Financial Instruments

6 Months Ended

Jun. 30, 2011

Financial Instruments

Financial Instruments

3. Financial Instruments

Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements.

Fair Value Hierarchy

The Company has categorized its financial instruments into a three-level hierarchy based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded at fair value on the Condensed Balance Sheets are categorized as follows:

· Level 1 - Unadjusted quoted prices for identical assets or liabilities in an active market.

· Level 2 - Quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability.  Level 2 inputs include the following:

a) Quoted prices for similar assets or liabilities in active markets;

b) Quoted prices for identical or similar assets or liabilities in non-active markets;

c) Inputs other than quoted market prices that are observable; and

d) Inputs that are derived principally from or corroborated by observable market data through correlation or other means.

· Level 3 - Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.  These valuations, whether derived internally or obtained from a third party, use critical assumptions that are not widely available to estimate market participant expectations in valuing the asset or liability.

The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010.

	2011
	Level 1		Level 2		Level 3(1)		Total
Assets:
Fixed maturities, available-for-sale, including securities pledged:
U.S. Treasuries	$	1,291.2	$	62.2	$	—	$	1,353.4
U.S government agencies and authorities	—		19.3		—		19.3
U.S. corporate, state and municipalities	—		9,726.1		122.4		9,848.5
Foreign	—		5,797.2		27.3		5,824.5
Residential mortgage-backed securities	—		2,112.4		19.6		2,132.0
Commercial mortgage-backed securities	—		2,114.3		—		2,114.3
Other asset-backed securities	—		708.0		182.6		890.6
Equity securities, available-for-sale	121.1		—		16.2		137.3
Derivatives:
Interest rate contracts	0.9		377.6		—		378.5
Foreign exchange contracts	—		4.4		—		4.4
Equity contracts	6.7		—		105.6		112.3
Credit contracts	—		1.2		—		1.2
Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement	1,720.9		—		—		1,720.9
Assets held in separate accounts	44,017.2		—		—		44,017.2
Total	$	47,158.0	$	20,922.7	$	473.7	$	68,554.4
Liabilities:
Investment contract guarantees:
Fixed Indexed Annuities (“FIA”)	$	—	$	—	$	1,310.2	$	1,310.2
Guaranteed Minimum Withdrawal and Accumulation Benefits (“GMWB” and “GMAB”)	—		—		72.6		72.6
Embedded derivative on reinsurance	—		27.1		—		27.1
Derivatives:
Interest rate contracts	—		294.6		—		294.6
Foreign exchange contracts	—		59.9		—		59.9
Equity contracts	59.2		—		7.8		67.0
Credit contracts	—		0.6		10.4		11.0
Total	$	59.2	$	382.2	$	1,401.0	$	1,842.4

(1) Level 3 net assets and liabilities accounted for (1.4)% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled (4.1)%.

	2010
	Level 1		Level 2		Level 3(1)		Total
Assets:
Fixed maturities, available-for-sale, including securities pledged:
U.S. Treasuries	$	1,552.3	$	60.4	$	—	$	1,612.7
U.S government agencies and authorities	—		24.3		—		24.3
U.S. corporate, state and municipalities	—		9,491.1		40.1		9,531.2
Foreign	—		5,389.1		9.8		5,398.9
Residential mortgage-backed securities	—		1,979.5		191.5		2,171.0
Commercial mortgage-backed securities	—		2,198.9		—		2,198.9
Other asset-backed securities	—		458.2		649.4		1,107.6
Equity securities, available-for-sale	132.9		—		13.5		146.4
Derivatives:
Interest rate contracts	2.6		162.5		12.0		177.1
Foreign exchange contracts	—		5.1		—		5.1
Equity contracts	12.4		—		95.3		107.7
Credit contracts	—		3.2		—		3.2
Embedded derivative on reinsurance	—		20.9		—		20.9
Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement	1,155.8		—		—		1,155.8
Assets held in separate accounts	44,413.3		—		—		44,413.3
Total	$	47,269.3	$	19,793.2	$	1,011.6	$	68,074.1
Liabilities:
Investment contract guarantees:
Fixed Indexed Annuities (“FIA”)	$	—	$	—	$	1,165.5	$	1,165.5
Guaranteed Minimum Withdrawal and Accumulation Benefits (“GMWB” and “GMAB”)	—		—		77.0		77.0
Derivatives:
Interest rate contracts	—		419.2		0.3		419.5
Foreign exchange contracts	—		42.1		—		42.1
Equity contracts	0.8		—		16.0		16.8
Credit contracts	—		0.1		14.4		14.5
Total	$	0.8	$	461.4	$	1,273.2	$	1,735.4

(1) Level 3 net assets and liabilities accounted for (0.4)% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled (1.2)%.

Transfers in and out of Level 1 and 2

There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2011.  The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.

Valuation of Financial Assets and Liabilities

As described below, certain assets and liabilities are measured at estimated fair value on the Company’s Condensed Balance Sheets. In addition, further disclosure of estimated fair values is included in this Financial Instruments footnote. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The exit price and the transaction (or entry) price will be the same at initial recognition in many circumstances. However, in certain cases, the transaction price may not represent fair value. The fair value of a liability is based on the amount that would be paid to transfer a liability to a third-party with an equal credit standing. Fair value is required to be a market-based measurement which is determined based on a hypothetical transaction at the measurement date, from a market participant’s perspective. The Company considers three broad valuation techniques when a quoted price is unavailable: (i) the market approach, (ii) the income approach and (iii) the cost approach. The Company determines the most appropriate valuation technique to use, given the instrument being measured and the availability of sufficient inputs. The Company prioritizes the inputs to fair valuation techniques and allows for the use of unobservable inputs to the extent that observable inputs are not available.

The Company utilizes a number of valuation methodologies to determine the fair values of its financial assets and liabilities in conformity with the concepts of “exit price” and the fair value hierarchy as prescribed in ASC Topic 820. Valuations are obtained from third party commercial pricing services, brokers, and industry-standard, vendor-provided software that models the value based on market observable inputs. The valuations obtained from brokers and third-party commercial pricing services are non-binding. The valuations are reviewed and validated monthly through the internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades, or monitoring of trading volumes.

All valuation methods and assumptions are validated at least quarterly to ensure the accuracy and relevance of the fair values. There were no material changes to the valuation methods or assumptions used to determine fair values during 2011.

The following valuation methods and assumptions were used by the Company in estimating the reported values for the investments and derivatives described below:

Fixed maturities: The fair values for the actively traded marketable bonds are determined based upon the quoted market prices and are classified as Level 1 assets.  Assets in this category would primarily include certain U.S. Treasury securities.  The fair values for marketable bonds without an active market are obtained through several commercial pricing services, which provide the estimated fair values.  These services incorporate a variety of market observable information in their valuation techniques, including benchmark yields, broker-dealer quotes, credit quality, issuer spreads, bids, offers and other reference data and are classified as Level 2 assets.  This category includes U.S. and foreign corporate bonds, ABS, U.S. agency and government guaranteed securities, CMBS, and all RMBS, including certain CMO assets and subprime RMBS.  The market for subprime RMBS has been determined to be active, and as such, these securities are now included in Level 2 of the valuation hierarchy.

Generally, the Company does not obtain more than one vendor price from pricing services per instrument.  The Company uses a hierarchy process in which prices are obtained from a primary vendor, and, if that vendor is unable to provide the price, the next vendor in the hierarchy is contacted until a price is obtained or it is determined that a price cannot be obtained from a commercial pricing service.  When a price cannot be obtained from a commercial pricing service, independent broker quotes are solicited.  Securities priced using independent broker quotes are classified as Level 3.

Broker quotes and prices obtained from pricing services are reviewed and validated monthly through an internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades, or monitoring of trading volumes.  At June 30, 2011, $205.4 and $17.1 billion of a total of $22.2 billion in fixed maturities were valued using unadjusted broker quotes and unadjusted prices obtained from pricing services, respectively, and verified through the review process.  The remaining balance in fixed maturities consisted primarily of privately placed bonds valued using a matrix-based pricing model.

All prices and broker quotes obtained go through the review process described above including valuations for which only one broker quote is obtained.  After review, for those instruments where the price is determined to be appropriate, the unadjusted price provided is used for financial statement valuation.  If it is determined that the price is questionable, another price may be requested from a different vendor.  For certain CMO assets, the average of several broker quotes may be used when multiple quotes are available. The internal valuation committee then reviews all prices for the instrument again, along with information from the review, to determine which price best represents “exit price” for the instrument.

Fair values of privately placed bonds are primarily determined using a matrix-based pricing model and are classified as Level 2 assets.  The model considers the current level of risk-free interest rates, current corporate spreads, the credit quality of the issuer, and cash flow characteristics of the security. Also considered are factors such as the net worth of the borrower, the value of collateral, the capital structure of the borrower, the presence of guarantees, and the Company’s evaluation of the borrower’s ability to compete in its relevant market.  Using this data, the model generates estimated market values which the Company considers reflective of the fair value of each privately placed bond. In addition, certain privately placed bonds are valued using broker quotes and internal pricing models and are classified as Level 3 assets. The Company’s internal pricing models utilizes the Company’s best estimate of expected future cash flows discounted at a rate of return that a market participant would require. The significant inputs to the models include, but are not limited to, current market inputs, such as credit loss assumptions, assumed prepayment speeds and business performance.

Equity securities, available-for-sale: Fair values of publicly traded equity securities are based upon quoted market price and are classified as Level 1 assets. Other equity securities, typically private equities or equity securities not traded on an exchange, are valued by other methods such as analytics or brokers and are classified as Level 3 assets.

Cash and cash equivalents, Short-term investments, and Short-term investments under securities loan agreement: The fair values for cash equivalents and short-term investments are determined based on quoted market prices.  These assets are classified as Level 1. Other short-term investments are valued and classified in the fair value hierarchy consistent with the policies described herein, depending on investment type.

Derivatives: The carrying amounts for these financial instruments, which can be assets or liabilities, reflect the fair value of the assets and liabilities.  Derivatives are carried at fair value (on the Condensed Balance Sheets), which is determined using the Company’s derivative accounting system in conjunction with observable key financial data from third party sources, such as yield curves, exchange rates, Standard & Poor’s 500 Index prices, and London Interbank Offered Rates, or through values established by third party brokers. Counterparty credit risk is considered and incorporated in the Company’s valuation process through counterparty credit rating requirements and monitoring of overall exposure. It is the Company’s policy to transact only with investment grade counterparties with a credit rating of A- or better. The Company’s own credit risk is also considered and incorporated in the Company’s valuation process. Valuations for the Company’s futures contracts are based on unadjusted quoted prices from an active exchange and, therefore, are classified as Level 1. The Company also has certain credit default swaps and options that are priced using models that primarily use market observable inputs, but contain inputs that are not observable to market participants, which have been classified as Level 3. All other derivative instruments are valued based on market observable inputs and are classified as Level 2.

Embedded derivatives - Investment contract guarantees: The Company records guarantees, which can be either assets or liabilities, for annuity contracts containing guaranteed riders for Guaranteed Minimum Accumulated Benefits (“GMABs”) and Guaranteed Minimum Withdrawal Benefits (“GMWBs”) without life contingencies in accordance with US GAAP for derivative instruments and hedging activities.  The guarantee is treated as an embedded derivative and is required to be reported separately from the host variable annuity contract.  The fair value of the obligation is calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the anticipated life of the related contracts.  The cash flow estimates are produced by using stochastic techniques under a variety of market return scenarios and other best estimate assumptions. These derivatives are classified as Level 3 assets in the fair value hierarchy.

The Company also records for its fixed indexed annuity (“FIA”) contracts an embedded derivative liability for interest payments to contractholders above the minimum guaranteed interest rate, in accordance with US GAAP for derivative instruments and hedging activities.  The guarantee is treated as an embedded derivative and is required to be reported separately from the host contract.  The fair value of the obligation is calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the anticipated life of the related contracts.  The cash flow estimates are produced by best estimate assumptions. These derivatives are classified as Level 3 assets in the fair value hierarchy.

Nonperformance risk for investment contract guarantees contains adjustments to the fair values of these contract liabilities related to the current credit standing of ING and the Company based on credit default swaps with similar term to maturity and priority of payment.  The ING credit default swap spread is applied to the discount factors for FIAs and the risk-free rates for GMABs and GMWBs in the Company’s valuation models in order to incorporate credit risk into the fair values of these investment contract guarantees.  As of June 30, 2011, the credit spreads of ING and the Company decreased by approximately 70 basis points from December 31, 2010, which contributed to changes in the valuation of the reserves for all investment contract guarantees.

Embedded derivative on reinsurance: The carrying value of the embedded derivative is estimated based upon the change in the fair value of the assets supporting the funds withheld payable under the combined coinsurance and coinsurance funds withheld reinsurance agreement between the Company and Security Life of Denver International Limited (“SLDI”). As the fair value of the assets held in trust is based on a quoted market price (Level 1), the fair value of the embedded derivative is based on market observable inputs and is classified as Level 2.

Assets held in separate accounts: Assets held in separate accounts are reported at the quoted fair values of the underlying investments in the separate accounts.  The underlying investments include mutual funds, short-term investments and cash, the valuations of which are based upon a quoted market price and are included in Level 1.

Level 3 Financial Instruments

The fair values of certain assets and liabilities are determined using prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (i.e., Level 3 as defined by ASC Topic 820), including but not limited to liquidity spreads for investments within markets deemed not currently active. These valuations, whether derived internally or obtained from a third party, use critical assumptions that are not widely available to estimate market participant expectations in valuing the asset or liability. In addition, the Company has determined, for certain financial instruments, an active market is such a significant input to determine fair value that the presence of an inactive market may lead to classification in Level 3. In light of the methodologies employed to obtain the fair values of financial assets and liabilities classified as Level 3, additional information is presented below.

The following tables summarize the changes in fair value of the Company’s Level 3 assets and liabilities for the three and six months ended June 30, 2011.

	Three Months Ended June 30, 2011
																								Change in
	Fair Value			Total realized/unrealized												Transfers		Transfers			Fair Value			unrealized gains
	as of			gains (losses) included in:						Purchases						in to		out of			as of			(losses) included
	April 1			Net income			OCI			and issuances			Settlements			Level 3(2)		Level 3(2)			June 30			in earnings(3)
Fixed maturities, available for sale, including securities pledged:
U.S. corporate, state and municipalities	$	32.0		$	—		$	0.3		$	—		$	(19.2	)	$	109.3	$	—		$	122.4		$	—
Foreign	8.0			(0.1		)	0.3			2.6			(1.5		)	23.4		(5.4		)	27.3			—
Residential mortgage-backed securities	90.6			(0.1		)	0.2			—			(0.7		)	0.2		(70.6		)	19.6			(0.1		)
Other asset-backed securities	188.3			—			(0.2		)	—			(7.3		)	1.8		—			182.6			(0.2		)
Total Fixed maturities, available for sale, including securities pledged:	318.9			(0.2		)	0.6			2.6			(28.7		)	134.7		(76.0		)	351.9			(0.3		)
Equity securities, available for sale	16.0			(0.1		)	0.1			1.4			—			—		(1.2		)	16.2			—
Derivatives, net	101.4			(10.9		)	—			—			(3.1		)	—		—			87.4			(8.2		)
Investment contract guarantees:
FIA	(1,266.2		)	(13.3		)	—			(38.1		)	7.4			—		—			(1,310.2		)	—
GMWB/GMAB	(66.8		)	(6.6		)	—			—			0.8			—		—			(72.6		)	—
Total Investment contract guarantees	(1,333.0		)	(19.9)		(1)	—			(38.1		)	8.2			—		—			(1,382.8		)	—

(1)	This amount is included in Interest credited and other benefits to contract owners on the Condensed Statements of Operations. All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis.
(2)	The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
(3)	For financial instruments still held as of June 30. Amounts are included in Net investment income and Net realized capital losses on the Condensed Statements of Operations.

	Six Months Ended June 30, 2011
																								Change in
	Fair Value			Total realized/unrealized												Transfers		Transfers			Fair Value			unrealized gains
	as of			gains (losses) included in:						Purchases						in to		out of			as of			(losses) included
	January 1			Net income			OCI			and issuances			Settlements			Level 3(2)		Level 3(2)			June 30			in earnings(3)
Fixed maturities, available for sale, including securities pledged:
U.S. corporate, state and municipalities	$	40.1		$	—		$	(1.0	)	$	—		$	(22.5	)	$	105.8	$	—		$	122.4		$	—
Foreign	9.8			0.3			0.9			2.6			(5.1		)	23.4		(4.6		)	27.3			—
Residential mortgage-backed securities	191.5			(1.2		)	0.7			2.9			(2.1		)	—		(172.2		)	19.6			(1.3		)
Other asset-backed securities	649.4			(1.5		)	5.0			—			(21.2		)	1.3		(450.4		)	182.6			(1.9		)
Total Fixed maturities, available for sale, including securities pledged:	890.8			(2.4		)	5.6			5.5			(50.9		)	130.5		(627.2		)	351.9			(3.2		)
Equity securities, available for sale	13.5			(0.1		)	0.1			4.0			—			—		(1.3		)	16.2			—
Derivatives, net	76.5			16.4			—			—			(5.5		)	—		—			87.4			16.9
Investment contract guarantees:
FIA	(1,165.5		)	(118.8		)	—			(69.9		)	44.0			—		—			(1,310.2		)	—
GMWB/GMAB	(77.0		)	2.8			—			—			1.6			—		—			(72.6		)	—
Total Investment contract guarantees	(1,242.5		)	(116.0		)(1)	—			(69.9		)	45.6			—		—			(1,382.8		)	—

(1)	This amount is included in Interest credited and other benefits to contract owners on the Condensed Statements of Operations. All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis.
(2)	The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
(3)	For financial instruments still held as of June 30. Amounts are included in Net investment income and Net realized capital losses on the Condensed Statements of Operations.

The following tables summarize the changes in fair value of the Company’s Level 3 assets and liabilities for the three and six months ended June 30, 2010.

	Three Months Ended June 30, 2010
																					Change in
	Fair Value			Total realized/unrealized						Purchases,			Transfers		Transfers			Fair Value			unrealized gains
	as of			gains (losses) included in:						issuances, and			in to		out of			as of			(losses) included
	April 1			Net income			OCI			settlements			Level 3(2)		Level 3(2)			June 30			in earnings(3)
Fixed maturities, available for sale, including securities pledged:
U.S. corporate, state and municipalities	$	41.1		$	(0.6	)	$	0.7		$	24.5		$	34.2	$	(32.9	)	$	67.0		$	(0.1	)
Foreign	71.3			0.3			1.7			11.1			2.2		(31.3		)	55.3			0.2
Residential mortgage-backed securities	44.5			(2.2		)	6.7			(2.3		)	113.8		(12.2		)	148.3			(2.2		)
Commercial mortgage-backed securities	7.9			—			—			—			—		(7.9		)	—			—
Other asset-backed securities	649.8			(11.6		)	31.0			(22.3		)	32.5		—			679.4			(12.8		)
Total Fixed maturities, available for sale, including securities pledged:	814.6			(14.1		)	40.1			11.0			182.7		(84.3		)	950.0			(14.9		)
																		—
Equity securities, available for sale	11.8			(0.1		)	(0.1		)	1.4			—		—			13.0			—
																		—
Derivatives, net	75.6			(58.3		)	—			49.4			—		—			66.7			1.3
																		—
Investment contract guarantees:																		—
FIA	(978.8		)	23.5			—			(22.0		)	—		—			(977.3		)	—
GMWB/GMAB	(55.1		)	(40.4		)	—			(1.6		)	—		—			(97.1		)	—
Total Investment contract guarantees	(1,033.9		)	(16.9		)(1)	—			(23.6		)	—		—			(1,074.4		)	—

(1)	This amount is included in Interest credited and other benefits to contractowners on the Condensed Statements of Operations. All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis.
(2)	The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
(3)	For financial instruments still held as of June 30. Amounts are included in Net investment income and Net realized capital losses on the Condensed Statements of Operations.

	Six Months Ended June 30, 2010
																					Change in
	Fair Value			Total realized/unrealized						Purchases,			Transfers		Transfers			Fair Value			unrealized gains
	as of			gains (losses) included in:						issuances, and			in to		out of			as of			(losses) included
	January 1			Net income			OCI			settlements			Level 3(2)		Level 3(2)			June 30			in earnings(3)
Fixed maturities, available for sale, including securities pledged:
U.S. corporate, state and municipalities	$	—		$	(0.6	)	$	0.7		$	24.3		$	42.6	$	—		$	67.0		$	0.1
Foreign	—			(9.5		)	7.0			9.1			48.7		—			55.3			(9.6		)
Residential mortgage-backed securities	1,088.2			(2.6		)	7.4			(6.0		)	13.1		(951.8		)	148.3			(2.6		)
Commercial mortgage-backed securities	—			—			—			—			—		—			—			—
Other asset-backed securities	423.9			(16.0		)	74.5			(39.4		)	236.4		—			679.4			(17.2		)
Total Fixed maturities, available for sale, including securities pledged:	1,512.1			(28.7		)	89.6			(12.0		)	340.8		(951.8		)	950.0			(29.3		)
Equity securities, available for sale	4.5			(0.1		)	(0.7		)	9.3			—		—			13.0			—
Derivatives, net	111.9			(58.7		)	—			13.5			—		—			66.7			12.7
Investment contract guarantees:
FIA	(927.2		)	(3.6		)	—			(46.5		)	—		—			(977.3		)	—
GMWB/GMAB	(73.9		)	(20.1		)	—			(3.1		)	—		—			(97.1		)	—
Total Investment contract guarantees	(1,001.1		)	(23.7		)(1)	—			(49.6		)	—		—			(1,074.4		)	—

(1)	This amount is included in Interest credited and other benefits to contractowners on the Condensed Statements of Operations. All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis.
(2)	The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
(3)	For financial instruments still held as of June 30. Amounts are included in Net investment income and Net realized capital losses on the Condensed Statements of Operations.

The transfers out of Level 3 during the six months ended June 30, 2011 in fixed maturities, including securities pledged, are primarily due to the Company’s determination that the market for subprime RMBS securities has become active.  While the valuation methodology has not changed, the Company has concluded that the frequency of transactions in the market for subprime RMBS securities represent regularly occurring market transactions and therefore are now classified as Level 2. The transfers out of Level 3 during the three months ended June 30, 2011 in fixed maturities, including securities pledged, are primarily due to an increased utilization of vendor valuations for certain CMO assets.

The remaining transfers in and out of Level 3 for fixed maturities during the three and six months ended June 30, 2011, are due to the variation in inputs relied upon for valuation each quarter. Securities that are primarily valued using independent broker quotes when prices are not available from one of the commercial pricing services are reflected as transfers into Level 3, as these securities are generally less liquid with very limited trading activity or where less transparency exists corroborating the inputs to the valuation methodologies. When securities are valued using more widely available information, the securities are transferred out of Level 3 and into Level 1 or 2, as appropriate.

The carrying values and estimated fair values of certain of the Company’s financial instruments were as follows at June 30, 2011 and December 31, 2010.

	2011				2010
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Assets:
Fixed maturities, available-for-sale, including securities pledged	$	21,904.9	$	21,904.9	$	21,806.9	$	21,806.9
Fixed maturities at fair value using the fair value option	277.7		277.7		237.7		237.7
Equity securities, available-for-sale	137.3		137.3		146.4		146.4
Mortgage loans on real estate	3,171.5		3,261.6		2,967.9		3,036.0
Loan - Dutch State obligation	739.1		733.2		843.9		795.7
Limited partnerships/corporations	323.4		325.3		295.8		297.9
Policy loans	117.0		117.0		122.1		122.1
Cash, cash equivalents, Short-term investments, and Short-term investments under securities loan agreement	1,720.9		1,720.9		1,155.8		1,155.8
Derivatives	496.4		496.4		293.1		293.1
Other investments	2.0		2.0		1.8		1.8
Deposits from affiliates	1,507.1		1,529.3		1,600.4		1,577.3
Embedded derivative on reinsurance	—		—		20.9		20.9
Assets held in separate accounts	44,017.2		44,017.2		44,413.3		44,413.3
Liabilities:
Investment contract liabilities:
Deferred annuities	20,776.4		20,745.9		20,819.6		20,272.4
Guaranteed investment contracts and funding agreements	2,189.4		1,911.0		2,218.3		1,909.5
Supplementary contracts and immediate annuities	795.7		822.4		803.3		716.8
Embedded derivative on reinsurance	27.1		27.1		—		—
Derivatives	432.5		432.5		492.9		492.9
Investment contract guarantees:
Fixed indexed annuities	1,310.2		1,310.2		1,165.5		1,165.5
Guaranteed minimum withdrawal and accumulation benefits	72.6		72.6		77.0		77.0
Notes to affiliates	435.0		438.3		435.0		447.2

The following disclosures are made in accordance with the requirements of ASC Topic 825 which requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates, in many cases, could not be realized in immediate settlement of the instrument.

ASC Topic 825 excludes certain financial instruments, including insurance contracts, and all nonfinancial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following valuation methods and assumptions were used by the Company in estimating the fair value of the following financial instruments, which are not carried at fair value on the Condensed Balance Sheets, and therefore not categorized in the fair value hierarchy:

Limited partnerships/corporations: The fair value for these investments, primarily private equities and hedge funds, is estimated based on the Net Asset Value as provided by the investee.

Mortgage loans on real estate: The fair values for mortgage loans on real estate are estimated using discounted cash flow analyses and rates currently being offered in the marketplace for similar loans to borrowers with similar credit ratings.  Loans with similar characteristics are aggregated for purposes of the calculations.

Loan - Dutch State obligation: The fair value of the Dutch State loan obligation is estimated utilizing discounted cash flows from the Dutch Strip Yield Curve.

Policy loans: The fair value of policy loans is equal to the carrying, or cash surrender, value of the loans. Policy loans are fully collateralized by the account value of the associated insurance contracts.

Other investments: The fair value of other investments is estimated based on the Company’s percentage of ownership of third party appraised value for joint ventures and third party appraised value for real estate.

Deposits from affiliates: Fair value is estimated based on the fair value of the liabilities for the account values of the underlying contracts, plus the fair value of the unamortized ceding allowance based on the present value of the projected release of the ceding allowance, discounted at risk-free rates, plus a credit spread.

Investment contract liabilities (included in Future policy benefits and claims reserves):

With a fixed maturity: Fair value is estimated by discounting cash flows, including associated expenses for maintaining the contracts, at rates, which are market risk-free rates augmented by credit spreads on current Company credit default swaps. The augmentation is present to account for non-performance risk. A margin for non-financial risks associated with the contracts is also included.

Without a fixed maturity: Fair value is estimated as the mean present value of stochastically modeled cash flows associated with the contract liabilities relevant to both the contractholder and to the Company. Here, the stochastic valuation scenario set is consistent with current market parameters, and discount is taken using stochastically evolving short risk-free rates in the scenarios augmented by credit spreads on current Company debt. The augmentation in the discount is present to account for non-performance risk. Margins for non-financial risks associated with the contract liabilities are also included.

Notes to affiliates: Estimated fair value of the Company’s notes to affiliates is based upon discounted future cash flows using a discount rate approximating the current market rate.

Fair value estimates are made at a specific point in time, based on available market information and judgments about various financial instruments, such as estimates of timing and amounts of future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized capital gains (losses). In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instruments. In evaluating the Company’s management of interest rate, price, and liquidity risks, the fair values of all assets and liabilities should be taken into consideration, not only those presented above.

Mortgage Loans on Real Estate

The Company’s mortgage loans on real estate are summarized as follows at June 30, 2011 and December 31, 2010.

	2011			2010
Total commercial mortgage loans	$	3,174.2		$	2,970.9
Collective valuation allowance	(2.7		)	(3.0		)
Total net commercial mortgage loans	$	3,171.5		$	2,967.9

As of June 30, 2011, all commercial mortgage loans are held-for-investment. The Company diversifies its commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk.  The Company manages risk when originating commercial mortgage loans by generally lending only up to 75% of the estimated fair value of the underlying real estate.  Subsequently, the Company continuously evaluates all mortgage loans based on relevant current information including an appraisal of loan-specific credit quality, property characteristics and market trends, and assigns a quality rating using the Company’s internally developed quality rating system. This quality rating is based on the Company’s assessment of the level of concern over future payment according to contract terms. Loan performance is continuously monitored on a loan-specific basis through the review of borrower submitted appraisals, operating statements, rent revenues and annual inspection reports, among other items. This review ensures properties are performing at a consistent and acceptable level to secure the debt.

The Company has established a collective valuation allowance for probable incurred, but not specifically identified, losses related to factors inherent in the lending process. The collective valuation allowance is determined based on historical loss rates as adjusted by current economic information for all loans that are not determined to have an individually-assessed loss.  The changes in the collective valuation allowance were as follows at June 30, 2011 and December 31, 2010.

	2011			2010
Collective valuation allowance for losses, beginning of period	$	3.0		$	4.1
Addition to / (release of) allowance for losses	(0.3		)	(1.1		)
Collective valuation allowance for losses, end of period	$	2.7		$	3.0

The commercial mortgage loan portfolio is the recorded investment, prior to collective valuation allowances, by the indicated loan-to-value ratio and debt service coverage ratio, as reflected in the following tables at June 30, 2011 and December 31, 2010.

	2011		2010
Loan-to-Value Ratio:
0% - 50%	$	1,064.2	$	1,140.4
50% - 60%	835.4		707.7
60% - 70%	1,057.3		903.4
70% - 80%	196.6		197.6
80% - 90%	20.7		21.8
Total Commercial Mortgage Loans	$	3,174.2	$	2,970.9

	2011		2010
Debt Service Coverage Ratio:
Greater than 1.5x	$	2,306.1	$	2,038.3
1.25x - 1.5x	392.2		387.9
1.0x - 1.25x	259.4		255.2
Less than 1.0x	80.9		144.0
Mortgages secured by loans on land or construction loans	135.6		145.5
Total Commercial Mortgage Loans	$	3,174.2	$	2,970.9

The Company believes it has a high quality mortgage loan portfolio with substantially all of commercial mortgages classified as performing. The Company defines delinquent commercial mortgage loans consistent with industry practice as 60 days past due. As of June 30, 2011, there were two commercial loans classified as delinquent. The Company’s policy is to recognize interest income until a loan becomes 90 days delinquent or foreclosure proceedings are commenced, at which point interest accrual is discontinued.

Interest accrual is not resumed until past due payments are brought current. At June 30, 2011, there were no commercial mortgage loans on nonaccrual status.

All commercial mortgages are rated for the purpose of quantifying the level of risk.  Those loans with higher risk are placed on a watch list and are closely monitored for collateral deficiency or other credit events that may lead to a potential loss of principal or interest.  If the value of any mortgage loan is determined to be impaired (i.e., when it is probable that the Company will be unable to collect on all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to either the present value of expected cash flows from the loan, discounted at the loan’s effective interest rate, or fair value of the collateral.

The carrying values and unpaid principal balances (prior to any charge-off) of impaired commercial mortgage loans were as follows as of June 30, 2011 and December 31, 2010.

	2011		2010
Impaired loans without valuation allowances	$	7.1	$	16.5
Unpaid principal balance of impaired loans	$	8.9	$	18.7

The following is information regarding impaired loans, restructured loans, loans 90 days or more past due and loans in the process of foreclosure at June 30, 2011 and December 31, 2010.

	2011		2010
Impaired loans, average investment during the period	$	11.8	$	32.4
Interest income recognized on impaired loans, on an accrual basis	—		1.3
Interest income recognized on impaired loans, on a cash basis	0.1		1.4

As of June 30, 2011 and December 31, 2010, there were no Restructured loans, Interest income recognized on restructured loans, Loans 90 days or more past due, interest no longer accruing, at amortized cost, Loans in foreclosure, at amortized cost, and Unpaid principal balance of loans 90 days or more past due, interest no longer accruing.

Derivative Financial Instruments

The Company’s use of derivatives is limited mainly to economic hedging purposes to reduce the Company’s exposure to cash flow variability of assets and liabilities, interest rate risk, credit risk, and market risk.  It is the Company’s policy not to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments recognized at fair value executed with the same counterparty under a master netting arrangement.

The Company enters into interest rate, equity market, credit default, and currency contracts, including swaps, caps, floors, options and futures, to reduce and manage risks associated with changes in value, yield, price, cash flow, or exchange rates of assets or liabilities held or intended to be held, or to assume or reduce credit exposure associated with a referenced asset, index, or pool.  The Company also utilizes options and futures on equity indices to reduce and manage risks associated with its annuity products.  Open derivative contracts are reported as either Derivatives or Other liabilities, as appropriate, on the Condensed Balance Sheets.  Changes in the fair value of such derivatives are recorded in Net realized capital gains (losses) in the Condensed Statements of Operations.

If the Company’s current debt and claims paying ratings were downgraded in the future, the terms in the Company’s derivative agreements may be triggered, which could negatively impact overall liquidity.  For the majority of the Company’s counterparties, there is a termination event should the Company’s financial strength ratings drop below BBB+/Baa1.

The Company also has investments in certain fixed maturity instruments, and has issued certain retail annuity products, that contain embedded derivatives whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short-term or long-term), exchange rates, prepayment rates, equity markets, or credit ratings/spreads.

Embedded derivatives within retail annuity products are included in Future policy benefits and claims reserves on the Condensed Balance Sheets, and changes in the fair value are recorded in Interest credited and other benefits to contract owners in the Condensed Statements of Operations.

In addition, the Company has entered into a coinsurance with funds withheld arrangement which contains an embedded derivative whose fair value is based on the change in the fair value of the underlying assets held in trust.  The embedded derivative within the coinsurance funds withheld arrangement is included in Future policy benefits and claims reserves on the Condensed Balance Sheets, and changes in the fair value are recorded in Interest credited and other benefits to contract owners in the Condensed Statement of Operations.

The Company enters into the following derivatives:

Interest rate caps: Interest rate caps are used to manage the interest rate risk in the Company’s fixed maturity portfolio.  Interest rate caps are purchased contracts that are used by the Company to hedge annuity products against rising interest rates.

Interest rate swaps: Interest rate swaps are used to manage the interest rate risk in the Company’s fixed maturity portfolio, as well as the Company’s liabilities.  Interest rate swaps represent contracts that require the exchange of cash flows at regular interim periods, typically monthly or quarterly.

Foreign exchange swaps: Foreign exchange swaps are used to reduce the risk of a change in the value, yield, or cash flow with respect to invested assets.  Foreign exchange swaps represent contracts that require the exchange of foreign currency cash flows for U.S. dollar cash flows at regular interim periods, typically quarterly or semi-annually.

Credit default swaps: Credit default swaps are used to reduce the credit loss exposure with respect to certain assets that the Company owns, or to assume credit exposure on certain assets that the Company does not own.  Payments are made to or received from the counterparty at specified intervals and amounts for the purchase or sale of credit protection.  In the event of a default on the underlying credit exposure, the Company will either receive an additional payment (purchased credit protection) or will be required to make an additional payment (sold credit protection) equal to par minus recovery value of the swap contract.

Total return swaps: Total return swaps are used to hedge against a decrease in variable annuity account values, which are invested in certain funds. The difference between floating-rate interest amounts calculated by reference to an agreed upon notional principal amount is exchanged with other parties at specified intervals.

Forwards: Certain forwards are acquired to hedge certain CMO assets that are held by the Company against movements in interest rates, particularly mortgage rates.  On the settlement date, the Company will either receive a payment (interest rate drops on purchased forwards or interest rate rises on sold forwards) or will be required to make a payment (interest rate rises on purchased forwards or interest rate drops on sold forwards). The Company also uses currency forward contracts to hedge policyholder liabilities in variable annuity contracts which are linked to foreign indexes. The currency fluctuations may result in a decrease in variable annuity account values, which would increase the possibility of the Company incurring an expense for guaranteed benefits in excess of account values.

Futures: Futures contracts are used to hedge against a decrease in certain equity indices. Such decreases may result in a decrease in variable annuity account values, which would increase the possibility of the Company incurring an expense for guaranteed benefits in excess of account values.  Futures contracts are also used to hedge against an increase in certain equity indices.  Such increases may result in increased payments to contract holders of fixed indexed annuity contracts, and the futures income would serve to offset this increased expense.

Options: Call options are used to hedge against an increase in the various equity indices. Such increase may result in increased payments to contract holders of FIA contracts, and the options offset this increased expense.

Embedded derivatives: The Company also has issued certain retail annuity products, that contain embedded derivatives whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short-term or long-term), exchange rates, prepayment rates, equity rates, or credit ratings/spreads. In addition, the Company has entered into a coinsurance with funds withheld arrangement which contains an embedded derivative whose fair value is based on the change in the fair value of the underlying assets held in trust.

The notional amounts and fair values of derivatives were as follows as of June 30, 2011 and December 31, 2010.

	2011					2010
	Notional	Asset		Liability		Notional	Asset		Liability
	Amount	Fair Value		Fair Value		Amount	Fair Value		Fair Value
Derivatives: Qualifying for hedge accounting(1)
Interest rate contracts	7.9	$	0.1	$	—	79.5	$	0.5	$	7.2
Foreign exchange contracts	—	—		—		25.4	—		0.2
Derivatives: Non-Qualifying for hedge accounting(1)
Interest rate contracts	15,388.6	378.4		294.6		17,450.9	176.6		412.3
Foreign exchange contracts	1,035.4	4.4		59.9		908.4	5.1		41.9
Equity contracts	9,950.5	112.3		67.0		9,269.8	107.7		16.8
Credit contracts	341.9	1.2		11.0		333.8	3.2		14.5
Embedded derivatives:
Within retail annuity products(2)	N/A	—		1,382.8		N/A	—		1,242.5
Within reinsurance agreement (2)	N/A	—		27.1		N/A	20.9		—
Total		$	496.4	$	1,842.4		$	314.0	$	1,735.4

N/A - Not applicable.
(1)	The fair values of these derivatives are reported in Derivatives or Other liabilities on the Condensed Balance Sheets.
(2)	The fair values of embedded derivatives within retail annuity products and reinsurance agreements are reported in Future policy benefits and claim reserves on the Condensed Balance Sheets.

Net realized gains (losses) on derivatives were as follows for the three and six months ended June 30, 2011 and 2010.

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Derivatives: Qualifying for hedge accounting(1):
Interest rate contracts	$	—		$	(1.5	)	$	—		$	(2.7	)
Derivatives: Non-Qualifying for hedge accounting(1):
Interest rate contracts	174.4			87.6			119.3			73.9
Foreign exchange contracts	(32.0		)	62.8			(64.0		)	104.3
Equity contracts	(45.9		)	495.1			(310.0		)	184.8
Credit contracts	1.5			(3.5		)	4.8			(3.3		)
Embedded derivatives:
Within retail annuity products(2)	(49.8		)	23.5			(140.3		)	(3.6		)
Within reinsurance agreement(2)	(26.3		)	(40.4		)	(48.0		)	(20.1		)
Total	$	21.9		$	623.6		$	(438.2	)	$	333.3

(1)	Changes in value are included in Net realized capital gains (losses) on the Condensed Statements of Operations.
(2)	Changes in value are included in Interest credited and other benefits to contract owners on the Condensed Statements of Operations.

Credit Default Swaps

The Company has entered into various credit default swaps. When credit default swaps are sold, the Company assumes credit exposure to certain assets that it does not own.  Credit default swaps may also be purchased to reduce credit exposure in the Company’s portfolio. Credit default swaps involve a transfer of credit risk from one party to another in exchange for periodic payments.  These instruments are typically written for a maturity period of five years and do not contain recourse provisions, which would enable the seller to recover from third parties.  The Company has International Swaps and Derivatives Association, Inc. (“ISDA”) agreements with each counterparty with which it conducts business and tracks the collateral positions for each counterparty.  To the extent cash collateral is received, it is included in Payables under securities loan agreement, including collateral held, on the Condensed Balance Sheets and is reinvested in short-term investments.  Collateral held is used in accordance with the Credit Support Annex (“CSA”) to satisfy any obligations.  Investment grade bonds owned by the Company are the source of noncash collateral posted, which is reported in Securities pledged on the Condensed Balance Sheets.  In the event of a default on the underlying credit exposure, the Company will either receive an additional payment (purchased credit protection) or will be required to make an additional payment (sold credit protection) equal to par minus recovery value of the swap contract. At June 30, 2011, the fair value of credit default swaps of $1.2 and $11.0 was included in Derivatives and Other liabilities, respectively, on the Condensed Balance Sheets.  At December 31, 2010, the fair value of credit default swaps of $3.2 and $14.5 was included in Derivatives and Other liabilities, respectively, on the Condensed Balance Sheets.  As of June 30, 2011 and December 31, 2010, the maximum potential future exposure to the Company on the sale of credit protection under credit default swaps was $315.6 and $308.1, respectively.