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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, 2010
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 October 31, 2010: 58,655,026
 

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,
2010
 
December 31,
2009
 
(Unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities:
 
 
 
Available for sale, at fair value (amortized cost: 2010 - $14,018,652; 2009 - $10,912,680)
$
14,648,448
 
 
$
10,704,131
 
Held for investment, at amortized cost (fair value: 2010 - $260,727; 2009 - $1,601,864)
289,953
 
 
1,635,083
 
Equity securities, available for sale, at fair value (cost: 2010 - $70,793; 2009 - $82,930)
82,172
 
 
93,086
 
Mortgage loans on real estate
2,528,459
 
 
2,449,778
 
Derivative instruments
283,920
 
 
479,272
 
Short-term investments
599,961
 
 
—
 
Other investments
19,810
 
 
12,760
 
Total investments
18,452,723
 
 
15,374,110
 
 
 
 
 
Cash and cash equivalents
664,519
 
 
528,002
 
Coinsurance deposits
2,566,228
 
 
2,237,740
 
Accrued investment income
148,512
 
 
113,658
 
Deferred policy acquisition costs
1,522,972
 
 
1,625,785
 
Deferred sales inducements
1,042,276
 
 
1,011,449
 
Deferred income taxes
61,420
 
 
85,661
 
Income taxes recoverable
7,760
 
 
103,684
 
Other assets
102,015
 
 
231,915
 
Total assets
$
24,568,425
 
 
$
21,312,004
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Liabilities:
 
 
 
Policy benefit reserves:
 
 
 
Traditional life and accident and health insurance products
$
167,526
 
 
$
140,351
 
Annuity products
21,958,455
 
 
19,195,870
 
Other policy funds and contract claims
183,948
 
 
119,403
 
Notes payable
327,740
 
 
316,468
 
Subordinated debentures
268,397
 
 
268,347
 
Other liabilities
615,970
 
 
516,942
 
Total liabilities
23,522,036
 
 
20,557,381
 
 
 
 
 
Stockholders' equity:
 
 
 
Common stock, par value $1 per share, 125,000,000 shares authorized; issued and outstanding:
2010 - 56,692,991 shares (excluding 5,776,031 treasury shares); 2009 - 56,203,159 shares (excluding 5,936,696 treasury shares)
56,693
 
 
56,203
 
Additional paid-in capital
446,895
 
 
422,225
 
Unallocated common stock held by ESOP; 2010 - 497,527 shares; 2009 - 527,272 shares
(5,195
)
 
(5,679
)
Accumulated other comprehensive income (loss)
201,771
 
 
(30,456
)
Retained earnings
346,225
 
 
312,330
 
Total stockholders' equity
1,046,389
 
 
754,623
 
Total liabilities and stockholders' equity
$
24,568,425
 
 
$
21,312,004
 
 
See accompanying notes to unaudited consolidated financial statements.

2
 

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,
 
2010
 
2009
 
2010
 
2009
Revenues:
 
 
 
 
 
 
 
Traditional life and accident and health insurance premiums
$
3,181
 
 
$
3,166
 
 
$
9,111
 
 
$
9,519
 
Annuity product charges
18,538
 
 
15,835
 
 
52,673
 
 
47,501
 
Net investment income
260,475
 
 
241,471
 
 
758,230
 
 
688,928
 
Change in fair value of derivatives
93,980
 
 
121,507
 
 
(32,742
)
 
108,178
 
Net realized gains on investments, excluding other than temporary impairment ("OTTI") losses
11,298
 
 
5,510
 
 
22,264
 
 
10,587
 
OTTI losses on investments:
 
 
 
 
 
 
 
Total OTTI losses
(2,160
)
 
(94,216
)
 
(16,347
)
 
(171,668
)
Portion of OTTI losses recognized in other comprehensive income
(1,830
)
 
49,641
 
 
8,316
 
 
108,012
 
Net OTTI losses recognized in operations
(3,990
)
 
(44,575
)
 
(8,031
)
 
(63,656
)
Gain (loss) on extinguishment of debt
—
 
 
—
 
 
(292
)
 
3,098
 
Total revenues
383,482
 
 
342,914
 
 
801,213
 
 
804,155
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Insurance policy benefits and change in future policy benefits
2,128
 
 
2,737
 
 
6,629
 
 
6,910
 
Interest sensitive and index product benefits
159,155
 
 
75,288
 
 
584,842
 
 
207,028
 
Amortization of deferred sales inducements
5,184
 
 
(8,081
)
 
21,516
 
 
17,814
 
Change in fair value of embedded derivatives
114,823
 
 
259,737
 
 
(11,513
)
 
414,636
 
Interest expense on notes payable
4,940
 
 
3,370
 
 
14,264
 
 
11,288
 
Interest expense on subordinated debentures
3,805
 
 
3,841
 
 
11,206
 
 
12,078
 
Interest expense on amounts due under repurchase agreements
—
 
 
100
 
 
—
 
 
344
 
Amortization of deferred policy acquisition costs
45,795
 
 
(2,972
)
 
73,980
 
 
44,938
 
Other operating costs and expenses
16,213
 
 
13,961
 
 
48,900
 
 
45,305
 
Total benefits and expenses
352,043
 
 
347,981
 
 
749,824
 
 
760,341
 
Income (loss) before income taxes
31,439
 
 
(5,067
)
 
51,389
 
 
43,814
 
Income tax expense (benefit)
10,925
 
 
(2,089
)
 
17,494
 
 
11,305
 
Net income (loss)
$
20,514
 
 
$
(2,978
)
 
$
33,895
 
 
$
32,509
 
 
 
 
 
 
 
 
 
Earnings (loss) per common share
$
0.35
 
 
$
(0.05
)
 
$
0.58
 
 
$
0.59
 
Earnings (loss) per common share - assuming dilution
$
0.33
 
 
$
(0.05
)
 
$
0.56
 
 
$
0.57
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 

3
 

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, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2008
$
50,739
 
 
$
376,782
 
 
$
(6,336
)
 
$
(147,376
)
 
$
223,035
 
 
$
496,844
 
Cumulative effect of noncredit OTTI, net
—
 
 
—
 
 
—
 
 
(20,094
)
 
25,240
 
 
5,146
 
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income for the period
—
 
 
—
 
 
—
 
 
—
 
 
32,509
 
 
32,509
 
Change in net unrealized investment gains/losses
—
 
 
—
 
 
—
 
 
251,689
 
 
—
 
 
251,689
 
Noncredit component of OTTI losses, available for sale securities, net
—
 
 
—
 
 
—
 
 
(70,208
)
 
—
 
 
(70,208
)
Other comprehensive income
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
213,990
 
Issuance of treasury stock
5
 
 
50
 
 
—
 
 
—
 
 
(18
)
 
37
 
Acquisition of 12,362 shares of common stock
(12
)
 
(40
)
 
—
 
 
—
 
 
—
 
 
(52
)
Allocation of 37,667 shares of common stock by ESOP, including excess income tax benefits
—
 
 
(114
)
 
406
 
 
—
 
 
—
 
 
292
 
Share-based compensation, including excess income tax benefits
—
 
 
2,814
 
 
—
 
 
—
 
 
—
 
 
2,814
 
Issuance of 5,000,000 shares of common stock in exchange for notes payable
5,000
 
 
26,226
 
 
—
 
 
—
 
 
—
 
 
31,226
 
Issuance of 132,300 shares of common stock
132
 
 
855
 
 
—
 
 
—
 
 
—
 
 
987
 
Issuance of 339,015 shares of common stock under compensation plans, including excess income tax benefits
339
 
 
(339
)
 
—
 
 
—
 
 
—
 
 
—
 
Balance at September 30, 2009
$
56,203
 
 
$
406,234
 
 
$
(5,930
)
 
$
14,011
 
 
$
280,766
 
 
$
751,284
 
 
See accompanying notes to unaudited consolidated financial statements.

4
 

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
2010
 
2009
Operating activities
 
 
 
Net income
$
33,895
 
 
$
32,509
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest sensitive and index product benefits
584,842
 
 
207,028
 
Amortization of deferred sales inducements
21,516
 
 
17,814
 
Annuity product charges
(52,673
)
 
(47,501
)
Change in fair value of embedded derivatives
(11,513
)
 
414,636
 
Increase in traditional life and accident and health insurance reserves
20,777
 
 
6,331
 
Policy acquisition costs deferred
(260,837
)
 
(244,164
)
Amortization of deferred policy acquisition costs
73,980
 
 
44,938
 
Provision for depreciation and other amortization
7,391
 
 
4,323
 
Amortization of discounts and premiums on investments
(188,044
)
 
(160,338
)
Realized gains on investments and net OTTI losses recognized
(14,233
)
 
53,069
 
Change in fair value of derivatives
30,876
 
 
(109,563
)
Deferred income taxes
(100,804
)
 
(114,669
)
Loss (gain) on extinguishment of debt
292
 
 
(3,098
)
Share-based compensation
6,624
 
 
3,183
 
Change in accrued investment income
(34,854
)
 
(39,409
)
Change in income taxes recoverable/payable
95,924
 
 
11,498
 
Change in other assets
(10,061
)
 
(4,111
)
Change in other policy funds and contract claims
64,545
 
 
(515
)
Change in collateral held for derivatives
(157,791
)
 
228,068
 
Change in other liabilities
25,439
 
 
(38,855
)
Other
421
 
 
(2,010
)
Net cash provided by operating activities
135,712
 
 
259,164
 
 
 
 
 
Investing activities
 
 
 
Sales, maturities, or repayments of investments:
 
 
 
Fixed maturity securities - available for sale
3,084,551
 
 
2,236,834
 
Fixed maturity securities - held for investment
1,585,267
 
 
1,918,418
 
Equity securities - available for sale
31,665
 
 
11,778
 
Mortgage loans on real estate
111,305
 
 
87,898
 
Derivative instruments
406,563
 
 
6,534
 
Acquisition of investments:
 
 
 
Fixed maturity securities - available for sale
(5,620,989
)
 
(5,987,086
)
Fixed maturity securities - held for investment
(215,870
)
 
—
 
Equity securities - available for sale
(10,125
)
 
—
 
Mortgage loans on real estate
(203,606
)
 
(149,624
)
Derivative instruments
(241,962
)
 
(189,424
)
Short-term investments
(599,746
)
 
—
 
Other investments
(533
)
 
(28
)
Purchases of property, furniture and equipment
(5,342
)
 
(1,001
)
Net cash used in investing activities
(1,678,822
)
 
(2,065,701
)

5
 

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
2010
 
2009
Financing activities
 
 
 
Receipts credited to annuity policyholder account balances
$
3,114,235
 
 
$
2,777,615
 
Coinsurance deposits
(248,488
)
 
(371,897
)
Return of annuity policyholder account balances
(1,189,388
)
 
(1,038,657
)
Financing fees incurred and deferred
(6,742
)
 
(320
)
Proceeds from notes payable
200,000
 
 
75,000
 
Repayments of notes payable
(156,641
)
 
(3,082
)
Purchase of call spread - 2015 Notes Hedges
(37,000
)
 
—
 
Increase in amounts due under repurchase agreements
—
 
 
410,254
 
Acquisition of common stock
(50
)
 
(34
)
Excess tax benefits realized from share-based compensation plans
256
 
 
63
 
Proceeds from issuance of common stock
2,723
 
 
987
 
Proceeds from issuance of warrants
15,600
 
 
—
 
Change in checks in excess of cash balance
(14,878
)
 
(8,404
)
Other
—
 
 
12
 
Net cash provided by financing activities
1,679,627
 
 
1,841,537
 
Increase in cash and cash equivalents
136,517
 
 
35,000
 
 
 
 
 
Cash and cash equivalents at beginning of period
528,002
 
 
214,862
 
Cash and cash equivalents at end of period
$
664,519
 
 
$
249,862
 
 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during period for:
 
 
 
Interest expense
$
17,101
 
 
$
19,669
 
Income taxes
121,488
 
 
117,850
 
Income tax refunds received
100,000
 
 
—
 
Non-cash operating activity:
 
 
 
Deferral of sales inducements
244,979
 
 
229,739
 
Non-cash investing activity:
 
 
 
Real estate acquired in satisfaction of mortgage loans
7,408
 
 
8,949
 
Non-cash financing activities:
 
 
 
Stock issued in extinguishment of debt
—
 
 
31,250
 
Conversion of subordinated debentures
56
 
 
—
 
 
See accompanying notes to unaudited consolidated financial statements.
 

6
 

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(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, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. 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, 2009.
 
We recorded an immaterial correction for the accounting for single premium immediate annuities during the third quarter 2010 which increased net income by $0.5 million. Reclassifications have been made to prior period financial statements to conform to the current period presentation.
 
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 disclose separately the amounts of significant transfers in to and out of Level 1 and Level 2 fair value measurement categories and describe the reasons for the transfers. 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, 2010, and has not had a material impact on our consolidated financial statements.
 
In June 2009, the FASB amended accounting standards for transfers and servicing of financial assets and extinguishments of liabilities. The new standard removes the concept of a qualifying special-purpose entity ("QSPE") from existing standards and removes the exception of QSPE's from consolidation requirements. Additionally, more stringent conditions for reporting a transfer of a portion of a financial asset as a sale were created, derecognition criteria was clarified, the initial measurement of retained interests was revised, the guaranteed mortgage securitization recharacterization provisions were removed and disclosure requirements were added. This standard was effective for us on January 1, 2010 and had no effect on our consolidated financial statements upon adoption.
 
In June 2009, the FASB issued an amendment to the accounting standards for consolidation of variable interest entities. The new standard replaces the quantitative-based risks and rewards calculation of existing standards for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with a primarily qualitative approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity ("VIE") that most significantly impacts the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. This standard was effective for us on January 1, 2010, and had no effect on our consolidated financial statements upon adoption. Through our funds withheld coinsurance agreement with an unauthorized life reinsurer we have been named as beneficiary of the trust that holds the funds withheld. We have determined that this trust is a VIE. We also have determined that the reinsurer is the primary beneficiary of this VIE due to the fact that all earnings of the trust inure to the reinsurer, and the reinsurer directs the operations of the trust subject to an investment policy. Therefore, we have not consolidated the trust prior to or after the adoption of this amendment to the accounting standards for consolidation of VIE's.
 
New Accounting Pronouncements
 
In January 2010, the FASB issued an accounting standards update that expands the disclosure requirements related to fair value measurements. A reporting entity will be 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. This guidance will be effective on January 1, 2011, and we do not expect the adoption to have a material impact on our consolidated financial statements.
 
In July 2010, the FASB issued an accounting standards update that expands disclosures and provide users more transparency about allowances for credit losses and the credit quality of the financing receivables of an entity. This guidance requires additional disclosures about an entity's financing receivables, such as credit quality indicators, aging of past due financing receivables, and significant purchases and sales of financing receivables. In addition, disclosures must be disaggregated by portfolio segment or class based on how an entity develops its allowance for credit losses and how it manages its credit exposure. Most of the disclosure requirements are effective for the fourth quarter of 2010 with certain additional disclosures required for the first quarter of 2011. We are currently evaluating the impact of this guidance on our consolidated financial statements.

7
 

 
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.
 
2. Fair Values of Financial Instruments
 
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 for use of inputs 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. Transfers between Level 1 and Level 2 were not material for the nine months ended September 30, 2010.
 
We utilize independent pricing services in estimating the fair values of investment securities. 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. 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.
 
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity. 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.

8
 

 
In addition, we obtain prices from a broker for our callable United States Government sponsored agencies. 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.
 
Fair value of call options are determined by obtaining prices from our counterparties who use market standard valuation methodologies. Market 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.
 
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.
 
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, 2010.
 
The fixed income securities markets in early 2009 experienced a period of extreme volatility and limited market liquidity conditions, which affected a broad range of asset classes and sectors. In addition, there were credit downgrade events and an increased probability of default for many fixed income instruments. These volatile market conditions increased the difficulty of valuing certain instruments as trading was less frequent and/or market data was less observable. There were certain instruments that were in active markets with significant observable data that became illiquid due to the current financial environment or market conditions. As a result, certain valuations require greater estimation and judgment as well as valuation methods which are more complex. These values may not ultimately be realizable in a market transaction, and such values may change very rapidly as market conditions change and valuation assumptions are modified.
 
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: The fair values of fixed maturity securities are obtained from third parties and are based on quoted market prices when available. 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.
 
Equity securities: The fair values of equity securities are based on quoted market prices. If quoted market prices are not available, the third parties use observable or unobservable inputs and other factors relating to instruments or securities with similar characteristics to determine fair value.
 
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 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. 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.
 
Short-term investments: The fair values of short-term investments are based on quoted market prices.
 
Other investments: Other investments is comprised of policy loans, rental real estate and real estate held for sale. 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 our real estate owned was determined either by obtaining a third party appraisal of the property or by estimating the potential annual net operating income from each commercial rental property, which we discount by a current market capitalization rate.
 
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.
 

9
 

2015 notes hedges: The fair value of these call options is determined by applying 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). 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. Fair values of other notes payable 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: 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.
 
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.
 
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.
 
The following sets forth a comparison of the fair values and carrying amounts of our financial instruments:
 
 
 
September 30, 2010
 
December 31, 2009
 
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
Available for sale
 
$
14,648,448
 
 
$
14,648,448
 
 
$
10,704,131
 
 
$
10,704,131
 
Held for investment
 
289,953
 
 
260,727
 
 
1,635,083
 
 
1,601,864
 
Equity securities, available for sale
 
82,172
 
 
82,172
 
 
93,086
 
 
93,086
 
Mortgage loans on real estate
 
2,528,459
 
 
2,580,440
 
 
2,449,778
 
 
2,409,197
 
Derivative instruments
 
283,920
 
 
283,920
 
 
479,272
 
 
479,272
 
Short-term investments
 
599,961
 
 
599,961
 
 
—
 
 
—
 
Other investments
 
19,810
 
 
19,810
 
 
12,760
 
 
12,760
 
Cash and cash equivalents
 
664,519
 
 
664,519
 
 
528,002
 
 
528,002
 
Coinsurance deposits
 
2,566,228
 
 
2,284,316
 
 
2,237,740
 
 
1,934,996
 
2015 notes hedges
 
38,483
 
 
38,483
 
 
—
 
 
—
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Policy benefit reserves
 
21,958,455
 
 
18,431,020
 
 
19,195,870
 
 
16,152,088
 
Notes payable
 
327,740
 
 
393,032
 
 
316,468
 
 
340,673
 
Subordinated debentures
 
268,397
 
 
166,029
 
 
268,347
 
 
186,215
 
2015 notes embedded derivatives
 
38,483
 
 
38,483
 
 
—
 
 
—
 
Interest rate swaps
 
2,531
 
 
2,531
 
 
1,891
 
 
1,891
 
 

10
 

Our assets and liabilities which are measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009 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, 2010
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
United States Government full faith and credit
 
$
3,698
 
 
$
3,698
 
 
$
—
 
 
$
—
 
United States Government sponsored agencies
 
4,152,112
 
 
—
 
 
4,152,112
 
 
—
 
United States municipalities, states and territories
 
1,261,070
 
 
—
 
 
1,261,070
 
 
—
 
Corporate securities
 
6,502,727
 
 
73,648
 
 
6,429,079
 
 
—
 
Residential mortgage backed securities
 
2,728,841
 
 
—
 
 
2,726,142
 
 
2,699
 
Equity securities, available for sale: finance, insurance and real estate
 
82,172
 
 
60,831
 
 
21,341
 
 
—
 
Derivative instruments
 
283,920
 
 
—
 
 
283,920
 
 
—
 
Cash and cash equivalents
 
664,519
 
 
664,519
 
 
—
 
 
—
 
Short-term investments
 
599,961
 
 
599,961
 
 
—
 
 
—
 
2015 notes hedges
 
38,483
 
 
—
 
 
38,483
 
 
—
 
 
 
$
16,317,503
 
 
$
1,402,657
 
 
$
14,912,147
 
 
$
2,699
 
Liabilities
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
2,531
 
 
$
—
 
 
$
2,531
 
 
$
—
 
2015 notes embedded derivatives
 
38,483
 
 
—
 
 
38,483
 
 
—
 
Fixed index annuities - embedded derivatives
 
1,706,262
 
 
—
 
 
—
 
 
1,706,262
 
 
 
$
1,747,276
 
 
$
—
 
 
$
41,014
 
 
$
1,706,262
 
 
 
 
 
 
 
 
 
 
December 31, 2009
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
United States Government full faith and credit
 
$
3,310
 
 
$
2,545
 
 
$
765
 
 
$
—
 
United States Government sponsored agencies
 
3,998,537
 
 
—
 
 
3,998,537
 
 
—
 
United States municipalities, states and territories
 
355,634
 
 
—
 
 
355,634
 
 
—
 
Corporate securities
 
3,857,549
 
 
70,363
 
 
3,773,078
 
 
14,108
 
Residential mortgage backed securities
 
2,489,101
 
 
—
 
 
2,486,290
 
 
2,811
 
Equity securities, available for sale: finance, insurance and real estate
 
93,086
 
 
83,672
 
 
8,415
 
 
999
 
Derivative instruments
 
479,272
 
 
—
 
 
479,272
 
 
—
 
Cash and cash equivalents
 
528,002
 
 
528,002
 
 
—
 
 
—
 
 
 
$
11,804,491
 
 
$
684,582
 
 
$
11,101,991
 
 
$
17,918
 
Liabilities
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
1,891
 
 
$
—
 
 
$
1,891
 
 
$
—
 
Fixed index annuities - embedded derivatives
 
1,375,866
 
 
—
 
 
—
 
 
1,375,866
 
 
 
$
1,377,757
 
 
$
—
 
 
$
1,891
 
 
$
1,375,866
 
 
During the three months ended September 30, 2010, we transferred four corporate securities with a fair value of $12.5 million from Level 2 to Level 1 as quoted prices in active markets as evidenced by actual trades of these securities occurred at the end of this period. Identical security trading had not been observable prior to this period for these four securities.

11
 

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, 2010 and 2009:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2010
 
2009
 
2010
 
2009
 
(Dollars in thousands)
Available for sale securities
 
 
 
 
 
 
 
Beginning balance
$
8,910
 
 
$
19,140
 
 
$
17,918
 
 
$
20,082
 
Purchases, issuances, and settlements
60
 
 
(52
)
 
(15,060
)
 
(126
)
Transfers out of Level 3
(6,155
)
 
—
 
 
(6,155
)
 
—
 
Total gains (losses) (realized/unrealized):
 
 
 
 
 
 
 
Included in other comprehensive income (loss)
(116
)
 
1,628
 
 
8,226
 
 
1,586
 
Included in operations
—
 
 
(287
)
 
(2,230
)
 
(1,113
)
Ending balance
$
2,699
 
 
$
20,429
 
 
$
2,699
 
 
$
20,429
 
 
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. Realized losses of $2.2 million for nine months ended September 30, 2010 are included in net realized gains on investments in the unaudited consolidated statements of operations compared to $0.3 million and $1.1 million for the three and nine months ended September 30, 2009.
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2010
 
2009
 
2010
 
2009
 
 
(Dollars in thousands)
Fixed index annuities - embedded derivatives
 
 
 
 
 
 
 
 
Beginning balance
 
$
1,482,429
 
 
$
1,050,769
 
 
$
1,375,866
 
 
$
998,015
 
Reinsurance adjustment
 
—
 
 
(14,567
)
 
—
 
 
(14,567
)
Premiums less benefits
 
156,984
 
 
2,377
 
 
571,719
 
 
(2,464
)
Change in unrealized gains, net
 
66,849
 
 
210,333
 
 
(241,323
)
 
267,928
 
Ending balance
 
$
1,706,262
 
 
$
1,248,912
 
 
$
1,706,262
 
 
$
1,248,912
 
 
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.
 

12
 

3. Investments
 
At September 30, 2010 and December 31, 2009, 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, 2010
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
United States Government full faith and credit
 
$
3,235
 
 
$
463
 
 
$
—
 
 
$
3,698
 
United States Government sponsored agencies
 
4,119,569
 
 
32,543
 
 
—
 
 
4,152,112
 
United States municipalities, states and territories
 
1,188,236
 
 
73,700
 
 
(866
)
 
1,261,070
 
Corporate securities
 
5,911,946
 
 
617,853
 
 
(27,072
)
 
6,502,727
 
Residential mortgage backed securities
 
2,795,666
 
 
82,133
 
 
(148,958
)
 
2,728,841
 
 
 
$
14,018,652
 
 
$
806,692
 
 
$
(176,896
)
 
$
14,648,448
 
 
 
 
 
 
 
 
 
 
Held for investment:
 
 
 
 
 
 
 
 
United States Government sponsored agencies
 
$
214,202
 
 
$
1,108
 
 
$
—
 
 
$
215,310
 
Corporate security
 
75,751
 
 
—
 
 
(30,334
)
 
45,417
 
 
 
$
289,953
 
 
$
1,108
 
 
$
(30,334
)
 
$
260,727
 
 
 
 
 
 
 
 
 
 
Equity securities, available for sale:
 
 
 
 
 
 
 
 
Finance, insurance, and real estate
 
$
70,793
 
 
$
12,111
 
 
$
(732
)
 
$
82,172
 
 
 
 
 
 
 
 
 
 
December 31, 2009
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
United States Government full faith and credit
 
$
3,101
 
 
$
215
 
 
$
(6
)
 
$
3,310
 
United States Government sponsored agencies
 
4,113,457
 
 
3,468
 
 
(118,388
)
 
3,998,537
 
United States municipalities, states and territories
 
350,787
 
 
7,110
 
 
(2,263
)
 
355,634
 
Corporate securities
 
3,709,446
 
 
233,023
 
 
(84,920
)
 
3,857,549
 
Residential mortgage backed securities
 
2,735,889
 
 
59,584
 
 
(306,372
)
 
2,489,101
 
 
 
$
10,912,680
 
 
$
303,400
 
 
$
(511,949
)
 
$
10,704,131
 
 
 
 
 
 
 
 
 
 
Held for investment:
 
 
 
 
 
 
 
 
United States Government sponsored agencies
 
$
1,559,434
 
 
$
1,647
 
 
$
(5,900
)
 
$
1,555,181
 
Corporate security
 
75,649
 
 
—
 
 
(28,966
)
 
46,683
 
 
 
$
1,635,083
 
 
$
1,647
 
 
$
(34,866
)
 
$
1,601,864
 
Equity securities, available for sale:
 
 
 
 
 
 
 
 
Finance, insurance, and real estate
 
$
82,930
 
 
$
13,425
 
 
$
(3,269
)
 
$
93,086
 
 
During the nine months ended September 30, 2010 and 2009, we received $4.0 billion and $3.6 billion, respectively, in redemption proceeds primarily related to calls of our callable United States Government sponsored agency securities, of which $1.6 billion and $1.9 billion, respectively, were classified as held for investment. We reinvested the proceeds from these redemptions primarily in United States Government sponsored agencies, corporate securities, and United States municipalities, states, and territories classified as available for sale. In addition, we held approximately $600 million in short-term investments at September 30, 2010. At September 30, 2010, 40% of our fixed income securities have call features and 14% ($2.0 billion) are subject to call redemption during the fourth quarter of 2010. Another 18% ($2.5 billion) will become subject to call redemption during the first three quarters of 2011.
 
 

13
 

The amortized cost and fair value of fixed maturity securities at September 30, 2010, 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 backed securities provide for periodic payments throughout their lives and are shown below as a separate line.
 
 
Available-for-sale
 
Held for investment
 
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
 
(Dollars in thousands)
Due in one year or less
 
$
30,372
 
 
$
30,721
 
 
$
—
 
 
$
—
 
Due after one year through five years
 
406,359
 
 
451,668
 
 
—
 
 
—
 
Due after five years through ten years
 
1,608,610
 
 
1,851,088
 
 
—
 
 
—
 
Due after ten years through twenty years
 
1,852,257
 
 
1,965,964
 
 
—
 
 
—
 
Due after twenty years
 
7,325,388
 
 
7,620,166
 
 
289,953
 
 
260,727
 
 
 
11,222,986
 
 
11,919,607
 
 
289,953
 
 
260,727
 
Residential mortgage backed securities
 
2,795,666
 
 
2,728,841
 
 
—
 
 
—
 
 
 
$
14,018,652
 
 
$
14,648,448
 
 
$
289,953
 
 
$
260,727
 
 
Net unrealized gains (losses) 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,
2010
 
December 31,
2009
 
 
(Dollars in thousands)
Net unrealized gains (losses) on available for sale fixed maturity securities and equity securities
 
$
641,185
 
 
$
(198,393
)
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements
 
(365,436
)
 
116,870
 
Deferred income tax valuation allowance reversal
 
22,534
 
 
22,534
 
Deferred income tax (expense) benefit
 
(96,512
)
 
28,533
 
Net unrealized gains (losses) reported as accumulated other comprehensive income (loss)
 
$
201,771
 
 
$
(30,456
)
 
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 and fair values, 98% and 97% of our fixed maturity portfolio was rated investment grade at September 30, 2010 and December 31, 2009, 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, 2010
 
December 31, 2009
NAIC
Designation
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
(Dollars in thousands)
1
 
$
10,482,067
 
 
$
10,863,122
 
 
$
9,495,015
 
 
$
9,370,647
 
2
 
3,434,818
 
 
3,703,832
 
 
2,571,815
 
 
2,555,826
 
3
 
349,422
 
 
298,439
 
 
409,860
 
 
315,948
 
4
 
32,259
 
 
32,079
 
 
24,375
 
 
20,799
 
5
 
2,943
 
 
4,200
 
 
21,013
 
 
20,749
 
6
 
7,096
 
 
7,503
 
 
25,685
 
 
22,026
 
 
 
$
14,308,605
 
 
$
14,909,175
 
 
$
12,547,763
 
 
$
12,305,995
 
 

14
 

A summary of our RMBS by collateral type and split by NAIC designation, as well as a separate summary of securities for which we have recognized OTTI and those which we have not yet recognized any OTTI is as follows:
 
 
 
 
 
September 30, 2010
 
December 31, 2009
Collateral Type
 
NAIC
Designation
 
Principal
Amount
 
Amortized
Cost
 
Fair Value
 
Principal
Amount
 
Amortized
Cost
 
Fair Value
 
 
 
 
(Dollars in thousands)
OTTI has not been recognized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency
 
1
 
$
67,103
 
 
$
66,390
 
 
$
73,631
 
 
$
69,496
 
 
$
68,715
 
 
$
72,306
 
Prime
 
1
 
1,818,274
 
 
1,722,604
 
 
1,761,936
 
 
1,713,391
 
 
1,595,502
 
 
1,585,337
 
 
 
2
 
26,291
 
 
24,730
 
 
24,499
 
 
127,951
 
 
127,210
 
 
106,395
 
 
 
3
 
21,474
 
 
21,145
 
 
18,795
 
 
1,474
 
 
1,471
 
 
977
 
 
 
4
 
10,627
 
 
10,195
 
 
10,347
 
 
—
 
 
—
 
 
—
 
Alt-A
 
1
 
55,282
 
 
54,732
 
 
52,375
 
 
93,963
 
 
87,071
 
 
70,749
 
 
 
2
 
5,123
 
 
5,219
 
 
4,304
 
 
46,456
 
 
47,301
 
 
38,030
 
 
 
 
 
$
2,004,174
 
 
$
1,905,015
 
 
$
1,945,887
 
 
$
2,052,731
 
 
$
1,927,270
 
 
$
1,873,794
 
OTTI has been recognized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime
 
1
 
$
226,865
 
 
$
205,822
 
 
$
180,883
 
 
$
173,149
 
 
$
156,108
 
 
$
126,301
 
 
 
2
 
195,252
 
 
185,801
 
 
159,643
 
 
223,473
 
 
212,221
 
 
156,522
 
 
 
3
 
69,651
 
 
65,530
 
 
61,645
 
 
60,965
 
 
58,965
 
 
44,853
 
Alt-A
 
1
 
269,492
 
 
232,093
 
 
213,585
 
 
194,682
 
 
164,402
 
 
127,341
 
 
 
2
 
160,021
 
 
137,310
 
 
117,387
 
 
111,673
 
 
96,700
 
 
75,557
 
 
 
3
 
71,622
 
 
59,857
 
 
47,112
 
 
134,085
 
 
115,522
 
 
81,922
 
 
 
6
 
4,899
 
 
4,238
 
 
2,699
 
 
5,394
 
 
4,701
 
 
2,811
 
 
 
 
 
$
997,802
 
 
$
890,651
 
 
$
782,954
 
 
$
903,421
 
 
$
808,619
 
 
$
615,307
 
Total by collateral type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency
 
 
 
$
67,103
 
 
$
66,390
 
 
$
73,631
 
 
$
69,496
 
 
$
68,715
 
 
$
72,306
 
Prime
 
 
 
2,368,434
 
 
2,235,827
 
 
2,217,748
 
 
2,300,403
 
 
2,151,477
 
 
2,020,385
 
Alt-A
 
 
 
566,439
 
 
493,449
 
 
437,462
 
 
586,253
 
 
515,697
 
 
396,410
 
 
 
 
 
$
3,001,976
 
 
$
2,795,666
 
 
$
2,728,841
 
 
$
2,956,152
 
 
$
2,735,889
 
 
$
2,489,101
 
Total by NAIC designation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
 
$
2,437,016
 
 
$
2,281,641
 
 
$
2,282,410
 
 
$
2,244,681
 
 
$
2,071,798
 
 
$
1,982,034
 
 
 
2
 
386,687
 
 
353,060
 
 
305,833
 
 
509,553
 
 
483,432
 
 
376,504
 
 
 
3
 
162,747
 
 
146,532
 
 
127,552
 
 
196,524
 
 
175,958
 
 
127,752
 
 
 
4
 
10,627
 
 
10,195
 
 
10,347
 
 
—
 
 
—
 
 
—
 
 
 
6
 
4,899
 
 
4,238
 
 
2,699
 
 
5,394
 
 
4,701
 
 
2,811
 
 
 
 
 
$
3,001,976
 
 
$
2,795,666
 
 
$
2,728,841
 
 
$
2,956,152
 
 
$
2,735,889
 
 
$
2,489,101
 
 
 

15
 

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 196 and 355 securities, respectively) have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009:
 
 
 
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, 2010
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
United States municipalities, states and territories
 
$
62,618
 
 
$
(866
)
 
$
—
 
 
$
—
 
 
$
62,618
 
 
$
(866
)
Corporate securities: