SEC Filing | American Equity Investment Life Holding Company

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AEL_10Q 063011

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)



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

For the quarterly period ended June 30, 2011



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

For the transition period from ________ to ________

Commission File Number : 001-31911

American Equity Investment Life Holding Company

(Exact name of registrant as specified in its charter)



Iowa		42-1447959
(State of Incorporation)		(I.R.S. Employer Identification No.)

6000 Westown Parkway West Des Moines, Iowa		50266
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code		(515) 221-0002
		(Telephone)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class		Name of each exchange on which registered
Common Stock, par value $1		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1

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

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

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



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

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

APPLICABLE TO CORPORATE ISSUERS:

Shares of common stock outstanding at July 31, 2011: 59,574,989

TABLE OF CONTENTS



	Page
PART I — FINANCIAL INFORMATION
Item 1: Financial Statements:	2
Consolidated Balance Sheets	2
Consolidated Statements of Operations	3
Consolidated Statements of Changes in Stockholders’ Equity	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	7
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3: Quantitative and Qualitative Disclosures about Market Risk	50
Item 4: Controls and Procedures	51

PART II — OTHER INFORMATION
Item 1: Legal Proceedings	52
Item 1A: Risk Factors	52
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 6: Exhibits	52

Signatures	53

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)



	June 30, 2011			December 31, 2010
	(Unaudited)
Assets
Investments:
Fixed maturity securities:
Available for sale, at fair value (amortized cost: 2011 - $15,323,420; 2010 - $15,621,894)	$	15,682,872		$	15,830,663
Held for investment, at amortized cost (fair value: 2011 - $2,124,918; 2010 - $781,748)	2,135,968			822,200
Equity securities, available for sale, at fair value (cost: 2011 - $59,196; 2010 - $61,185)	66,612			65,961
Mortgage loans on real estate	2,798,233			2,598,641
Derivative instruments	537,920			479,786
Other investments	26,030			19,680
Total investments	21,247,635			19,816,931

Cash and cash equivalents	949,484			597,766
Coinsurance deposits	2,699,158			2,613,191
Accrued investment income	215,457			167,645
Deferred policy acquisition costs	1,825,392			1,747,760
Deferred sales inducements	1,326,984			1,227,328
Deferred income taxes	185,152			143,253
Income taxes recoverable	9,442			6,134
Other assets	108,067			106,755
Total assets	$	28,566,771		$	26,426,763

Liabilities and Stockholders' Equity
Liabilities:
Policy benefit reserves	$	25,940,513		$	23,655,807
Other policy funds and contract claims	318,420			222,860
Notes payable	337,239			330,835
Subordinated debentures	268,512			268,435
Other liabilities	662,555			1,010,779
Total liabilities	27,527,239			25,488,716

Stockholders' equity:
Preferred stock, no par value, 2,000,000 shares authorized, 2011 and 2010 no shares issued and oustanding	—			—
Common stock, par value $1 per share, 125,000,000 shares authorized; issued and outstanding: 2011 - 57,832,075 shares (excluding 5,568,860 treasury shares); 2010 - 56,968,446 shares (excluding 5,874,392 treasury shares)	57,832			56,968
Additional paid-in capital	463,245			454,454
Unallocated common stock held by ESOP; 2011 - 395,859 shares; 2010 - 447,048 shares	(4,264		)	(4,815		)
Accumulated other comprehensive income	123,482			81,820
Retained earnings	399,237			349,620
Total stockholders' equity	1,039,532			938,047
Total liabilities and stockholders' equity	$	28,566,771		$	26,426,763

See accompanying notes to unaudited consolidated financial statements.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Revenues:
Traditional life and accident and health insurance premiums	$	3,289		$	2,643		$	6,205		$	5,930
Annuity product charges	19,892			18,617			36,854			34,135
Net investment income	296,878			254,845			589,006			497,755
Change in fair value of derivatives	(22,029		)	(208,737		)	126,624			(126,722		)
Net realized gains (losses) on investments, excluding other than temporary impairment ("OTTI") losses	(854		)	1,063			(2,047		)	10,966
OTTI losses on investments:
Total OTTI losses	(113		)	(1,603		)	(5,213		)	(14,187		)
Portion of OTTI losses recognized in (from) other comprehensive income	(2,116		)	785			(3,587		)	10,146
Net OTTI losses recognized in operations	(2,229		)	(818		)	(8,800		)	(4,041		)
Loss on extinguishment of debt	—			(292		)	—			(292		)
Total revenues	294,947			67,321			747,842			417,731

Benefits and expenses:
Insurance policy benefits and change in future policy benefits	2,499			2,169			4,394			4,501
Interest sensitive and index product benefits	238,420			228,818			398,085			425,687
Amortization of deferred sales inducements	20,265			3,243			50,957			16,332
Change in fair value of embedded derivatives	(60,963		)	(190,211		)	67,340			(126,336		)
Interest expense on notes payable	7,832			4,673			15,739			9,324
Interest expense on subordinated debentures	3,481			3,716			6,947			7,401
Interest expense on amounts due under repurchase agreements	1			—			5			—
Amortization of deferred policy acquisition costs	38,862			917			94,085			28,185
Other operating costs and expenses	16,634			16,702			34,108			32,687
Total benefits and expenses	267,031			70,027			671,660			397,781
Income (loss) before income taxes	27,916			(2,706		)	76,182			19,950
Income tax expense (benefit)	9,642			(1,202		)	26,565			6,569
Net income (loss)	$	18,274		$	(1,504	)	$	49,617		$	13,381

Earnings (loss) per common share	$	0.31		$	(0.03	)	$	0.84		$	0.23
Earnings (loss) per common share - assuming dilution	$	0.28		$	(0.03	)	$	0.77		$	0.23

See accompanying notes to unaudited consolidated financial statements.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollars in thousands, except per share data)

(Unaudited)



	Common Stock			Additional Paid-in Capital			Unallocated Common Stock Held by ESOP			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders' Equity

Balance at December 31, 2010	$	56,968		$	454,454		$	(4,815	)	$	81,820		$	349,620		$	938,047
Other comprehensive income:
Net income for period	—			—			—			—			49,617			49,617
Change in net unrealized investment gains/losses	—			—			—			40,687			—			40,687
Noncredit component of OTTI losses, available for sale securities, net	—			—			—			975			—			975
Other comprehensive income																91,279
Acquisition of 500 shares of common stock	—			(6		)	—			—			—			(6		)
Allocation of 51,189 shares of common stock by ESOP, including excess income tax benefits	—			69			551			—			—			620
Share-based compensation, including excess income tax benefits	—			5,229			—			—			—			5,229
Issuance of 864,129 shares of common stock under compensation plans, including excess income tax benefits	864			3,499			—			—			—			4,363
Balance at June 30, 2011	$	57,832		$	463,245		$	(4,264	)	$	123,482		$	399,237		$	1,039,532

Balance at December 31, 2009	$	56,203		$	422,225		$	(5,679	)	$	(30,456	)	$	312,330		$	754,623
Other comprehensive income:
Net income for period	—			—			—			—			13,381			13,381
Change in net unrealized investment gains/losses	—			—			—			146,867			—			146,867
Noncredit component of OTTI losses, available for sale securities, net	—			—			—			(2,762		)	—			(2,762		)
Other comprehensive income																157,486
Conversion of $60 of subordinated debentures	7			49			—			—			—			56
Acquisition of 6,300 shares of common stock	(6		)	(44		)	—			—			—			(50		)
Allocation of 29,745 shares of common stock by ESOP, including excess income tax benefits	—			(27		)	321			—			—			294
Share-based compensation, including excess income tax benefits	—			4,150			—			—			—			4,150
Issuance of 377,215 shares of common stock under compensation plans, including excess income tax benefits	377			1,546			—			—			—			1,923
Other	—			—			—			—			(13		)	(13		)
Balance at June 30, 2010	$	56,581		$	427,899		$	(5,358	)	$	113,649		$	325,698		$	918,469

See accompanying notes to unaudited consolidated financial statements.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



	Six Months Ended June 30,
	2011			2010
Operating activities
Net income	$	49,617		$	13,381
Adjustments to reconcile net income to net cash provided by operating activities:
Interest sensitive and index product benefits	398,085			425,687
Amortization of deferred sales inducements	50,957			16,332
Annuity product charges	(36,854		)	(34,135		)
Change in fair value of embedded derivatives	67,340			(126,336		)
Increase in traditional life and accident and health insurance reserves	45,720			11,616
Policy acquisition costs deferred	(222,358		)	(155,813		)
Amortization of deferred policy acquisition costs	94,085			28,185
Provision for depreciation and other amortization	9,292			4,744
Amortization of discounts and premiums on investments	(78,582		)	(122,658		)
Realized gains on investments and net OTTI losses recognized	10,847			(6,925		)
Change in fair value of derivatives	(127,799		)	125,469
Deferred income taxes	(64,332		)	(68,812		)
Loss on extinguishment of debt	—			292
Share-based compensation	4,181			3,975
Change in accrued investment income	(47,812		)	637
Change in income taxes recoverable/payable	(3,308		)	118,267
Change in other assets	2,182			6,641
Change in other policy funds and contract claims	95,560			34,767
Change in collateral held for derivatives	12,910			(244,816		)
Change in other liabilities	(74,889		)	(16,479		)
Other	703			255
Net cash provided by operating activities	185,545			14,274

Investing activities
Sales, maturities, or repayments of investments:
Fixed maturity securities - available for sale	3,244,966			2,038,295
Fixed maturity securities - held for investment	—			892,464
Equity securities - available for sale	2,958			23,020
Mortgage loans on real estate	86,079			53,277
Derivative instruments	275,473			307,799
Other investments	57			—
Acquisition of investments:
Fixed maturity securities - available for sale	(3,189,624		)	(3,641,409		)
Fixed maturity securities - held for investment	(1,279,831		)	—
Equity securities - available for sale	—			(10,125		)
Mortgage loans on real estate	(296,884		)	(137,301		)
Derivative instruments	(189,759		)	(156,318		)
Other investments	(1,660		)	(81		)
Purchases of property, furniture and equipment	(3,552		)	(4,985		)
Net cash used in investing activities	(1,351,777		)	(635,364		)

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)



	Six Months Ended June 30,
	2011			2010
Financing activities
Receipts credited to annuity policyholder account balances	$	2,450,646		$	1,893,642
Coinsurance deposits	(37,196		)	(158,442		)
Return of annuity policyholder account balances	(898,472		)	(788,938		)
Financing fees incurred and deferred	(1,566		)	—
Repayments of notes payable	—			(6,641		)
Acquisition of common stock	(6		)	(50		)
Excess tax benefits realized from share-based compensation plans	1,117			250
Proceeds from issuance of common stock	4,255			1,864
Change in checks in excess of cash balance	(828		)	(3,222		)
Net cash provided by financing activities	1,517,950			938,463
Increase in cash and cash equivalents	351,718			317,373

Cash and cash equivalents at beginning of period	597,766			528,002
Cash and cash equivalents at end of period	$	949,484		$	845,375

Supplemental disclosures of cash flow information
Cash paid during period for:
Interest expense	$	15,210		$	12,983
Income taxes	93,200			56,488
Income tax refunds received	—			100,000
Non-cash operating activity:
Deferral of sales inducements	189,200			151,079
Non-cash investing activity:
Real estate acquired in satisfaction of mortgage loans	6,308			4,300
Mortgage loan on real estate sold	1,215			—
Non-cash financing activities:
Conversion of subordinated debentures	—			56

See accompanying notes to unaudited consolidated financial statements.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(Unaudited)

1. Significant Accounting Policies

Consolidation and Basis of Presentation

The accompanying consolidated financial statements of American Equity Investment Life Holding Company (“we”, “us” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly our financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for the three and six month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires the use of management estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand our financial position and results of operations, refer to the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.

During 2011, we discovered a prior period error related to policy benefit reserves for our single premium immediate annuity products. Accordingly, we made an adjustment in the first quarter of 2011 which resulted in a decrease of policy benefit reserves and a decrease in interest sensitive and index product benefits of $4.2 million. On an after-tax basis, the adjustment resulted in a $2.7 million increase in net income for the six months ended June 30, 2011.

Adopted Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board ("FASB") issued an accounting standards update that expands the disclosure requirements related to fair value measurements. A reporting entity is now required to present on a gross basis rather than as one net number information about the purchases, sales, issuances and settlements of financial instruments that are categorized as Level 3 for fair value measurements. Clarification on existing disclosure requirements is also provided in this update relating to the level of disaggregation of information as to determining appropriate classes of assets and liabilities as well as disclosure requirements regarding valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This standard was effective for us on January 1, 2011, and has not had a material impact on our consolidated financial statements.

New Accounting Pronouncements

In October 2010, as a result of a consensus of the FASB Emerging Issues Task Force, the FASB issued an accounting standards update that modifies the definition of the types of costs incurred that can be capitalized in the acquisition of new and renewal insurance contracts. This guidance defines the costs that qualify for deferral as incremental direct costs that result directly from and are essential to successful contract transactions and would not have been incurred by the insurance entity had the contract transactions not occurred. In addition, it lists certain costs as deferrable as those that are directly related to underwriting, policy issuance and processing, medical and inspection, and sales force contract selling as deferrable, as well as the portion of an employee's total compensation related directly to time spent performing those activities for actual acquired contracts and other costs related directly to those activities that would not have been incurred if the contract had not been acquired. This amendment to current GAAP should be applied prospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with retrospective application permitted. We are currently evaluating the impact of the guidance on our consolidated financial statements. See note 6 to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2010, for the policy issue costs that could be subject to non-deferral.

In April 2011, the FASB issued an accounting standards update that gives creditors guidance in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. Troubled debt restructures are considered impaired receivables for which an amount of impairment loss is determined at the time the loan is restructured. This accounting standards update is effective for us beginning on July 1, 2011, and will be applied retrospectively to restructures that we have completed on or after January 1, 2011. We do not expect this guidance to have a material effect on our financial statements.

In May 2011, the FASB issued an accounting standards update that addresses fair value measurement and disclosure as part of its convergence efforts with the International Accounting Standards Board. The result is common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards. This accounting standards update changes the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Some changes clarify the FASB's intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing informations about fair value measurements. The disclosure requirements add information about transfers between Level 1 and Level 2 of the fair value hierarchy, information about the sensitivity of a fair value measurement categorized within Level 3 of the fair value hierarchy to changes in unobservable inputs and any interrelationships between those unobservable inputs, and the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value of such items is required to be disclosed. This accounting standards update is effective during interim and annual periods beginning after December 15, 2011 and early application is not permitted. We do not anticipate any effect to our financial position, results of operations or cash flows upon adoption.

In June 2011, the FASB issued an accounting standards update that expands the disclosure requirements related to other comprehensive income. A reporting entity is now required to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both choices, the reporting entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. This standard also requires the reporting entity to present reclassification adjustments from other comprehensive income to net income and eliminates the presentation of other comprehensive income as part of the statements of stockholders' equity. This accounting standards update is effective during interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. We do not anticipate any effect to our financial position, results of operations or cash flows upon adoption.

2. Fair Values of Financial Instruments

The following sets forth a comparison of the fair values and carrying amounts of our financial instruments:



	June 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
Assets
Fixed maturity securities:
Available for sale	$	15,682,872	$	15,682,872	$	15,830,663	$	15,830,663
Held for investment	2,135,968		2,124,918		822,200		781,748
Equity securities, available for sale	66,612		66,612		65,961		65,961
Mortgage loans on real estate	2,798,233		2,856,400		2,598,641		2,670,009
Derivative instruments	537,920		537,920		479,786		479,786
Other investments	2,120		2,185		558		558
Cash and cash equivalents	949,484		949,484		597,766		597,766
Coinsurance deposits	2,699,158		2,394,311		2,613,191		2,282,998
2015 notes hedges	63,141		63,141		66,595		66,595

Liabilities
Policy benefit reserves	25,702,884		21,448,934		23,464,810		19,594,396
Notes payable	337,239		480,635		330,835		489,097
Subordinated debentures	268,512		246,502		268,435		213,369
2015 notes embedded derivatives	63,141		63,141		66,595		66,595
Interest rate swaps	937		937		1,976		1,976

Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.

We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated balance sheets as follows:

Level 1— Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.

Level 2— Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are observable.

Level 3— Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected future cash flows with our own assumptions about what a market participant would use in determining fair value.

Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security, however there were no transfers between levels during the six months ended June 30, 2011.

Our assets and liabilities which are measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 are presented below based on the fair value hierarchy levels:



	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
June 30, 2011
Assets
Fixed maturity securities:
Available for sale:
United States Government full faith and credit	$	4,419	$	4,419	$	—	$	—
United States Government sponsored agencies	1,152,300		—		1,152,300		—
United States municipalities, states and territories	2,763,142		—		2,763,142		—
Corporate securities	8,657,083		61,324		8,595,759		—
Residential mortgage backed securities	2,827,512		—		2,825,319		2,193
Other asset backed securities	278,416		—		278,416		—
Equity securities, available for sale: finance, insurance and real estate	66,612		46,842		19,770		—
Derivative instruments	537,920		—		537,920		—
Cash and cash equivalents	949,484		949,484		—		—
2015 notes hedges	63,141		—		63,141		—
	$	17,300,029	$	1,062,069	$	16,235,767	$	2,193
Liabilities
Interest rate swaps	$	937	$	—	$	937	$	—
2015 notes embedded derivatives	63,141		—		63,141		—
Fixed index annuities - embedded derivatives	2,368,533		—		—		2,368,533
	$	2,432,611	$	—	$	64,078	$	2,368,533

December 31, 2010
Assets
Fixed maturity securities:
Available for sale:
United States Government full faith and credit	$	4,388	$	4,388	$	—	$	—
United States Government sponsored agencies	3,003,651		—		3,003,651		—
United States municipalities, states and territories	2,367,003		—		2,367,003		—
Corporate securities	7,372,537		71,230		7,301,307		—
Residential mortgage backed securities	2,878,557		—		2,875,855		2,702
Other asset backed securities	204,527		—		204,527		—
Equity securities, available for sale: finance, insurance and real estate	65,961		46,925		19,036		—
Derivative instruments	479,786		—		479,786		—
Cash and cash equivalents	597,766		597,766		—		—
2015 notes hedges	66,595		—		66,595		—
	$	17,040,771	$	720,309	$	16,317,760	$	2,702
Liabilities
Interest rate swaps	$	1,976	$	—	$	1,976	$	—
2015 notes embedded derivatives	66,595		—		66,595		—
Fixed index annuities - embedded derivatives	1,971,383		—		—		1,971,383
	$	2,039,954	$	—	$	68,571	$	1,971,383

The following methods and assumptions were used in estimating the fair values of financial instruments during the periods presented in these consolidated financial statements.

Fixed maturity securities and equity securities

The fair values of fixed maturity securities and equity securities in an active and orderly market are determined by utilizing independent pricing services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:


•	reported trading prices,


•	benchmark yields


•	broker-dealer quotes,


•	benchmark securities,


•	bids and offers,


•	credit ratings,


•	relative credit information, and


•	other reference data.

The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.

The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity. When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing service. In situations where a price is not available from this service, we may obtain further quotes or prices from additional parties as needed. In addition, for our callable United States Government sponsored agencies we obtain two broker quotes and take the average of two broker prices received. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may execute the disposition of the assets.

We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations on a case-by-case basis of inputs and assumptions similar to those used by the pricing services. Although we do identify differences from time to time as a result of these validation procedures, we did not make any significant adjustments as of June 30, 2011 and December 31, 2010.

Mortgage loans on real estate

The fair values of mortgage loans on real estate are calculated using discounted expected cash flows using current competitive market interest rates currently being offered for similar loans which are not fair value exit prices.

Derivative instruments

The fair values of derivative instruments, primarily call options, are based upon the amount of cash that we will receive to settle each derivative instrument on the reporting date. These amounts are obtained from each of the counterparties using industry accepted valuation models and are adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index annuity policy liabilities.

Other investments

Other investments is comprised of policy loans and an equity method investment. We have not attempted to determine the fair values associated with our policy loans, as we believe any differences between carrying value and the fair values afforded these instruments are immaterial to our consolidated financial position and, accordingly, the cost to provide such disclosure does not justify the benefit to be derived. The fair value of of our equity method investment was determined by calculating the present value of future cash flows discounted by a risk free rate, a risk spread, and a liquidity discount.

Cash and cash equivalents

Amounts reported in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.

2015 notes hedges

The fair value of these call options is determined by a third party who applies market observable data such as our common stock price, its dividend yield and its volatility, as well as the time to expiration of the call options to determine a fair value of the buy side of these options.

Policy benefit reserves and coinsurance deposits

The fair values of the liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated at the cost we would incur to extinguish the liability (i.e., the cash surrender value) as these contracts are generally issued without an annuitization date. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. We are not required to and have not estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosures of fair value.

Notes payable

The fair value of the convertible senior notes is based upon quoted market prices.

Subordinated debentures

Fair values for subordinated debentures are estimated using discounted cash flow calculations based principally on observable inputs including our incremental borrowing rates, which reflect our credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued.

Interest rate swaps

The fair values of our pay fixed/receive variable interest rate swaps are obtained from third parties and are determined by discounting expected future cash flows using projected LIBOR rates for the term of the swaps.

2015 notes embedded derivatives

The fair value of this embedded derivative is determined by pricing the call options that hedge this potential liability. The terms of the conversion premium are identical to the 2015 notes hedges and the method of determining fair value of the call options is based upon observable market data.

Fixed index annuities - embedded derivatives

We estimate the fair value of the embedded derivative component of our fixed index annuity policy liabilities at each valuation date by (i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (ii) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance risk related to those liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth and future policy decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credit on the next policy anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.

The following tables provide a reconciliation of the beginning and ending balances for our Level 3 assets and liabilities, which are measured at fair value on a recurring basis using significant unobservable inputs for the three and six months ended June 30, 2011 and 2010:



	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(Dollars in thousands)
Available for sale securities
Beginning balance	$	4,301		$	18,909		$	2,702		$	17,918
Sales	—			(14,838		)	—			(14,838		)
Principal returned	(78		)	(157		)	(266		)	(314		)
(Amortization)/accretion of premium/discount	(4		)	10			8			32
Reclassification	(1,600		)	—			—			—
Total gains (losses) (realized/unrealized):
Included in other comprehensive income (loss)	104			7,216			279			8,342
Included in operations	(530		)	(2,230		)	(530		)	(2,230		)
Ending balance	$	2,193		$	8,910		$	2,193		$	8,910

In the second quarter of 2011 we removed an ownership interest in a limited partnership from the preceding table because it is an equity method investment that does not have a readily determinable fair value and is not measured at fair value on a recurring basis.



	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(Dollars in thousands)
Fixed index annuities - embedded derivatives
Beginning balance	$	2,242,000		$	1,526,117		$	1,971,383		$	1,375,866
Premiums less benefits	251,733			251,587			467,676			414,735
Change in unrealized gains, net	(125,200		)	(295,275		)	(70,526		)	(308,172		)
Ending balance	$	2,368,533		$	1,482,429		$	2,368,533		$	1,482,429

Change in unrealized gains, net for each period in our embedded derivatives are included in change in fair value of embedded derivatives in the unaudited consolidated statements of operations.

3. Investments

At June 30, 2011 and December 31, 2010, the amortized cost and fair value of fixed maturity securities and equity securities were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
June 30, 2011
Fixed maturity securities:
Available for sale:
United States Government full faith and credit	$	4,083	$	345	$	(9	)	$	4,419
United States Government sponsored agencies	1,137,254		15,390		(344		)	1,152,300
United States municipalities, states and territories	2,723,736		66,969		(27,563		)	2,763,142
Corporate securities	8,362,716		422,447		(128,080		)	8,657,083
Residential mortgage backed securities	2,820,507		100,566		(93,561		)	2,827,512
Other asset backed securities	275,124		8,933		(5,641		)	278,416
	$	15,323,420	$	614,650	$	(255,198	)	$	15,682,872

Held for investment:
United States Government sponsored agencies	$	2,060,110	$	10,172	$	(407	)	$	2,069,875
Corporate security	75,858		—		(20,815		)	55,043
	$	2,135,968	$	10,172	$	(21,222	)	$	2,124,918

Equity securities, available for sale:
Finance, insurance, and real estate	$	59,196	$	8,370	$	(954	)	$	66,612

December 31, 2010
Fixed maturity securities:
Available for sale:
United States Government full faith and credit	$	4,082	$	324	$	(18	)	$	4,388
United States Government sponsored agencies	2,994,174		11,123		(1,646		)	3,003,651
United States municipalities, states and territories	2,397,622		22,765		(53,384		)	2,367,003
Corporate securities	7,124,316		380,124		(131,903		)	7,372,537
Residential mortgage backed securities	2,900,028		86,950		(108,421		)	2,878,557
Other asset backed securities	201,672		7,792		(4,937		)	204,527
	$	15,621,894	$	509,078	$	(300,309	)	$	15,830,663

Held for investment:
United States Government sponsored agencies	$	746,414	$	—	$	(15,309	)	$	731,105
Corporate security	75,786		—		(25,143		)	50,643
	$	822,200	$	—	$	(40,452	)	$	781,748

Equity securities, available for sale:
Finance, insurance, and real estate	$	61,185	$	6,722	$	(1,946	)	$	65,961

During the six months ended June 30, 2011 and 2010, we received $2.9 billion and $2.4 billion, respectively, in redemption proceeds related to calls of our callable United States Government sponsored agency securities and public and private corporate bonds, of which $892.5 million were classified as held for investment for the six months ended June 30, 2010. There were no calls of held for investment securities during the six months ended June 30, 2011. We reinvested the proceeds from these redemptions primarily in United States Government sponsored agencies, United States municipalities, states, and territories, corporate securities and residential mortgage and asset backed securities. At June 30, 2011, 34% of our fixed income securities have call features and 1% ($0.1 billion) were subject to call redemption. Another 19% ($3.2 billion) will become subject to call redemption during the next twelve months (principally the first and second quarters of 2012).

The amortized cost and fair value of fixed maturity securities at June 30, 2011, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our residential mortgage and other asset backed securities provide for periodic payments throughout their lives and are shown below as separate lines.



	Available-for-sale				Held for investment
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	28,157	$	28,971	$	—	$	—
Due after one year through five years	416,992		470,079		—		—
Due after five years through ten years	1,858,825		2,039,722		—		—
Due after ten years through twenty years	3,830,178		3,916,472		—		—
Due after twenty years	6,093,637		6,121,700		2,135,968		2,124,918
	12,227,789		12,576,944		2,135,968		2,124,918
Residential mortgage backed securities	2,820,507		2,827,512		—		—
Other asset backed securities	275,124		278,416		—		—
	$	15,323,420	$	15,682,872	$	2,135,968	$	2,124,918

Net unrealized gains on available for sale fixed maturity securities and equity securities reported as a separate component of stockholders' equity were comprised of the following:



	June 30, 2011			December 31, 2010
	(Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities and equity securities	$	366,868		$	213,545
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements	(211,564		)	(122,336		)
Deferred income tax valuation allowance reversal	22,534			22,534
Deferred income tax benefit	(54,356		)	(31,923		)
Net unrealized gains reported as accumulated other comprehensive income	$	123,482		$	81,820

The National Association of Insurance Commissioners (“NAIC”) assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given by the Nationally Recognized Statistical Rating Organizations (“NRSRO’s”). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 designations are considered “investment grade” while NAIC Class 3 through 6 designations are considered “non-investment grade.” Based on the NAIC designations, we had 99% and 98% of our fixed maturity portfolio rated investment grade at June 30, 2011 and December 31, 2010, respectively.

The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:



	June 30, 2011				December 31, 2010
NAIC Designation	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
1	$	12,923,194	$	13,134,579	$	12,152,552	$	12,246,954
2	4,260,986		4,427,188		3,892,680		4,012,076
3	248,488		218,080		368,680		323,113
4	17,933		17,125		19,820		19,178
5	5,302		5,868		6,089		6,262
6	3,485		4,950		4,273		4,828
	$	17,459,388	$	17,807,790	$	16,444,094	$	16,612,411

The following tables show our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 707 and 780 securities, respectively) have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010:



	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
June 30, 2011
Fixed maturity securities:
Available for sale:
United States Government full faith and credit	$	558	$	(9	)	$	—	$	—		$	558	$	(9	)
United States Government sponsored agencies	$	53,253	$	(344	)	$	—	$	—		$	53,253	$	(344	)
United States municipalities, states and territories	945,652		(27,181		)	8,554		(382		)	954,206		(27,563		)
Corporate securities:
Finance, insurance and real estate	608,845		(23,541		)	86,065		(7,415		)	694,910		(30,956		)
Manufacturing, construction and mining	1,203,704		(41,396		)	12,998		(1,874		)	1,216,702		(43,270		)
Utilities and related sectors	1,046,966		(37,300		)	15,833		(2,855		)	1,062,799		(40,155		)
Wholesale/retail trade	173,230		(5,147		)	9,150		(1,324		)	182,380		(6,471		)
Services, media and other	235,752		(7,228		)	—		—			235,752		(7,228		)
Residential mortgage backed securities	248,319		(14,285		)	819,884		(79,276		)	1,068,203		(93,561		)
Other asset backed securities	93,237		(5,641		)	—		—			93,237		(5,641		)
	$	4,609,516	$	(162,072	)	$	952,484	$	(93,126	)	$	5,562,000	$	(255,198	)
Held for investment:
United States Government sponsored agencies	993,800		(407		)	—		—			993,800		(407		)
Corporate security:
Insurance	—		—			55,043		(20,815		)	55,043		(20,815		)
	993,800		(407		)	55,043		(20,815		)	1,048,843		(21,222		)

Equity securities, available for sale:
Finance, insurance and real estate	$	—	$	—		$	16,828	$	(954	)	$	16,828	$	(954	)

December 31, 2010
Fixed maturity securities:
Available for sale:
United States Government full faith and credit	$	548	$	(18	)	$	—	$	—		$	548	$	(18	)
United States Government sponsored agencies	110,101		(1,646		)	—		—			110,101		(1,646		)
United States municipalities, states and territories	1,510,354		(51,989		)	7,525		(1,395		)	1,517,879		(53,384		)
Corporate securities:
Finance, insurance and real estate	570,978		(27,603		)	114,128		(13,001		)	685,106		(40,604		)
Manufacturing, construction and mining	1,024,454		(33,239		)	34,490		(2,333		)	1,058,944		(35,572		)
Utilities and related sectors	927,476		(34,630		)	14,157		(4,552		)	941,633		(39,182		)
Wholesale/retail trade	153,699		(4,947		)	9,175		(1,304		)	162,874		(6,251		)
Services, media and other	181,857		(10,294		)	—		—			181,857		(10,294		)
Residential mortgage backed securities	396,083		(14,100		)	966,332		(94,321		)	1,362,415		(108,421		)
Other asset backed securities	83,011		(4,937		)	—		—			83,011		(4,937		)
	$	4,958,561	$	(183,403	)	$