Edgar Filing: REINSURANCE GROUP OF AMERICA INC

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-11848

REINSURANCE GROUP OF AMERICA, INCORPORATED

(Exact name of Registrant as specified in its charter)

MISSOURI

43-1627032

(State or other jurisdiction of

incorporation or organization)

(IRS employer

identification number)

1370 Timberlake Manor Parkway

Chesterfield, Missouri 63017

(Address of principal executive offices)

(636) 736-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant 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 ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of April 30, 2012, 73,712,236 shares of the registrant’s common stock were outstanding.

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS


Item		Page
	PART I – FINANCIAL INFORMATION

1	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited) March 31, 2012 and December 31, 2011		3
	Condensed Consolidated Statements of Income (Unaudited) Three months ended March 31, 2012 and 2011		4
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three months ended March 31, 2012 and 2011		5
	Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 2012 and 2011		6
	Notes to Condensed Consolidated Financial Statements (Unaudited)		7
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
3	Quantitative and Qualitative Disclosure About Market Risk		62
4	Controls and Procedures		62

	PART II – OTHER INFORMATION

1	Legal Proceedings		63
1A	Risk Factors		63
2	Unregistered Sales of Equity Securities and Use of Proceeds		63
6	Exhibits		63
	Signatures		64
	Index to Exhibits		65

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	March 31, 2012			December 31, 2011
	(Dollars in thousands, except share data)
Assets
Fixed maturity securities:
Available-for-sale at fair value (amortized cost of $14,814,859 and $14,182,880 at March 31, 2012 and December 31, 2011, respectively)	$	16,794,057		$	16,200,950
Mortgage loans on real estate (net of allowances of $14,650 and $11,793 at March 31, 2012 and December 31, 2011, respectively)		1,040,733			991,731
Policy loans		1,260,070			1,260,400
Funds withheld at interest		5,472,532			5,410,424
Short-term investments		75,425			88,566
Other invested assets		867,507			1,012,541

Total investments		25,510,324			24,964,612
Cash and cash equivalents		873,933			962,870
Accrued investment income		173,629			144,334
Premiums receivable and other reinsurance balances		1,131,334			1,059,572
Reinsurance ceded receivables		597,508			626,194
Deferred policy acquisition costs		3,629,424			3,543,925
Other assets		369,930			332,466

Total assets	$	32,286,082		$	31,633,973

Liabilities and Stockholders’ Equity
Future policy benefits	$	10,413,361		$	9,903,886
Interest-sensitive contract liabilities		8,252,995			8,394,468
Other policy claims and benefits		2,984,681			2,841,373
Other reinsurance balances		132,389			118,219
Deferred income taxes		1,728,765			1,679,834
Other liabilities		777,678			810,775
Long-term debt		1,414,829			1,414,688
Collateral finance facility		652,029			652,032

Total liabilities		26,356,727			25,815,275

Commitments and contingent liabilities (See Note 8)

Stockholders’ Equity:
Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no shares issued or outstanding)		—			—
Common stock (par value $.01 per share; 140,000,000 shares authorized; shares issued: 79,137,758 at March 31, 2012 and December 31, 2011)		791			791
Additional paid-in-capital		1,736,184			1,727,774
Retained earnings		2,906,310			2,818,429
Treasury stock, at cost; 5,425,522 and 5,770,024 shares at March 31, 2012 and December 31, 2011, respectively		(325,732	)		(346,449	)
Accumulated other comprehensive income		1,611,802			1,618,153

Total stockholders’ equity		5,929,355			5,818,698

Total liabilities and stockholders’ equity	$	32,286,082		$	31,633,973

See accompanying notes to condensed consolidated financial statements (unaudited).

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended March 31,
	2012			2011
	(Dollars in thousands, except per share data)
Revenues:
Net premiums	$	1,863,482		$	1,736,130
Investment income, net of related expenses		340,940			371,040
Investment related gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		(7,607	)		(1,556	)
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income		(7,221	)		—
Other investment related gains (losses), net		58,348			125,176

Total investment related gains (losses), net		43,520			123,620
Other revenues		45,033			51,645

Total revenues		2,292,975			2,282,435

Benefits and Expenses:
Claims and other policy benefits		1,580,149			1,469,449
Interest credited		88,042			106,063
Policy acquisition costs and other insurance expenses		307,634			346,247
Other operating expenses		110,098			106,150
Interest expense		23,322			24,569
Collateral finance facility expense		2,967			3,202

Total benefits and expenses		2,112,212			2,055,680

Income before income taxes		180,763			226,755
Provision for income taxes		57,445			77,835

Net income	$	123,318		$	148,920

Earnings per share:
Basic earnings per share	$	1.68		$	2.03
Diluted earnings per share	$	1.67		$	2.02

Dividends declared per share	$	0.18		$	0.12

See accompanying notes to condensed consolidated financial statements (unaudited).

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)


	Three months ended March 31,
	2012			2011
Comprehensive income:
Net income	$	123,318		$	148,920

Other comprehensive income:
Change in foreign currency translation adjustments		24,080			24,407
Change in net unrealized gain on investments		(35,415	)		(35,818	)
Change in other-than-temporary impairment losses on fixed maturity securities		4,694			—
Changes in pension and other postretirement plan adjustments		290			214

Total other comprehensive income		(6,351	)		(11,197	)

Total comprehensive income	$	116,967		$	137,723

See accompanying notes to condensed consolidated financial statements.

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three months ended March 31,
	2012			2011
	(Dollars in thousands)
Cash Flows from Operating Activities:
Net income	$	123,318		$	148,920
Adjustments to reconcile net income to net cash provided by operating activities:
Change in operating assets and liabilities:
Accrued investment income		(28,616	)		(26,763	)
Premiums receivable and other reinsurance balances		(61,722	)		85,908
Deferred policy acquisition costs		(65,583	)		82,324
Reinsurance ceded receivable balances		28,686			(38,230	)
Future policy benefits, other policy claims and benefits, and other reinsurance balances		554,354			227,509
Deferred income taxes		38,107			20,319
Other assets and other liabilities, net		5,944			(25,759	)
Amortization of net investment premiums, discounts and other		(35,281	)		(27,093	)
Investment related gains, net		(43,520	)		(123,620	)
Excess tax benefits from share-based payment arrangement		30			(932	)
Other, net		38,938			53,065

Net cash provided by operating activities		554,655			375,648

Cash Flows from Investing Activities:
Sales of fixed maturity securities available-for-sale		47,096			910,943
Maturities of fixed maturity securities available-for-sale		36,437			85,374
Purchases of fixed maturity securities available-for-sale		(572,345	)		(1,087,526	)
Cash invested in mortgage loans		(75,081	)		(28,493	)
Cash invested in funds withheld at interest		(33,083	)		571
Principal payments on mortgage loans on real estate		22,081			11,843
Principal payments on policy loans		330			6,402
Change in short-term investments and other invested assets		65,256			(24,911	)

Net cash used in investing activities		(509,309	)		(125,797	)

Cash Flows from Financing Activities:
Dividends to stockholders		(13,255	)		(8,832	)
Repurchase of collateral finance facility securities		—			(7,586	)
Net borrowing under credit agreements		—			56,000
Proceeds from redemption and remarketing of trust preferred securities		—			154,588
Purchases of treasury stock		(4,118	)		(335,955	)
Excess tax benefits from share-based payment arrangement		(30	)		932
Exercise of stock options, net		216			(5,811	)
Change in cash collateral for derivative positions		(100,565	)		(6,120	)
Deposits on universal life and other investment type policies and contracts		37,303			13,724
Withdrawals on universal life and other investment type policies and contracts		(59,922	)		(110,703	)

Net cash used in financing activities		(140,371	)		(249,763	)
Effect of exchange rate changes on cash		6,088			3,923

Change in cash and cash equivalents		(88,937	)		4,011
Cash and cash equivalents, beginning of period		962,870			463,661

Cash and cash equivalents, end of period	$	873,933		$	467,672

Supplementary information:
Cash paid for interest	$	24,592		$	12,846
Cash paid for income taxes, net of refunds	$	15,112		$	77,441

See accompanying notes to condensed consolidated financial statements (unaudited).

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

Reinsurance Group of America, Incorporated (“RGA”) is an insurance holding company that was formed on December 31, 1992. The accompanying unaudited condensed consolidated financial statements of RGA and its subsidiaries (collectively, the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. There were no subsequent events that would require disclosure or adjustments to the accompanying condensed consolidated financial statements through the date the financial statements were issued. These unaudited condensed consolidated financial statements include the accounts of RGA and its subsidiaries and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2011 Annual Report on Form 10-K (“2011 Annual Report”) filed with the Securities and Exchange Commission on February 29, 2012.

The Company has adjusted the presentation of certain prior-period information to conform to the current presentation. Such adjustments reflect the retrospective adoption of the amended general accounting principles for Financial Services – Insurance as it relates to accounting for costs associated with acquiring or renewing insurance contracts. The financial statements and notes to the financial statements presented herein have been adjusted to reflect the retrospective adoption of the new accounting principles. See below for additional information. All intercompany accounts and transactions have been eliminated.

In October 2010, the FASB amended the general accounting principles for Financial Services – Insurance as it relates to accounting for costs associated with acquiring or renewing insurance contracts. This amendment clarifies that only those costs that result directly from and are essential to the contract transaction and that would not have been incurred had the contract transaction not occurred can be capitalized. It also defines acquisitions costs as costs that are related directly to the successful acquisitions of new or renewal insurance contracts. The Company adopted the amended general accounting principles on a retrospective basis on January 1, 2012. The Company believes retrospective adoption provides the most comparable and useful financial information for financial statement users. The financial statements and notes to the financial statements presented herein have been adjusted to reflect the retrospective adoption of the new accounting principles.

The following tables present the effects of the retrospective adoption of the new accounting principles to the Company’s previously reported consolidated balance sheet as of December 31, 2011 and condensed consolidated statement of income and condensed consolidated statement of cash flows for the three months ended March 31, 2011 (in thousands, except share amounts):


	December 31, 2011
	As Reported		Adjustments			As Amended
Assets
Deferred policy acquisition costs	$	4,013,984	$	(470,059	)	$	3,543,925

Liabilities and Stockholders’ Equity
Future policy benefits		9,903,503		383			9,903,886
Deferred income taxes		1,831,869		(152,035	)		1,679,834
Stockholders’ Equity:
Retained earnings		3,131,934		(313,505	)		2,818,429
Accumulated other comprehensive income		1,623,055		(4,902	)		1,618,153

	Three months ended March 31, 2011
	As Reported		Adjustments			As Amended
Benefits and Expenses:
Policy acquisition costs and other insurance expenses	$	331,153	$	15,094		$	346,247

Income before income taxes		241,849		(15,094	)		226,755

Provision for income taxes		81,033		(3,198	)		77,835

Net income	$	160,816	$	(11,896	)	$	148,920


(Continued)	December 31, 2011
(Continued)	As Reported		Adjustments			As Amended
Earnings per share:
Basic earnings per share	$	2.20	$	(0.17	)	$	2.03
Diluted earnings per share	$	2.18	$	(0.16	)	$	2.02

	Three months ended March 31, 2011
	As Reported		Adjustments			As Amended
Cash Flows from Operating Activities:
Net Income	$	160,816	$	(11,896	)	$	148,920
Change in operating assets and liabilities
Deferred policy acquisition costs		67,230		15,094			82,324
Deferred income taxes		23,517		(3,198	)		20,319

2. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share on net income (in thousands, except per share information):


	Three months ended March 31,
	2012		2011
Earnings:
Net income (numerator for basic and diluted calculations)	$	123,318	$	148,920
Shares:
Weighted average outstanding shares (denominator for basic calculation)		73,575		73,213
Equivalent shares from outstanding stock options		468		623

Denominator for diluted calculation		74,043		73,836

Earnings per share:
Basic	$	1.68	$	2.03
Diluted	$	1.67	$	2.02

The calculation of common equivalent shares does not include the impact of options having a strike or conversion price that exceeds the average stock price for the earnings period, as the result would be antidilutive. The calculation of common equivalent shares also excludes the impact of outstanding performance contingent shares, as the conditions necessary for their issuance have not been satisfied as of the end of the reporting period. For the three months ended March 31, 2012, approximately 1.4 million stock options and approximately 0.7 million performance contingent shares were excluded from the calculation. For the three months ended March 31, 2011, approximately 0.8 million stock options and approximately 0.8 million performance contingent shares were excluded from the calculation.

3. Accumulated Other Comprehensive Income

The balance of and changes in each component of accumulated other comprehensive income (“AOCI”) for the three months ended March 31, 2012 are as follows (dollars in thousands):


	Accumulated Other Comprehensive Income (Loss), Net of Income Tax
	Accumulated Currency Translation Adjustments		Unrealized Appreciation of Securities			Pension and Postretirement Benefits			Total
Balance, December 31, 2011	$	229,795	$	1,419,318		$	(30,960	)	$	1,618,153
Change in component during the period		24,080		(30,721	)		290			(6,351	)

Balance, March 31, 2012	$	253,875	$	1,388,597		$	(30,670	)	$	1,611,802

4. Investments

The Company had total cash and invested assets of $26.4 billion and $25.9 billion at March 31, 2012 and December 31, 2011, respectively, as illustrated below (dollars in thousands):


	March 31, 2012		December 31, 2011
Fixed maturity securities, available-for-sale	$	16,794,057	$	16,200,950
Mortgage loans on real estate		1,040,733		991,731
Policy loans		1,260,070		1,260,400
Funds withheld at interest		5,472,532		5,410,424
Short-term investments		75,425		88,566
Other invested assets		867,507		1,012,541
Cash and cash equivalents		873,933		962,870

Total cash and invested assets	$	26,384,257	$	25,927,482

All investments held by the Company are monitored for conformance to the qualitative and quantitative limits prescribed by the applicable jurisdiction’s insurance laws and regulations. In addition, the operating companies’ boards of directors periodically review their respective investment portfolios. The Company’s investment strategy is to maintain a predominantly investment-grade, fixed maturity securities portfolio, which will provide adequate liquidity for expected reinsurance obligations and maximize total return through prudent asset management. The Company’s asset/liability duration matching differs between operating segments. Based on Canadian reserve requirements, the Canadian liabilities are matched with long-duration Canadian assets. The duration of the Canadian portfolio exceeds twenty years. The average duration for all portfolios, when consolidated, ranges between eight and ten years.

The Company participates in a securities borrowing program whereby securities, which are not reflected on the Company’s condensed consolidated balance sheets, are borrowed from a third party. The Company is required to maintain a minimum of 100% of the market value of the borrowed securities as collateral. The Company had borrowed securities with an amortized cost and an estimated fair value of $150.0 million as of March 31, 2012 and December 31, 2011. The borrowed securities are used to provide collateral under an affiliated reinsurance transaction.

Investment Income, Net of Related Expenses

Major categories of investment income, net of related expenses, consist of the following (dollars in thousands):


	Three months ended March 31,
	2012		2011
Fixed maturity securities available-for-sale	$	191,418	$	184,561
Mortgage loans on real estate		14,965		13,734
Policy loans		16,783		16,371
Funds withheld at interest		115,014		153,060
Short-term investments		988		925
Other invested assets		11,322		9,698

Investment revenue		350,490		378,349
Investment expense		9,550		7,309

Investment income, net of related expenses	$	340,940	$	371,040

Investment Related Gains (Losses), Net

Investment related gains (losses), net consist of the following (dollars in thousands):


	Three months ended March 31,
	2012			2011
Fixed maturities and equity securities available for sale:
Other-than-temporary impairment losses on fixed maturities	$	(7,607	)	$	(1,556	)
Portion of loss recognized in accumulated other comprehensive income (before taxes)		(7,221	)		—

Net other-than-temporary impairment losses on fixed maturities recognized in earnings		(14,828	)		(1,556	)
Impairment losses on equity securities		(839	)		—
Gain on investment activity		22,312			29,376
Loss on investment activity		(7,504	)		(6,914	)
Other impairment losses and change in mortgage loan provision		(5,843	)		576
Derivatives and other, net		50,222			102,138

Net gains	$	43,520		$	123,620

The net other-than-temporary impairment losses on fixed maturity securities recognized in earnings of $14.8 million and $1.6 million in the first three months of 2012 and 2011, respectively, are primarily due to a decline in value of structured securities with exposure to commercial mortgages and corporate bankruptcies. The decrease in derivatives and other is primarily due to a decrease in the fair value of free-standing derivatives.

During the three months ended March 31, 2012 and 2011, the Company sold fixed maturity securities and equity securities with fair values of $248.1 million and $196.6 million at losses of $7.5 million and $6.9 million, respectively. The Company generally does not engage in short-term buying and selling of securities.

Other-Than-Temporary Impairments

As discussed in Note 2 – “Summary of Significant Accounting Policies” of the Company’s 2011 Annual Report, a portion of certain other-than-temporary impairment (“OTTI”) losses on fixed maturity securities are recognized in AOCI. For these securities the net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in AOCI. The following table sets forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in AOCI, and the corresponding changes in such amounts (dollars in thousands):


	Three months ended
	2012			2011
Balance, beginning of period	$	63,947		$	47,291
Initial impairments—credit loss OTTI recognized on securities not previously impaired		1,902			—
Additional impairments—credit loss OTTI recognized on securities previously impaired		8,720			658
Credit loss OTTI previously recognized on securities impaired to fair value during the period		(11,381	)		—
Credit loss OTTI previously recognized on securities which matured, paid down, prepaid or were sold during the period		(952	)		—

Balance, end of period	$	62,236		$	47,949

Fixed Maturity and Equity Securities Available-for-Sale

The following tables provide information relating to investments in fixed maturity securities and equity securities by sector as of March 31, 2012 and December 31, 2011 (dollars in thousands):


March 31, 2012:	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		% of Total			Other-than- temporary impairments in AOCI
Available-for-sale:
Corporate securities	$	7,518,983	$	671,100	$	78,629	$	8,111,454		48.3	%	$	—
Canadian and Canadian provincial governments		2,610,735		1,229,402		797		3,839,340		22.9			—
Residential mortgage-backed securities		1,075,073		72,598		9,443		1,138,228		6.8			(710	)
Asset-backed securities		448,688		11,390		45,551		414,527		2.5			(4,512	)
Commercial mortgage-backed securities		1,302,734		104,586		64,899		1,342,421		8.0			(6,118	)
U.S. government and agencies		257,928		22,500		1,335		279,093		1.6			—
State and political subdivisions		191,113		27,873		4,982		214,004		1.3			—
Other foreign government, supranational and foreign government-sponsored enterprises		1,409,605		49,908		4,523		1,454,990		8.6			—

Total fixed maturity securities	$	14,814,859	$	2,189,357	$	210,159	$	16,794,057		100.0	%	$	(11,340	)

Non-redeemable preferred stock	$	77,766	$	4,963	$	2,706	$	80,023		81.6	%
Other equity securities		16,046		3,446		1,487		18,005		18.4

Total equity securities	$	93,812	$	8,409	$	4,193	$	98,028		100.0	%


December 31, 2011:	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		% of Total			Other-than- temporary impairments in AOCI
Available-for-sale:
Corporate securities	$	6,931,958	$	654,519	$	125,371	$	7,461,106		46.0	%	$	—
Canadian and Canadian provincial governments		2,507,802		1,362,160		29		3,869,933		23.9			—
Residential mortgage-backed securities		1,167,265		76,393		16,424		1,227,234		7.6			(1,042	)
Asset-backed securities		443,974		11,692		53,675		401,991		2.5			(5,256	)
Commercial mortgage-backed securities		1,233,958		87,750		79,489		1,242,219		7.7			(12,225	)
U.S. government and agencies		341,087		32,976		61		374,002		2.3			—
State and political subdivisions		184,308		24,419		3,341		205,386		1.3			—
Other foreign government, supranational and foreign government-sponsored enterprises		1,372,528		50,127		3,576		1,419,079		8.7			—

Total fixed maturity securities	$	14,182,880	$	2,300,036	$	281,966	$	16,200,950		100.0	%	$	(18,523	)

Non-redeemable preferred stock	$	82,488	$	4,677	$	8,982	$	78,183		68.6	%
Other equity securities		35,352		1,903		1,538		35,717		31.4

Total equity securities	$	117,840	$	6,580	$	10,520	$	113,900		100.0	%

The Company enters into various collateral arrangements that require both the pledging and acceptance of fixed maturity securities as collateral, which are excluded from the tables above. The Company pledged fixed maturity securities as collateral to derivative and reinsurance counterparties with an amortized cost of $37.4 million and $29.0 million, and an estimated fair value of $41.3 million and $32.6 million, as of March 31, 2012 and December 31, 2011 respectively, which are included in other invested assets in the condensed consolidated balance sheets.

The Company received fixed maturity securities as collateral from derivative and reinsurance counterparties with an estimated fair value of $30.1 million and $1.0 million, as of March 31, 2012 and December 31, 2011, respectively. Subject to certain constraints, the Company is permitted by contract to sell or re-pledge this collateral; however, as of March 31, 2012 and December 31, 2011, none of the collateral had been sold or re-pledged.

As of March 31, 2012, the Company held securities with a fair value of $1,179.0 million that were issued by the Canadian province of Ontario and $1,083.2 million that were issued by an entity that is guaranteed by the Canadian province of

Quebec, both of which exceeded 10% of condensed consolidated stockholders’ equity. As of December 31, 2011, the Company held securities with a fair value of $1,171.2 million that were issued by the Canadian province of Ontario and $1,107.7 million that were issued by an entity that is guaranteed by the Canadian province of Quebec, both of which exceeded 10% of condensed consolidated stockholders’ equity.

The amortized cost and estimated fair value of fixed maturity securities available-for-sale at March 31, 2012 are shown by contractual maturity in the table below. Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2012, the contractual maturities of investments in fixed maturity securities were as follows (dollars in thousands):


	Amortized Cost		Fair Value
Available-for-sale:
Due in one year or less	$	179,357	$	180,864
Due after one year through five years		2,659,446		2,770,954
Due after five year through ten years		4,094,202		4,447,320
Due after ten years		5,055,359		6,499,742
Asset and mortgage-backed securities		2,826,495		2,895,177

Total	$	14,814,859	$	16,794,057

The tables below show the major industry types of the Company’s corporate fixed maturity holdings as of March 31, 2012 and December 31, 2011 (dollars in thousands):


March 31, 2012:	Amortized Cost		Estimated Fair Value		% of Total
Finance	$	2,578,694	$	2,686,141		33.1	%
Industrial		3,751,858		4,109,403		50.7
Utility		1,179,592		1,306,787		16.1
Other		8,839		9,123		0.1

Total	$	7,518,983	$	8,111,454		100.0	%


December 31, 2011:	Amortized Cost		Estimated Fair Value		% of Total
Finance	$	2,411,175	$	2,442,149		32.7	%
Industrial		3,402,099		3,760,187		50.4
Utility		1,115,384		1,255,090		16.9
Other		3,300		3,680		—

Total	$	6,931,958	$	7,461,106		100.0	%

The creditworthiness of Greece, Ireland, Italy, Portugal and Spain, commonly referred to as “Europe’s peripheral region,” is under ongoing stress and uncertainty due to high debt levels and economic weakness. The Company did not have exposure to sovereign fixed maturity securities, which includes global government agencies, from Europe’s peripheral region as of March 31, 2012 and December 31, 2011. In addition, the Company did not purchase or sell credit protection, through credit default swaps, referenced to sovereign entities of Europe’s peripheral region. The tables below show the Company’s exposure to sovereign fixed maturity securities originated in countries other than Europe’s peripheral region, included in “Other foreign government, supranational and foreign government-sponsored enterprises,” in Note 4 – “Investments,” as of March 31, 2012 and December 31, 2011 (dollars in thousands):


March 31, 2012:	Amortized Cost		Estimated Fair Value		% of Total
Australia	$	455,583	$	462,177		37.9	%
Japan		199,435		203,543		16.7
United Kingdom		121,984		132,406		10.8
South Africa		59,393		60,381		5.0
New Zealand		53,981		53,238		4.4
Cayman Islands		48,374		51,807		4.2
Germany		42,434		44,326		3.6
Other		197,465		212,848		17.4

Total	$	1,178,649	$	1,220,726		100.0	%


December 31, 2011:	Amortized Cost		Estimated Fair Value		% of Total
Australia	$	437,713	$	446,694		39.1	%
Japan		214,994		219,276		19.2
United Kingdom		118,618		130,106		11.4
Germany		72,926		75,741		6.6
New Zealand		51,547		51,544		4.5
South Africa		37,624		38,528		3.4
South Korea		30,592		32,025		2.8
Other		139,927		148,792		13.0

Total	$	1,103,941	$	1,142,706		100.0	%

The tables below show the Company’s exposure to non-sovereign fixed maturity securities and equity securities, based on the security’s country of issuance, from Europe’s peripheral region as of March 31, 2012 and December 31, 2011 (dollars in thousands):


March 31, 2012:	Amortized Cost		Estimated Fair Value		% of Total
Financial institutions:
Ireland	$	4,160	$	4,569		6.6	%
Spain		25,656		23,715		34.3

Total financial institutions		29,816		28,284		40.9


Other:
Ireland		12,475		13,285		19.3
Italy		2,980		3,058		4.4
Spain		24,449		24,450		35.4

Total other		39,904		40,793		59.1

Total	$	69,720	$	69,077		100.0	%


December 31, 2011:	Amortized Cost		Estimated Fair Value		% of Total
Financial institutions:
Ireland	$	4,084	$	4,397		5.9	%
Spain		25,565		20,378		27.6

Total financial institutions		29,649		24,775		33.5


Other:
Ireland		12,474		13,149		17.8
Italy		2,898		2,808		3.8
Spain		34,459		33,137		44.9

Total other		49,831		49,094		66.5

Total	$	79,480	$	73,869		100.0	%

Unrealized Losses for Fixed Maturity Securities Available-for-Sale

The following table presents the total gross unrealized losses for the 851 and 940 fixed maturity and equity securities as of March 31, 2012 and December 31, 2011, respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):


	March 31, 2012					December 31, 2011
	Gross Unrealized Losses		% of Total			Gross Unrealized Losses		% of Total
Less than 20%	$	92,037		42.9	%	$	131,155		44.8	%
20% or more for less than six months		9,986		4.7			51,503		17.6
20% or more for six months or greater		112,329		52.4			109,828		37.6

Total	$	214,352		100.0	%	$	292,486		100.0	%

As of March 31, 2012 and December 31, 2011, respectively, 58.9% and 65.3% of these gross unrealized losses were associated with investment grade securities. The unrealized losses on these securities decreased primarily due to a decline in interest rates since December 31, 2011.

The Company’s determination of whether a decline in value is other-than-temporary includes analysis of the underlying credit and the extent and duration of a decline in value. The Company’s credit analysis of an investment includes determining whether the issuer is current on its contractual payments, evaluating whether it is probable that the Company will be able to collect all amounts due according to the contractual terms of the security and analyzing the overall ability of the Company to recover the amortized cost of the investment. The Company continues to consider valuation declines as a potential indicator of credit deterioration. The Company believes that due to fluctuating market conditions and an extended period of economic uncertainty, the extent and duration of a decline in value have become less indicative of when there has been credit deterioration with respect to a fixed maturity security since it may not have an impact on the ability of the issuer to service all scheduled payments and the Company’s evaluation of the recoverability of all contractual cash flows or the ability to recover an amount at least equal to amortized cost. In the Company’s impairment review process, the duration and severity of an unrealized loss position for equity securities are given greater weight and consideration given the lack of contractual cash flows or deferability features. As of March 31, 2012 and December 31, 2011, gross unrealized losses on equity securities greater than 20 percent and 12 months or more totaled $0.5 million.

The following tables present the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for 851 and 940 fixed maturity securities and equity securities that have estimated fair values below amortized cost as of March 31, 2012 and December 31, 2011, respectively (dollars in thousands). These investments are presented by class and grade of security, as well as the length of time the related market value has remained below amortized cost.


	Less than 12 months				12 months or greater				Total
March 31, 2012:	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Investment grade securities:
Corporate securities	$	862,016	$	21,354	$	257,018	$	39,896	$	1,119,034	$	61,250
Canadian and Canadian provincial governments		28,422		797		—		—		28,422		797
Residential mortgage-backed securities		73,291		1,148		49,221		6,875		122,512		8,023
Asset-backed securities		90,691		2,241		96,052		24,491		186,743		26,732
Commercial mortgage-backed securities		92,710		1,432		52,313		13,549		145,023		14,981
U.S. government and agencies		87,486		1,335		—		—		87,486		1,335
State and political subdivisions		27,839		3,462		12,020		1,520		39,859		4,982
Other foreign government, supranational and foreign government-sponsored enterprises		221,491		2,401		17,336		2,122		238,827		4,523

Total investment grade securities		1,483,946		34,170		483,960		88,453		1,967,906		122,623

Non-investment grade securities:
Corporate securities		147,646		9,931		47,308		7,448		194,954		17,379
Residential mortgage-backed securities		3,851		167		14,434		1,253		18,285		1,420
Asset-backed securities		11		30		25,023		18,789		25,034		18,819
Commercial mortgage-backed securities		32,637		1,201		61,562		48,717		94,199		49,918

Total non-investment grade securities		184,145		11,329		148,327		76,207		332,472		87,536

Total fixed maturity securities	$	1,668,091	$	45,499	$	632,287	$	164,660	$	2,300,378	$	210,159

Non-redeemable preferred stock	$	7,603	$	484	$	19,099	$	2,222	$	26,702	$	2,706
Other equity securities		20		183		5,537		1,304		5,557		1,487

Total equity securities	$	7,623	$	667	$	24,636	$	3,526	$	32,259	$	4,193


	Less than 12 months				12 months or greater				Total
December 31, 2011:	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Investment grade securities:
Corporate securities	$	790,758	$	40,180	$	286,244	$	63,117	$	1,077,002	$	103,297
Canadian and Canadian provincial governments		3,094		29		—		—		3,094		29
Residential mortgage-backed securities		128,622		3,549		58,388		10,382		187,010		13,931
Asset-backed securities		101,263		3,592		93,910		29,036		195,173		32,628
Commercial mortgage-backed securities		109,455		3,538		58,979		22,001		168,434		25,539
U.S. government and agencies		1,764		61		—		—		1,764		61
State and political subdivisions		21,045		1,845		12,273		1,268		33,318		3,113
Other foreign government, supranational and foreign government-sponsored enterprises		148,416		1,085		16,588		2,491		165,004		3,576

Total investment grade securities		1,304,417		53,879		526,382		128,295		1,830,799		182,174

Non-investment grade securities:
Corporate securities		212,795		10,852		47,310		11,222		260,105		22,074
Residential mortgage-backed securities		23,199		712		10,459		1,781		33,658		2,493
Asset-backed securities		2,363		940		21,275		20,107		23,638		21,047
Commercial mortgage-backed securities		34,918		7,220		62,357		46,730		97,275		53,950
State and political subdivisions		4,000		228		—		—		4,000		228

Total non-investment grade securities		277,275		19,952		141,401		79,840		418,676		99,792

Total fixed maturity securities	$	1,581,692	$	73,831	$	667,783	$	208,135	$	2,249,475	$	281,966

Non-redeemable preferred stock	$	19,516	$	4,478	$	15,694	$	4,504	$	35,210	$	8,982
Other equity securities		1,662		602		5,905		936		7,567		1,538

Total equity securities	$	21,178	$	5,080	$	21,599	$	5,440	$	42,777	$	10,520

As of March 31, 2012, the Company does not intend to sell these fixed maturity securities and does not believe it is more likely than not that it will be required to sell these fixed maturity securities before the recovery of the fair value up to the current amortized cost of the investment, which may be maturity. However, unforeseen facts and circumstances may cause the Company to sell fixed maturity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality, asset-liability management and liquidity guidelines.

As of March 31, 2012, the Company has the ability and intent to hold the equity securities until the recovery of the fair value up to the current cost of the investment. However, unforeseen facts and circumstances may cause the Company to sell equity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality and liquidity guidelines.

Unrealized losses on non-investment grade securities are principally related to asset-backed securities, residential mortgage-backed securities and commercial mortgage-backed securities and were the result of wider credit spreads resulting from higher risk premiums since the time of initial purchase, largely due to macroeconomic conditions and credit market deterioration, including the impact of lower real estate valuations. As of March 31, 2012 and December 31, 2011, approximately $68.8 million and $68.6 million, respectively, of gross unrealized losses greater than 12 months was associated with non-investment grade asset and mortgage-backed securities. This class of securities was evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts and security specific expectations of cash flows. This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, and (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company owns, such as overcollateralization and excess spread.

Mortgage Loans

Mortgage loans represented approximately 3.9% and 3.8% of the Company’s cash and invested assets as of March 31, 2012 and December 31, 2011, respectively. The Company makes mortgage loans on income producing properties, such as apartments, retail and office buildings, light warehouses and light industrial facilities. Loan-to-value ratios at the time of loan approval are 75% or less.

Information regarding the Company’s credit quality indicators for its recorded investment in mortgage loans, gross of valuation allowances, as of March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):


Internal credit risk grade:	March 31, 2012		December 31, 2011
High investment grade	$	295,266	$	252,333
Investment grade		539,872		526,608
Average		93,324		105,177
Watch list		107,225		91,037
In or near default		19,696		28,369

Total	$	1,055,383	$	1,003,524

The age analysis of the Company’s past due recorded investment in mortgage loans, gross of valuation allowances, as of March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):


	March 31, 2012		December 31, 2011
31-60 days past due	$	11,937	$	21,800
61-90 days past due		3,634		—
Greater than 90 days		17,153		20,316

Total past due		32,724		42,116
Current		1,022,659		961,408

Total	$	1,055,383	$	1,003,524

The following table presents the recorded investment in mortgage loans, by method of evaluation of credit loss, and the related valuation allowances, by type of credit loss, at (dollars in thousands):


	March 31, 2012		December 31, 2011
Mortgage loans:
Evaluated individually for credit losses	$	56,855	$	60,904
Evaluated collectively for credit losses		998,528		942,620

Mortgage loans, gross of valuation allowances		1,055,383		1,003,524

Valuation allowances:
Specific for credit losses		9,884		8,188
Non-specifically identified credit losses		4,766		3,605

Total valuation allowances		14,650		11,793

Mortgage loans, net of valuation allowances	$	1,040,733	$	991,731

Information regarding the Company’s loan valuation allowances for mortgage loans for the three months ending March 31, 2012 and 2011 are as follows (dollars in thousands):


	Three Months Ended March 31,
	2012			2011
Balance, beginning of period	$	11,793		$	6,239
Charge-offs		(2,193	)		—
Provision (release)		5,050			(575	)

Balance, end of period	$	14,650		$	5,664

Information regarding the portion of the Company’s mortgage loans that were impaired as of March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):


	Unpaid Principal Balance		Recorded Investment		Related Allowance		Carrying Value
March 31, 2012:
Impaired mortgage loans with no valuation allowance recorded	$	12,189	$	11,646	$	—	$	11,646
Impaired mortgage loans with valuation allowance recorded		45,352		45,209		9,884		35,325

Total impaired mortgage loans	$	57,541	$	56,855	$	9,884	$	46,971

December 31, 2011:
Impaired mortgage loans with no valuation allowance recorded	$	32,088	$	31,496	$	—	$	31,496
Impaired mortgage loans with valuation allowance recorded		29,724		29,408		8,188		21,220

Total impaired mortgage loans	$	61,812	$	60,904	$	8,188	$	52,716

The Company’s average investment in impaired mortgage loans and the related interest income are reflected in the table below for the periods indicated (dollars in thousands):


	Three Months Ended
	March 31, 2012				March 31, 2011
	Average Investment⁽¹⁾		Interest Income		Average Investment⁽¹⁾		Interest Income
Impaired mortgage loans with no valuation allowance recorded	$	21,571	$	169	$	17,751	$	167
Impaired mortgage loans with valuation allowance recorded		37,308		308		18,741		118

Total	$	58,879	$	477	$	36,492	$	285

(1)	Average recorded investment represents the average loan balances as of the beginning of period and all subsequent quarterly end of period balances.

The Company did not acquire any impaired mortgage loans during the three months ended March 31, 2012 and 2011. The Company had $17.2 million and $20.3 million of mortgage loans, gross of valuation allowances, that were on nonaccrual status at March 31, 2012 and December 31, 2011, respectively.

Other Invested Assets

Other invested assets include equity securities, limited partnership interests, structured loans and derivative contracts. Other invested assets represented approximately 3.3% and 3.9% of the Company’s cash and invested assets as of March 31, 2012 and 2011, respectively. Carrying values of these assets as of March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):


	March 31, 2012		December 31, 2011
Equity securities	$	98,028	$	113,900
Limited partnerships		265,879		251,315
Structured loans		245,246		281,022
Derivatives		168,961		257,050
Other		89,393		109,254

Total other invested assets	$	867,507	$	1,012,541

The decrease in derivatives in 2012 is primarily due to a decrease in the carrying value of derivatives (primarily interest rate swaps and equity options) used to economically hedge changes in the fair value of liabilities associated with the reinsurance of variable annuities with guaranteed living benefits.

5. Derivative Instruments

The following table presents the notional amounts and fair value of derivative instruments as of March 31, 2012 and December 31, 2011 (dollars in thousands):


	March 31, 2012						December 31, 2011
	Notional		Carrying Value/Fair Value				Notional		Carrying Value/Fair Value
	Amount		Assets		Liabilities		Amount		Assets		Liabilities
Derivatives not designated as hedging instruments:
Interest rate swaps⁽¹⁾	$	2,708,940	$	117,624	$	20,454	$	2,748,317	$	184,842	$	18,702
Financial futures⁽¹⁾		274,101		—		—		277,814		—		—
Foreign currency forwards⁽¹⁾		24,400		2,482		—		24,400		4,560		—
Consumer Price index (“CPI”) swaps⁽¹⁾		102,425		1,230		—		101,069		766		—
Credit default swaps⁽¹⁾		649,500		3,245		3,707		649,500		1,313		10,949
Equity options⁽¹⁾		669,188		69,426		—		510,073		90,106		—
Embedded derivatives in:
Modified coinsurance or funds withheld arrangements⁽²⁾		—		—		370,884		—		—		361,456
Indexed annuity products⁽³⁾		—		3,514		772,938		—		4,945		751,523
Variable annuity products⁽³⁾		—		—		130,344		—		—		276,718

Total non-hedging derivatives		4,428,554		197,521		1,298,327		4,311,173		286,532		1,419,348

Derivatives designated as hedging instruments:
Interest rate swaps⁽¹⁾		57,005		39		924		56,250		133		960
Foreign currency swaps⁽¹⁾		621,578		282		33,143		621,578		286		23,996

Total hedging derivatives		678,583		321		34,067		677,828		419		24,956

Total derivatives	$	5,107,137	$	197,842	$	1,332,394	$	4,989,001	$	286,951	$	1,444,304

(1)	Carried on the Company’s condensed consolidated balance sheets in other invested assets or other liabilities, at fair value.

(2)	Embedded liability is included on the condensed consolidated balance sheets with the host contract in funds withheld at interest, at fair value.

(3)	Embedded liability is included on the condensed consolidated balance sheets with the host contract in interest-sensitive contract liabilities, at fair value. Embedded asset is included on the condensed consolidated balance sheets in reinsurance ceded receivables.

Accounting for Derivative Instruments and Hedging Activities

The Company does not enter into derivative instruments for speculative purposes. As discussed below under “Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging,” the Company uses various derivative instruments for risk management purposes that either do not qualify or have not been qualified for hedge accounting treatment, including derivatives used to economically hedge changes in the fair value of liabilities associated with the reinsurance of variable annuities with guaranteed living benefits. As of March 31, 2012 and December 31, 2011, the Company held interest rate swaps that were designated and qualified as cash flow hedges of interest rate risk. As of March 31, 2012 and December 31, 2011, the Company held foreign currency swaps that were designated and qualified as fair value hedges of a portion of its net investment in its foreign operations. As of March 31, 2012 and December 31, 2011, the Company also had derivative instruments that were not designated as hedging instruments. See Note 2 – “Summary of Significant Accounting Policies” of the Company’s 2011 Annual Report for a detailed discussion of the accounting treatment for derivative instruments, including embedded derivatives. Derivative instruments are carried at fair value and generally require an insignificant amount of cash at inception of the contracts.

Fair Value Hedges

During the fourth quarter of 2011 the Company removed the fair value hedge designation for its interest rate swaps. However, prior to the fourth quarter of 2011 the Company designated and accounted for certain interest rate swaps that convert fixed rate investments to floating rate investments as fair value hedges when they meet the requirements of the general accounting principles for Derivatives and Hedging. The gain or loss on the hedged item attributable to the hedged benchmark interest rate and the offsetting gain or loss on the related interest rate swaps for the three months ended March 31, 2011 were (dollars in thousands):


Type of Fair Value Hedge	Hedged Item	Gains (Losses) Recognized for Derivatives		Gains (Losses) Recognized for Hedged Items			Ineffectiveness Recognized in Investment Related Gains (Losses)
For the three months ended March 31, 2011:
Interest rate swaps	Fixed rate maturities	$	223	$	(97	)	$	126

A regression analysis was used, both at the inception of the hedge and on an ongoing basis, to determine whether each derivative used in a hedge transaction is highly effective in offsetting changes in the hedged item. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.

Cash Flow Hedges

The Company designates and accounts for certain interest rate swaps, in which the cash flows are denominated in different currencies, commonly referred to as cross-currency swaps, as cash flow hedges when they meet the requirements of the general accounting principles for Derivatives and Hedging.

The following table presents the components of AOCI, before income tax, and the condensed consolidated income statement classification where the gain or loss is recognized related to cash flow hedges for the three months ended March 31, 2012 (dollars in thousands):


	2012
Accumulated other comprehensive income (loss), balance beginning of year	$	(828	)
Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges		323
Amounts reclassified to investment related gains (losses), net		—
Amounts reclassified to investment income		(357	)

Accumulated other comprehensive income (loss), balance end of period	$	(862	)

As of March 31, 2012, the before-tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are $0.8 million. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains (losses) as an adjustment to investment income over the term of the investment cash flows. There were no hedged forecasted transactions, other than the receipt or payment of variable interest payments on existing financial instruments, for the three months ended March 31, 2012. The Company had no derivative instruments that were designated and qualified as cash flow hedges for the three months ended March 31, 2011.

The following table presents the effects of derivatives in cash flow hedging relationships on the condensed consolidated statements of income and AOCI for the three months ended March 31, 2012 (dollars in thousands):


Derivatives in Cash Flow Hedging Relationships	Amount of Gains (Losses) Deferred in AOCI on Derivatives		Amount and Location of Gains (Losses) Reclassified from AOCI into Income (Loss)				Amount and Location of Gains (Losses) Recognized in Income (Loss) on Derivatives
	(Effective Portion)		(Effective Portion)				(Ineffective Portion and Amounts Excluded from Effectiveness Testing)
			Investment Related Gains (Losses)		Investment Income		Investment Related Gains (Losses)			Investment Income
Interest rate swaps	$	323	$	—	$	357	$	(24	)	$	—

Hedges of Net Investments in Foreign Operations

The Company uses foreign currency swaps to hedge a portion of its net investment in certain foreign operations against adverse movements in exchange rates. The following tables illustrate the Company’s net investments in foreign operations (“NIFO”) hedges for the three months ended March 31, 2012 and 2011 (dollars in thousands):


	Derivative Gains (Losses) Deferred in AOCI
	For the three months ended March 31,
Type of NIFO Hedge ^{(1) (2)}	2012			2011
Foreign currency swaps	$	(10,645	)	$	(15,104	)

(1)	There were no sales or substantial liquidations of net investments in foreign operations that would have required the reclassification of gains or losses from accumulated other comprehensive income (loss) into investment income during the periods presented.

(2)	There was no ineffectiveness recognized for the Company’s hedges of net investments in foreign operations.

The cumulative foreign currency translation gain (loss) recorded in AOCI related to these hedges was $(6.6) million and $4.1 million at March 31, 2012 and December 31, 2011, respectively. If a foreign operation was sold or substantially liquidated, the amounts in AOCI would be reclassified to the condensed consolidated statements of income. A pro rata portion would be reclassified upon partial sale of a foreign operation.

Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging

The Company uses various other derivative instruments for risk management purposes that either do not qualify or have not been qualified for hedge accounting treatment, including derivatives used to economically hedge changes in the fair value of liabilities associated with the reinsurance of variable annuities with guaranteed living benefits. The gain or loss related to the change in fair value for these derivative instruments is recognized in investment related gains (losses), in the condensed consolidated statements of income, except where otherwise noted. For the three months ended March 31, 2012 and 2011, the Company recognized investment related losses of $93.3 million and $25.9 million, respectively, related to derivatives (not including embedded derivatives) that do not qualify or have not been qualified for hedge accounting.

Interest Rate Swaps

Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). With an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between two rates, which can be either fixed-rate or floating-rate interest amounts, tied to an agreed-upon notional principal amount. These transactions are executed pursuant to master agreements that provide for a single net payment or individual gross payments at each due date.

Financial Futures

Exchange-traded equity futures are used primarily to economically hedge liabilities embedded in certain variable annuity products. With exchange-traded equity futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the relevant stock indices, and to post variation margin on a daily basis in an amount equal to the difference between the daily estimated fair values of those contracts. The Company enters into exchange-traded equity futures with regulated futures commission merchants that are members of the exchange.

Equity Options

Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products. To hedge against adverse changes in equity indices volatility, the Company buys put options. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.

CPI Swaps

CPI swaps are used by the Company primarily to economically hedge liabilities embedded in certain insurance products where value is directly affected by changes in a designated benchmark consumer price index. With a CPI swap transaction, the Company agrees with another party to exchange the actual amount of inflation realized over a specified period of time for a fixed amount of inflation determined at inception. These transactions are executed pursuant to master agreements that provide for a single net payment or individual gross payments to be made by the counterparty at each due date. Most of these swaps will require a single payment to be made by one counterparty at the maturity date of the swap.

Foreign Currency Swaps

Foreign currency swaps are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. With a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate calculated by reference to an agreed upon principal amount. The principal amount of each currency is exchanged at the inception and termination of the currency swap by each party. The Company may also use foreign currency swaps to economically hedge the foreign currency risk associated with certain of its net investments in foreign operations.

Foreign Currency Forwards

Foreign currency forwards are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. With a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made in a different currency at the specified future date.

Credit Default Swaps

The Company sells protection under single name credit default swaps and credit default swap index tranches to diversify its credit risk exposure in certain portfolios and, in combination with purchasing securities, to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for indexed reference entities and single name reference entities are defined in the contracts. The Company’s maximum exposure to credit loss equals the notional value for credit default swaps. In the event of default for credit default swaps, the Company is typically required to pay the protection holder the full notional value less a recovery rate determined at auction.

The Company’s maximum amount at risk on credit default swaps, assuming the value of the underlying referenced securities is zero, was $614.0 million at March 31, 2012 and December 31, 2011.

The Company also purchases credit default swaps to reduce its risk against a drop in bond prices due to credit concerns of certain bond issuers. If a credit event, as defined by the contract, occurs, the Company is able to put the bond back to the counterparty at par.

Embedded Derivatives

The Company has certain embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance treaties structured on a modified coinsurance (“modco”) or funds withheld basis. Changes in fair values of embedded derivatives on modco or funds withheld treaties are net of a decrease in investment related gains (losses), net of $63.5 million and $23.9 million for the three months ended March 31, 2012 and 2011, respectively, associated with the Company’s own credit risk. Changes in fair values of embedded derivatives on variable annuity contracts are net of an increase in investment related gains (losses), net of $37.0 million for the three months ended March 31, 2012 associated with the Company’s own credit risk. Additionally, the Company reinsures equity-indexed annuity and variable annuity contracts with benefits that are considered embedded derivatives, including guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits, and guaranteed minimum income benefits. The related gains (losses) and the effect on net income after amortization of deferred acquisition costs (“DAC”) and income taxes for the three months ended March 31, 2012 and 2011 are reflected in the following table (dollars in thousands):


	Three months ended March 31,
	2012			2011
Embedded derivatives in modco or funds withheld arrangements included in investment related gains	$	(9,428	)	$	90,535
After the associated amortization of DAC and taxes, the related amounts included in net income		1,933			19,183
Embedded derivatives in variable annuity contracts included in investment related gains		146,375			32,654
After the associated amortization of DAC and taxes, the related amounts included in net income		15,082			8,801
Amounts related to embedded derivatives in equity-indexed annuities included in benefits and expenses		(19,739	)		(41,271	)
After the associated amortization of DAC and taxes, the related amounts included in net income		13,870			(36,650	)

Non-hedging Derivatives

A summary of the effect of non-hedging derivatives, including embedded derivatives, on the Company’s income statement for the three months ended March 31, 2012 and 2011 is as follows (dollars in thousands):


		Gain (Loss) for the Three Months Ended March 31,
Type of Non-hedging Derivative	Income Statement Location of Gain (Loss)	2012			2011
Interest rate swaps	Investment related gains (losses), net	$	(47,352	)	$	(10,730	)
Financial futures	Investment related gains (losses), net		(17,409	)		(11,423	)
Foreign currency forwards	Investment related gains (losses), net		(1,608	)		(855	)
CPI swaps	Investment related gains (losses), net		(802	)		811
Credit default swaps	Investment related gains (losses), net		11,813			892
Equity options	Investment related gains (losses), net		(37,983	)		(4,568	)
Embedded derivatives in:
Modco or funds withheld arrangements	Investment related gains (losses), net		(9,428	)		90,535
Indexed annuity products	Policy acquisition costs and other insurance expenses		(998	)		8,094
Indexed annuity products	Interest credited		(18,741	)		(49,365	)
Variable annuity products	Investment related gains (losses), net		146,375			32,654

Total non-hedging derivatives		$	23,867		$	56,045

Credit Risk

The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. As exchange-traded futures are affected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties.

The Company enters into various collateral arrangements, which require both the posting and accepting of collateral in connection with its derivative instruments. Collateral agreements contain attachment thresholds that may vary depending on the posting party’s ratings. Additionally, a decline in the Company’s or the counterparty’s credit ratings to specified levels could result in potential settlement of the derivative positions under the Company’s agreements with its counterparties. The Company also has exchange-traded futures, which require the maintenance of a margin account.

The Company’s credit exposure related to derivative contracts is generally limited to the fair value at the reporting date plus or minus any collateral posted or held by the Company. Information regarding the Company’s credit exposure related to its over-the-counter derivative contracts and margin account for exchange-traded futures at March 31, 2012 and December 31, 2011 are reflected in the following table (dollars in thousands):


	March 31, 2012			December 31, 2011
Estimated fair value of derivatives in net asset position	$	136,100		$	227,399
Securities pledged to counterparties as collateral⁽¹⁾		35,623			27,052
Cash pledged from counterparties as collateral⁽²⁾		(140,915	)		(241,480	)
Securities pledged from counterparties as collateral⁽³⁾		(30,146	)		(997	)

Net credit exposure	$	662		$	11,974

Margin account related to exchange-traded futures⁽²⁾	$	15,742		$	18,153

(1)	Consists of U.S. Treasury securities, included in other invested assets.

(2)	Included in cash and cash equivalents.

(3)	Consists of U.S. Treasury securities.

6. Fair Value of Assets and Liabilities

General accounting principles for Fair Value Measurements and Disclosures define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with these principles, valuation techniques utilized by management for invested assets and embedded derivatives reported at fair value are generally categorized into three types:

Market Approach. Market approach valuation techniques use prices and other relevant information from market transactions involving identical or comparable assets or liabilities. Valuation techniques consistent with the market approach include comparables and matrix pricing. Comparables use market multiples, which might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering both quantitative and qualitative factors specific to the measurement. Matrix pricing is a mathematical technique used principally to value certain securities without relying exclusively on quoted prices for the specific securities but comparing the securities to benchmark or comparable securities.

Income Approach. Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single discounted amount. These techniques rely on current expectations of future amounts. Examples of income approach valuation techniques include present value techniques, option-pricing models and binomial or lattice models that incorporate present value techniques.

Cost Approach. Cost approach valuation techniques are based upon the amount that, at present, would be required to replace the service capacity of an asset, or the current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility.

The three approaches described above are consistent with generally accepted valuation techniques. While all three approaches are not applicable to all assets or liabilities reported at fair value, where appropriate and possible, one or more valuation techniques may be used. The selection of the valuation technique(s) to apply considers the definition of an exit price and the nature of the asset or liability being valued and significant expertise and judgment is required. The Company performs regular analysis and review of the various techniques utilized in determining fair value to ensure that the valuation approaches utilized are appropriate and consistently applied, and that the various assumptions are reasonable. As indicated above, the Company also utilizes information from third parties, such as pricing services and brokers, to assist in determining fair values for certain assets and liabilities; however, management is ultimately responsible for all fair values presented in the Company’s financial statements. The Company performs analysis and review of the information and prices received from third parties to ensure that the prices represent a reasonable estimate of the fair value. This process involves quantitative and qualitative analysis and is overseen by the Company’s investment and accounting personnel. Examples of procedures performed include, but are not limited to, initial and ongoing review of third party pricing services and techniques, review of

pricing trends and monitoring of recent trade information. In addition, the Company utilizes both internal and external cash flow models to analyze the reasonableness of fair values utilizing credit spread and other market assumptions, where appropriate. As a result of the analysis, if the Company determines there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly.

For invested assets reported at fair value, the Company utilizes when available, fair values based on quoted prices in active markets that are regularly and readily obtainable. Generally, these are very liquid investments and the valuation does not require management judgment. When quoted prices in active markets are not available, fair value is based on the market valuation techniques described above, primarily a combination of the market approach, including matrix pricing and the income approach. For corporate and government securities, the assumptions and inputs used by management in applying these techniques include, but are not limited to: using standard market observable inputs which are derived from, or corroborated by, market observable data including market yield curve, duration, call provisions, observable prices and spreads for similar publicly traded or privately traded issues that incorporate the credit quality and industry sector of the issuer. For structured securities that include residential mortgage-backed securities, commercial mortgage-backed securities and asset-backed securities, valuation is based primarily on matrix pricing or other similar techniques using standard market inputs including spreads for actively traded securities, spreads off benchmark yields, expected prepayment speeds and volumes, current and forecasted loss severity, rating, weighted average coupon, weighted average maturity, average delinquency rates, geographic region, debt-service coverage ratios and issuance-specific information including, but not limited to: collateral type, payment terms of the underlying assets, payment priority within the tranche, structure of the security, deal performance and vintage of loans.

When observable inputs are not available, the market standard valuation techniques for determining the estimated fair value of certain types of securities that trade infrequently, and therefore have little or no price transparency, rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs can be based in large part on management judgment or estimation, and cannot be supported by reference to market activity. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and are believed to be consistent with what other market participants would use when pricing such securities.

The use of different techniques, assumptions and inputs may have a material effect on the estimated fair values of the Company’s securities holdings.

For the quarters ended March 31, 2012 and 2011, the application of market standard valuation techniques applied to similar assets and liabilities has been consistent.

General accounting principles for Fair Value Measurements and Disclosures also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets and liabilities include investment securities and derivative contracts that are traded in exchange markets.

Level 2

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or market standard valuation techniques and assumptions with significant inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Such observable inputs include benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are not active and observable yields and spreads in the market. The Company’s Level 2 assets and liabilities include investment securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose values are determined using market standard valuation techniques. This category primarily includes corporate securities, Canadian and Canadian provincial government securities, and residential and commercial mortgage-backed securities, among others. Level 2 valuations are generally obtained from third party pricing services for identical or comparable assets or liabilities or through the use of valuation methodologies using observable market inputs. Prices from services are validated through analytical reviews and assessment of current market activity.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the related assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using market standard valuation techniques described above. When observable inputs are not available, the market standard techniques for determining the estimated fair value of certain securities that trade infrequently, and therefore have little transparency, rely on inputs that are significant to the estimated fair value and that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs can be based in large part on management judgment or estimation and cannot be supported by reference to market activity. Even though unobservable, management believes these inputs are based on assumptions

deemed appropriate given the circumstances and consistent with what other market participants would use when pricing similar assets and liabilities. For the Company’s invested assets, this category generally includes corporate securities (primarily private placements), asset-backed securities (including those with exposure to subprime mortgages), and to a lesser extent, certain residential and commercial mortgage-backed securities, among others. Prices are determined using valuation methodologies such as discounted cash flow models and other similar techniques. Non-binding broker quotes, which are utilized when pricing service information is not available, are reviewed for reasonableness based on the Company’s understanding of the market, and are generally considered Level 3. Under certain circumstances, based on its observations of transactions in active markets, the Company may conclude the prices received from independent third party pricing services or brokers are not reasonable or reflective of market activity. In those instances, the Company would apply internally developed valuation techniques to the related assets or liabilities. Additionally, the Company’s embedded derivatives, all of which are associated with reinsurance treaties, are classified in Level 3 since their values include significant unobservable inputs.

When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest priority level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, gains and losses for such assets and liabilities categorized within Level 3 may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 are summarized below (dollars in thousands):


March 31, 2012:				Fair Value Measurements Using:
March 31, 2012:	Total			Level 1		Level 2			Level 3
Assets:
Fixed maturity securities – available-for-sale:
Corporate securities	$	8,111,454		$	75,329	$	7,058,454		$	977,671
Canadian and Canadian provincial governments		3,839,340			—		3,839,340			—
Residential mortgage-backed securities		1,138,228			—		1,083,793			54,435
Asset-backed securities		414,527			—		268,165			146,362
Commercial mortgage-backed securities		1,342,421			—		1,223,743			118,678
U.S. government and agencies securities		279,093			166,724		112,369			—
State and political subdivision securities		214,004			12,793		195,972			5,239
Other foreign government supranational and foreign government-sponsored enterprises		1,454,990			180,114		1,274,876			—

Total fixed maturity securities – available-for-sale		16,794,057			434,960		15,056,712			1,302,385
Funds withheld at interest – embedded derivatives		(370,884	)		—		—			(370,884	)
Cash equivalents		349,457			349,457		—			—
Short-term investments		19,195			10,909		8,286			—
Other invested assets:
Non-redeemable preferred stock		80,023			66,024		13,999			—
Other equity securities		18,005			3,392		2,786			11,827
Derivatives:
Interest rate swaps		96,285			—		96,285			—
Foreign currency forwards		2,482			—		2,482			—
CPI swaps		1,230			—		1,230			—
Credit default swaps		(462	)		—		(462	)		—
Equity options		69,426			—		69,426			—
Collateral		41,298			35,623		5,675			—
Other		13,143			13,143		—			—

Total other invested assets		321,430			118,182		191,421			11,827
Reinsurance ceded receivable – embedded derivatives		3,514			—		—			3,514

Total	$	17,116,769		$	913,508	$	15,256,419		$	946,842

Liabilities:
Interest sensitive contract liabilities – embedded derivatives	$	903,282		$	—	$	—		$	903,282
Other liabilities:
Derivatives:
Foreign currency swaps		32,861			—		32,861			—

Total other liabilities		32,861			—		32,861			—

Total	$	936,143		$	—	$	32,861		$	903,282


December 31, 2011:				Fair Value Measurements Using:
December 31, 2011:	Total			Level 1		Level 2			Level 3
Assets:
Fixed maturity securities – available-for-sale:
Corporate securities	$	7,461,106		$	76,097	$	6,410,840		$	974,169
Canadian and Canadian provincial governments		3,869,933			—		3,869,933			—
Residential mortgage-backed securities		1,227,234			—		1,145,579			81,655
Asset-backed securities		401,991			—		208,499			193,492
Commercial mortgage-backed securities		1,242,219			—		1,126,243			115,976
U.S. government and agencies securities		374,002			300,514		73,488			—
State and political subdivision securities		205,386			12,894		182,119			10,373
Other foreign government, supranational and foreign government-sponsored enterprises		1,419,079			223,440		1,195,639			—

Total fixed maturity securities – available-for-sale		16,200,950			612,945		14,212,340			1,375,665
Funds withheld at interest – embedded derivatives		(361,456	)		—		—			(361,456	)
Cash equivalents		504,522			504,522		—			—
Short-term investments		46,671			37,155		9,516			—
Other invested assets:
Non-redeemable preferred stock		78,183			58,906		19,277			—
Other equity securities		35,717			5,308		18,920			11,489
Derivatives:
Interest rate swaps		168,484			—		168,484			—
Foreign currency forwards		4,560			—		4,560			—
CPI swaps		766			—		766			—
Credit default swaps		(4,003	)		—		(4,003	)		—
Equity options		87,243			—		87,243			—
Collateral		32,622			27,052		5,570			—
Other		59,373			59,373		—			—

Total other invested assets		462,945			150,639		300,817			11,489
Reinsurance ceded receivable – embedded derivatives		4,945			—		—			4,945

Total	$	16,858,577		$	1,305,261	$	14,522,673		$	1,030,643

Liabilities:
Interest sensitive contract liabilities – embedded derivatives	$	1,028,241		$	—	$	—		$	1,028,241
Other liabilities:
Derivatives:
Interest rate swaps		3,171			—		3,171			—
Credit default swaps		5,633			—		5,633			—
Equity options		(2,864	)		—		(2,864	)		—
Foreign currency swaps		23,710			—		23,710			—

Total other liabilities		29,650			—		29,650			—

Total	$	1,057,891		$	—	$	29,650		$	1,028,241

Management is responsible for monitoring the fair value process, ensuring objective and reliable valuation practices and pricing of financial instruments, and approving changes to valuation methodologies and pricing sources. The Company performs ongoing analysis of the prices received from pricing services to ensure that the prices represent a reasonable estimate of the fair value. The Company conducts other specific activities to monitor controls around pricing, which include comparing a sample of executed prices of securities sold to the fair value estimates, comparing fair value estimates to management’s knowledge of the current market, and ongoing confirmation that third party pricing services use, wherever possible, market-based parameters for valuation. The Company also determines if the inputs used in estimated fair values received from pricing services or brokers are observable by assessing whether these inputs can be corroborated by observable market data. The fair value of embedded derivative liabilities, including those calculated by third parties, are monitored through the use of attribution reports to quantify the effect of underlying sources of fair value change, including capital market inputs based on policyholder account values, interest rates and short-term and long-term implied volatilities, from period to period. Actuarial assumptions are based on experience studies performed internally in combination with available industry information and are reviewed on an annual basis. The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring bases are summarized below.

Fixed Maturity Securities – The fair values of the Company’s public fixed maturity securities, which include corporate and structured securities, are generally based on prices obtained from independent pricing services. Prices from pricing services are sourced from multiple vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company generally receives prices from multiple pricing services for each security, but ultimately

uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. To validate reasonability, prices are periodically reviewed by internal asset managers through comparison with directly observed recent market trades and internal estimates of current fair value, developed using market observable inputs and economic indicators. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. If the pricing information received from third party pricing services is not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service.

If the Company ultimately concludes that pricing information received from the independent pricing service is not reflective of market activity, non-binding broker quotes are used, if available. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information from the pricing service or broker with an internally developed valuation; however, this occurs infrequently. Internally developed valuations or non-binding broker quotes are also used to determine fair value in circumstances where vendor pricing is not available. These estimates may use significant unobservable inputs, which reflect the Company’s assumptions about the inputs market participants would use in pricing the asset. Circumstances where observable market data are not available may include events such as market illiquidity and credit events related to the security. Pricing service overrides, internally developed valuations and non-binding broker quotes are generally based on significant unobservable inputs and are often reflected as Level 3 in the valuation hierarchy.

The fair values of private placement securities are primarily determined using a discounted cash flow model. In certain cases these models primarily use observable inputs with a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions, taking into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Generally, these securities have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model may also incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the security. To the extent management determines that such unobservable inputs are not significant to the price of a security, a Level 2 classification is made. Otherwise, a Level 3 classification is used.

Embedded Derivatives – For embedded derivative liabilities associated with the underlying products in reinsurance treaties, primarily equity-indexed and variable annuity treaties, the Company utilizes a market standard technique, which includes an estimate of future equity option purchases and an adjustment for the Company’s own credit risk. The variable annuity embedded derivative calculations are performed by third parties based on methodology and input assumptions provided by the Company. To validate the reasonability of the resulting fair value, the Company’s internal actuaries perform reviews and analytical procedures on the results. The capital market inputs to the model, such as equity indexes, short-term equity volatility and interest rates, are generally observable. Long-term volatility inputs are a significant unobservable input. However, the valuation models also use inputs requiring certain actuarial assumptions such as future interest margins, policyholder behavior, including future equity participation rates, and explicit risk margins related to non-capital market inputs, that are generally not observable and may require use of significant management judgment.

The fair value of embedded derivatives associated with funds withheld reinsurance treaties is determined based upon a total return swap technique with reference to the fair value of the investments held by the ceding company that support the Company’s funds withheld at interest asset with an adjustment for the Company’s own credit risk. The fair value of the underlying assets is generally based on market observable inputs using industry standard valuation techniques. However, the valuation also requires certain significant inputs based on actuarial assumptions, which are generally not observable and accordingly, the valuation is considered Level 3 in the fair value hierarchy.

Company’s Own Credit Risk – The Company uses a structural default risk model to estimate its own credit risk. The input assumptions are a combination of externally derived and published values (default threshold and uncertainty), market inputs (interest rate, Company equity price per share, Company debt per share, Company equity price volatility) and insurance industry data (Loss Given Default), adjusted for market recoverability.

Cash Equivalents and Short-Term Investments – Cash equivalents and short-term investments include money market instruments, commercial paper and other highly liquid debt instruments. Money market instruments are generally valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. The fair value of certain other short-term investments, such as floating rate notes and bonds with original maturities less then twelve months, are based upon other market observable data and are typically classified as Level 2. Various time deposits carried as cash equivalents or short-term investments are not measured at estimated fair value and therefore are excluded from the tables presented.

Equity Securities – Equity securities consist principally of preferred stock of publicly and privately traded companies. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities

are determined using valuation models that require a substantial level of judgment. In determining the fair value of certain

privately traded equity securities the models may also use unobservable inputs, which reflect the Company’s assumptions about the inputs market participants would use in pricing. The estimated fair value of certain private equity securities are based on net asset value calculations using fund statements. Most privately traded equity securities are classified within Level 3 because the fund statements are considered a significant unobservable input. The fair values of preferred equity securities are based on prices obtained from independent pricing services and these securities are generally classified within Level 2 in the fair value hierarchy.

Derivative Assets and Derivative Liabilities – Level 1 measurement includes assets and liabilities comprised of exchange-traded derivatives. Valuation is based on unadjusted quoted prices in active markets that are readily and regularly available. Level 2 measurement includes all types of derivative instruments utilized by the Company with the exception of exchange-traded derivatives. These derivatives are principally valued using an income approach. Valuations of interest rate contracts, non-option-based, are based on present value techniques, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves, and repurchase rates. Valuations of foreign currency contracts, non-option-based, are based on present value techniques, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves, currency spot rates, and cross currency basis curves. Valuations of credit contracts, non-option-based, are based on present value techniques, which utilize significant inputs that may include the swap yield curve, credit curves, and recovery rates. Valuations of equity market contracts, non-option-based, are based on present value techniques, which utilize significant inputs that may include the swap yield curve, spot equity index levels, and dividend yield curves. Valuations of equity market contracts, option-based, are based on option pricing models, which utilize significant inputs that may include the swap yield curve, spot equity index levels, dividend yield curves, and equity volatility. The Company does not currently have derivatives included in Level 3 measurement.

As of March 31, 2012 and December 31, 2011, respectively, the Company classified approximately 7.8% and 8.5% of its fixed maturity securities in the Level 3 category. These securities primarily consist of private placement corporate securities with inactive trading markets. Additionally, the Company has included asset-backed securities with sub-prime exposure and mortgage-backed securities with below investment grade ratings in the Level 3 category due to market uncertainty associated with these securities and the Company’s utilization of information from third parties for the valuation of these securities.

The significant unobservable inputs used in the fair value measurement of the Company’s corporate, sovereign, government-backed and other political subdivision securities are probability of default, liquidity premium, subordination premium and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumptions used for the liquidity premium, subordination premium and loss severity.

The significant unobservable inputs used in the fair value measurement of the Company’s asset and mortgage-backed securities are prepayment rates, probability of default, liquidity premium and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the liquidity premium and loss severity and a directionally opposite change in the assumption used for prepayment rates.

The actuarial assumptions used in the fair value of embedded derivatives which include assumptions related to lapses, withdrawals, and mortality, are based on experience studies performed by the Company in combination with available industry information and are reviewed annually. The significant unobservable inputs used in the fair value measurement of embedded derivatives are assumptions associated with policyholder experience and selected capital market assumptions for equity indexed and variable annuities. The selected capital market assumptions, which include long-term implied volatilities, are based on observable historical information. Changes in interest rates, equity indices, equity volatility, the Company’s own credit risk, and actuarial assumptions regarding policyholder experience may result in significant fluctuations in the value of embedded derivatives.

Fair value measurements associated with funds withheld reinsurance treaties are generally not materially sensitive to changes in unobservable inputs associated with policyholder experience. The primary drivers of change in these fair values are related to movements of credit spreads, which are generally observable. Increases (decreases) in market credit spreads tend to decrease (increase) the fair value of embedded derivatives. Increases (decreases) in the own credit assumption tend to decrease (increase) the magnitude of the fair value of embedded derivatives.

Fair value measurements associated with variable annuity treaties are sensitive to both capital markets inputs and policyholder experience inputs. Increases (decreases) in lapse rates tend to decrease (increase) the value of the embedded derivatives associated with variable annuity treaties. Increases (decreases) in the long-term volatility assumption tend to increase (decrease) the fair value of embedded derivatives. Increases (decreases) in the own credit assumption tend to decrease (increase) the magnitude of the fair value of embedded derivatives.

The following table presents quantitative information about significant unobservable inputs used in Level 3 fair value measurements that are developed by the Company as of March 31, 2012.


March 31, 2012:				Valuation	Unobservable	Range
March 31, 2012:	Fair Value			Technique(s)	Input	(Weighted Average)
Assets:
State and political subdivision securities	$	5,239		Market comparable securities	Liquidity premium		1%
Corporate securities		20,101		Market comparable securities	Liquidity premium		1-2%(2%	)
Private equity securities		9,852		Net asset value	Fund financial statements		Not Applicable
Funds withheld at interest- embedded derivatives		(370,884	)	Total return swap	Mortality		0-100% (1%	)
					Lapse		0-35% (4%	)
					Withdrawal		0-5% (4%	)
					Own Credit		0-1% (0%	)
					Crediting rate		2-4% (3%	)
Reinsurance ceded receivable- embedded derivatives		3,514		Discounted cash flow	Mortality		0-100% (8%	)
					Lapse		14-16% (15%	)
Liabilities:
Interest sensitive contract liabilities- embedded derivatives- indexed annuities		772,939		Discounted cash flow	Mortality		0-100% (1%	)
					Lapse		0-35% (4%	)
					Withdrawal		0-5% (4%	)
					Option budget projection		2-4% (3%	)
Interest sensitive contract liabilities- embedded derivatives- variable annuities		130,343		Discounted cash flow	Mortality		0-100% (1%	)
					Lapse		0-25% (5%	)
					Withdrawal		0-7% (4%	)
					Own Credit		0-1% (1%	)
					Long-term volatility		0-27% (16%	)

The Company recognizes transfers of financial instruments into and out of levels within the fair value hierarchy at the beginning of the quarter in which the actual event or change in circumstances that caused the transfer occurs. Financial instruments transferred into Level 3 are due to a lack of observable market transactions and price information. Financial instruments are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the financial instrument, a specific event, one or more significant input(s) becoming observable. Transfers out of Level 3 were primarily the result of the Company using observable pricing information or a third party pricing quotation that appropriately reflects the fair value of those financial instruments, without the need for adjustment based on the Company’s own assumptions regarding the characteristics of a specific financial instrument or the current liquidity in the market. In addition, certain transfers out of Level 3 were also due to increased observations of market transactions and price information for those financial instruments. Transfers from Level 1 to Level 2 are due to the lack of observable market data when pricing these securities, while transfers from Level 2 to Level 1 are due to an increase in the availability of market observable data in an active market. During the three months ended March 31, 2012 and 2011, transfers between Levels 1 and 2 were not material.

The tables below provide a summary of the changes in fair value of Level 3 assets and liabilities for the three months ended March 31, 2012, as well as the portion of gains or losses included in income for the three months ended March 31, 2012 attributable to unrealized gains or losses related to those assets and liabilities still held at March 31, 2012 (dollars in thousands):


For the three months ended March 31, 2012:	Fixed maturity securities - available-for-sale
For the three months ended March 31, 2012:	Corporate securities			Residential mortgage- backed securities			Asset-backed securities			Commercial mortgage- backed securities			State and political subdivision securities
Fair value, beginning of period	$	974,169		$	81,655		$	193,492		$	115,976		$	10,373
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses		30			110			249			588			(5	)
Investment related gains (losses), net		(585	)		279			(670	)		(12,075	)		(4	)
Claims & other policy benefits		—			—			—			—			—
Interest credited		—			—			—			—			—
Policy acquisition costs and other insurance expenses		—			—			—			—			—
Included in other comprehensive income		(682	)		1,580			6,696			13,521			406
Purchases⁽¹⁾		21,161			244			—			—			—
Sales⁽¹⁾		(9,408	)		(8,004	)		—			—			—
Settlements⁽¹⁾		(20,875	)		(1,800	)		(3,865	)		—			(23	)
Transfers into Level 3		17,444			—			1,080			10,846			—
Transfers out of Level 3		(3,583	)		(19,629	)		(50,620	)		(10,178	)		(5,508	)

Fair value, end of period	$	977,671		$	54,435		$	146,362		$	118,678		$	5,239

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	30		$	106		$	249		$	588		$	(5	)
Investment related gains (losses), net		(727	)		(108	)		(607	)		(12,075	)		—
Claims & other policy benefits		—			—			—			—			—
Interest credited		—			—			—			—			—
Policy acquisition costs and other insurance expenses		—			—			—			—			—


For the three months ended March 31, 2012 (continued):	Funds withheld at interest- embedded derivative			Other invested assets- other equity securities		Reinsurance ceded receivable- embedded derivative			Interest sensitive contract liabilities embedded derivative
Fair value, beginning of period	$	(361,456	)	$	11,489	$	4,945		$	(1,028,241	)
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses		—			—		—			—
Investment related gains (losses), net		(9,428	)		—		—			146,375
Claims & other policy benefits		—			—		—			2,278
Interest credited		—			—		—			(21,193	)
Policy acquisition costs and other insurance expenses		—			—		(1,329	)		—
Included in other comprehensive income		—			338		—			—
Purchases⁽¹⁾		—			—		—			(23,590	)
Sales⁽¹⁾		—			—		—			—
Settlements⁽¹⁾		—			—		(102	)		21,089
Transfers into Level 3		—			—		—			—
Transfers out of Level 3		—			—		—			—

Fair value, end of period	$	(370,884	)	$	11,827	$	3,514		$	(903,282	)

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	—		$	—	$	—		$	—
Investment related gains (losses), net		(9,428	)		—		—			144,624
Claims & other policy benefits		—			—		—			2,037
Interest credited		—			—		—			(42,107	)
Policy acquisition costs and other insurance expenses		—			—		(1,188	)		—

(1)

The amount reported within purchases, sales and settlements is the purchase price (for purchases) and the sales/settlement proceeds (for sales and settlements) based upon the actual date purchased or sold/settled. Items purchased and sold/settled in the same period are excluded from the rollforward. The Company had no issuances during the period.

The tables below provide a summary of the changes in fair value of Level 3 assets and liabilities for the three months ended March 31, 2011, as well as the portion of gains or losses included in income for the three months ended March 31, 2011

attributable to unrealized gains or losses related to those assets and liabilities still held at March 31, 2011 (dollars in thousands):


For the three months ended March 31, 2011:	Fixed maturity securities - available-for-sale
For the three months ended March 31, 2011:	Corporate securities			Residential mortgage- backed securities			Asset- backed securities			Commercial mortgage- backed securities
Fair value, beginning of period	$	872,179		$	183,291		$	228,558		$	147,556
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses		88			260			582			558
Investment related gains (losses), net		420			(357	)		844			(489	)
Claims & other policy benefits		—			—			—			—
Interest credited		—			—			—			—
Policy acquisition costs and other insurance expenses		—			—			—			—
Included in other comprehensive income		222			7,394			4,231			33,141
Purchases ⁽¹⁾		100,202			453			4,872			2,613
Sales⁽¹⁾		(1,509	)		(14,065	)		(18,299	)		—
Settlements⁽¹⁾		(50,679	)		(8,160	)		(8,148	)		(330	)
Transfers into Level 3		34,410			5,001			11,326			55,189
Transfers out of Level 3		(14,863	)		(35,249	)		(21,720	)		(34,844	)

Fair value, end of period	$	940,470		$	138,568		$	202,246		$	203,394

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	74		$	258		$	507		$	554
Investment related gains (losses), net		(514	)		—			(552	)		(489	)
Claims & other policy benefits		—			—			—			—
Interest credited		—			—			—			—
Policy acquisition costs and other insurance expenses		—			—			—			—


For the three months ended March 31, 2011 (continued):	Fixed maturity securities - available-for-sale
For the three months ended March 31, 2011 (continued):	State and political subdivision securities			Other foreign government, supranational and foreign government- sponsored enterprises			Funds withheld at interest- embedded derivative
Fair value, beginning of period	$	6,983		$	6,736		$	(274,220	)
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses		368			1			—
Investment related gains (losses), net		(4	)		—			90,535
Claims & other policy benefits		—			—			—
Interest credited		—			—			—
Policy acquisition costs and other insurance expenses		—			—			—
Included in other comprehensive income		2,675			(102	)		—
Purchases⁽¹⁾		871			—			—
Sales⁽¹⁾		—			(161	)		—
Settlements⁽¹⁾		(21	)		—			—
Transfers into Level 3		34,209			21			—

Fair value, end of period	$	45,081		$	6,495		$	(183,685	)

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses	$	368		$	(37	)	$	—
Investment related gains (losses), net		—			—			90,535
Claims & other policy benefits		—			—			—
Interest credited		—			—			—

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company