The following table presents the notional amounts and fair value of derivative instruments as of June 30, 2011 and December 31, 2010 (dollars in thousands):

				June 30, 2011						December 31, 2010
					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⁾			$	2,623,012	$	37,001	$	29,041	$	2,302,853	$	20,042	$	17,132
	Financial futures⁽¹⁾				174,096		--		--		210,295		--		--
	Foreign currency forwards⁽¹⁾				39,700		5,706		--		39,700		5,924		--
	Consumer Price index (“CPI”) swaps⁽¹⁾				126,091		1,667		--		120,340		1,491		--
	Credit default swaps⁽¹⁾				612,500		2,210		4,201		392,500		2,429		131
	Equity options⁽¹⁾				253,803		44,326		--		33,041		5,043		--
	Embedded derivatives in:
		Modified coinsurance or funds
			withheld arrangements⁽²⁾		--		--		173,160		--		--		274,220
		Indexed annuity products⁽³⁾			--		86,029		758,431		--		75,431		668,951
		Variable annuity products⁽³⁾			--		--		45,741		--		--		52,534
	Total non-hedging derivatives				3,829,202		176,939		1,010,574		3,098,729		110,360		1,012,968

Derivatives designated as
	hedging instruments:
	Interest rate swaps⁽¹⁾				21,783		--		1,984		21,783		--		1,718
	Foreign currency swaps⁽¹⁾				615,323		--		66,425		615,323		--		45,749
	Total hedging derivatives				637,106		--		68,409		637,106		--		47,467
Total derivatives				$	4,466,308	$	176,939	$	1,078,983	$	3,735,835	$	110,360	$	1,060,435

(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.

The Company does not enter into derivative instruments for speculative purposes. As discussed below under “Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging”, the Company uses various derivative instruments for risk management purposes that either do not qualify or have not been qualified for hedge accounting treatment, including derivatives used to economically hedge changes in the fair value of liabilities associated with the reinsurance of variable annuities with guaranteed living benefits. As of June 30, 2011 and December 31, 2010, the Company held interest rate swaps that were designated and qualified as fair value hedges of interest rate risk. As of June 30, 2011 and December 31, 2010, 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. As of June 30, 2011 and December 31, 2010, 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 2010 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.

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, both recognized in investment related gains/losses, for the three and six months ended June 30, 2011 and 2010 were (dollars in thousands):

Type of Fair Value Hedge	Hedged Item		Gains (Losses) Recognized for Derivatives		Gains (Losses) Recognized for Hedged Items		Ineffectiveness Recognized in Investment Related Gains (Losses)

For the three months ended June 30, 2011:
Interest rate swaps	Fixed rate fixed maturities	$	(489)	$	694	$	205

For the three months ended June 30, 2010:
Interest rate swaps	Fixed rate fixed maturities	$	(877)	$	1,046	$	169

For the six months ended June 30, 2011:
Interest rate swaps	Fixed rate fixed maturities	$	(266)	$	596	$	330

For the six months ended June 30, 2010:
Interest rate swaps	Fixed rate fixed maturities	$	(1,200)	$	1,500	$	300

All components of each derivative's gain or loss were included in the assessment of hedge effectiveness. There were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.

The Company uses foreign currency swaps to hedge a portion of its net investment in certain foreign operations against adverse movements in exchange rates. Ineffectiveness on the foreign currency swap is based upon the change in forward rates. The following table illustrates the Company's net investments in foreign operations (“NIFO”) hedges for the three and six months ended June 30, 2011 and 2010 (dollars in thousands):

		Derivative Gains (Losses) Deferred in AOCI
		For the three months ended				For the six months ended
Type of NIFO Hedge ^{(1) (2)}		2011		2010		2011			2010

Foreign currency swaps		$	(9,916)	$	16,846	$	(25,020)	$	8,766

(1)	There were no sales or substantial liquidations of net investments in foreign operations that would have required the reclassification of gains or losses from accumulated other comprehensive income (loss) into investment income during the periods presented.
(2)	There was no ineffectiveness recognized for the Company's hedges of net investments in foreign operations.

The cumulative foreign currency translation loss recorded in AOCI related to the Company's NIFO hedges was $25.8 million and $0.8 million at June 30, 2011 and December 31, 2010, respectively. If a foreign operation was sold or substantially liquidated, the amounts in AOCI would be reclassified to the consolidated statements of income. A pro rata portion would be reclassified upon partial sale of a foreign operation.

The Company uses various other derivative instruments for risk management purposes that either do not qualify or have not been qualified for hedge accounting treatment, including derivatives used to economically hedge changes in the fair value of liabilities associated with the reinsurance of variable annuities with guaranteed living benefits. The gain or loss related to the change in fair value for these derivative instruments is recognized in investment related gains (losses), in the consolidated statements of income, except where otherwise noted. For the three months ended June 30, 2011 and 2010, the Company recognized investment related gains of $28.5 million and $117.6 million, respectively, and $2.6 million and $118.0 million for the six months ended June 30, 2011 and 2010, respectively, related to derivatives (not including embedded derivatives) that do not qualify or have not been qualified for hedge accounting.

Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). With an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts tied to an agreed-upon notional principal amount. These transactions are executed pursuant to master agreements that provide for a single net payment or individual gross payments at each due date.

Exchange-traded equity futures are used primarily to economically hedge liabilities embedded in certain variable annuity products. With exchange-traded equity futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the relevant stock indices, and to post variation margin on a daily basis in an amount equal to the difference between the daily estimated fair values of those contracts. The Company enters into exchange-traded equity futures with regulated futures commission merchants that are members of the exchange.

Foreign currency swaps are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. With a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate calculated by reference to an agreed upon principal amount. The principal amount of each currency is exchanged at the inception and termination of the currency swap by each party. The Company may also use foreign currency swaps to economically hedge the foreign currency risk associated with certain of its net investments in foreign operations.

Foreign currency forwards are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. With a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made in a different currency at the specified future date.

CPI swaps are used by the Company primarily to economically hedge liabilities embedded in certain insurance products where value is directly affected by changes in a designated benchmark consumer price index. With a CPI swap transaction, the Company agrees with another party to exchange the actual amount of inflation realized over a specified period of time for a fixed amount of inflation determined at inception. These transactions are executed pursuant to master agreements that provide for a single net payment or individual gross payments to be made by the counterparty at each due date. Most of these swaps will require a single payment to be made by one counterparty at the maturity date of the swap.

The Company invests in credit default swaps to diversify its credit risk exposure in certain portfolios. These credit default swaps are over-the-counter instruments in which the Company receives payments at specified intervals to insure credit risk on a portfolio of U.S. investment-grade securities. Generally, if a credit event, as defined by the contract, occurs, the contract will require the swap to be settled gross by the delivery of par quantities or value of the referenced investment securities equal to the specified swap notional amount in exchange for the payment of cash amounts by the Company equal to the par value of the investment security surrendered.

The Company also purchases credit default swaps to reduce its risk against a drop in bond prices due to credit concerns of certain bond issuers. If a credit event, as defined by the contract, occurs, the Company is able to put the bond back to the counterparty at par.

Credit default swaps are also used by the Company to synthetically replicate investment risks and returns which are not readily available in the investments markets. These transactions are a combination of a derivative and an investment instrument such as a U.S. corporate security.

Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products. To hedge against adverse changes in equity indices volatility, the Company enters into contracts to sell the equity index options within a limited time at a contracted price. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.

The Company has certain embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance treaties structured on a modified coinsurance or funds withheld basis. Additionally, the Company reinsures equity-indexed annuity and variable annuity contracts with benefits that are considered embedded derivatives, including guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits, and guaranteed minimum income benefits. The related gains (losses) for the three and six months ended June 30, 2011 and 2010 are reflected in the following table (dollars in thousands):

		Three months ended				Six months ended
		June 30,				June 30,
		2011		2010		2011		2010
Embedded derivatives in modified coinsurance or funds withheld
	arrangements and variable annuity contracts included in investment
	related gains (losses)	$	(15,335)	$	(108,422)	$	107,854	$	21,383
After the associated amortization of DAC and taxes, the related
	amounts included in net income		(3,626)		(7,172)		24,358		13,407
Amounts related to embedded derivatives in equity-indexed annuities
	included in benefits and expenses		(32,077)		(14,950)		(73,348)		(3,222)
After the associated amortization of DAC and taxes, the related
	amounts included in net income		(13,192)		(3,952)		(49,842)		(5,184)

Non-hedging Derivatives

A summary of the effect of non-hedging derivatives, including embedded derivatives, on the Company’s income statement for the three and six months ended June 30, 2011 and 2010 is as follows (dollars in thousands):

					Gain (Loss) for the Three Months Ended
					June 30,
Type of Non-hedging Derivative			Income Statement Location of Gain (Loss)		2011		2010
Interest rate swaps			Investment related gains (losses), net		$	25,343	$	87,115
Financial futures			Investment related gains (losses), net			(2,873)		32,823
Foreign currency forwards			Investment related gains (losses), net			595		1,447
CPI swaps			Investment related gains (losses), net			503		108
Credit default swaps			Investment related gains (losses), net			988		(4,060)
Equity options			Investment related gains (losses), net			3,919		127
Embedded derivatives in:
	Modified coinsurance or funds withheld
		arrangements	Investment related gains (losses), net			10,525		32,512
	Indexed annuity products		Policy acquisition costs and other insurance
				expenses		4,026		2,596
	Indexed annuity products		Interest credited			(36,101)		(17,546)
	Variable annuity products		Investment related gains (losses), net			(25,860)		(140,934)
Total non-hedging derivatives					$	(18,935)	$	(5,812)

					Gain (Loss) for the Six Months Ended
					June 30,
Type of Non-hedging Derivative			Income Statement Location of Gain (Loss)		2011		2010
Interest rate swaps			Investment related gains (losses), net		$	14,613	$	98,455
Financial futures			Investment related gains (losses), net			(14,296)		21,077
Foreign currency forwards			Investment related gains (losses), net			(260)		618
CPI swaps			Investment related gains (losses), net			1,315		1,032
Credit default swaps			Investment related gains (losses), net			1,880		(3,284)
Equity options			Investment related gains (losses), net			(650)		127
Embedded derivatives in:
	Modified coinsurance or funds withheld
		arrangements	Investment related gains (losses), net			101,060		155,147
	Indexed annuity products		Policy acquisition costs and other insurance
				expenses		12,119		1,161
	Indexed annuity products		Interest credited			(85,466)		(4,383)
	Variable annuity products		Investment related gains (losses), net			6,794		(133,763)
Total non-hedging derivatives					$	37,109	$	136,187

The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. As exchange-traded futures are affected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties.

The Company enters into various collateral arrangements, which require both the posting and accepting of collateral in connection with its derivative instruments. Collateral agreements contain attachment thresholds that may vary depending on the posting party's ratings. Additionally, a decline in the Company's or the counterparty's credit ratings to specified levels could result in potential settlement of the derivative positions under the Company's agreements with its counterparties. The Company also has exchange-traded futures, which require the maintenance of a margin account.

The Company's credit exposure related to derivative contracts is generally limited to the fair value at the reporting date plus or minus any collateral posted or held by the Company. Information regarding the Company's credit exposure related to its over-the-counter derivative contracts and margin account for exchange-traded futures at June 30, 2011 and December 31, 2010 are reflected in the following table (dollars in thousands):

			June 30, 2011		December 31, 2010
Estimated fair value of derivatives in net asset (liability) position			$	(10,741)	$	(29,801)
	Securities pledged to counterparties as collateral⁽¹⁾			60,337		48,223
	Cash pledged from counterparties as collateral⁽²⁾			(18,310)		(10,300)
	Securities pledged from counterparties as collateral⁽³⁾			(30,253)		(1,781)
Net credit exposure			$	1,033	$	6,341

Margin account related to exchange-traded futures⁽²⁾			$	11,379	$	16,285

(1)		Consists of U.S. Treasury securities, included in other invested assets.
(2)		Included in cash and cash equivalents
(3)		Consists of U.S. Treasury securities.