Edgar Filing: AMERICAN EQUITY INVESTMENT LIFE HOLDING CO

AEL_10Q 093011

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 September 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 x 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 October 31, 2011: 59,581,489

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	31
Item 3: Quantitative and Qualitative Disclosures about Market Risk	53
Item 4: Controls and Procedures	54

PART II — OTHER INFORMATION
Item 1: Legal Proceedings	54
Item 1A: Risk Factors	54
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 6: Exhibits	55

Signatures	56

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)



	September 30, 2011			December 31, 2010
	(Unaudited)
Assets
Investments:
Fixed maturity securities:
Available for sale, at fair value (amortized cost: 2011 - $15,924,537; 2010 - $15,621,894)	$	17,378,812		$	15,830,663
Held for investment, at amortized cost (fair value: 2011 - $2,838,736; 2010 - $781,748)	2,827,461			822,200
Equity securities, available for sale, at fair value (cost: 2011 - $59,197; 2010 - $61,185)	65,401			65,961
Mortgage loans on real estate	2,838,893			2,598,641
Derivative instruments	171,905			479,786
Other investments	112,876			19,680
Total investments	23,395,348			19,816,931

Cash and cash equivalents	572,314			597,766
Coinsurance deposits	2,759,735			2,613,191
Accrued investment income	212,792			167,645
Deferred policy acquisition costs	1,638,087			1,747,760
Deferred sales inducements	1,199,372			1,227,328
Deferred income taxes	21,386			143,253
Income taxes recoverable	18,036			6,134
Other assets	58,867			106,755
Total assets	$	29,875,937		$	26,426,763

Liabilities and Stockholders' Equity
Liabilities:
Policy benefit reserves	$	26,917,463		$	23,655,807
Other policy funds and contract claims	375,368			222,860
Notes payable	340,552			330,835
Subordinated debentures	268,552			268,435
Other liabilities	614,465			1,010,779
Total liabilities	28,516,400			25,488,716

Stockholders' equity:
Preferred stock, no par value, 2,000,000 shares authorized, 2011 and 2010 no shares issued and outstanding	—			—
Common stock, par value $1 per share, 125,000,000 shares authorized; issued and outstanding: 2011 - 57,855,375 shares (excluding 5,569,610 treasury shares); 2010 - 56,968,446 shares (excluding 5,874,392 treasury shares)	57,855			56,968
Additional paid-in capital	464,768			454,454
Unallocated common stock held by ESOP; 2011 - 395,859 shares; 2010 - 447,048 shares	(3,965		)	(4,815		)
Accumulated other comprehensive income	454,710			81,820
Retained earnings	386,169			349,620
Total stockholders' equity	1,359,537			938,047
Total liabilities and stockholders' equity	$	29,875,937		$	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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenues:
Traditional life and accident and health insurance premiums	$	3,126		$	3,181		$	9,331		$	9,111
Annuity product charges	20,405			18,538			57,259			52,673
Net investment income	305,502			260,475			894,508			758,230
Change in fair value of derivatives	(333,621		)	93,980			(206,997		)	(32,742		)
Net realized gains (losses) on investments, excluding other than temporary impairment ("OTTI") losses	(17,292		)	11,298			(19,339		)	22,264
OTTI losses on investments:
Total OTTI losses	(5,133		)	(2,160		)	(10,346		)	(16,347		)
Portion of OTTI losses recognized in (from) other comprehensive income	(3,758		)	(1,830		)	(7,345		)	8,316
Net OTTI losses recognized in operations	(8,891		)	(3,990		)	(17,691		)	(8,031		)
Loss on extinguishment of debt	—			—			—			(292		)
Total revenues	(30,771		)	383,482			717,071			801,213

Benefits and expenses:
Insurance policy benefits and change in future policy benefits	1,888			2,128			6,282			6,629
Interest sensitive and index product benefits	223,232			159,155			621,317			584,842
Amortization of deferred sales inducements	(28,065		)	5,184			22,892			21,516
Change in fair value of embedded derivatives	(205,565		)	114,823			(138,225		)	(11,513		)
Interest expense on notes payable	7,984			4,940			23,723			14,264
Interest expense on subordinated debentures	3,488			3,805			10,435			11,206
Interest expense on amounts due under repurchase agreements	—			—			5			—
Amortization of deferred policy acquisition costs	(28,930		)	45,795			65,155			73,980
Other operating costs and expenses	15,903			16,213			50,011			48,900
Total benefits and expenses	(10,065		)	352,043			661,595			749,824
Income (loss) before income taxes	(20,706		)	31,439			55,476			51,389
Income tax expense (benefit)	(7,638		)	10,925			18,927			17,494
Net income (loss)	$	(13,068	)	$	20,514		$	36,549		$	33,895

Earnings (loss) per common share	$	(0.22	)	$	0.35		$	0.62		$	0.58
Earnings (loss) per common share - assuming dilution	$	(0.22	)	$	0.33		$	0.59		$	0.56

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	—			—			—			—			36,549		36,549
Change in net unrealized investment gains/losses	—			—			—			370,694			—		370,694
Noncredit component of OTTI losses, available for sale securities, net	—			—			—			2,196			—		2,196
Other comprehensive income															409,439
Acquisition of 1,250 shares of common stock	(1		)	(12		)	—			—			—		(13		)
Allocation of 78,897 shares of common stock by ESOP, including excess income tax benefits	—			65			850			—			—		915
Share-based compensation, including excess income tax benefits	—			6,575			—			—			—		6,575
Issuance of 888,179 shares of common stock under compensation plans, including excess income tax benefits	888			3,686			—			—			—		4,574
Balance at September 30, 2011	$	57,855		$	464,768		$	(3,965	)	$	454,710		$	386,169	$	1,359,537

Balance at December 31, 2009	$	56,203		$	422,225		$	(5,679	)	$	(30,456	)	$	312,330	$	754,623
Other comprehensive income:
Net income for period	—			—			—			—			33,895		33,895
Change in net unrealized investment gains/losses	—			—			—			234,529			—		234,529
Noncredit component of OTTI losses, available for sale securities, net	—			—			—			(2,302		)	—		(2,302		)
Other comprehensive income															266,122
Conversion of $60 of subordinated debentures	7			49			—			—			—		56
Acquisition of 6,300 shares of common stock	(6		)	(44		)	—			—			—		(50		)
Allocation of 44,641 shares of common stock by ESOP, including excess income tax benefits	—			(31		)	484			—			—		453
Share-based compensation, including excess income tax benefits	—			6,800			—			—			—		6,800
Issuance of 488,725 shares of common stock under compensation plans, including excess income tax benefits	489			2,296			—			—			—		2,785
Issuance of warrants	—			15,600			—			—			—		15,600
Balance at September 30, 2010	$	56,693		$	446,895		$	(5,195	)	$	201,771		$	346,225	$	1,046,389

See accompanying notes to unaudited consolidated financial statements.

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



	Nine Months Ended September 30,
	2011			2010
Operating activities
Net income	$	36,549		$	33,895
Adjustments to reconcile net income to net cash provided by operating activities:
Interest sensitive and index product benefits	621,317			584,842
Amortization of deferred sales inducements	22,892			21,516
Annuity product charges	(57,259		)	(52,673		)
Change in fair value of embedded derivatives	(138,225		)	(11,513		)
Increase in traditional life and accident and health insurance reserves	70,612			20,777
Policy acquisition costs deferred	(342,299		)	(260,837		)
Amortization of deferred policy acquisition costs	65,155			73,980
Provision for depreciation and other amortization	14,113			7,391
Amortization of discounts and premiums on investments	(115,340		)	(188,044		)
Realized gains on investments and net OTTI losses recognized	37,030			(14,233		)
Change in fair value of derivatives	205,264			30,876
Deferred income taxes	(78,920		)	(100,804		)
Loss on extinguishment of debt	—			292
Share-based compensation	5,591			6,624
Change in accrued investment income	(45,147		)	(34,854		)
Change in income taxes recoverable/payable	(11,902		)	95,924
Change in other assets	4,375			(10,061		)
Change in other policy funds and contract claims	152,508			64,545
Change in collateral held for derivatives	(284,870		)	(157,791		)
Change in other liabilities	(61,921		)	25,439
Other	516			421
Net cash provided by operating activities	100,039			135,712

Investing activities
Sales, maturities, or repayments of investments:
Fixed maturity securities - available for sale	3,433,977			3,084,551
Fixed maturity securities - held for investment	—			1,585,267
Equity securities - available for sale	2,958			31,665
Mortgage loans on real estate	133,560			111,305
Derivative instruments	432,411			406,563
Other investments	91			—
Acquisition of investments:
Fixed maturity securities - available for sale	(3,685,523		)	(5,620,989		)
Fixed maturity securities - held for investment	(1,940,163		)	(215,870		)
Equity securities - available for sale	—			(10,125		)
Mortgage loans on real estate	(413,536		)	(203,606		)
Derivative instruments	(295,099		)	(241,962		)
Short-term investments	—			(599,746		)
Other investments	(77,189		)	(533		)
Purchases of property, furniture and equipment	(4,643		)	(5,342		)
Net cash used in investing activities	(2,413,156		)	(1,678,822		)

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)



	Nine Months Ended September 30,
	2011			2010
Financing activities
Receipts credited to annuity policyholder account balances	$	3,718,010		$	3,114,235
Coinsurance deposits	(80,932		)	(248,488		)
Return of annuity policyholder account balances	(1,357,892		)	(1,189,388		)
Financing fees incurred and deferred	(1,566		)	(6,742		)
Proceeds from notes payable	—			200,000
Repayments of notes payable	—			(156,641		)
Purchase of call spread - 2015 Notes Hedges	—			(37,000		)
Acquisition of common stock	(13		)	(50		)
Excess tax benefits realized from share-based compensation plans	1,060			256
Proceeds from issuance of common stock	4,461			2,723
Proceeds from issuance of warrants	—			15,600
Change in checks in excess of cash balance	4,537			(14,878		)
Net cash provided by financing activities	2,287,665			1,679,627
Increase (decrease) in cash and cash equivalents	(25,452		)	136,517

Cash and cash equivalents at beginning of period	597,766			528,002
Cash and cash equivalents at end of period	$	572,314		$	664,519

Supplemental disclosures of cash flow information
Cash paid during period for:
Interest expense	$	22,129		$	17,101
Income taxes	108,800			121,488
Income tax refunds received	—			100,000
Non-cash operating activity:
Deferral of sales inducements	281,376			244,979
Non-cash investing activity:
Real estate acquired in satisfaction of mortgage loans	17,358			7,408
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

September 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 nine month periods ended September 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 nine months ended September 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.

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 standard update was effective for us on July 1, 2011, was applied retrospectively to restructures that we have completed on or after 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 and we expect to apply prospectively. 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 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:



	September 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
Assets
Fixed maturity securities:
Available for sale	$	17,378,812	$	17,378,812	$	15,830,663	$	15,830,663
Held for investment	2,827,461		2,838,736		822,200		781,748
Equity securities, available for sale	65,401		65,401		65,961		65,961
Mortgage loans on real estate	2,838,893		2,942,195		2,598,641		2,670,009
Derivative instruments	171,905		171,905		479,786		479,786
Other investments	78,051		78,129		558		558
Cash and cash equivalents	572,314		572,314		597,766		597,766
Coinsurance deposits	2,759,735		2,479,722		2,613,191		2,282,998
2015 notes hedges	21,695		21,695		66,595		66,595

Liabilities
Policy benefit reserves	26,651,672		22,412,815		23,464,810		19,594,396
Notes payable	340,552		389,243		330,835		489,097
Subordinated debentures	268,552		243,135		268,435		213,369
2015 notes embedded derivatives	21,695		21,695		66,595		66,595
Interest rate swaps	387		387		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 nine months ended September 30, 2011.

Our assets and liabilities which are measured at fair value on a recurring basis as of September 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)
September 30, 2011
Assets
Fixed maturity securities:
Available for sale:
United States Government full faith and credit	$	4,681	$	4,681	$	—	$	—
United States Government sponsored agencies	1,232,751		—		1,232,751		—
United States municipalities, states and territories	3,157,337		—		3,157,337		—
Corporate securities	9,757,306		58,734		9,698,572		—
Residential mortgage backed securities	2,841,189		—		2,839,094		2,095
Other asset backed securities	385,548		—		385,548		—
Equity securities, available for sale: finance, insurance and real estate	65,401		43,499		21,902		—
Derivative instruments	171,905		—		171,905		—
Cash and cash equivalents	572,314		572,314		—		—
2015 notes hedges	21,695		—		21,695		—
	$	18,210,127	$	679,228	$	17,528,804	$	2,095
Liabilities
Interest rate swaps	$	387	$	—	$	387	$	—
2015 notes embedded derivatives	21,695		—		21,695		—
Fixed index annuities - embedded derivatives	2,399,097		—		—		2,399,097
	$	2,421,179	$	—	$	22,082	$	2,399,097

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 September 30, 2011 and December 31, 2010.

Mortgage loans on real estate

Mortgage loans on real estate are not measured at fair value on a recurring basis. 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. The fair values of impaired mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral (based on appraised values) less estimated costs to sell.

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

None of the assets included in other investments are measured at fair value on a recurring basis. Other investments is comprised of policy loans, an equity method investment, and company owned life insurance (COLI). 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. The fair value of our COLI approximates the carrying value which is equal to the cash surrender value.

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. Neither policy benefit reserves nor coinsurance deposits are measured at fair value on a recurring basis.

Notes payable

The fair value of the convertible senior notes is based upon quoted market prices, and notes payable are not remeasured at fair value on a recurring basis.

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. Subordinated debentures are not measured at fair value on a recurring basis.

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 nine months ended September 30, 2011 and 2010:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(Dollars in thousands)
Available for sale securities
Beginning balance	$	2,193		$	8,910		$	2,702		$	17,918
Sales	—						—			(14,838		)
Principal returned	(80		)	(181		)	(346		)	(495		)
(Amortization)/accretion of premium/discount	29			10			37			42
Transfers out of Level 3	—			(6,155		)	—			(6,155		)
Total gains (losses) (realized/unrealized):
Included in other comprehensive income (loss)	105			115			384			8,457
Included in operations	(152		)	—			(682		)	(2,230		)
Ending balance	$	2,095		$	2,699		$	2,095		$	2,699

The transfers out of Level 3 were corporate debt and equity securities in the home building sector that were issued as a result of a bankruptcy reorganization in late 2009. The operation that has resulted from this emergence from bankruptcy has become a stable business to which a third party broker has applied observable market data such as similar securities and credit spreads in determining fair value of these securities.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
	(Dollars in thousands)
Fixed index annuities - embedded derivatives
Beginning balance	$	2,368,533		$	1,482,429	$	1,971,383		$	1,375,866
Premiums less benefits	274,579			156,984		742,255			571,719
Change in unrealized gains, net	(244,015		)	66,849		(314,541		)	(241,323		)
Ending balance	$	2,399,097		$	1,706,262	$	2,399,097		$	1,706,262

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 September 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)
September 30, 2011
Fixed maturity securities:
Available for sale:
United States Government full faith and credit	$	4,083	$	598	$	—		$	4,681
United States Government sponsored agencies	1,215,879		16,981		(109		)	1,232,751
United States municipalities, states and territories	2,813,263		344,132		(58		)	3,157,337
Corporate securities	8,780,244		1,049,175		(72,113		)	9,757,306
Residential mortgage backed securities	2,747,860		168,051		(74,722		)	2,841,189
Other asset backed securities	363,208		26,196		(3,856		)	385,548
	$	15,924,537	$	1,605,133	$	(150,858	)	$	17,378,812
Held for investment:
United States Government sponsored agencies	$	2,751,566	$	30,739	$	—		$	2,782,305
Corporate security	75,895		—		(19,464		)	56,431
	$	2,827,461	$	30,739	$	(19,464	)	$	2,838,736
Equity securities, available for sale:
Finance, insurance, and real estate	$	59,197	$	9,030	$	(2,826	)	$	65,401

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 nine months ended September 30, 2011 and 2010, we received $2.9 billion and $4.0 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 $1.6 billion were classified as held for investment for the nine months ended September 30, 2010. There were no calls of held for investment securities during the nine months ended September 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 other asset backed securities. At September 30, 2011, 36% of our fixed income securities have call features and 1% ($0.1 billion) were subject to call redemption. Another 21% ($4.0 billion) will become subject to call redemption during the next twelve months (principally the first three quarters of 2012).

The amortized cost and fair value of fixed maturity securities at September 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	$	44,455	$	45,218	$	—	$	—
Due after one year through five years	438,413		492,808		—		—
Due after five years through ten years	1,993,044		2,202,168		—		—
Due after ten years through twenty years	3,960,426		4,283,903		—		—
Due after twenty years	6,377,131		7,127,978		2,827,461		2,838,736
	12,813,469		14,152,075		2,827,461		2,838,736
Residential mortgage backed securities	2,747,860		2,841,189		—		—
Other asset backed securities	363,208		385,548		—		—
	$	15,924,537	$	17,378,812	$	2,827,461	$	2,838,736

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:



	September 30, 2011			December 31, 2010
	(Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities and equity securities	$	1,460,479		$	213,545
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements	(795,593		)	(122,336		)
Deferred income tax valuation allowance reversal	22,534			22,534
Deferred income tax benefit	(232,710		)	(31,923		)
Net unrealized gains reported as accumulated other comprehensive income	$	454,710		$	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 September 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:



	September 30, 2011				December 31, 2010
NAIC Designation	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
1	$	14,135,552	$	15,232,031	$	12,152,552	$	12,246,954
2	4,376,651		4,771,912		3,892,680		4,012,076
3	221,596		194,853		368,680		323,113
4	9,876		9,041		19,820		19,178
5	5,041		5,861		6,089		6,262
6	3,282		3,850		4,273		4,828
	$	18,751,998	$	20,217,548	$	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 233 and 780 securities, respectively) have been in a continuous unrealized loss position, at September 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)
September 30, 2011
Fixed maturity securities:
Available for sale:
United States Government sponsored agencies	$	52,933	$	(109	)	$	—	$	—		$	52,933	$	(109	)
United States municipalities, states and territories	3,487		(58		)	—		—			3,487		(58		)
Corporate securities:
Finance, insurance and real estate	520,139		(37,487		)	116,744		(9,711		)	636,883		(47,198		)
Manufacturing, construction and mining	141,465		(3,515		)	29,093		(2,669		)	170,558		(6,184		)
Utilities and related sectors	206,963		(9,784		)	26,043		(3,755		)	233,006		(13,539		)
Wholesale/retail trade	22,029		(477		)	9,100		(1,371		)	31,129		(1,848		)
Services, media and other	13,284		(137		)	21,232		(3,207		)	34,516		(3,344		)
Residential mortgage backed securities	279,160		(15,088		)	781,104		(59,634		)	1,060,264		(74,722		)
Other asset backed securities	28,790		(1,257		)	10,762		(2,599		)	39,552		(3,856		)
	$	1,268,250	$	(67,912	)	$	994,078	$	(82,946	)	$	2,262,328	$	(150,858	)
Held for investment:
Corporate security:
Insurance	$	—	$	—		$	56,431	$	(19,464	)	$	56,431	$	(19,464	)

Equity securities, available for sale:
Finance, insurance and real estate	$	11,593	$	(1,406	)	$	6,237	$	(1,420	)	$	17,830	$	(2,826	)

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	)	$	1,145,807	$	(116,906	)	$	6,104,368	$	(300,309	)
Held for investment:
United States Government sponsored agencies	$	731,105	$	(15,309	)	$	—	$	—		$	731,105	$	(15,309	)
Corporate security:
Insurance	—		—			50,643		(25,143		)	50,643		(25,143		)
	$	731,105	$	(15,309	)	$	50,643	$	(25,143	)	$	781,748	$	(40,452	)
Equity securities, available for sale:
Finance, insurance and real estate	$	14,583	$	(1,199	)	$	16,253	$	(747	)	$	30,836	$	(1,946	)

The following is a description of the factors causing the temporary unrealized losses by investment category as of September 30, 2011:

United States Government sponsored agencies; and United States municipalities, states and territories: These securities are relatively long in duration, making the value of such securities sensitive to changes in market interest rates. We purchase these securities regularly over time at different interest rates available at time of purchase; thus, some securities carry yields less than those available at September 30, 2011.

Corporate securities: The unrealized losses in these securities are due partially to the timing of purchases in 2011 and a small number of securities seeing their yield spreads widen due to issuer specific news. In addition, the financial sector credit spreads widened during the quarter on declining fiscal policy and continued stress in the European Union.

Residential mortgage backed securities: At September 30, 2011, we had no exposure to sub-prime residential mortgage backed securities. All of our residential mortgage backed securities are pools of first-lien residential mortgage loans. Substantially all of the securities that we own are in the most senior tranche of the securitization in which they are structured and are not subordinated to any other tranche. Our "Alt-A"

residential mortgage backed securities are comprised of 36 securities with a total amortized cost basis of $445.3million and a fair value of $405.6 million. Despite recent improvements in the capital markets, the fair values of RMBS continue at prices below amortized cost. RMBS prices will likely remain below our cost basis until the housing market is able to absorb current and future foreclosures.

Equity securities: Equity securities in an unrealized loss position have exposure to the economic uncertainty surrounding the European Union which has resulted in unrealized losses in this category. A majority of these securities have been in an unrealized loss position for 12 months or more and are investment grade perpetual preferred stocks that are absent credit deterioration. A continued difficult investment environment has raised concerns in regard to earnings and dividend stability in many companies which directly affect the values of these securities.

Where the decline in market value of debt securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more likely than not we will be required to sell these securities before a recovery of amortized cost, which may be maturity. For equity securities, we recognize an impairment charge in the period in which we do not have the intent and ability to hold the securities until a recovery of cost or we determine that the security will not recover to book value within a reasonable period of time. We determine what constitutes a reasonable period of time on a security-by-security basis based upon consideration of all the evidence available to us, including the magnitude of an unrealized loss and its duration. In any event, this period does not exceed 18 months from the date of impairment for perpetual preferred securities for which there is evidence of deterioration in credit of the issuer and common equity securities. For perpetual preferred securities absent evidence of a deterioration in credit of the issuer we apply an impairment model, including an anticipated recovery period, similar to a debt security. For equity securities we measure impairment charges based upon the difference between the book value of a security and its fair value.

All of the securities with unrealized losses are current with respect to the payment of principal and interest.

Changes in net unrealized gains on investments for the nine months ended September 30, 2011 and 2010 are as follows:



	Nine Months Ended September 30,
	2011		2010
	(Dollars in thousands)
Fixed maturity securities held for investment carried at amortized cost	$	51,727	$	3,993

Investments carried at fair value: