
AA	169.2		—		—		63.7		—		232.9
A	49.1		—		72.8		91.6		7.7		221.2
BBB	3.4		—		—		—		—		3.4
Below investment grade	136.1		—		—		—		—		136.1
Total other asset-backed securities	$	876.6	$	7.1	$	98.8	$	189.0	$	9.9	$	1,181.4

	Estimated Unrealized Gain (Loss) of Security by Year of Security Origination
	2009 and
Rating	Prior			2010		2011		2012			2013			Total
	(Dollars In Millions)
AAA	$	(16.4	)	$	0.1	$	0.9	$	(0.3	)	$	(0.1	)	$	(15.8	)
AA	(7.4		)	—		—		(0.1		)	—			(7.5		)
A	5.2			—		5.3		(0.5		)	(0.1		)	9.9
BBB	(0.1		)	—		—		—			—			(0.1		)
Below investment grade	12.3			—		—		—			—			12.3
Total other asset-backed securities	$	(6.4	)	$	0.1	$	6.2	$	(0.9	)	$	(0.2	)	$	(1.2	)

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We obtained ratings of our fixed maturities from Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Corporation (“S&P”), and/or Fitch Ratings (“Fitch”). If a fixed maturity is not rated by Moody’s, S&P, or Fitch, we use ratings from the National Association of Insurance Commissioners (“NAIC”), or we rate the fixed maturity based upon a comparison of the unrated issue to rated issues of the same issuer or rated issues of other issuers with similar risk characteristics. As of June 30, 2013, 98.9% of our fixed maturities were rated by Moody’s, S&P, Fitch, and/or the NAIC.

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

	As of		% Fair		As of		% Fair
	June 30, 2013		Value		December 31, 2012		Value
	(Dollars In Thousands)
Banking	$	2,225,813	7.6	%	$	2,314,924	7.7	%
Other finance	444,752		1.5		346,029		1.2
Electric	3,560,117		12.2		3,782,241		12.6
Natural gas	2,107,766		7.2		2,199,265		7.3
Insurance	2,473,720		8.5		2,539,394		8.4
Energy	1,632,963		5.6		1,820,275		6.1
Communications	1,258,387		4.3		1,260,773		4.2
Basic industrial	1,289,354		4.4		1,293,037		4.3
Consumer noncyclical	1,804,366		6.2		1,738,686		5.8
Consumer cyclical	947,973		3.2		941,057		3.1
Finance companies	237,814		0.8		244,107		0.8
Capital goods	1,017,655		3.5		1,065,864		3.5
Transportation	710,936		2.4		670,477		2.2
Other industrial	255,459		0.9		235,642		0.8
Brokerage	584,914		2.0		588,307		2.0
Technology	852,979		2.9		844,036		2.8
Real estate	118,987		0.4		119,021		0.4
Other utility	68,416		0.2		34,779		0.1
Commercial mortgage-backed securities	1,113,815		3.8		1,040,896		3.5
Other asset-backed securities	1,181,385		4.0		1,132,943		3.8
Residential mortgage-backed non-agency securities	848,946		2.9		987,035		3.3
Residential mortgage-backed agency securities	1,058,121		3.6		1,210,098		4.0
U.S. government-related securities	1,382,533		4.7		1,474,319		4.9
Other government-related securities	122,840		0.4		164,222		0.5
State, municipals, and political divisions	1,604,865		5.5		1,722,551		5.7
Other	335,000		1.3		300,000		1.0
Total	$	29,239,876	100.0	%	$	30,069,978	100.0	%

Our investments classified as available-for-sale and trading in debt and equity securities are reported at fair value. Our investments classified as held-to-maturity are reported at amortized cost. As of June 30, 2013, our fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $29.2 billion, which was 6.6% above amortized cost of $27.4 billion. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market fluctuations are not expected to adversely affect liquidity.

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

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Mortgage Loans

We invest a portion of our investment portfolio in commercial mortgage loans. As of June 30, 2013, our mortgage loan holdings were approximately $4.8 billion. We have specialized in making loans on credit-oriented commercial properties, credit-anchored strip shopping centers, and apartments. Our underwriting procedures relative to our commercial loan portfolio are based, in our view, on a conservative and disciplined approach. We concentrate on a small number of commercial real estate asset types associated with the necessities of life (retail, multi-family, professional office buildings, and warehouses). We believe these asset types tend to weather economic downturns better than other commercial asset classes in which we have chosen not to participate. We believe this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout our history.

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

We record mortgage loans net of an allowance for credit losses. This allowance is calculated through analysis of specific loans that have indicators of potential impairment based on current information and events. As of June 30, 2013 and December 31, 2012, our allowance for mortgage loan credit losses was $7.0 million and $2.9 million, respectively. While our mortgage loans do not have quoted market values, as of June 30, 2013, we estimated the fair value of our mortgage loans to be $5.3 billion (using discounted cash flows from the next call date), which was approximately 10% greater than the amortized cost, less any related loan loss reserve.

At the time of origination, our mortgage lending criteria targets that the loan-to-value ratio on each mortgage is 75% or less. We target projected rental payments from credit anchors (i.e., excluding rental payments from smaller local tenants) of 70% of the property’s projected operating expenses and debt service.

We also offer a type of commercial mortgage loan under which we will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate. As of June 30, 2013 and December 31, 2012, approximately $705.7 million and $817.3 million, respectively, of our mortgage loans had this participation feature. Cash flows received as a result of this participation feature are recorded as interest income. Exceptions to these loan-to-value measures may be made if we believe the mortgage has an acceptable risk profile. During the three and six month period ended June 30, 2013, we recognized $5.8 million and $9.2 million of participating mortgage loan income, respectively.

Certain of our mortgage loans have call options or interest rate reset options between 3 and 10 years. However, if interest rates were to significantly increase, we may be unable to exercise the call options or increase the interest rates on our existing mortgage loans commensurate with the significantly increased market rates. Assuming the loans are called at their next call dates, approximately $106.1 million will become due in the remainder of 2013, $1.3 billion in 2014 through 2018, $581.3 million in 2019 through 2023, and $173.7 million thereafter.

As of June 30, 2013, approximately $16.0 million, or 0.04%, of invested assets consisted of nonperforming, restructured or mortgage loans that were foreclosed and were converted to real estate properties. We do not expect these investments to adversely affect our liquidity or ability to maintain proper matching of assets and liabilities. Our mortgage loan portfolio consists of two categories of loans: (1) those not subject to a pooling and servicing agreement and (2) those subject to a contractual pooling and servicing agreement.

As of June 30, 2013, $13.8 million of mortgage loans not subject to a pooling and servicing agreement were nonperforming. We did not foreclose on any nonperforming loans during the six months ended June 30, 2013.

As of June 30, 2013, $2.2 million of loans subject to a pooling and servicing agreement were nonperforming. None of these nonperforming loans have been restructured during the six months ended June 30, 2013. We did not foreclose on any nonperforming loans during the six months ended June 30, 2013.

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

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

Risk Management and Impairment Review

We monitor the overall credit quality of our portfolio within established guidelines. The following table includes our available-for-sale fixed maturities by credit rating as of June 30, 2013:

			Percent of
Rating	Fair Value		Fair Value
	(Dollars In Thousands)
AAA	$	3,768,417	14.5	%
AA	1,723,705		6.6
A	8,204,100		31.5
BBB	10,955,950		42.1
Investment grade	24,652,172		94.7
BB	681,951		2.6
B	116,167		0.4
CCC or lower	602,053		2.3
Below investment grade	1,400,171		5.3
Total	$	26,052,343	100.0	%

Not included in the table above are $2.5 billion of investment grade and $356.5 million of below investment grade fixed maturities classified as trading securities and $335.0 million of fixed maturities classified as held-to-maturity.

Limiting bond exposure to any creditor group is another way we manage credit risk. We held no credit default swaps on the positions listed below as of June 30, 2013. The following summarizes our ten largest maturity exposures to an individual creditor group as of June 30, 2013:

	Fair Value of
	Funded		Unfunded		Total
Creditor	Securities		Exposures		Fair Value
	(Dollars In Millions)
Duke Energy Corp	$	199.3	$	—	$	199.3
Comcast Corp.	182.7		—		182.7
Exelon Corp.	168.2		—		168.2
Nextera Energy Inc.	161.2		—		161.2
General Electric	160.1		—		160.1
Berkshire Hathaway Inc.	159.9		—		159.9
JP Morgan Chase and Company	135.3		11.4		146.7
Verizon Communications Inc.	140.8		—		140.8
Rio Tinto	139.8		—		139.8
Citigroup Inc.	131.9		6.0		137.9

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

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

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

Securities in an unrealized loss position are reviewed at least quarterly to determine if an other-than-temporary impairment is present based on certain quantitative and qualitative factors. We consider a number of factors in determining whether the impairment is other-than-temporary. These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) an assessment of our intent to sell the security (including a more likely than not assessment of whether we will be required to sell the security) before recovering the security’s amortized cost, 5) the time period during which the decline has occurred, 6) an economic analysis of the issuer’s industry, and 7) the financial strength, liquidity, and recoverability of the issuer. Management performs a security-by-security review each quarter in evaluating the need for any other-than-temporary impairments. Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures considered, along with an analysis regarding our expectations for recovery of the security’s entire amortized cost basis through the receipt of future cash flows. Based on our analysis, for the three and six months ended June 30, 2013, we concluded that approximately $4.0 million and $8.6 million, respectively, of investment securities in an unrealized loss position was other-than-temporarily impaired, due to credit-related factors, resulting in a charge to earnings. Additionally, $2.2 million and $5.5 million of non-credit losses previously recorded in other comprehensive income were recorded in earnings as credit losses for the three and six months ended June 30, 2013, respectively. These non-credit losses were caused by recognizing, in the current quarter, credit losses in earnings that had previously been recognized as non-credit losses in other comprehensive income.

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

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

Certain European countries have experienced varying degrees of financial stress. Risks from the continued debt crisis in Europe could continue to disrupt the financial markets which could have a detrimental impact on global economic conditions and on sovereign and non-sovereign obligations. There remains considerable uncertainty as to future developments in the European debt crisis and the impact on financial markets.

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The chart shown below includes our non-sovereign fair value exposures in these countries as of June 30, 2013. As June 30, 2013, we had no unfunded exposure and had no direct sovereign fair value exposure.

					Total Gross
	Non-sovereign Debt				Funded
Financial Instrument and Country	Financial		Non-financial		Exposure
	(Dollars In Millions)
Securities:
United Kingdom	$	398.9	$	468.6	$	867.5
Switzerland	116.9		201.8		318.7
France	69.2		95.2		164.4
Sweden	143.7		4.7		148.4
Netherlands	146.7		83.9		230.6
Spain	38.6		105.4		144.0
Belgium	—		94.9		94.9
Germany	49.8		76.3		126.1
Ireland	5.7		94.0		99.7
Luxembourg	—		57.3		57.3
Italy	—		46.9		46.9
Norway	—		39.4		39.4
Total securities	969.5		1,368.4		2,337.9
Derivatives:
Germany	14.2		—		14.2
Switzerland	11.5		—		11.5
Total derivatives	25.7		—		25.7
Total securities	$	995.2	$	1,368.4	$	2,363.6

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Realized Gains and Losses

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

	For The									For The
	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2013			2012			Change			2013			2012			Change
	(Dollars In Thousands)
Fixed maturity gains - sales	$	21,579		$	16,511		$	5,068		$	34,433		$	39,326		$	(4,893	)
Fixed maturity losses - sales	(2,287		)	(94		)	(2,193		)	(2,843		)	(3,231		)	388
Equity gains - sales	2,366			148			2,218			2,367			148			2,219
Impairments on fixed maturity securities	(2,910		)	(13,442		)	10,532			(6,497		)	(32,038		)	25,541
Impairments on equity securities	(1,090		)	—			(1,090		)	(2,087		)	—			(2,087		)
Modco trading portfolio	(126,694		)	56,063			(182,757		)	(142,022		)	74,162			(216,184		)
Other	(5,191		)	(4,749		)	(442		)	(6,408		)	(7,043		)	635
Total realized gains (losses) - investments	$	(114,227	)	$	54,437		$	(168,664	)	$	(123,057	)	$	71,324		$	(194,381	)
Derivatives related to variable annuity contracts:
Interest rate futures - VA	$	(7,654	)	$	69,196		$	(76,850	)	$	(24,138	)	$	35,790		$	(59,928	)
Equity futures - VA	(4,036		)	(220		)	(3,816		)	(27,261		)	(25,319		)	(1,942		)
Currency futures - VA	(112		)	1,764			(1,876		)	7,971			780			7,191
Volatility futures - VA	—			343			(343		)	—			(132		)	132
Variance swaps - VA	2,214			1,063			1,151			(8,219		)	(821		)	(7,398		)
Equity options - VA	(8,131		)	3,153			(11,284		)	(36,537		)	(20,719		)	(15,818		)
Interest rate swaptions - VA	1,639			8,831			(7,192		)	(2,463		)	5,312			(7,775		)
Interest rate swaps - VA	(89,722		)	5,954			(95,676		)	(106,278		)	3,826			(110,104		)
Embedded derivative - GMWB	25,939			(85,456		)	111,395			106,314			(35,289		)	141,603
Funds withheld derivative	9,837			—			9,837			9,837			—			9,837
Total derivatives related to variable annuity contracts	(70,026		)	4,628			(74,654		)	(80,774		)	(36,572		)	(44,202		)
Embedded derivative - Modco reinsurance treaties	144,998			(48,679		)	193,677			161,773			(37,973		)	199,746
Embedded derivative - FIA	(41		)	—			(41		)	(41		)	—			(41		)
Interest rate swaps	1,909			(2,916		)	4,825			2,912			(879		)	3,791
Interest rate caps	—			(351		)	351			—			(2,515		)	2,515
Derivatives with PLC(1)	(9,751		)	500			(10,251		)	(13,529		)	500			(14,029		)
Other derivatives	(498		)	(950		)	452			(143		)	(238		)	95
Total realized gains (losses) - derivatives	$	66,591		$	(47,768	)	$	114,359		$	70,198		$	(77,677	)	$	147,875

(1)These derivatives include the interest support, a yearly renewable term (“YRT”) premium support, and portfolio maintenance agreements between certain of our subsidiaries and PLC.

Realized gains and losses on investments reflect portfolio management activities designed to maintain proper matching of assets and liabilities and to enhance long-term investment portfolio performance. The change in net realized investment gains (losses), excluding impairments and Modco trading portfolio activity during the three and six months ended June 30, 2013, primarily reflects the normal operation of our asset/liability program within the context of the changing interest rate and spread environment, as well as tax planning strategies designed to utilize capital loss carryforwards.

From time to time, we are required to post and obligated to return collateral related to derivative transactions. As of June 30, 2013, we had posted cash and securities (at fair value) as collateral of approximately $60.3 million and $52.3 million, respectively. As of June 30, 2013, we received $1.0 million of cash as collateral. We do not net the collateral posted or received with the fair value of the derivative financial instruments for reporting purposes.

Realized losses are comprised of both write-downs of other-than-temporary impairments and actual sales of investments. For the three and six months ended June 30, 2013, we recognized pre-tax other-than-temporary impairments of $4.0 million and $8.6 million, respectively, due to credit-related factors, resulting in a charge to earnings. During the three and six months ended June 30, 2013, $2.2 million and $5.5 million of non-credit losses previously recorded in other comprehensive income were recorded in earnings as credit losses, respectively. These non-credit losses were caused by recognizing, in the current quarter, credit losses in earnings that had previously been recognized as non-credit losses in other comprehensive income. For the three and six months ended June 30, 2012, we

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recognized pre-tax other-than-temporary impairments of $13.4 million and $32.0 million, respectively. These other-than-temporary impairments resulted from our analysis of circumstances and our belief that credit events, loss severity, changes in credit enhancement, and/or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to these investments. These other-than-temporary impairments, net of Modco recoveries, are presented in the chart below:

	For The				For The
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
	(Dollars In Millions)
Alt-A MBS	$	1.4	$	2.8	$	3.0	$	4.7
Other MBS	1.5		5.0		3.5		9.9
Corporate bonds	—		5.6		—		17.4
Equities	1.1		—		2.1		—
Total	$	4.0	$	13.4	$	8.6	$	32.0

As previously discussed, management considers several factors when determining other-than-temporary impairments. Although we purchase securities with the intent to hold them until maturity, we may change our position as a result of a change in circumstances. Any such decision is consistent with our classification of all but a specific portion of our investment portfolio as available-for-sale. For the six months ended June 30, 2013, we sold securities in an unrealized loss position with a fair value of $57.2 million. For such securities, the proceeds, realized loss, and total time period that the security had been in an unrealized loss position are presented in the table below:

	Proceeds		% Proceeds		Realized Loss			% Realized Loss
	(Dollars In Thousands)
<= 90 days	$	20,784	36.3	%	$	(314	)	11.1	%
>90 days but <= 180 days	26,862		46.9		(507		)	17.8
>180 days but <= 270 days	22		—		(2		)	0.1
>270 days but <= 1 year	13		—		(4		)	0.2
>1 year	9,539		16.8		(2,016		)	70.8
Total	$	57,220	100.0	%	$	(2,843	)	100.0	%

For the three and six months ended June 30, 2013, we sold securities in an unrealized loss position with a fair value (proceeds) of $53.2 million and $57.2 million, respectively. The loss realized on the sale of these securities was $2.3 million and $2.8 million, respectively.

For the three and six months ended June 30, 2013, we sold securities in an unrealized gain position with a fair value of $409.9 million and $797.7 million, respectively. The gain realized on the sale of these securities was $23.9 million and $36.8 million, respectively.

The $6.4 million of other realized losses recognized for the six months ended June 30, 2013, consists of the increase in the mortgage loan reserves mortgage loan losses of $2.3 million and real estate gains of $0.1 million.

For the three and six months ended June 30, 2013, net losses of $126.7 million and $142.0 million, respectively, primarily related to changes in fair value on our Modco trading portfolios were included in realized gains and losses. Of this amount, approximately $19.7 million and $22.0 million, respectively, of gains were realized through the sale of certain securities, which will be reimbursed to our reinsurance partners over time through the reinsurance settlement process for this block of business. The Modco embedded derivative associated with the trading portfolios had realized pre-tax gains of $145.0 million and $161.8 million, respectively, during the three and six months ended June 30, 2013. These gains were primarily the result of an increase in treasury yields.

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

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We use equity, interest rate, currency, and volatility futures to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within our variable annuity products. In general, the cost of such benefits varies with the level of equity and interest rate markets, foreign currency levels, and overall volatility. The equity futures resulted in net pre-tax losses of $4.0 million and $27.3 million, interest rate futures resulted in pre-tax losses of $7.7 million and $24.1 million, currency futures resulted in net pre-tax losses of $0.1 million and net pre-tax gains of $8.0 million, and volatility futures resulted in no pre-tax gains or losses for the three and six months ended June 30, 2013, respectively. No volatility future positions were held during the three and six months ended June 30, 2013.

We also use equity options and variance swaps to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within our variable annuity products. In general, the cost of such benefits varies with the level of equity markets and overall volatility. The equity options resulted in net pre-tax losses of $8.1 million  and $36.5 million and the variance swaps resulted in a net pre-tax gain of $2.2 million and a net pre-tax loss of $8.2 million, respectively, for the three and six months ended June 30, 2013.

We use interest rate swaps and interest rate swaptions to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within our variable annuity products. The interest rate swaps resulted in net pre-tax losses of $89.7 million and $106.3 million and interest rate swaptions resulted in a net pre-tax gain of $1.6 million and a net pre-tax loss of $2.5 million, respectively, for the three and six months ended June 30, 2013.

The GMWB rider embedded derivative on variable deferred annuities, with the GMWB rider, had net realized gains of $25.9 million and $106.3 million for the three and six months ended June 30, 2013, respectively.

The Funds Withheld derivative associated with Shades Creek had a pre-tax realized gain of $9.8 million for the three and six months ended June 30, 2013.

We use certain interest rate swaps to mitigate the price volatility of fixed maturities. These positions resulted in net pre-tax gains of $1.9 million and $2.9 million for the three and six months ended June 30, 2013, respectively. The pre-tax gains were primarily the result of $2.3 million and $3.3 million in unrealized gains and $0.4 million and $0.4 million in realized losses due to interest settlements during the three and six months ended June 30, 2013, respectively.

We purchased interest rate caps during 2011, to mitigate our credit risk with respect to our LIBOR exposure and the potential impact of European financial market distress. These caps resulted in insignificant pre-tax losses for the three and six months ended June 30, 2013.

Certain of our subsidiaries have derivatives with PLC. These derivatives consist of an interest support agreement, a YRT premium support agreement, and two portfolio maintenance agreements with PLC. We recognized a pre-tax loss of $9.7 million and $13.5 million related to the interest support agreement and insignificant losses and a pre-tax gain of $0.1 million related to the YRT premium support agreement for the three and six months ended June 30, 2013, respectively. We entered into two separate portfolio maintenance agreements in October 2012. We recognized insignificant losses for the three and six months ended June 30, 2013 related to our portfolio maintenance agreements.

We also use various swaps and other types of derivatives to mitigate risk related to other exposures. These contracts generated net pre-tax losses of $0.5 million and $0.1 million for the three and six months ended June 30, 2013, respectively.

We recognized insignificant losses for the three and six months ended June 30, 2013 related to the embedded derivative on the FIA product.

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, 2013. Information about unrealized gains and losses is subject to rapidly changing conditions, including volatility of financial markets and changes in interest rates. Management considers a number of factors in determining if an unrealized loss is other-than-temporary, including the expected cash to be collected and the intent, likelihood, and/or ability to hold the security until recovery. Consistent

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with our long-standing practice, we do not utilize a “bright line test” to determine other-than-temporary impairments. On a quarterly basis, we perform an analysis on every security with an unrealized loss to determine if an other-than-temporary impairment has occurred. This analysis includes reviewing several metrics including collateral, expected cash flows, ratings, and liquidity. Furthermore, since the timing of recognizing realized gains and losses is largely based on management’s decisions as to the timing and selection of investments to be sold, the tables and information provided below should be considered within the context of the overall unrealized gain/(loss) position of the portfolio. We had an overall net unrealized gain of $1.5 billion, prior to tax and DAC offsets, as of June 30, 2013, and an overall net unrealized gain of $3.1 billion as of December 31, 2012.

For fixed maturity and equity securities held that are in an unrealized loss position as of June 30, 2013, the fair value, amortized cost, unrealized loss, and total time period that the security has been in an unrealized loss position are presented in the table below:

	Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized
	Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)
<= 90 days	$	5,213,923	79.3	%	$	5,504,311	78.8	%	$	(290,388	)	70.4	%
>90 days but <= 180 days	281,816		4.3		312,751		4.5		(30,935		)	7.5
>180 days but <= 270 days	142,591		2.2		160,900		2.3		(18,309		)	4.4
>270 days but <= 1 year	47,257		0.7		53,474		0.8		(6,217		)	1.5
>1 year but <= 2 years	477,882		7.3		508,695		7.3		(30,813		)	7.5
>2 years but <= 3 years	38,294		0.6		42,918		0.6		(4,624		)	1.1
>3 years but <= 4 years	25,358		0.4		27,801		0.4		(2,443		)	0.6
>4 years but <= 5 years	169		—		228		—		(59		)	—
>5 years	349,123		5.2		378,050		5.3		(28,927		)	7.0
Total	$	6,576,413	100.0	%	$	6,989,128	100.0	%	$	(412,715	)	100.0	%

The majority of the unrealized loss as of June 30, 2013 for both investment grade and below investment grade securities is attributable to a widening in credit and mortgage spreads for certain securities. The negative impact of spread levels for certain securities was partially offset by lower treasury yield levels and the associated positive effect on security prices. However, certain types of securities, including tranches of RMBS and ABS, continue to be priced at a level which has caused the unrealized losses noted above. We believe spread levels on these RMBS and ABS are largely due to uncertainties regarding future performance of the underlying mortgage loans and/or assets.

As of June 30, 2013, the Barclays Investment Grade Index was priced at 144.4 bps versus a 10 year average of 157.2 bps. Similarly, the Barclays High Yield Index was priced at 492.3 bps versus a 10 year average of 563.9 bps. As of June 30, 2013, the five, ten, and thirty-year U.S. Treasury obligations were trading at levels of 1.395%, 2.487%, and 3.500%, as compared to 10 year averages of 2.780%, 3.570%, and 4.289%, respectively.

As of June 30, 2013, 85.1% of the unrealized loss was associated with securities that were rated investment grade. We have examined the performance of the underlying collateral and cash flows and expect that our investments will continue to perform in accordance with their contractual terms. Factors such as credit enhancements within the deal structures and the underlying collateral performance/characteristics support the recoverability of the investments. Based on the factors discussed, we do not consider these unrealized loss positions to be other-than-temporary. However, from time to time, we may sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield enhancement, asset/liability management, and liquidity requirements.

Expectations that investments in mortgage-backed and asset-backed securities will continue to perform in accordance with their contractual terms are based on assumptions a market participant would use in determining the current fair value. It is reasonably possible that the underlying collateral of these investments will perform worse than current market expectations and that such an event may lead to adverse changes in the cash flows on our holdings of these types of securities. This could lead to potential future write-downs within our portfolio of mortgage-backed and asset-backed securities. Expectations that our investments in corporate securities and/or debt obligations will continue to perform in accordance with their contractual terms are based on evidence gathered through our normal credit

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surveillance process. Although we do not anticipate such events, it is reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate securities. It is also possible that such unanticipated events would lead us to dispose of those certain holdings and recognize the effects of any such market movements in our financial statements.

As of June 30, 2013, there were estimated gross unrealized losses of $10.8 million related to our mortgage-backed securities collateralized by Alt-A mortgage loans. Gross unrealized losses in our securities collateralized by Alt-A residential mortgage loans as of June 30, 2013, were primarily the result of continued widening spreads, representing marketplace uncertainty arising from higher defaults in Alt-A residential mortgage loans and rating agency downgrades of securities collateralized by Alt-A residential mortgage loans.

We have no material concentrations of issuers or guarantors of fixed maturity securities. The industry segment composition of all securities in an unrealized loss position held as of June 30, 2013, is presented in the following table:

	Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized
	Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)
Banking	$	567,318	8.6	%	$	603,529	8.6	%	$	(36,211	)	8.8	%
Other finance	167,897		2.6		176,348		2.5		(8,451		)	2.0
Electric	399,389		6.1		428,100		6.1		(28,711		)	7.0
Natural gas	226,621		3.4		248,171		3.6		(21,550		)	5.2
Insurance	308,572		4.7		330,207		4.7		(21,635		)	5.2
Energy	137,099		2.1		147,816		2.1		(10,717		)	2.6
Communications	186,107		2.8		208,185		3.0		(22,078		)	5.3
Basic industrial	424,762		6.5		454,966		6.5		(30,204		)	7.3
Consumer noncyclical	622,493		9.5		676,116		9.7		(53,623		)	13.0
Consumer cyclical	341,959		5.2		364,489		5.2		(22,530		)	5.5
Finance companies	42,267		0.6		43,802		0.6		(1,535		)	0.4
Capital goods	237,281		3.6		247,364		3.5		(10,083		)	2.4
Transportation	115,671		1.8		124,127		1.8		(8,456		)	2.0
Other industrial	101,042		1.5		106,846		1.5		(5,804		)	1.4
Brokerage	119,459		1.8		124,812		1.8		(5,353		)	1.3
Technology	340,801		5.2		359,403		5.1		(18,602		)	4.5
Real estate	616		—		625		—		(9		)	—
Other utility	22,055		0.3		23,911		0.3		(1,856		)	0.4
Commercial mortgage-backed securities	471,988		7.2		494,058		7.1		(22,070		)	5.3
Other asset-backed securities	667,676		10.2		706,798		10.1		(39,122		)	9.5
Residential mortgage-backed non-agency securities	296,894		4.5		311,239		4.5		(14,345		)	3.5
Residential mortgage-backed agency securities	47,921		0.7		48,670		0.7		(749		)	0.2
U.S. government-related securities	645,223		9.8		670,256		9.7		(25,033		)	6.2
Other government-related securities	20,000		0.3		20,001		0.3		(1		)	—
States, municipals, and political divisions	65,302		1.0		69,289		1.0		(3,987		)	1.0
Total	$	6,576,413	100.0	%	$	6,989,128	100.0	%	$	(412,715	)	100.0	%

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

	As of
	June 30, 2013		December 31, 2012
Banking	8.8	%	10.2	%
Other finance	2.0		0.5
Electric	7.0		6.6
Natural gas	5.2		4.1
Insurance	5.2		7.3
Energy	2.6		0.3
Communications	5.3		0.4
Basic industrial	7.3		3.2
Consumer noncyclical	13.0		2.7
Consumer cyclical	5.5		0.9
Finance companies	0.4		1.7
Capital goods	2.4		2.0
Transportation	2.0		—
Other industrial	1.4		0.2
Brokerage	1.3		0.4
Technology	4.5		1.0
Real estate	—		—
Other utility	0.4		—
Commercial mortgage-backed securities	5.3		0.4
Other asset-backed securities	9.5		43.8
Residential mortgage-backed non-agency securities	3.5		13.7
Residential mortgage-backed agency securities	0.2		—
U.S. government-related securities	6.2		0.4
Other government-related securities	—		—
States, municipals, and political divisions	1.0		0.2
Total	100.0	%	100.0	%

The range of maturity dates for securities in an unrealized loss position as of June 30, 2013, varies, with 4.9% maturing in less than 5 years, 35.1% maturing between 5 and 10 years, and 60.0% maturing after 10 years. The following table shows the credit rating of securities in an unrealized loss position as of June 30, 2013:

S&P or Equivalent	Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized
Designation	Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)
AAA/AA/A	$	3,477,500	52.9	%	$	3,667,707	52.5	%	$	(190,207	)	46.1	%
BBB	2,312,338		35.2		2,473,145		35.4		(160,807		)	39.0
Investment grade	5,789,838		88.1		6,140,852		87.9		(351,014		)	85.1
BB	280,716		4.3		306,120		4.4		(25,404		)	6.2
B	106,985		1.6		112,290		1.6		(5,305		)	1.3
CCC or lower	398,874		6.0		429,866		6.1		(30,992		)	7.4
Below investment grade	786,575		11.9		848,276		12.1		(61,701		)	14.9
Total	$	6,576,413	100.0	%	$	6,989,128	100.0	%	$	(412,715	)	100.0	%

As of June 30, 2013, we held a total of 562 positions that were in an unrealized loss position. Included in that amount were 120 positions of below investment grade securities with a fair value of $786.6 million that were in an unrealized loss position. Total unrealized losses related to below investment grade securities were $61.7 million, of

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which $33.2 million had been in an unrealized loss position for more than twelve months. Below investment grade securities in an unrealized loss position were 2.2% of invested assets.

As of June 30, 2013, securities in an unrealized loss position that were rated as below investment grade represented 11.9% of the total fair value and 14.9% of the total unrealized loss. After a review of each security and its expected cash flows, we believe the decline in market value to be temporary. We have the ability and intent to hold these securities to maturity. As of June 30, 2013, total unrealized losses for all securities in an unrealized loss position for more than twelve months were $66.9 million. A widening of credit spreads is estimated to account for unrealized losses of $206.4 million, with changes in treasury rates offsetting this loss by an estimated $139.5 million.

The majority of our RMBS holdings as of June 30, 2013, were super senior or senior bonds in the capital structure. Our total non-agency portfolio has a weighted-average life of 3.61 years. The following table categorizes the weighted-average life for our non-agency portfolio, by category of material holdings, as of June 30, 2013:

	Weighted-Average
Non-agency portfolio	Life
Prime	2.60
Alt-A	4.69

The following table includes the fair value, amortized cost, unrealized loss, and total time period that the security has been in an unrealized loss position for all below investment grade securities as of June 30, 2013:

	Fair		% Fair		Amortized		% Amortized		Unrealized			% Unrealized
	Value		Value		Cost		Cost		Loss			Loss
	(Dollars In Thousands)
<= 90 days	$	478,116	60.8	%	$	504,747	59.5	%	$	(26,631	)	43.2	%
>90 days but <= 180 days	8,753		1.1		9,883		1.2		(1,130		)	1.8
>180 days but <= 270 days	359		—		403		—		(44		)	0.1
>270 days but <= 1 year	3,747		0.5		4,419		0.5		(672		)	1.1
>1 year but <= 2 years	80,771		10.3		92,107		10.9		(11,336		)	18.4
>2 years but <= 3 years	25,358		3.2		27,801		3.3		(2,443		)	4.0
>3 years but <= 4 years	22,125		2.8		24,258		2.9		(2,133		)	3.5
>4 years but <= 5 years	142		—		157		—		(15		)	—
>5 years	167,204		21.3		184,501		21.7		(17,297		)	27.9
Total	$	786,575	100.0	%	$	848,276	100.0	%	$	(61,701	)	100.0	%

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

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

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

Our decision to sell investment assets could be impacted by accounting rules, including rules relating to the likelihood of a requirement to sell securities before recovery of our cost basis. Under stressful market and economic

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conditions, liquidity may broadly deteriorate which could negatively impact our ability to sell investment assets. If we require on short notice significant amounts of cash in excess of normal requirements, we may have difficulty selling investment assets in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both.

While we anticipate that our operating cash flows will be sufficient to meet our investment commitments and operating cash needs in a normal credit market environment, we recognize that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, we have established repurchase agreement programs to provide liquidity when needed. We expect that the rate received on our investments will equal or exceed our borrowing rate. Under this program, we may, from time to time, sell an investment security at a specific price and agree to repurchase that security at another specified price at a later date. These borrowings are for a term less than ninety days. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities, and the agreements provide for net settlement in the event of default or on termination of the agreements. As of June 30, 2013, the fair value of securities pledged under the repurchase program was $356.1 million and the repurchase obligation of $340.0 million was included in our consolidated condensed balance sheets (at an average borrowing rate of 8 basis points). During the six months ended June 30, 2013, the maximum balance outstanding at any one point in time related to these programs was $645.1 million. The average daily balance was $423.9 million (at an average borrowing rate of 12 basis points) during the six months ended June 30, 2013. As of December 31, 2012, we had a $150.0 million outstanding balance related to such borrowings. During 2012, the maximum balance outstanding at any one point in time related to these programs was $425.0 million. The average daily balance was $266.3 million (at an average borrowing rate of 14 basis points) during the year ended December 31, 2012.

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

Credit Facility

We and PLC have access to a Credit Facility that provides the ability to borrow on an unsecured basis up to an aggregate principal amount of $750 million. We have the right in certain circumstances to request that the commitment under the Credit Facility be increased up to a maximum principal amount of $1.0 billion. Balances outstanding under the Credit Facility accrue interest at a rate equal to, at the option of the Borrowers, (i) LIBOR plus a spread based on the ratings of PLC’s senior unsecured long-term debt (“Senior Debt”), or (ii) the sum of (A) a rate equal to the highest of (x) the Administrative Agent’s prime rate, (y) 0.50% above the Federal Funds rate, or (z) the one-month LIBOR plus 1.00% and (B) a spread based on the ratings of PLC’s Senior Debt. The Credit Facility also provides for a facility fee at a rate, currently 0.175%, that varies with the ratings of PLC’s Senior Debt and that is calculated on the aggregate amount of commitments under the Credit Facility, whether used or unused. The maturity date on the Credit Facility is July 17, 2017. We were not aware of any non-compliance with the financial debt covenants of the Credit Facility as of June 30, 2013. We did not have an outstanding balance under the Credit Facility as of June 30, 2013. PLC had an outstanding balance of $360.0 million at an interest rate of LIBOR plus 1.20% under the Credit Facility as of June 30, 2013.

Sources and Use of Cash

Our primary sources of funding are from our insurance operations and revenues from investments.  These sources of cash support our operations and are used to pay dividends to PLC.  The states in which we and our insurance subsidiaries are domiciled impose certain restrictions on the ability to pay dividends. These restrictions are based in part on the prior year’s statutory income and/or surplus.

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

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capital and activity stock to support continued membership in the FHLB and current and future advances, and 3) the availability of adequate eligible mortgage or treasury/agency collateral to back current and future advances.

We held $64.6 million of FHLB common stock as of June 30, 2013, which is included in equity securities. In addition, our obligations under the advances must be collateralized. We maintain control over any such pledged assets, including the right of substitution. As of June 30, 2013, we had $922.1 million of funding agreement-related advances and accrued interest outstanding under the FHLB program.

As of June 30, 2013, we reported approximately $624.2 million (fair value) of Auction Rate Securities (“ARS”) in non-Modco portfolios. As of June 30, 2013, 100% of these ARS were rated Aaa/AA+. While the auction rate market has experienced liquidity constraints, we believe that based on our current liquidity position and our operating cash flows, any lack of liquidity in the ARS market will not have a material impact on our liquidity, financial condition, or cash flows.

All of the auction rate securities held, on a consolidated basis, in non-Modco portfolios as of June 30, 2013, were student loan-backed auction rate securities, for which the underlying collateral is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). As there is no active market for these auction rate securities, we use a valuation model, which incorporates, among other inputs, the contractual terms of each indenture and current valuation information from actively-traded asset-backed securities with comparable underlying assets (i.e. FFELP-backed student loans) and vintage.

We use an income approach valuation model to determine the fair value of our student loan-backed auction rate securities. Specifically, a discounted cash flow method is used. The expected yield on the auction rate securities is estimated for each coupon date, based on the contractual terms on each indenture. The estimated market yield is based on comparable securities with observable yields and an additional yield spread for illiquidity of auction rate securities in the current market.

The auction rate securities held in non-Modco portfolios are classified as a Level 2 or Level 3 valuation. An unrealized loss of $27.7 million and $44.0 million was recorded as of June 30, 2013 and December 31, 2012, respectively, and we have not recorded any other-than-temporary impairment because the underlying collateral for each of the auction rate securities is at least 97% guaranteed by the FFELP and there are subordinate tranches within each of these auction rate security issuances that would support the senior tranches in the event of default. In the event of a complete and total default by all underlying student loans, the principal shortfall, in excess of the 97% FFELP guarantee, would be absorbed by the subordinate tranches. Our credit exposure is to the FFELP guarantee, not the underlying student loans. At this time, we have no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary. In addition, we do not intend to sell or expect to be required to sell the securities before recovering our amortized cost of these securities. Therefore, we believe that no other-than-temporary impairment has been experienced.

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

We maintain investment strategies intended to provide adequate funds to pay benefits and expected surrenders, withdrawals, loans, and redemption obligations without forced sales of investments. In addition, we hold highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund our expected operating expenses, surrenders, and withdrawals. We were committed as of June 30, 2013, to fund mortgage loans in the amount of $313.6 million.

Our positive cash flows from operations are used to fund an investment portfolio that provides for future benefit payments. We employ a formal asset/liability program to manage the cash flows of our investment portfolio relative to our long-term benefit obligations. As of June 30, 2013, we held cash and short-term investments of $301.9 million.

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

	For The Six Months Ended June 30,
	2013			2012
	(Dollars In Thousands)
Net cash provided by operating activities	$	262,701		$	175,685
Net cash used in investing activities	(801,912		)	(113,524		)
Net cash provided by (used in) financing activities	400,489			(113,151		)
Total	$	(138,722	)	$	(50,990	)

For The Six Months Ended June 30, 2013 as compared to The Six Months Ended June 30, 2012

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

Net cash used in investing activities - Changes in cash from investing activities primarily related to the activity in our investment portfolio.

Net cash provided by (used in) financing activities - Changes in cash from financing activities included $225.5 million inflows of investment product and universal life net activity and as compared to $98.7 million of outflows in the prior year. We had inflows of $190.0 million from repurchase program borrowings as compared to $200.0 million for the six months ended June 30, 2012. Net issuances of non-recourse funding obligations equaled $30.0 million during the six months ended June 30, 2013, as compared to repurchases of $91.7 million during the six months ended June 30, 2012.

Capital Resources

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

Golden Gate Captive Insurance Company (“Golden Gate”), a South Carolina special purpose financial captive insurance company and wholly owned subsidiary, had three series of Surplus Notes with a total outstanding balance of $800 million as of June 30, 2013. PLC holds the entire outstanding balance of Surplus Notes. The Series A1 Surplus Notes have a balance of $400 million and accrue interest at 7.375%, the Series A2 Surplus Notes have a balance of $100 million and accrue interest at 8%, and the Series A3 Surplus Notes have a balance of $300 million and accrue interest at 8.45%.

Golden Gate II Captive Insurance Company (“Golden Gate II”), a wholly owned special purpose financial captive insurance company, had $575.0 million of non-recourse funding obligations outstanding as of June 30, 2013. These outstanding non-recourse funding obligations were issued to special purpose trusts, which in turn issued securities to third parties. Certain of our affiliates own a portion of these securities. As of June 30, 2013, securities related to $269.9 million of the outstanding balance of the non-recourse funding obligations were held by external parties, securities related to $72.0 million of the non-recourse funding obligations were held by nonconsolidated affiliates, and securities related to $233.1 million were held by consolidated subsidiaries of the Company. These non-recourse funding obligations mature in 2052. $275 million of this amount is currently accruing interest at a rate of LIBOR plus 30 basis points. We have experienced higher borrowing costs than were originally expected associated with $300 million of our non-recourse funding obligations supporting the business reinsured to Golden Gate II. These higher costs are the result of higher spread component of interest expense associated with the illiquidity of the current market for auction rate securities, as well as a rating downgrade of our guarantor by certain rating agencies. The current

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rate associated with these obligations is LIBOR plus 200 basis points, which is the maximum rate we can be required to pay under these obligations. We have contingent approval to issue an additional $100 million of obligations. Under the terms of the non-recourse funding obligations, the holders of the non-recourse funding obligations cannot require repayment from PLC, us, or any of our subsidiaries, other than Golden Gate II, the direct issuers of the non-recourse funding obligations, although PLC has agreed to indemnify Golden Gate II for certain costs and obligations (which obligations do not include payment of principal and interest on the non-recourse funding obligations). In addition, PLC has entered into certain support agreements with Golden Gate II obligating it to make capital contributions or provide support related to certain of Golden Gate II’s expenses and in certain circumstances, to collateralize certain of PLC’s obligations to Golden Gate II.

Golden Gate III Vermont Captive Insurance Company (“Golden Gate III”), a wholly owned Vermont special purpose financial captive insurance company, is party to a Reimbursement Agreement (the “Reimbursement Agreement”) with UBS AG, Stamford Branch (“UBS”), as issuing lender. Under the original Reimbursement Agreement, dated April 23, 2010, UBS issued a letter of credit (the “LOC”) in the initial amount of $505 million to a trust for the benefit of West Coast Life Insurance Company (“WCL”). The Reimbursement Agreement was subsequently amended and restated effective November 21, 2011, to replace the existing LOC with one or more letters of credit from UBS, and to extend the maturity date from April 1, 2018, to April 1, 2022. The LOC balance was $590 million as of June 30, 2013. Subject to certain conditions, the amount of the LOC will be periodically increased up to a maximum of $610 million in 2013. The term of the LOC is expected to be 12 years, subject to certain conditions including capital contributions made to Golden Gate III by one of its affiliates. The LOC was issued to support certain obligations of Golden Gate III to WCL under an indemnity reinsurance agreement. In addition, we have entered into certain support agreements with Golden Gate III obligating us to make capital contributions or provide support related to certain of Golden Gate III’s expenses and in certain circumstances, to collateralize certain of our obligations to Golden Gate III. Subsequent to the current period on August 7, 2013 the Company entered into a Second Amended and Restated Reimbursement Agreement with UBS. Under the Second Amended and Restated Reimbursement Agreement a new LOC in an initial amount of $710 million was issued by UBS in replacement of the LOC that was in place as of June 30, 2013.  For additional information please refer to Note 17, Subsequent Events, to the quarterly consolidated condensed financial statements.

Golden Gate IV Vermont Captive Insurance Company (“Golden Gate IV”), a wholly owned Vermont special purpose financial captive insurance company, is party to a Reimbursement Agreement with UBS AG, Stamford Branch, as issuing lender. Under the Reimbursement Agreement, dated March 10, 2010, UBS issued an LOC in the initial amount of $270 million to a trust for the benefit of WCL. The LOC balance has increased, in accordance with the terms of the Reimbursement Agreement, during the first quarter of 2013 and was $675 million as of June 30, 2013. Subject to certain conditions, the amount of the LOC will be periodically increased up to a maximum of $790 million in 2016. The term of the LOC is expected to be 12 years from the original issuance date and with a maturity date of December 30, 2022. The LOC was issued to support certain obligations of Golden Gate IV to WCL under an indemnity reinsurance agreement. In addition, we have entered into certain support agreements with Golden Gate IV obligating us to make capital contributions or provide support related to certain of Golden Gate IV’s expenses and in certain circumstances, to collateralize certain of our obligations to Golden Gate IV.

On October 10, 2012, Golden Gate V Vermont Captive Insurance Company (“Golden Gate V”) and Red Mountain, LLC (“Red Mountain”), a wholly owned subsidiary, entered into a 20-year transaction to finance up to $945 million of “AXXX” reserves related to a block of universal life insurance policies with secondary guarantees issued by the Company and its subsidiary, WCL. Golden Gate V issued non-recourse funding obligations to Red Mountain, and Red Mountain issued a note with an initial principal amount of $275 million, increasing to a maximum of $945 million in 2027, to Golden Gate V for deposit to a reinsurance trust supporting Golden Gate V’s obligations under a reinsurance agreement with WCL, pursuant to which WCL cedes liabilities relating to the policies of WCL and retrocedes liabilities relating to the policies of the Company. Through the structure, Hannover Life Reassurance Company of America (“Hannover Re”), the ultimate risk taker in the transaction, provides credit enhancement to the Red Mountain note for the 20-year term in exchange for a fee. The transaction is “non-recourse” to Golden Gate V, Red Mountain, WCL, PLC and the Company, meaning that none of these companies are liable for the reimbursement of any credit enhancement payments required to be made. As of June 30, 2013, the principal balance of the Red Mountain note was $335 million. In connection with the transaction, PLC has entered into certain support agreements under which we guarantee or otherwise support certain obligations of Golden Gate V and Red Mountain.

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

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

Statutory reserves established for variable annuity contracts are sensitive to changes in the equity markets and are affected by the level of account values relative to the level of any guarantees and product design. As a result, the relationship between reserve changes and equity market performance may be non-linear during any given reporting period. Market conditions greatly influence the capital required due to their impact on the valuation of reserves and derivative investments mitigating the risk in these reserves. Risk mitigation activities may result in material and sometimes counterintuitive impacts on statutory surplus and RBC ratio. Notably, as changes in these market and non-market factors occur, both our potential obligation and the related statutory reserves and/or required capital can vary at a non-linear rate.

In an effort to mitigate the equity market risks discussed above relative to our RBC ratio, in the fourth quarter of 2012, PLC established an indirect wholly owned insurance subsidiary, Shades Creek Captive Insurance Company (“Shades Creek”) to which we have reinsured GMWB and GMDB riders related to our variable annuity contracts. The purpose of Shades Creek is to reduce the volatility in RBC due to non-economic variables included within the RBC calculation. As of April 1, 2013, Shades Creek became a direct wholly owned insurance subsidiary of PLC.

On April 10, 2013, we entered into an agreement with AXA Financial, Inc. (“AXA”) and AXA Equitable Financial Services, LLC to acquire the stock of MONY Life Insurance Company (“MONY”) from AXA and to enter into a reinsurance agreement (the “Reinsurance Agreement”) which will reinsure certain business of MONY Life Insurance Company of America (“MLOA”). The aggregate purchase price for MONY and the reinsured business is expected to be approximately $1.06 billion. The purchase price includes approximately $303 million of adjusted statutory capital and surplus and approximately $60 million of deferred tax assets. The estimated initial capital investment is expected to be approximately $1.09 billion which includes certain RBC and tax impacts related to the transaction.

We cede material amounts of insurance and transfer related assets to other insurance companies through reinsurance. However, notwithstanding the transfer of related assets, we remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations that it assumed. We evaluate the financial condition of our reinsurers and monitor the associated concentration of credit risk. For the three and six months ended June 30, 2013, we ceded premiums to unaffiliated third party reinsurers amounting to $396.8 million and $722.6 million, respectively. In addition, we had receivables from unaffiliated reinsurers amounting to $5.7 billion as of June 30, 2013. We review reinsurance receivable amounts for collectability and establish bad debt reserves if deemed appropriate.

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Ratings

Various Nationally Recognized Statistical Rating Organizations (“rating organizations”) review the financial performance and condition of insurers, including us and our insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations. These ratings are important to maintaining public confidence in an insurer’s products, its ability to market its products and its competitive position. The following table summarizes the financial strength ratings of our significant member companies from the major independent rating organizations as of June 30, 2013:

			Standard &
Ratings	A.M. Best	Fitch	Poor’s	Moody’s
Insurance company financial strength rating:
Protective Life Insurance Company	A+	A	AA-	A2
West Coast Life Insurance Company	A+	A	AA-	A2
Protective Life and Annuity Insurance Company	A+	A	AA-	—
Lyndon Property Insurance Company	A-	—	—	—

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

LIABILITIES

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

As of June 30, 2013, we had policy liabilities and accruals of approximately $23.3 billion. Our interest-sensitive life insurance policies have a weighted average minimum credited interest rate of approximately 3.53%.

Contractual Obligations

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

As of June 30, 2013, we carried a $78.2 million liability for uncertain tax positions, including interest on unrecognized tax benefits. These amounts are not included in the long-term contractual obligations table because of the difficulty in making reasonably reliable estimates of the occurrence or timing of cash settlements with the respective taxing authorities.

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The table below sets forth future maturities of our contractual obligations.

			Payments due by period
			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
	(Dollars In Thousands)
Non-recourse funding obligations(1)	$	4,685,904	$	89,349	$	191,616	$	207,448	$	4,197,491
Stable value products(2)	2,662,233		485,184		1,454,835		655,185		67,029
Operating leases(3)	17,263		5,698		8,675		2,547		343
Home office lease(4)	75,410		75,410		—		—		—
Mortgage loan and investment commitments	326,795		326,795		—		—		—
Repurchase program borrowings(5)	340,002		340,002		—		—		—
Policyholder obligations(6)	33,849,436		1,146,507		2,532,048		2,311,967		27,858,914
Total	$	41,957,043	$	2,468,945	$	4,187,174	$	3,177,147	$	32,123,777

(1)Non-recourse funding obligations include all undiscounted principal amounts owed and expected future interest payments due over the term of the notes.  Of the total undiscounted cash flows, $1.9 billion relates to the Golden Gate V transaction.  These cash out flows are matched and predominantly offset by the cash in flows Golden Gate V receives from notes issued by a nonconsolidated variableinterest entity. Additionally, $2.3 billion of the total undiscounted cash flows are obligations to PLC. The remaining $0.5 billion of undiscounted cash flows are associated with the Golden Gate II notes outstanding.

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

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

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

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

(6)Estimated contractual policyholder obligations are based on mortality, morbidity, and lapse assumptions comparable to our historical experience, modified for recent observed trends. These obligations are based on current balance sheet values and do not incorporate an expectation of future sales. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. Separate account obligations are excluded from the chart as variable separate account obligations are legally insulated from general account obligations, and will be fully funded by cash flows from variable separate account assets. We expect to fully fund the general account obligations from cash flows from general account assets.

FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB guidance defines fair value for GAAP and establishes a framework for measuring fair value as well as a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. The term “fair value” in this document is defined in accordance with GAAP. The standard describes three levels of inputs that may be used to measure fair value. For more information, see Note 2, Summary of Significant Accounting Policies and Note 13, Fair Value of Financial Instruments.

Available-for-sale securities and trading account securities are recorded at fair value, which is primarily based on actively traded markets where prices are based on either direct market quotes or observed transactions. Liquidity is a significant factor in the determination of the fair value for these securities. Market price quotes may not be readily available for some positions or for some positions within a market sector where trading activity has slowed significantly or ceased. These situations are generally triggered by the market’s perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer’s financial position, changes in credit ratings, and cash flows on the investments. As of June 30, 2013, $1.1 billion of available-for-sale and trading account assets, excluding other long-term investments, were classified as Level 3 fair value assets.

The fair values of derivative assets and liabilities include adjustments for market liquidity, counterparty credit quality, and other deal specific factors, where appropriate. The fair values of derivative assets and liabilities traded in the over-the-counter market are determined using quantitative models that require the use of multiple market inputs including interest rates, prices, and indices to generate continuous yield or pricing curves and volatility factors. The predominance of market inputs are actively quoted and can be validated through external sources. Estimation risk is greater for derivative financial instruments that are either option-based or have longer maturity dates where observable market inputs are less readily available or are unobservable, in which case quantitative based extrapolations of rate,

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price, or index scenarios are used in determining fair values. As of June 30, 2013, the Level 3 fair values of derivative assets and liabilities determined by these quantitative models were $47.8 million and $256.8 million, respectively.

The liabilities of certain of our annuity account balances are calculated at fair value using actuarial valuation models. These models use various observable and unobservable inputs including projected future cash flows, policyholder behavior, our credit rating, and other market conditions. As of June 30, 2013, the Level 3 fair value of these liabilities was $114.6 million.

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

Of our $1.1 billion, or 2.7% of total assets (measured at fair value on a recurring basis) classified as Level 3 assets, $760.9 million were ABS. Of this amount, $602.4 million were student loan related ABS and $158.5 million were non-student loan related ABS. The years of issuance of the ABS are as follows:

Year of Issuance	Amount
	(In Millions)
2002	$	292.8
2003	114.8
2004	119.6
2005	2.3
2006	21.6
2007	101.3
2012	94.5
2013	14.0
Total	$	760.9

The ABS was rated as follows: $500.9 million were AAA rated, $182.1 million were AA rated, $72.0 million were A rated, $3.1 million were BBB rated, and $2.8 million were less than investment grade. We do not expect any credit losses on these securities related to student loans since the majority of the underlying collateral of the student loan asset-backed securities is guaranteed by the U.S. Department of Education.

MARKET RISK EXPOSURES AND OFF-BALANCE SHEET ARRANGEMENTS

Our financial position and earnings are subject to various market risks including changes in interest rates, the yield curve, spreads between risk-adjusted and risk-free interest rates, foreign currency rates, used vehicle prices, and equity price risks and issuer defaults. We analyze and manage the risks arising from market exposures of financial instruments, as well as other risks, through an integrated asset/liability management process. Our asset/liability management programs and procedures involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, credit and market risk, and cash flow characteristics. These programs also incorporate the use of derivative financial instruments primarily to reduce our exposure to interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk. See Note 14, Derivative Financial Instruments for additional information on our financial instruments.

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

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

We utilize a risk management strategy that includes the use of derivative financial instruments. Derivative instruments expose us to credit market and basis risk. Such instruments can change materially in value from period-to-period. We minimize our credit risk by entering into transactions with highly rated counterparties. We manage the market and basis risks by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. We monitor our use of derivatives in connection with our overall asset/liability management programs and procedures. In addition, all derivative programs are monitored by our risk management department.

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

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

·Foreign Currency Futures

·Variance Swaps

·Interest Rate Futures

·Equity Options

·Equity Futures

·Credit Derivatives

·Interest Rate Swaps

·Interest Rate Swaptions

·Volatility Futures

Other Derivatives

Certain of our subsidiaries have derivatives with PLC. These derivatives consist of an interest support agreement, a YRT premium support arrangement, and portfolio maintenance agreements with PLC.

We have a funds withheld account that consists of various derivative instruments held by us that is used to hedge the GMWB and GMDB riders. The economic performance of derivatives in the funds withheld account is ceded to Shades Creek. The funds withheld account is accounted for as a derivative financial instrument.

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

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In the ordinary course of our commercial mortgage lending operations, we may commit to provide a mortgage loan before the property to be mortgaged has been built or acquired. The mortgage loan commitment is a contractual obligation to fund a mortgage loan when called upon by the borrower. The commitment is not recognized in our financial statements until the commitment is actually funded. The mortgage loan commitment contains terms, including the rate of interest, which may be different than prevailing interest rates. As of June 30, 2013, we had outstanding mortgage loan commitments of $313.6 million at an average rate of 4.7%.

Impact of continued low interest rate environment

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

The table below presents account values by range of current minimum guaranteed interest rates and current crediting rates for our universal life and deferred fixed annuity products as of June 30, 2013:

Credited Rate Summary
As of June 30, 2013
				1-50 bps			More than
Minimum Guaranteed Interest Rate	At			above			50 bps
Account Value	MGIR			MGIR			above MGIR			Total
	(Dollars In Millions)
Universal Life Insurance
>2% - 3%	$	36		$	16		$	1,081		$	1,133
>3% - 4%	1,384			653			1,172			3,209
>4% - 5%	2,036			3,086			390			5,512
>5% - 6%	223			—			—			223
Subtotal	3,679			3,755			2,643			10,077
Fixed Annuities
1%	$	329		$	155		$	543		$	1,027
>1% - 2%	595			513			356			1,464
>2% - 3%	1,517			351			832			2,700
>3% - 4%	316			—			—			316
>4% - 5%	234			—			—			234
Subtotal	2,991			1,019			1,731			5,741
Total	$	6,670		$	4,774		$	4,374		$	15,818
Percentage of Total	42		%	30		%	28		%	100		%

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The table below presents account values by range of current minimum guaranteed interest rates and current crediting rates for our universal life and deferred fixed annuity products as of December 31, 2012:

Credited Rate Summary
As of December 31, 2012
				1-50 bps			More than
Minimum Guaranteed Interest Rate	At			above			50 bps
Account Value	MGIR			MGIR			above MGIR			Total
	(Dollars In Millions)
Universal Life Insurance
>2% - 3%	$	36		$	1		$	911		$	948
>3% - 4%	1,402			649			1,137			3,188
>4% - 5%	2,058			3,069			385			5,512
>5% - 6%	223			—			—			223
Subtotal	3,719			3,719			2,433			9,871
Fixed Annuities
1%	$	275		$	104		$	477		$	856
>1% - 2%	570			459			489			1,518
>2% - 3%	1,544			353			892			2,789
>3% - 4%	347			—			—			347
>4% - 5%	240			—			—			240
Subtotal	2,976			916			1,858			5,750
Total	$	6,695		$	4,635		$	4,291		$	15,621
Percentage of Total	43		%	30		%	27		%	100		%

Certain deferred fixed annuity products have been reclassified between ranges as of December 31, 2012 to make the year-end period comparable to the current quarter. The reclassifications did not change the prior year total, only the classification within the ranges.

We are active in mitigating the impact of a continued low interest rate environment through product design, as well as adjusting crediting rates on current in-force policies and contracts. We also manage interest rate and reinvestment risks through our asset/liability management process. Our asset/liability management programs and procedures involve the monitoring of asset and liability durations; cash flow testing under various interest rate scenarios; and the regular rebalancing of assets and liabilities with respect to yield, credit and market risk, and cash flow characteristics. These programs also incorporate the use of derivative financial instruments primarily to reduce our exposure to interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk.

IMPACT OF INFLATION

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

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

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RECENTLY ISSUED ACCOUNTING STANDARDS

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

Item 3.Quantitative and Qualitative Disclosures about Market Risk

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

Item 4.Controls and Procedures

(a)Disclosure controls and procedures

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

(b)Changes in internal control over financial reporting

There have been no changes in the Company’s internal control over financial reporting during the six months ended June 30, 2013, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company’s internal controls exist within a dynamic environment and the Company continually strives to improve its internal controls and procedures to enhance the quality of its financial reporting.

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PART II

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

The operating results of companies in the insurance industry have historically been subject to significant fluctuations. The factors which could affect the Company’s future results include, but are not limited to, general economic conditions and known trends and uncertainties. In addition to other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, Risk Factors and Cautionary Factors that may Affect Future Results in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect the Company’s business, financial condition, or future results of operations.

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

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

The Company may also use derivative financial instruments within its risk management strategy to mitigate risks arising from its exposure to individual issuers or sectors of issuers and to mitigate the adverse effects of distressed domestic and/or international credit and/or equity markets and/or interest rate levels or volatility on its overall financial condition or results of operations.

The use of derivative financial instruments by the Company may have an adverse impact on the level of statutory capital and the risk based capital ratios of the Company’s insurance subsidiaries. The Company employs strategies in the use of derivative financial instruments that are intended to mitigate such adverse impacts, but the Company’s strategies may not be effective.

The Company may also choose not to hedge, in whole or in part, these or other risks that it has identified, due to, for example, the availability and/or cost of a suitable derivative financial instrument or, in reaction to extreme credit, equity market and/or interest rate levels or volatility. Additionally, the Company’s estimates and assumptions made in connection with its use of any derivative financial instrument may fail to reflect or correspond to its actual long-term exposure in respect to identified risks. Derivative financial instruments held or purchased by the Company may also otherwise be insufficient to hedge the risks in relation to the Company’s obligations. In addition, the Company may fail to identify risks, or the magnitude thereof, to which it is exposed. The Company is also exposed to the risk that its use of derivative financial instruments within its risk management strategy may not be properly designed and/or may not be properly implemented as designed.

The Company is also subject to the risk that its derivative counterparties may fail or refuse to meet their obligations to the Company under derivative financial instruments. If the Company’s derivative counterparties fail or refuse to meet their obligations to the Company in this regard, the Company’s efforts to mitigate risks to which it is subject through the use of such derivative financial instruments may prove to be ineffective or inefficient.

The above factors, either alone or in combination, may have a material adverse effect on the Company’s financial condition and results of operations.

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The Company is highly regulated, is subject to numerous legal restrictions and regulations and is subject to audits, examinations and actions by regulators and law enforcement agencies.

The Company is subject to government regulation in each of the states in which it conducts business. In many instances, the regulatory models emanate from the National Association of Insurance Commissioners (“NAIC”). Such regulation is vested in state agencies having broad administrative and in some instances discretionary power dealing with many aspects of the Company’s business, which may include, among other things, premium rates and increases thereto, underwriting practices, reserve requirements, marketing practices, advertising, privacy, policy forms, reinsurance reserve requirements, insurer use of captive reinsurance companies, acquisitions, mergers, capital adequacy, claims practices and the remittance of unclaimed property. In addition, some state insurance departments may enact rules or regulations with extra-territorial application, effectively extending their jurisdiction to areas such as permitted insurance company investments that are normally the province of an insurance company’s domiciliary state regulator.

At any given time, a number of financial, market conduct, or other examinations or audits of the Company’s subsidiaries may be ongoing. It is possible that any examination or audit may result in payments of fines and penalties, payments to customers, or both, as well as changes in systems or procedures, any of which could have a material adverse effect on the Company’s financial condition or results of operations.

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

State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, are often made for the benefit of the consumer and may lead to additional expense for the insurer and, thus, could have a material adverse effect on the Company’s financial condition and results of operations. The NAIC may also be influenced by the initiatives and regulatory structures or schemes of international regulatory bodies, and those initiatives or regulatory structures or schemes may not translate readily into the regulatory structures or schemes or the legal system (including the interpretation or application of standards by juries) under which U.S. insurers must operate. Application of such initiatives or regulatory structures or schemes to the Company could have a material adverse effect on the Company’s financial condition and results of operations.

Although some NAIC pronouncements, particularly as they affect accounting and reserving issues, may take effect automatically without affirmative action taken by the states, the NAIC is not a governmental entity and its processes and procedures do not comport with those to which governmental entities typically adhere. Therefore, it is possible that actions could be taken by the NAIC that become effective without the procedural safeguards that would be present if governmental action was required. In addition, with respect to some financial regulations and guidelines, states sometimes defer to the interpretation of the insurance department of a non-domiciliary state. Neither the action of the domiciliary state nor the action of the NAIC is binding on a state. Accordingly, a state could choose to follow a different interpretation. The Company is also subject to the risk that compliance with any particular regulator’s interpretation of a legal, accounting or actuarial issue may not result in compliance with another regulator’s interpretation of the same issue, particularly when compliance is judged in hindsight. There is an additional risk that any particular regulator’s interpretation of a legal, accounting or actuarial issue may change over time to the Company’s detriment, or that changes to the overall legal or market environment may cause the Company to change its practices in ways that may, in some cases, limit its growth or profitability. Statutes, regulations, and interpretations may be applied with retroactive impact, particularly in areas such as accounting and reserve requirements. Also, regulatory actions with prospective impact can potentially have a significant impact on currently sold products.

The NAIC has announced more focused inquiries on certain matters that could have an impact on the Company’s financial condition and results of operations.  Such inquiries concern, for example, examination of statutory accounting disclosures for separate accounts, insurer use of captive reinsurance companies, certain aspects of insurance holding company reporting and disclosure, reserving for universal life products with secondary guarantees, and reinsurance. In addition, the NAIC continues to consider various initiatives to change and modernize its financial and solvency regulations. It is considering changing to, or has considered and passed, a principles-based reserving method for life insurance and annuity reserves, changes to the accounting and risk-based capital regulations, changes to the

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governance practices of insurers, and other items. Some of these proposed changes, including implementing a principles-based reserving methodology, would require the approval of state legislatures. The Company cannot provide any estimate as to what impact these more focused inquiries or proposed changes, if they occur, will have on its product mix, product profitability, reserve and capital requirements, financial condition or results of operations.

With respect to reserving requirements for universal life policies with secondary guarantees (“ULSG”), in 2012 the NAIC adopted revisions to Actuarial Guideline XXXVIII (“AG38”) addressing those requirements. Some of the regulatory participants in the AG38 revision process appeared to believe that one of the purposes of the revisions was to calculate reserves for ULSG similarly to reserves for guaranteed level term life insurance contracts with the same guarantee period. The effect of the revisions was to increase the level of reserves that must be held by insurers on ULSG with certain product designs that are issued on and after January 1, 2013, and to cause insurers to test the adequacy of reserves, and possibly increase the reserves, on ULSG with certain product designs that were issued before January 1, 2013. The increased reserves on ULSG issued on and after January 1, 2013 may make certain product designs including some of those offered by the Company’s subsidiaries before January 1, 2013, unprofitable to the Company if issued after 2012 unless prices are increased. The Company has developed and introduced a new ULSG product for sales in 2013. The Company cannot predict future regulatory actions that could negatively impact the Company’s ability to market its new product. Such regulatory reactions could include, for example, withdrawal of state approvals of the new product or adoption of further changes to AG38 or other adverse action including retroactive regulatory action that could negatively impact the Company’s new product. A disruption of the Company’s ability to sell financially viable life insurance products or an increase in reserves on ULSG policies issued either before or after January 1, 2013, could have a material adverse impact on the Company’s financial condition or results of operations.

The Company currently uses, and expects to be able to continue using, affiliated captive reinsurance companies in various structures relating to term life insurance and universal life insurance with secondary guarantees, and certain guaranteed benefits relating to variable annuities. The NAIC has established a subgroup to study the use of captives and special purpose vehicles to transfer insurance risk in relation to existing state laws and regulations. That subgroup issued a Captives and Special Purpose Vehicles White Paper, which was recently adopted by the NAIC Financial Condition (E) Committee. The Financial Condition Committee also adopted an “interim solution for captives” in the form of a new charge for the Financial Accounting Working Group (“FAWG”). FAWG, a working group of regulators whose meetings are not open to the public, will now be reviewing captive transactions submitted by the states, in a peer review and comment process, while the remaining recommendations in the White Paper are divided among the NAIC Reinsurance (E) Task Force and the Principles Based Reserving Implementation (“EX”) Task Force. Also, the Federal Advisory Committee on Insurance (“FACI”) took up the issue of captives at a recent meeting, and a task force was created.  Any regulatory action that adversely affects the Company’s use or increases the Company’s cost of using affiliated captive reinsurers, either retroactively or prospectively, could have a material adverse impact on the Company’s financial condition or results of operations.

Recently, new laws and regulations have been adopted that require life insurers to search for unreported deaths. The New York Insurance Department issued a letter and adopted a regulation requiring life insurers doing business in New York, which includes one of the Company’s subsidiaries, to use data available on the U.S. Social Security Administration’s Death Master File or a similar database (a “Death Database”) to identify instances where amounts under life insurance policies, annuities, and retained asset accounts would be payable if notice of the death and/or a claim for benefits had been submitted to the insurer, to locate and pay beneficiaries under such contracts, and to report the results. Life insurance industry associations and regulatory associations are also considering the matters. The National Conference of Insurance Legislators (“NCOIL”) has adopted the Model Unclaimed Life Insurance Benefits Act (the “Unclaimed Benefits Act”) and legislation has been enacted in several states that is similar to the Unclaimed Benefits Act, although each state’s version differs in some respects. The Unclaimed Benefits Act would impose new requirements on insurers to periodically compare their in-force life insurance and annuity contracts and retained asset accounts against a Death Database, investigate any potential matches to confirm the death and determine whether benefits are due, and to attempt to locate the beneficiaries of any benefits that are due or, if no beneficiary can be located, escheat the benefit to the state as unclaimed property. Other states in which the Company does business may also consider adopting legislation similar to the Unclaimed Benefits Act. The Company cannot predict whether such legislation will be proposed or enacted in additional states.

A number of state treasury departments have audited life insurance companies for compliance with unclaimed property laws. The focus of the audits has been to determine whether there have been maturities of policies on

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contracts, or policies that have exceeded limiting age with respect to which death benefits or other payments under the policies should be treated as unclaimed property that should be escheated to the state. In addition, the audits have sought to identify unreported deaths of insureds. There is no clear basis in previously existing law for treating an unreported death as giving rise to a policy benefit that would be subject to unclaimed property procedures. A number of life insurers, however, have entered into resolution agreements with state treasury departments under which the life insurers agreed to procedures for comparing their previously issued life insurance and annuity contracts and retained asset accounts against a Death Database, treating confirmed deaths as giving rise to a death benefit under their policies, locating beneficiaries and paying them the benefits and interest, and escheating the benefits and interest to the state if the beneficiary could not be found. The amounts publicly reported to have been paid to beneficiaries or escheated to the states have been substantial.

The NAIC has established an Investigations of Life/Annuity Claims Settlement Practices (D) Task Force to coordinate targeted multi-state examinations of life insurance companies on claims settlement practices. The state insurance regulators on the Task Force have initiated targeted multi-state examinations of life insurance companies with respect to the companies’ claims paying practices and use of a death database to identify unreported deaths in their life insurance policies, annuity contracts and retained asset accounts. There is no clear basis in previously existing law for requiring a life insurer to search for unreported deaths in order to determine whether a benefit is owed. A number of life insurers, however, have entered into settlement or consent agreements with state insurance regulators under which the life insurers agreed to implement systems and procedures for periodically comparing their life insurance and annuity contracts and retained asset accounts against a Death Database, treating confirmed deaths as giving rise to a death benefit under their policies, locating beneficiaries and paying them the benefits and interest, and escheating the benefits and interest to the state if the beneficiary could not be found.  It has been publicly reported that the life insurers have paid substantial administrative and/or examination fees to the insurance regulators in connection with the settlement or consent agreements.

Certain of the Company’s subsidiaries as well as certain other insurance companies from whom the Company has coinsured blocks of life insurance and annuity policies are subject to state treasury department audits and/or targeted multistate examinations by insurance regulators similar to those described above. It is possible that the audits, examinations and/or the enactment of state laws similar to the Unclaimed Benefits Act could result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, payment of administrative penalties and/or examination fees to state authorities, and changes to the Company’s procedures for identifying unreported deaths and escheatment of abandoned property. It is possible any such additional payments and any costs related to changes in Company procedures could materially impact the Company’s financial results from operations. It is also possible that life insurers, including the Company, may be subject to claims, regulatory actions, law enforcement actions, and civil litigation arising from their prior business practices. Any resulting liabilities, payments or costs, including initial and ongoing costs of changes to the Company’s procedures or systems, could be significant and could have a material adverse effect on the Company’s financial condition or results of operations.

During December 2012, the West Virginia Treasurer filed actions against the Company’s subsidiaries Protective Life Insurance Company and West Coast Life Insurance Company in West Virginia state court (State of West Virginia ex rel. John D. Perdue vs. Protective Life Insurance Company, State of West Virginia ex rel. John D. Perdue vs. West Coast Life Insurance Company). The actions, which also name numerous other life insurance companies, allege that the companies violated the West Virginia Uniform Unclaimed Property Act, seek to compel compliance with the Act, and seek payment of unclaimed property, interest, and penalties. While the legal theory or theories that may give rise to liability in the West Virginia Treasurer litigation are uncertain, it is possible that other jurisdictions may pursue similar actions. The Company does not currently believe that losses, if any, arising from the West Virginia Treasurer litigation will be material. The Company cannot, however, predict whether other jurisdictions will pursue similar actions or, if they do, whether such actions will have a material impact on the Company’s financial results from operations. Additionally, the California Controller has recently sued two insurance carriers for alleged failure to comply with audit requests from an appointed third party auditor. The Company cannot predict whether California might pursue a similar action against the Company and further cannot predict whether other jurisdictions might pursue similar actions. The Company does not believe however that any such action would have a material impact on the Company’s financial results from operations.

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. From time to time, companies

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may be asked to contribute amounts beyond prescribed limits. The Company cannot predict the amount or timing of any future assessments.

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

At the federal level, bills are routinely introduced in both chambers of the United States Congress (“Congress”) that could affect life insurers. In the past, Congress has considered legislation that would impact insurance companies in numerous ways, such as providing for an optional federal charter or a federal presence for insurance, preempting state law in certain respects regarding the regulation of reinsurance, increasing federal oversight in areas such as consumer protection and other matters. The Company cannot predict whether or in what form legislation will be enacted and, if so, whether the enacted legislation will positively or negatively affect the Company or whether any effects will be material.

The Company is subject to various conditions and requirements of the Patient Protection and Affordable Care Act of 2010 (“the Healthcare Act”). The Healthcare Act makes significant changes to the regulation of health insurance and may affect the Company in various ways. The Healthcare Act may affect the small blocks of business the Company has offered or acquired over the years that is, or is deemed to be, health insurance. The Healthcare Act may also affect the benefit plans the Company sponsors for employees or retirees and their dependents, the Company’s expense to provide such benefits, the tax liabilities of the Company in connection with the provision of such benefits, and the Company’s ability to attract or retain employees. In addition, the Company may be subject to regulations, guidance or determinations emanating from the various regulatory authorities authorized under the Healthcare Act. The Company cannot predict the effect that the Healthcare Act, or any regulatory pronouncement made thereunder, will have on its results of operations or financial condition.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) makes sweeping changes to the regulation of financial services entities, products and markets. Certain provisions of Dodd-Frank are or may become applicable to the Company, its competitors or those entities with which the Company does business. Such provisions include, but are not limited to the following: the establishment of the Federal Insurance Office, changes to the regulation and standards applicable to broker dealers and investment advisors, changes to the regulation of reinsurance, changes to regulations affecting the rights of shareholders, and the imposition of additional regulation over credit rating agencies.

Dodd-Frank also created the Financial Stability Oversight Council (the “FSOC”), which has issued a final rule and interpretive guidance setting forth the methodology by which it will determine whether a non-bank financial company is a systemically important financial institution (“SIFI”). A non-bank financial company, such as the Company, that is designated as a SIFI by the FSOC will become subject to supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company is not currently supervised by the Federal Reserve. Such supervision could impact the Company’s requirements relating to capital, liquidity, stress testing, limits on counterparty credit exposure, compliance and governance, early remediation in the event of financial weakness and other prudential matters. FSOC-designated non-bank financial companies will also be required to prepare resolution plans, so-called “living wills,” that set out how they could most efficiently be liquidated if they endangered the U.S. financial system or the broader economy. The FSOC has made its initial SIFI designations, and the Company was not designated. However, the Company could be considered and designated at any time.  Because the process is in its initial stages, the Company is, at this time, unable to predict the impact on an entity that is supervised as a SIFI by the Federal Reserve Board. The Company is not able to predict whether the capital requirements imposed on SIFIs may impact the capital requirements applicable to the Company even if it is not designated as a SIFI. The uncertainty about capital requirements could influence the Company’s business decisions with respect to some product lines.

Additionally, Dodd-Frank created the Consumer Financial Protection Bureau (“CFPB”), an independent division of the Department of Treasury with jurisdiction over credit, savings, payment, and other consumer financial products and services, other than investment products already regulated by the United States Securities and Exchange

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Commission (the “SEC”) or the U.S. Commodity Futures Trading Commission. CFPB has issued a rule to bring under its supervisory authority certain nonbanks whose activities it determines pose risks to consumers. It is unclear at this time which products will be covered by this rule. Certain of the Company’s subsidiaries sell products that may be regulated by the CFPB. Additionally, the CFPB is exploring the possibility of helping Americans manage their retirement savings and is considering the extent of its authority in that area. The Company is unable, at this time, to predict the impact of these activities on the Company.

In addition, Dodd-Frank includes a new framework of regulation of over-the-counter (“OTC”) derivatives markets which requires clearing of certain types of transactions which have been or are currently traded OTC by the Company. The types of transactions to be cleared are expected to increase in the future. The new framework could potentially impose additional costs, including increased margin requirements and additional regulation on the Company. Increased margin requirements on the Company’s part, combined with restrictions on securities that will qualify as eligible collateral, could continue to reduce its liquidity and require an increase in its holdings of cash and government securities with lower yields causing a reduction in income. The Company uses derivative financial instruments to mitigate a wide range of risks in connection with its businesses, including those arising from its variable annuity products with guaranteed benefit features. The derivative clearing requirements of Dodd-Frank could continue to increase the cost of the Company’s risk mitigation and expose it to the risk of a default by a clearinghouse with respect to the Company’s cleared derivative transactions.

Numerous provisions of Dodd-Frank require the adoption of implementing rules and/or regulations. The process of adopting such implementing rules and/or regulations have in some instances been delayed beyond the timeframes imposed by Dodd-Frank. Until the various final regulations are promulgated pursuant to Dodd-Frank, the full impact of the regulations on the Company will remain unclear. In addition, Dodd-Frank mandates multiple studies, which could result in additional legislation or regulation applicable to the insurance industry, the Company, its competitors or the entities with which the Company does business. Legislative or regulatory requirements imposed by or promulgated in connection with Dodd-Frank may impact the Company in many ways, including but not limited to the following: placing the Company at a competitive disadvantage relative to its competition or other financial services entities, changing the competitive landscape of the financial services sector and/or the insurance industry, making it more expensive for the Company to conduct its business, requiring the reallocation of significant company resources to government affairs, legal and compliance-related activities, causing historical market behavior or statistics utilized by the Company in connection with its efforts to manage risk and exposure to no longer be predictive of future risk and exposure or otherwise have a material adverse effect on the overall business climate as well as the Company’s financial condition and results of operations.

The Company may be subject to regulation by the United States Department of Labor when providing a variety of products and services to employee benefit plans and individual investors that are governed by the Employee Retirement Income Security Act (“ERISA”). The Department of Labor is currently in the process of re-proposing a rule that would change the circumstances under which one who works with employee benefit plans and Individual Retirement Accounts would be considered a fiduciary under ERISA. Severe penalties are imposed for breach of duties under ERISA and the Company cannot predict the impact that the Department of Labor’s re-proposed rule may have on its operations.

Certain equity and debt securities policies, contracts, and annuities offered by the Company’s subsidiaries are subject to regulation under the federal securities laws administered by the SEC. The federal securities laws contain regulatory restrictions and criminal, administrative, and private remedial provisions. From time to time, the SEC and the Financial Industry Regulatory Authority (“FINRA”) examine or investigate the activities of broker dealers and investment advisors, including the Company’s affiliated broker dealers and investment advisors. These examinations or investigations often focus on the activities of the registered representatives and registered investment advisors doing business through such entities and the entities’ supervision of those persons. It is possible that any examination or investigation could lead to enforcement action by the regulator and/or may result in payments of fines and penalties, payments to customers, or both, as well as changes in systems or procedures of such entities, any of which could have a material adverse effect on the Company’s financial condition or results of operations.

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

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business in other countries can include fines and imprisonment, both within the U.S. and abroad.  U.S. enforcement of anti-corruption laws continues to increase in magnitude, and penalties may be substantial.

Other types of regulation that could affect the Company and its subsidiaries include insurance company investment laws and regulations, state statutory accounting and reserving practices, anti-trust laws, minimum solvency requirements, state securities laws, federal privacy laws, insurable interest laws, federal anti-money laundering and anti-terrorism laws, employment and immigration laws (including a law in Alabama where over 50% of the Company’s employees are located), and because the Company owns and operates real property, state, federal, and local environmental laws. Under some circumstances, severe penalties may be imposed for breach of these laws.

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

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.

Under the Internal Revenue Code of 1986, as amended (the “Code”), income taxes payable by policyholders on investment earnings is deferred during the accumulation period of most life insurance and annuity products. This favorable tax treatment provides some of the Company’s products with a competitive advantage over products offered by non-insurance companies. To the extent that the Code is revised to either reduce the tax-deferred status of life insurance and annuity products or to establish the tax-deferred status of competing products, then all life insurance companies (including the Company’s subsidiaries) would be adversely affected with respect to their ability to sell such products. Furthermore, depending upon grandfathering provisions, such changes could cause increased surrenders of existing life insurance and annuity products. For example, new legislation that further restricts the deductibility of interest on funds borrowed to purchase corporate-owned life insurance products could result in increased surrenders of these products. Additionally, changes in tax law that establish new tax-advantaged retirement and life savings plans could reduce the existing tax advantage of investing in certain life insurance and annuity products.

The Company is subject to the federal corporate income tax. It currently benefits from certain tax provisions, such as the dividends-received deduction, the deferral of certain types of economic income from derivatives and securities, and the deduction for future policy benefits and claims. The Administration and Congress have separately made proposals that either materially change or eliminate these benefits. Most of the foregoing proposals would cause the Company to pay higher current taxes, offset by a reduction in its deferred taxes.  However, the proposal regarding the dividends-received deduction would cause the Company’s net income and earnings per share to decrease. Whether these proposals will be enacted, and if so, whether they will be enacted as described above, is uncertain.

The Company’s mid-2005 transition from relying on reinsurance for newly-written traditional life products to reinsuring some of these products’ reserves into its captive insurance companies resulted in a net reduction in its current taxes, offset by an increase in its deferred taxes. The resulting benefit of reduced current taxes is attributed to the applicable life products and is an important component of the profitability of these products. The profitability and competitive position of these products is dependent on the continuation of current tax law and the ability to generate taxable income.

There is general uncertainty regarding the taxes to which the Company and its products will be subject in the future. The Company cannot predict what changes to tax law or interpretations of existing tax law may ultimately be enacted or adopted, or whether such changes will adversely affect the Company.

A disruption affecting the electronic systems of the Company or those on whom the Company relies could adversely affect the Company’s business, financial condition and results of operations.

In conducting its business, the Company relies extensively on various electronic systems, including computer systems, data processing and administrative systems, and communication systems. The Company’s business partners, counter parties, service providers and distributors also rely on such systems, as do securities exchanges and financial markets that are important to the Company’s ability to conduct its business. These systems could be disrupted, damaged or destroyed by intentional or unintentional acts or events such as cyber-attacks, viruses, sabotage, fire, flooding,

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human error, system failures, and failures of power or water supply. They may also be disrupted, damaged or destroyed by natural events such as storms, floods or earthquakes.   While the Company and others on whom it depends try to identify threats and implement measures to protect their systems, such protective measures may not be sufficient. Disruption, damage or destruction of any of these systems could cause the Company or others on whom the Company relies to be unable to conduct business for an extended period of time, which could materially adversely impact the Company’s business and its financial condition and results of operations.

Confidential information maintained in the Company’s systems could be compromised or misappropriated, damaging the Company’s business and reputation and adversely affecting its financial condition and results of operations.

In the course of conducting its business, the Company retains confidential information, including information about its customers and proprietary business information. The Company maintains physical, administrative, and technical safeguards to protect the information. The Company retains confidential information in various electronic systems, including computer systems, data processing and administrative systems, and communication systems. The Company relies on commercial technologies to maintain the security of those systems and to maintain the security of its transmission of such information to other parties, including its business partners, counter parties and service providers. An intentional or unintentional breach or compromise of the Company’s security measures could result in the disclosure, misappropriation, misuse, alteration or destruction of the confidential information retained by the Company, which could damage the Company’s business and reputation, and adversely affect its financial condition and results of operations by, among other things, causing harm to the Company’s customers, deterring customers and others from doing business with the Company, subjecting the Company to significant civil and criminal liability, and requiring the Company to incur significant legal and other expenses.

The Company may not be able to achieve the expected results from its recently announced acquisition.

On April 10, 2013, the Company entered into a master agreement with AXA Financial, Inc. and AXA Equitable Financial Services, LLC for the acquisition of MONY Life Insurance Company and a reinsurance agreement for certain business of MONY Life Insurance Company of America. The Company may not be able to complete the transactions due to, among other things, the inability of the parties to satisfy the various closing conditions, including the receipt of required regulatory approvals. A delay in the closing of the transactions may negatively impact the expected results from the transactions. In addition, if the transactions are completed, integration of the acquisition may be more expensive, more difficult, or take longer than expected; the source of funds for the transactions may be different than originally contemplated; the actual financial results of the transactions could differ materially from the Company’s expectations and may be impacted by items not taken into account in its forecasts and calculations; and the Company’s expectations regarding its ability to successfully integrate and transition the acquired operations and satisfy its legal and compliance obligations in relation to the transactions may prove to be incorrect.

The Company could be adversely affected by an inability to access FHLB lending.

During the fourth quarter of 2010, the Federal Housing Finance Agency issued an Announced Notice of Proposed Rulemaking (“ANPR”). The purpose of the ANPR is to seek comment on several possible changes to the requirements applicable to members of the FHLB. Any changes to such requirements that eliminate the Company’s eligibility for continued FHLB membership or limit the Company’s borrowing capacity pursuant to its FHLB membership could have a material adverse effect on the Company. The Company can give no assurance as to the outcome of the ANPR. The FHFA also released an advisory bulletin on the particular risks associated with lending to insurance companies as opposed to federally-backed banks, which includes standards for evaluating FHLB’s lending to an insurance company member. These standards are broad and raise concerns about the state regulatory framework and of FHLB creditor status in the event of insurer insolvency. The FHFA has issued a report entitled “FHFA Can Enhance Its Oversight of FHLBank Advances to Insurance Companies by Improving Communication with State Insurance Regulators and Industry Groups,” which proposes the FHFA coordinate with state regulators to obtain confidential supervisory information about insurers and interact with NAIC working groups to receive “early warning” information about failing members, so the FHFA can participate in the rehabilitation and perhaps increase FHLB creditor status. Any standards or events that result in stricter regulation of, or reduced incidence of, FHLB-insurer lending could have a material adverse effect on the Company.

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Item 6.       Exhibits

Item
Number	Document
* 2(b)	Master Agreement by and among AXA Equitable Financial Services, LLC, AXA, Financial, Inc. and Protective Life Insurance Company, dated as of April 10, 2013, filed herewith.
12	Consolidated Earnings Ratio
31(a)	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a)	Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)	Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Financial statements from the quarterly report on Form 10-Q of Protective Life Insurance Company for the quarter ended June 30, 2013, filed on August 12, 2013, formatted in XBRL: (i) the Consolidated Condensed Statements of Income, (ii) the Consolidated Condensed Statements of Comprehensive Income (Loss), (iii) the Consolidated Condensed Balance Sheets, (iv) the Consolidated Condensed Statements of Shareowner’s Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (iv) the Notes to Consolidated Condensed Financial Statements.

* The registrant agrees to furnish the Commission supplementally upon request a copy of any omitted schedule to any material plan of acquisition, disposition, or reorganization listed above.

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SIGNATURE

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

	PROTECTIVE LIFE INSURANCE COMPANY
Date:      August 12, 2013	By:	/s/ Steven G. Walker
		Steven G. Walker
		Senior Vice President, Controller
		and Chief Accounting Officer

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