RGA 10-Q Quarterly Report June 30, 2010

REINSURANCE GROUP OF AMERICA INC

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10-Q 1 c59463e10vq.htm FORM 10-Q e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2010


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

Commission File Number 1-11848

REINSURANCE GROUP OF AMERICA, INCORPORATED

(Exact name of Registrant as specified in its charter)


MISSOURI		43-1627032
(State or other jurisdiction of incorporation or organization)		(IRS employer identification number)

1370 Timberlake Manor Parkway
Chesterfield, Missouri 63017
(Address of principal executive offices)
(636) 736-7000
(Registrant’s telephone number, including area code)

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

Yes þ 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 þ No o

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


Large accelerated filer þ	Accelerated filer o	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 þ

As of July 30, 2010, 73,156,938 shares of the registrant’s common stock were outstanding.

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS


Item		Page
	PART I — FINANCIAL INFORMATION

1	Financial Statements

	Condensed Consolidated Balance Sheets (Unaudited) June 30, 2010 and December 31, 2009		3

	Condensed Consolidated Statements of Income (Unaudited) Three and six months ended June 30, 2010 and 2009		4

	Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 2010 and 2009		5

	Notes to Condensed Consolidated Financial Statements (Unaudited)		6

2	Management's Discussion and Analysis of Financial Condition and Results of Operations		36

3	Quantitative and Qualitative Disclosure About Market Risk		71

4	Controls and Procedures		71

	PART II — OTHER INFORMATION

1	Legal Proceedings		71

1A	Risk Factors		71

2	Unregistered Sales of Equity Securities and Use of Proceeds		71

6	Exhibits		71

	Signatures		72

	Index to Exhibits		73
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	June 30,			December 31,
	2010			2009
	(Dollars in thousands, except per share data)
Assets
Fixed maturity securities:
Available-for-sale at fair value (amortized cost of $12,381,638 and $11,616,957 at June 30, 2010 and December 31, 2009, respectively)	$	13,077,607		$	11,763,358
Mortgage loans on real estate (net of allowances of $8,179 and $5,784 at at June 30, 2010 and December 31, 2009, respectively)		838,827			791,668
Policy loans		1,173,016			1,136,564
Funds withheld at interest		5,257,929			4,895,356
Short-term investments		63,962			121,060
Other invested assets		637,827			516,086

Total investments		21,049,168			19,224,092
Cash and cash equivalents		557,756			512,027
Accrued investment income		144,658			107,447
Premiums receivable and other reinsurance balances		898,522			850,096
Reinsurance ceded receivables		721,830			716,480
Deferred policy acquisition costs		3,597,865			3,698,972
Other assets		250,807			140,387

Total assets	$	27,220,606		$	25,249,501


Liabilities and Stockholders’ Equity
Future policy benefits	$	8,518,817		$	7,748,480
Interest-sensitive contract liabilities		7,781,407			7,666,002
Other policy claims and benefits		2,387,579			2,229,083
Other reinsurance balances		143,723			106,706
Deferred income taxes		977,873			613,222
Other liabilities		742,940			792,775
Long-term debt		1,216,230			1,216,052
Collateral finance facility		850,030			850,037
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures of the Company		159,316			159,217

Total liabilities		22,777,915			21,381,574

Commitments and contingent liabilities (See Note 8)

Stockholders’ Equity:
Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no shares issued or outstanding)		—			—
Common stock (par value $.01 per share; 140,000,000 shares authorized; shares issued: 73,363,523 at June 30, 2010 and December 31, 2009)		734			734
Warrants		66,912			66,912
Additional paid-in-capital		1,473,305			1,463,101
Retained earnings		2,282,968			2,055,549
Treasury stock, at cost; 209,962 and 373,861 shares at June 30, 2010 and December 31, 2009, respectively		(9,570	)		(17,578	)
Accumulated other comprehensive income (loss):
Accumulated currency translation adjustment, net of income taxes		173,985			210,878
Unrealized appreciation of securities, net of income taxes		470,365			104,457
Pension and postretirement benefits, net of income taxes		(16,008	)		(16,126	)

Total stockholders’ equity		4,442,691			3,867,927

Total liabilities and stockholders’ equity	$	27,220,606		$	25,249,501

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

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
	(Dollars in thousands, except per share data)
Revenues:
Net premiums	$	1,582,017		$	1,375,181		$	3,210,481		$	2,721,228
Investment income, net of related expenses		291,671			284,636			595,929			507,832
Investment related gains (losses), net:
Other-than-temporary impairments on fixed maturity securities		(3,489	)		(36,942	)		(10,919	)		(71,337	)
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income		(139	)		16,135			2,205			16,135
Other investment related gains (losses), net		26,620			98,995			162,891			61,128

Total investment related gains (losses), net		22,992			78,188			154,177			5,926
Other revenues		35,197			75,161			71,475			109,020

Total revenues		1,931,877			1,813,166			4,032,062			3,344,006


Benefits and Expenses:
Claims and other policy benefits		1,307,239			1,123,696			2,682,419			2,293,440
Interest credited		79,169			72,897			136,103			109,806
Policy acquisition costs and other insurance expenses		237,149			308,403			603,451			507,204
Other operating expenses		83,147			71,095			174,346			137,844
Interest expense		25,141			19,595			40,590			41,712
Collateral finance facility expense		1,960			2,057			3,766			4,371

Total benefits and expenses		1,733,805			1,597,743			3,640,675			3,094,377


Income before income taxes		198,072			215,423			391,387			249,629
Provision for income taxes		71,053			62,244			141,929			73,160

Net income	$	127,019		$	153,179		$	249,458		$	176,469


Earnings per share:
Basic earnings per share	$	1.74		$	2.11		$	3.41		$	2.43
Diluted earnings per share	$	1.70		$	2.10		$	3.34		$	2.42

Dividends declared per share	$	0.12		$	0.09		$	0.24		$	0.18

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

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six months ended June 30,
	2010			2009
	(Dollars in thousands)
Cash Flows from Operating Activities:
Net income	$	249,458		$	176,469
Adjustments to reconcile net income to net cash provided by operating activities:
Change in operating assets and liabilities:
Accrued investment income		(38,770	)		(29,934	)
Premiums receivable and other reinsurance balances		(118,265	)		(55,706	)
Deferred policy acquisition costs		37,995			50,801
Reinsurance ceded balances		(5,351	)		(3,771	)
Future policy benefits, other policy claims and benefits, and other reinsurance balances		1,176,366			437,355
Deferred income taxes		105,285			46,667
Other assets and other liabilities, net		(190,883	)		32,908
Amortization of net investment premiums, discounts and other		(64,779	)		(59,792	)
Investment related gains, net		(154,177	)		(5,926	)
Gain on repurchase of long-term debt		—			(38,875	)
Excess tax benefits from share-based payment arrangement		(782	)		(1,452	)
Other, net		39,116			(9,527	)

Net cash provided by operating activities		1,035,213			539,217

Cash Flows from Investing Activities:
Sales of fixed maturity securities available-for-sale		1,490,869			1,268,318
Maturities of fixed maturity securities available-for-sale		72,758			26,117
Purchases of fixed maturity securities available-for-sale		(2,372,035	)		(1,994,477	)
Cash invested in mortgage loans		(61,676	)		—
Cash invested in policy loans		(38,864	)		(9,508	)
Cash invested in funds withheld at interest		(74,093	)		(37,140	)
Principal payments on mortgage loans on real estate		12,500			14,367
Principal payments on policy loans		2,412			20,470
Change in short-term investments and other invested assets		91,175			4,771

Net cash used in investing activities		(876,954	)		(707,082	)

Cash Flows from Financing Activities:
Dividends to stockholders		(17,561	)		(13,085	)
Repurchase of long-term debt		—			(39,960	)
Net repayments under credit agreements		—			(22,539	)
Purchases of treasury stock		(718	)		(1,607	)
Excess tax benefits from share-based payment arrangement		782			1,452
Exercise of stock options, net		8,008			532
Change in cash collateral for derivative positions		72,894			(143,353	)
Net withdrawals on universal life and other investment type policies and contracts		(170,776	)		(82,242	)

Net cash used in financing activities		(107,371	)		(300,802	)
Effect of exchange rate changes on cash		(5,159	)		10,211

Change in cash and cash equivalents		45,729			(458,456	)
Cash and cash equivalents, beginning of period		512,027			875,403

Cash and cash equivalents, end of period	$	557,756		$	416,947


Supplementary information:
Cash paid for interest	$	48,353		$	37,871
Cash paid for income taxes, net of refunds	$	32,981		$	13,009

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

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Organization and Basis of Presentation

Reinsurance Group of America, Incorporated (“RGA”) is an insurance holding company that was formed on December 31, 1992. The accompanying unaudited condensed consolidated financial statements of RGA and its subsidiaries (collectively, the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The Company has determined that there were no subsequent events that would require disclosure or adjustments to the accompanying condensed consolidated financial statements through the date the financial statements were issued. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2009 Annual Report on Form 10-K (“2009 Annual Report”) filed with the Securities and Exchange Commission on March 2, 2010.

The accompanying unaudited condensed consolidated financial statements include the accounts of RGA and its subsidiaries. All intercompany accounts and transactions have been eliminated. The Company has reclassified the presentation of certain prior-period information to conform to the current presentation.

2. Earnings Per Share

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


	Three months ended				Six months ended
	June 30,				June 30,
	2010		2009		2010		2009
Earnings:
Net income (numerator for basic and diluted calculations)	$	127,019	$	153,179	$	249,458	$	176,469
Shares:
Weighted average outstanding shares (denominator for basic calculation)		73,141		72,770		73,094		72,740
Equivalent shares from outstanding stock options ⁽¹⁾		1,580		169		1,556		172

Denominator for diluted calculation		74,721		72,939		74,650		72,912

Earnings per share:
Basic	$	1.74	$	2.11	$	3.41	$	2.43
Diluted	$	1.70	$	2.10	$	3.34	$	2.42


(1)		Year-to-date amounts are weighted average of the individual quarterly amounts.

The calculation of common equivalent shares does not include the impact of options or warrants having a strike or conversion price that exceeds the average stock price for the earnings period, as the result would be antidilutive. The calculation of common equivalent shares also excludes the impact of outstanding performance contingent shares, as the conditions necessary for their issuance have not been satisfied as of the end of the reporting period. For the three months ended June 30, 2010, approximately 0.7 million stock options and approximately 0.7 million performance contingent shares were excluded from the calculation. For the three months ended June 30, 2009, approximately 1.5 million stock options and approximately 0.6 million performance contingent shares were excluded from the calculation.

3. Comprehensive Income

The following table presents the components of the Company’s other comprehensive income (loss) (dollars in thousands):


	Three months ended						Six months ended
	June 30,			June 30,			June 30,			June 30,
	2010			2009			2010			2009
Net income	$	127,019		$	153,179		$	249,458		$	176,469
Other comprehensive income (loss), net of income tax:
Unrealized investment gains, net of reclassification adjustment for gains included in net income		217,369			377,336			367,341			235,673
Reclassification adjustment for other-than-temporary impairments		91			(10,488	)		(1,433	)		(10,488	)
Currency translation adjustments		(63,564	)		108,681			(36,893	)		85,837
Unrealized pension and postretirement benefit adjustment		58			83			118			285

Comprehensive income	$	280,973		$	628,791		$	578,591		$	487,776

The balance of and changes in each component of accumulated other comprehensive income (loss) for the six months ended June 30, 2010 are as follows (dollars in thousands):


	Accumulated Other Comprehensive Income (Loss), Net of Income Tax
	Accumulated
	Currency			Unrealized		Pension and
	Translation			Appreciation		Postretirement
	Adjustments			of Securities		Benefits			Total
Balance, December 31, 2009	$	210,878		$	104,457	$	(16,126	)	$	299,209
Change in component during the period		(36,893	)		365,908		118			329,133

Balance, June 30, 2010	$	173,985		$	470,365	$	(16,008	)	$	628,342

4. Investments

The Company had total cash and invested assets of $21.6 billion and $19.7 billion at June 30, 2010 and December 31, 2009, respectively, as illustrated below (dollars in thousands):


	June 30, 2010		December 31, 2009
Fixed maturity securities, available-for-sale	$	13,077,607	$	11,763,358
Mortgage loans on real estate		838,827		791,668
Policy loans		1,173,016		1,136,564
Funds withheld at interest		5,257,929		4,895,356
Short-term investments		63,962		121,060
Other invested assets		637,827		516,086
Cash and cash equivalents		557,756		512,027

Total cash and invested assets	$	21,606,924	$	19,736,119

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

Investment Income, Net of Related Expenses

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


	Three months ended						Six months ended
	June 30,						June 30,
	2010			2009			2010			2009
Fixed maturity securities available-for-sale	$	175,638		$	150,916		$	353,130		$	290,097
Mortgage loans on real estate		11,954			11,379			24,160			22,956
Policy loans		18,037			16,938			37,879			33,349
Funds withheld at interest		84,392			102,524			175,573			152,986
Short-term investments		1,130			1,283			2,378			2,001
Other invested assets		6,256			5,967			14,767			15,165

Investment revenue		297,407			289,007			607,887			516,554
Investment expense		(5,736	)		(4,371	)		(11,958	)		(8,722	)

Investment income, net of related expenses	$	291,671		$	284,636		$	595,929		$	507,832

Investment Related Gains (Losses), Net

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


	Three months ended						Six months ended
	June 30,						June 30,
	2010			2009			2010			2009
Fixed maturity and equity securities available for sale:
Other-than-temporary impairment losses on fixed maturities	$	(3,489	)	$	(36,942	)	$	(10,919	)	$	(71,337	)
Portion of loss recognized in accumulated other comprehensive income (before taxes)		(139	)		16,135			2,205			16,135

Net other-than-temporary impairment losses on fixed maturities recognized in earnings		(3,628	)		(20,807	)		(8,714	)		(55,202	)
Impairment losses on equity securities		(10	)		—			(32	)		(5,430	)
Gain on investment activity		19,363			25,281			35,462			37,511
Loss on investment activity		(5,662	)		(18,828	)		(14,194	)		(38,477	)
Other impairment losses		(1,165	)		(1,268	)		(2,395	)		(2,965	)
Derivatives and other, net		14,094			93,810			144,050			70,489

Net gains	$	22,992		$	78,188		$	154,177		$	5,926

The net other-than-temporary impairment losses on fixed maturity securities recognized in earnings of $3.6 million and $8.7 million in the second quarter and first six months of 2010, respectively, were primarily due to a decline in value of structured securities with exposure to commercial mortgages. The much larger other-than-temporary impairments in 2009 were primarily due to the turmoil in the U.S. and global financial markets which resulted in bankruptcies, credit defaults, consolidations and government interventions. Those conditions had moderated considerably by the beginning of 2010. The volatility in derivatives and other is primarily due to changes in the fair value of embedded derivative liabilities associated with modified coinsurance and funds withheld treaties and guaranteed minimum benefit riders.

During the three months ended June 30, 2010 and 2009, the Company sold fixed maturity securities and equity securities with fair values of $159.2 million and $214.2 million at gross losses of $5.7 million and $18.8 million, respectively, or at 96.6% and 91.9% of amortized cost, respectively. During the six months ended June 30, 2010 and 2009, the Company sold fixed maturity securities and equity securities with fair values of $399.3 million and $322.6 million at gross losses of $14.2 million and $38.5 million, respectively, or at 96.6% and 89.3% of amortized cost, respectively. The Company generally does not engage in short-term buying and selling of securities.

Other-Than-Temporary Impairments

The Company has a process in place to identify fixed maturity and equity securities that could potentially have credit impairments that are other-than-temporary. This process involves monitoring market events that could impact issuers’ credit ratings, business climates, management changes, litigation, government actions and other similar factors. This process also involves monitoring late payments, pricing levels, rating agency actions, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.

The Company reviews all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. The Company considers relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in fair value; (3) the issuer’s financial position and access to capital and (4) for fixed maturity securities, the Company’s intent to sell a security or whether it is more likely than not it will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, its ability and intent to hold the security for a period of time that allows for the recovery in value. To the extent the Company determines that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized.

On April 1, 2009, (“Date of Adoption”), the Company adopted the amended general accounting principles for Investments as it relates to the recognition and presentation of other-than-temporary impairments. See Note 12 — “New Accounting Standards” for further discussion of the adoption. The amended recognition provisions apply only to fixed maturity securities classified as available-for-sale and held-to-maturity, while the presentation and disclosure requirements apply to both fixed maturity and equity securities.

Impairment losses on equity securities are recognized in net income. Recognition of impairment losses on fixed maturity securities is dependent on the facts and circumstances related to a specific security. If the Company intends to sell a security or it is more likely than not that it would be required to sell a security before the recovery of its amortized cost, it recognizes an other-than-temporary impairment in net income for the difference between amortized cost and fair value, less any current period credit loss. If the Company does not expect to recover the amortized cost basis, it does not plan to sell the security and if it is not more likely than not that it would be required to sell a security before the recovery of its amortized cost, less any current period credit loss, the recognition of the other-than-temporary impairment is bifurcated. The Company recognizes the credit loss portion in net income and the non-credit loss portion in accumulated other comprehensive income (“AOCI”).

For the three and six months ended June 30, 2010, the Company recognized $3.6 million and $8.7 million, respectively, of credit related losses, primarily in various mortgage-backed securities and to a lesser extent, U.S. corporate securities. For the three-month period between the Date of Adoption and June 30, 2009, the Company recognized $20.8 million of credit related losses in mortgage-backed securities and U.S. corporate securities combined. The Company estimates the amount of the credit loss component of a fixed maturity security impairment as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating-rate security. The techniques and assumptions for establishing the best estimate cash flows vary depending on the type of security. The asset-backed securities’ cash flow estimates are based on security-specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds and structural support, including subordination and guarantees. The corporate fixed maturity security cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using security specific facts and circumstances including timing, security interests and loss severity.

The following tables set forth the amount of credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the other-than-temporary impairment (“OTTI”) loss was recognized in AOCI, and the corresponding changes in such amounts (dollars in thousands):


	Three months ended
	June 30,
	2010			2009
Balance, beginning of period	$	(51,578	)	$	(17,132	)
Initial impairments — credit loss OTTI recognized on securities not previously impaired		(1,152	)		(3,242	)
Additional impairments — credit loss OTTI recognized on securities previously impaired		(3,303	)		(3,562	)
Sales during the period of securities previously credit loss OTTI impaired		2,685			—

Balance, end of period	$	(53,348	)	$	(23,936	)


				Three months
	Six months ended			ended ⁽¹⁾
	June 30, 2010			June 30, 2009
Balance, beginning of period	$	(47,905	)	$	(17,132	)
Initial impairments — credit loss OTTI recognized on securities not previously impaired		(2,724	)		(3,242	)
Additional impairments — credit loss OTTI recognized on securities previously impaired		(5,404	)		(3,562	)
Sales during the period of securities previously credit loss OTTI impaired		2,685			—

Balance, end of period	$	(53,348	)	$	(23,936	)


(1)		Shortened period due to adoption of amended general accounting principles on April 1, 2009.

Fixed Maturity and Equity Securities Available-for-Sale

As mentioned above, the amended general accounting principles for Investments change how an entity recognizes an other-than-temporary impairment for a fixed maturity security by separating the other-than-temporary impairment loss between the amount representing the credit loss and the amount relating to other factors, such as an increase in interest rates, if the Company does not have the intent to sell or it more likely than not will not be required to sell prior to recovery of the amortized cost less any current period credit loss. Credit losses are recognized in net income and losses relating to other non-credit factors are recognized in AOCI and included in unrealized losses in the tables below. The following tables provide information relating to investments in fixed maturity securities and equity securities by sector as of June 30, 2010 and December 31, 2009 (dollars in thousands):


												Other-than-
							Estimated					temporary
June 30, 2010:	Amortized		Unrealized		Unrealized		Fair		% of			impairments
	Cost		Gains		Losses		Value		Total			in AOCI
Available-for-sale:
U.S. corporate securities	$	4,269,575	$	309,130	$	118,585	$	4,460,120		34.1	%	$	—
Canadian and Canadian provincial governments		2,032,471		489,262		6,312		2,515,421		19.2			—
Residential mortgage-backed securities		1,554,585		57,289		38,514		1,573,360		12.0			(3,227	)
Foreign corporate securities		1,895,573		113,455		19,097		1,989,931		15.2			—
Asset-backed securities		496,652		14,093		61,122		449,623		3.5			(3,404	)
Commercial mortgage-backed securities		1,229,237		56,477		118,777		1,166,937		8.9			(12,114	)
U.S. government and agencies		443,024		25,546		—		468,570		3.6			—
State and political subdivisions		106,978		404		9,295		98,087		0.8			—
Other foreign government securities		353,543		6,231		4,216		355,558		2.7			—

Total fixed maturity securities	$	12,381,638	$	1,071,887	$	375,918	$	13,077,607		100.0	%	$	(18,745	)


Non-redeemable preferred stock	$	111,566	$	2,574	$	9,550	$	104,590		63.1	%
Other equity securities		54,800		7,638		1,185		61,253		36.9

Total equity securities	$	166,366	$	10,212	$	10,735	$	165,843		100.0	%


												Other-than-
							Estimated					temporary
December 31, 2009:	Amortized		Unrealized		Unrealized		Fair		% of			impairments
	Cost		Gains		Losses		Value		Total			in AOCI
Available-for-sale:
U.S. corporate securities	$	3,689,797	$	180,635	$	147,384	$	3,723,048		31.7	%	$	—
Canadian and Canadian provincial governments		1,984,475		394,498		25,746		2,353,227		20.0			—
Residential mortgage-backed securities		1,494,021		32,538		70,015		1,456,544		12.4			(7,018	)
Foreign corporate securities		1,627,806		77,340		33,398		1,671,748		14.2			—
Asset-backed securities		522,760		9,307		80,131		451,936		3.8			(2,194	)
Commercial mortgage-backed securities		1,177,621		20,670		169,427		1,028,864		8.7			(13,690	)
U.S. government and agencies		540,001		1,085		15,027		526,059		4.5			—
State and political subdivisions		107,233		273		17,744		89,762		0.8			—
Other foreign government securities		473,243		2,198		13,271		462,170		3.9			—

Total fixed maturity securities	$	11,616,957	$	718,544	$	572,143	$	11,763,358		100.0	%	$	(22,902	)


Non-redeemable preferred stock	$	123,648	$	1,878	$	12,328	$	113,198		66.0	%
Other equity securities		58,008		760		409		58,359		34.0

Total equity securities	$	181,656	$	2,638	$	12,737	$	171,557		100.0	%

As of June 30, 2010, the Company held securities with a fair value of $802.8 million that were issued by the Canadian province of Ontario and $707.5 million in one entity that were guaranteed by the Canadian province of Quebec, all of which exceeded 10% of consolidated stockholders’ equity. As of December 31, 2009, the Company held securities with a fair value of $448.3 million issued by the Federal National Mortgage Corporation, $482.6 million that were issued by the United States Treasury, $895.7 million that were issued by the Canadian province of Ontario, and $679.9 million in one entity that were

guaranteed by the Canadian province of Quebec, all of which exceeded 10% of consolidated stockholders’ equity.

The amortized cost and estimated fair value of fixed maturity securities available-for-sale at June 30, 2010 are shown by contractual maturity for all securities except certain U.S. government agency securities, which are distributed by maturity year based on the Company’s estimate of the rate of future prepayments of principal over the remaining lives of the securities. These estimates are derived from prepayment rates experienced at the interest rate levels projected for the applicable underlying collateral and can be expected to vary from actual experience. Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. At June 30, 2010, the contractual maturities of investments in fixed maturity securities were as follows (dollars in thousands):


	Amortized		Fair
	Cost		Value
Available-for-sale:
Due in one year or less	$	294,029	$	297,722
Due after one year through five years		1,462,074		1,516,916
Due after five year through ten years		3,234,623		3,455,137
Due after ten years		4,110,438		4,617,912
Asset and mortgage-backed securities		3,280,474		3,189,920

Total	$	12,381,638	$	13,077,607

The table below includes major industry types and weighted average credit ratings of the Company’s U.S. and foreign corporate fixed maturity holdings as of June 30, 2010 and December 31, 2009 (dollars in thousands):


			Estimated					Average Credit
June 30, 2010:	Amortized Cost		Fair Value		% of Total			Ratings
Finance	$	1,510,575	$	1,510,087		23.4	%		A-
Industrial		2,102,396		2,247,318		34.8			BBB+
Foreign ⁽¹⁾		1,895,573		1,989,931		30.9			A+
Utility		652,785		698,450		10.8			BBB+
Other		3,819		4,265		0.1			A+

Total	$	6,165,148	$	6,450,051		100.0	%		A-


			Estimated					Average Credit
December 31, 2009:	Amortized Cost		Fair Value		% of Total			Ratings
Finance	$	1,411,464	$	1,358,925		25.2	%		A-
Industrial		1,670,610		1,735,522		32.2			BBB+
Foreign ⁽¹⁾		1,627,352		1,671,090		30.9			A
Utility		603,958		624,710		11.6			BBB+
Other		4,219		4,549		0.1			A

Total	$	5,317,603	$	5,394,796		100.0	%		A-


(1)		Includes U.S. dollar-denominated debt obligations of foreign obligors and other foreign investments.

At June 30, 2010 and December 31, 2009, the Company had $386.7 million and $584.9 million, respectively, of gross unrealized losses related to its fixed maturity and equity securities. The distribution of the gross unrealized losses related to these securities is shown below.


	June 30,			December 31,
	2010			2009
Sector:
U.S. corporate securities		33	%		26	%
Canadian and Canada provincial governments		2			4
Residential mortgage-backed securities		10			12
Foreign corporate securities		5			7
Asset-backed securities		16			14
Commercial mortgage-backed securities		31			29
State and political subdivisions		2			3
U.S. government and agencies		—			3
Other foreign government securities		1			2

Total		100	%		100	%


Industry:
Finance		26	%		25	%
Asset-backed		16			13
Industrial		10			7
Mortgage-backed		41			41
Government		5			12
Utility		2			2

Total		100	%		100	%

The following table presents total gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for 900 and 1,316 fixed maturity securities and equity securities as of June 30, 2010 and December 31, 2009, respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):


	June 30, 2010							December 31, 2009
			Gross							Gross
	Number of		Unrealized					Number of		Unrealized
	Securities		Losses		% of Total			Securities		Losses		% of Total
Less than 20%		765	$	137,788		35.6	%		1,112	$	254,075		43.4	%
20% or more for less than six months		30		56,428		14.6			38		69,322		11.9
20% or more for six months or greater		105		192,437		49.8			166		261,483		44.7

Total		900	$	386,653		100.0	%		1,316	$	584,880		100.0	%

As of June 30, 2010 and December 31, 2009, respectively, 58.7% and 71.4% of these securities were investment grade. The Company has experienced a higher recovery of market value for investment-grade securities in recent periods. The amount of the unrealized loss on these securities was primarily attributable to a widening of credit default spreads since the time securities were purchased.

While all of these securities are monitored for potential impairment, the Company believes due to fluctuating market conditions and liquidity concerns, and the relatively recent high levels of price volatility, the extent and duration of a decline in value have become less indicative of when there has been credit deterioration with respect to an issuer. The Company’s determination of whether a decline in value is other-than-temporary includes analysis of the underlying credit and the extent and duration of a decline in value. The Company’s credit analysis of an investment includes determining whether the issuer is current on its contractual payments, evaluating whether it is probable that the Company will be able to collect all amounts due according to the contractual terms of the security and analyzing the overall ability of the Company to recover the amortized cost of the investment. The Company continues to consider valuation declines as a potential indicator of credit deterioration.

The following tables present the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for the 900 and 1,316 fixed maturity securities and equity securities that have estimated fair values below amortized cost as of June 30, 2010 and December 31, 2009, respectively (dollars in thousands). These investments are presented by class and grade of security, as well as the length of time the related market value has remained below amortized cost.


	Less than 12 months				12 months or greater				Total
			Gross				Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
June 30, 2010:	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Investment grade securities:
U.S. corporate securities	$	172,127	$	28,320	$	356,979	$	63,781	$	529,106	$	92,101
Canadian and Canadian provincial governments		110,191		2,321		129,393		3,991		239,584		6,312
Residential mortgage-backed securities		220,187		8,692		158,173		10,059		378,360		18,751
Foreign corporate securities		166,246		4,036		168,247		11,562		334,493		15,598
Asset-backed securities		12,037		1,360		137,569		35,303		149,606		36,663
Commercial mortgage-backed securities		60,812		7,503		160,272		31,513		221,084		39,016
State and political subdivisions		23,443		921		53,484		5,693		76,927		6,614
Other foreign government securities		28,355		176		89,826		4,040		118,181		4,216

Total investment grade securities		793,398		53,329		1,253,943		165,942		2,047,341		219,271


Non-investment grade securities:
U.S. corporate securities		91,934		9,278		133,958		17,206		225,892		26,484
Asset-backed securities		11,174		2,158		29,522		22,301		40,696		24,459
Foreign corporate securities		3,017		3,446		597		53		3,614		3,499
Residential mortgage-backed securities		397		551		67,120		19,212		67,517		19,763
Commercial mortgage-backed securities		—		—		60,956		79,761		60,956		79,761
State and political subdivisions		—		—		5,432		2,681		5,432		2,681

Total non-investment grade securities		106,522		15,433		297,585		141,214		404,107		156,647

Total fixed maturity securities	$	899,920	$	68,762	$	1,551,528	$	307,156	$	2,451,448	$	375,918


Non-redeemable preferred stock	$	29,219	$	1,755	$	35,596	$	7,795	$	64,815	$	9,550
Other equity securities		12,927		909		1,352		276		14,279		1,185

Total equity securities	$	42,146	$	2,664	$	36,948	$	8,071	$	79,094	$	10,735


Total number of securities in an unrealized loss position		371				529				900


	Less than 12 months				12 months or greater				Total
			Gross				Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
December 31, 2009:	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Investment grade securities:
U.S. corporate securities	$	373,049	$	27,625	$	679,908	$	89,711	$	1,052,957	$	117,336
Canadian and Canadian provincial governments		494,718		15,374		135,315		10,372		630,033		25,746
Residential mortgage-backed securities		402,642		23,671		197,320		20,185		599,962		43,856
Foreign corporate securities		362,406		5,262		182,300		24,693		544,706		29,955
Asset-backed securities		48,651		1,927		166,603		57,262		215,254		59,189
Commercial mortgage-backed securities		177,360		10,312		425,793		79,297		603,153		89,609
U.S. government and agencies		496,514		15,027		—		—		496,514		15,027
State and political subdivisions		34,612		3,397		40,945		11,437		75,557		14,834
Other foreign government securities		240,216		8,370		30,321		4,901		270,537		13,271

Total investment grade securities		2,630,168		110,965		1,858,505		297,858		4,488,673		408,823


Non-investment grade securities:
U.S. corporate securities		35,477		11,293		168,375		18,755		203,852		30,048
Asset-backed securities		6,738		3,256		24,408		17,686		31,146		20,942
Foreign corporate securities		1,755		17		3,771		3,426		5,526		3,443
Residential mortgage-backed securities		10,657		1,909		66,756		24,250		77,413		26,159
Commercial mortgage-backed securities		—		—		57,179		79,818		57,179		79,818
State and political subdivisions		—		—		5,170		2,910		5,170		2,910

Total non-investment grade securities		54,627		16,475		325,659		146,845		380,286		163,320

Total fixed maturity securities	$	2,684,795	$	127,440	$	2,184,164	$	444,703	$	4,868,959	$	572,143


Non-redeemable preferred stock	$	8,320	$	1,263	$	68,037	$	11,065	$	76,357	$	12,328
Other equity securities		5		15		7,950		394		7,955		409

Total equity securities	$	8,325	$	1,278	$	75,987	$	11,459	$	84,312	$	12,737


Total number of securities in an unrealized loss position		582				734				1,316

As of June 30, 2010, the Company does not intend to sell these fixed maturity securities and does not believe it is more likely than not that it will be required to sell these fixed maturity securities before the recovery of the fair value up to the current amortized cost of the investment, which may be maturity. However, as facts and circumstances change, the Company may sell fixed maturity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality, asset-liability management and liquidity guidelines. As of June 30, 2010, the Company has the ability and intent to hold the equity securities until the recovery of the fair value up to the current cost of the investment. However, from time to time, if facts and circumstances change, the Company may sell equity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality and liquidity guidelines.

5. Derivative Instruments

The following table presents the notional amounts and fair value of derivative instruments as of June 30, 2010 and December 31, 2009 (dollars in thousands):


	June 30, 2010						December 31, 2009
	Notional		Carrying Value/Fair Value				Notional		Carrying Value/Fair Value
	Amount		Assets		Liabilities		Amount		Assets		Liabilities
Derivatives not designated as hedging instruments:
Interest rate swaps ⁽¹⁾	$	1,973,016	$	59,861	$	—	$	1,388,570	$	17,962	$	47,061
Financial futures ⁽¹⁾		305,125		—		—		200,436		—		—
Foreign currency forwards ⁽¹⁾		40,500		2,939		—		40,500		2,200		—
Consumer Price index (“CPI”) swaps ⁽¹⁾		137,800		1,848		—		124,034		1,631		—
Credit default swaps ⁽¹⁾		317,500		—		3,166		367,500		2,363		249
Equity options ⁽¹⁾		6,710		1,654		—		—		—		—
Embedded derivatives in:
Modified coinsurance or funds withheld arrangements ⁽²⁾		—		—		279,348		—		—		434,494
Indexed annuity products ⁽³⁾		—		70,154		602,093		—		68,873		584,906
Variable annuity products ⁽³⁾		—		—		157,511		—		—		23,748

Total non-hedging derivatives		2,780,651		136,456		1,042,118		2,121,040		93,029		1,090,458


Derivatives designated as hedging instruments:
Interest rate swaps ⁽¹⁾		21,783		—		1,877		21,783		—		677
Foreign currency swaps ⁽¹⁾		397,580		2,499		1,538		226,715		—		9,008

Total hedging derivatives		419,363		2,499		3,415		248,498		—		9,685


Total derivatives	$	3,200,014	$	138,955	$	1,045,533	$	2,369,538	$	93,029	$	1,100,143


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

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

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

Accounting for Derivative Instruments and Hedging Activities

The Company does not enter into derivative instruments for speculative purposes. As of June 30, 2010 and December 31, 2009, the Company held interest rate swaps that were designated and qualified as fair value hedges of interest rate risk. As of June 30, 2010 and December 31, 2009, the Company held foreign currency swaps that were designated and qualified as fair value hedges of a portion of its net investment in its foreign operations. Gains of $50.0 million related to foreign currency swaps terminated in the second quarter of 2009 continue to be reflected in AOCI. As of June 30, 2010 and December 31, 2009, the Company also had derivative instruments that were not designated as hedging instruments. See Note 2 — “Summary of Significant Accounting Policies” of the Company’s 2009 annual report on Form 10-K for a detailed discussion of the accounting treatment for derivative instruments, including embedded derivatives. Derivative instruments are carried at fair value and generally require an insignificant amount of cash at inception of the contracts.

Fair Value Hedges

The Company designates and accounts for certain interest rate swaps that convert fixed rate investments to floating rate investments as fair value hedges when they meet the requirements of the general accounting principles for Derivatives and

Hedging . The gain or loss on the hedged item attributable to the hedged benchmark interest rate and the offsetting gain or loss on the related interest rate swaps for the three and six months ended June 30, 2010 and 2009 were (dollars in thousands):

Type of Fair

Derivative Gain

Hedge Gain (Loss)

Hedged Item Gain

Value Hedge

(Loss) Location

Recognized

Hedged Item

(Loss) Location

(Loss) Recognized

For the three months ended June 30, 2010:

Interest rate swaps