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Table of Contents

 
 
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 September 30, 2009
OR
     
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
(State or other jurisdiction
of incorporation or organization)
  43-1627032
(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 o 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
(Do not check if a smaller reporting company)
  Smaller reporting company o
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 October 28, 2009, 72,799,831 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) September 30, 2009 and December 31, 2008     3  
 
           
 
  Condensed Consolidated Statements of Income (Unaudited) Three and nine months ended September 30, 2009 and 2008     4  
 
           
 
  Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 2009 and 2008     5  
 
           
 
  Notes to Condensed Consolidated Financial Statements (Unaudited)     6  
 
           
2
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     37  
 
           
3
  Quantitative and Qualitative Disclosures About Market Risk     74  
 
           
4
  Controls and Procedures     74  
 
           
PART II — OTHER INFORMATION
       
 
           
1
  Legal Proceedings     74  
 
           
  Risk Factors     74  
 
           
2
  Unregistered Sales of Equity Securities and Use of Proceeds     75  
 
           
6
  Exhibits     75  
 
           
 
  Signatures     76  
 
           
 
  Index to Exhibits     77  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    September 30,     December 31,  
    2009     2008  
    (Dollars in thousands)  
Assets
               
Fixed maturity securities:
               
Available-for-sale at fair value (amortized cost of $10,770,522 and $9,382,848 at September 30, 2009 and December 31, 2008, respectively)
  $ 10,986,825     $ 8,531,804  
Mortgage loans on real estate
    736,982       775,050  
Policy loans
    1,079,051       1,096,713  
Funds withheld at interest
    4,820,534       4,520,398  
Short-term investments
    89,372       58,123  
Other invested assets
    516,079       628,649  
 
           
Total investments
    18,228,843       15,610,737  
Cash and cash equivalents
    546,882       875,403  
Accrued investment income
    151,744       87,424  
Premiums receivable and other reinsurance balances
    808,719       640,235  
Reinsurance ceded receivables
    714,761       735,155  
Deferred policy acquisition costs
    3,604,148       3,610,334  
Other assets
    107,016       99,530  
 
           
Total assets
  $ 24,162,113     $ 21,658,818  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Future policy benefits
  $ 7,405,615     $ 6,431,530  
Interest-sensitive contract liabilities
    7,446,900       7,690,942  
Other policy claims and benefits
    2,202,428       1,923,018  
Other reinsurance balances
    153,627       173,645  
Deferred income taxes
    675,679       310,360  
Other liabilities
    679,347       585,199  
Long-term debt
    816,648       918,246  
Collateral finance facility
    850,025       850,035  
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures of the Company
    159,168       159,035  
 
           
Total liabilities
    20,389,437       19,042,010  
 
               
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 September 30, 2009 and 73,363,398 at December 31, 2008)
    734       734  
Warrants
    66,912       66,914  
Additional paid-in-capital
    1,460,361       1,450,041  
Retained earnings
    1,952,934       1,682,087  
Accumulated other comprehensive income:
               
Accumulated currency translation adjustment, net of income taxes
    185,570       19,794  
Unrealized appreciation (depreciation) of securities, net of income taxes
    145,166       (553,407 )
Pension and postretirement benefits, net of income taxes
    (13,354 )     (14,658 )
 
           
Total stockholders’ equity before treasury stock
    3,798,323       2,651,505  
Less treasury shares held of 573,299 and 740,195 at cost at September 30, 2009 and December 31, 2008, respectively
    (25,647 )     (34,697 )
 
           
Total stockholders’ equity
    3,772,676       2,616,808  
 
           
Total liabilities and stockholders’ equity
  $ 24,162,113     $ 21,658,818  
 
           
See accompanying notes to condensed consolidated financial statements (unaudited).

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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2009     2008     2009     2008  
    (Dollars in thousands, except per share data)  
Revenues:
                               
Net premiums
  $ 1,405,179     $ 1,303,590     $ 4,126,407     $ 3,960,210  
Investment income, net of related expenses
    299,471       220,248       807,303       674,642  
Investment related gains (losses), net:
                               
Other-than-temporary impairments on fixed maturity securities
    (16,945 )     (92,388 )     (88,282 )     (98,087 )
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income
    (4,000 )           12,135        
Other investment related gains (losses), net
    63,304       (148,919 )     124,432       (305,559 )
 
                       
Total investment related gains (losses), net
    42,359       (241,307 )     48,285       (403,646 )
Other revenues
    31,972       27,764       140,992       81,962  
 
                       
Total revenues
    1,778,981       1,310,295       5,122,987       4,313,168  
 
                       
Benefits and Expenses:
                               
Claims and other policy benefits
    1,155,811       1,062,948       3,449,251       3,311,287  
Interest credited
    85,153       9,293       194,959       146,190  
Policy acquisition costs and other insurance expenses
    271,789       124,836       778,993       330,370  
Other operating expenses
    76,403       63,886       214,247       189,223  
Interest expense
    5,243       9,935       46,955       54,609  
Collateral finance facility expense
    2,031       6,851       6,402       21,291  
 
                       
Total benefits and expenses
    1,596,430       1,277,749       4,690,807       4,052,970  
 
                       
Income from continuing operations before income taxes
    182,551       32,546       432,180       260,198  
Provision for income taxes
    64,343       7,296       137,503       87,553  
 
                       
Income from continuing operations
    118,208       25,250       294,677       172,645  
Discontinued operations:
                               
Loss from discontinued accident and health operations, net of income taxes
          (22 )           (5,210 )
 
                       
Net income
  $ 118,208     $ 25,228     $ 294,677     $ 167,435  
 
                       
 
                               
Basic earnings per share:
                               
Income from continuing operations
  $ 1.62     $ 0.41     $ 4.05     $ 2.77  
Discontinued operations
          (0.01 )           (0.08 )
 
                       
Net income
  $ 1.62     $ 0.40     $ 4.05     $ 2.69  
 
                       
 
                               
Diluted earnings per share:
                               
Income from continuing operations
  $ 1.61     $ 0.40     $ 4.03     $ 2.70  
Discontinued operations
                      (0.08 )
 
                       
Net income
  $ 1.61     $ 0.40     $ 4.03     $ 2.62  
 
                       
 
Dividends declared per share
  $ 0.09     $ 0.09     $ 0.27     $ 0.27  
 
                       
See accompanying notes to condensed consolidated financial statements (unaudited).

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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Nine months ended September 30,  
    2009     2008  
    (Dollars in thousands)  
Cash Flows from Operating Activities:
               
Net income
  $ 294,677     $ 167,435  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Change in operating assets and liabilities:
               
Accrued investment income
    (61,137 )     (61,713 )
Premiums receivable and other reinsurance balances
    (94,650 )     (65,059 )
Deferred policy acquisition costs
    84,861       (415,768 )
Reinsurance ceded balances
    20,394       (24,477 )
Future policy benefits, other policy claims and benefits, and other reinsurance balances
    682,234       484,914  
Deferred income taxes
    (46,756 )     6,928  
Other assets and other liabilities, net
    182,090       73,627  
Amortization of net investment premiums, discounts and other
    (93,359 )     (73,819 )
Investment related losses (gains), net
    (48,285 )     403,646  
Gain on repurchase of long-term debt
    (38,875 )      
Excess tax benefits from share-based payment arrangement
    (1,491 )     (3,763 )
Other, net
    23,235       (26,807 )
 
           
Net cash provided by operating activities
    902,938       465,144  
 
               
Cash Flows from Investing Activities:
               
Sales of fixed maturity securities available-for-sale
    2,081,979       1,489,125  
Maturities of fixed maturity securities available-for-sale
    61,180       105,352  
Purchases of fixed maturity securities available-for-sale
    (3,019,892 )     (2,388,376 )
Cash invested in mortgage loans
    (72 )      
Cash invested in policy loans
    (9,508 )     (9,054 )
Cash invested in funds withheld at interest
    (59,486 )     (66,834 )
Net increase on securitized lending activities
          112,061  
Principal payments on mortgage loans on real estate
    29,036       49,313  
Principal payments on policy loans
    27,170       19,976  
Change in short-term investments and other invested assets
    (35,343 )     (156,832 )
 
           
Net cash used in investing activities
    (924,936 )     (845,269 )
 
               
Cash Flows from Financing Activities:
               
Dividends to stockholders
    (19,635 )     (16,799 )
Repurchase of long-term debt
    (39,960 )      
Principal payments on long-term debt
    (22,539 )      
Purchases of treasury stock
    (1,607 )     (3,104 )
Excess tax benefits from share-based payment arrangement
    1,491       3,763  
Exercise of stock options, net
    963       4,398  
Change in securities sold under agreements to repurchase and cash collateral for derivative positions
    (137,418 )     (30,094 )
Excess deposits (payments) on universal life and other investment type policies and contracts
    (104,694 )     440,875  
 
           
Net cash provided by (used in) financing activities
    (323,399 )     399,039  
Effect of exchange rate changes on cash
    16,876       (11,010 )
 
           
Change in cash and cash equivalents
    (328,521 )     7,904  
Cash and cash equivalents, beginning of period
    875,403       404,351  
 
           
Cash and cash equivalents, end of period
  $ 546,882     $ 412,255  
 
           
 
               
Supplementary information:
               
Cash paid for interest
  $ 49,193     $ 69,259  
Cash paid for income taxes, net of refunds
  $ 21,491     $ 24,715  
See accompanying notes to condensed consolidated financial statements (unaudited).

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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 nine month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The Company has determined that there were no subsequent events, other than as disclosed in Note 14 — “Subsequent Events”, that would require disclosure or adjustments to the accompanying condensed consolidated financial statements through October 29, 2009, 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 2008 Annual Report on Form 10-K (“2008 Annual Report”) filed with the Securities and Exchange Commission on March 2, 2009.
The accompanying unaudited condensed consolidated financial statements include the accounts of Reinsurance Group of America, Incorporated 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 income from continuing operations (in thousands, except per share information):
                                 
    Three months ended   Nine months ended
    September 30,   September 30,   September 30,   September 30,
    2009   2008   2009   2008
     
Earnings:
                               
Income from continuing operations (numerator for basic and diluted calculations)
  $ 118,208     $ 25,250     $ 294,677     $ 172,645  
Shares:
                               
Weighted average outstanding shares (denominator for basic calculation)
    72,781       62,323       72,754       62,251  
Equivalent shares from outstanding stock options(1)
    505       1,284       283       1,689  
     
Denominator for diluted calculation
    73,286       63,607       73,037       63,940  
Earnings per share:
                               
Basic
  $ 1.62     $ 0.41     $ 4.05     $ 2.77  
Diluted
  $ 1.61     $ 0.40     $ 4.03     $ 2.70  
     
 
(1)   Year-to-date amounts are a 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 September 30, 2009, approximately 1.2 million stock options and approximately 0.6 million performance contingent shares were excluded from the calculation. For the three months ended September 30, 2008, approximately 1.3 million stock options and approximately 0.4 million performance contingent shares were excluded from the calculation.

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3. Comprehensive Income
The following table presents the components of the Company’s other comprehensive income (loss) (dollars in thousands):
                                 
    Three months ended   Nine months ended
    September 30,   September 30,
    2009   2008   2009   2008
     
Net income
  $ 118,208     $ 25,228     $ 294,677     $ 167,435  
Other comprehensive income (loss), net of income tax:
                               
Unrealized investment gains (losses), net of reclassification adjustment for gains (losses) included in net income
    475,230       (405,751 )     710,903       (671,443 )
Reclassification adjustment for other-than-temporary impairments
    2,600             (7,888 )      
Currency translation adjustments
    79,939       (71,853 )     165,776       (78,258 )
Unrealized pension and postretirement benefit adjustment
    1,019       292       1,304       561  
     
Comprehensive income (loss)
  $ 676,996     $ (452,084 )   $ 1,164,772     $ (581,705 )
     
The balance of and changes in each component of accumulated other comprehensive income (loss) for the nine months ended September 30, 2009 are as follows (dollars in thousands):
                                 
    Accumulated Other Comprehensive Income (Loss),
    Net of Income Tax
    Accumulated   Unrealized        
    Currency   Appreciation   Pension and    
    Translation   (Depreciation)   Postretirement  
    Adjustments   of Securities   Benefits   Total
Balance, December 31, 2008
  $ 19,794     $ (553,407 )   $ (14,658 )   $ (548,271 )
Change in component during the period
    165,776       703,015       1,304       870,095  
Effect of reclassifying noncredit component of previously recognized impairment losses on fixed maturities, available for sale, net
          (4,442 )           (4,442 )
     
Balance, September 30, 2009
  $ 185,570     $ 145,166     $ (13,354 )   $ 317,382  
     
4. Investments
The Company had total cash and invested assets of $18.8 billion and $16.5 billion at September 30, 2009 and December 31, 2008, respectively, as illustrated below (dollars in thousands):
                 
    September 30, 2009   December 31, 2008
Fixed maturity securities, available-for-sale
  $ 10,986,825     $ 8,531,804  
Mortgage loans on real estate
    736,982       775,050  
Policy loans
    1,079,051       1,096,713  
Funds withheld at interest
    4,820,534       4,520,398  
Short-term investments
    89,372       58,123  
Other invested assets
    516,079       628,649  
Cash and cash equivalents
    546,882       875,403  
     
Total cash and invested assets
  $ 18,775,725     $ 16,486,140  
     
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, to provide adequate liquidity for expected reinsurance obligations, and to 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.

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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   Nine months ended
    September 30,   September
    2009   2008   2009   2008
     
Fixed maturity securities available-for-sale
  $ 153,752     $ 141,624     $ 443,849     $ 412,785  
Mortgage loans on real estate
    11,323       12,767       34,279       37,457  
Policy loans
    17,298       16,463       50,647       48,341  
Funds withheld at interest
    114,731       42,363       267,717       154,254  
Short-term investments
    1,205       1,344       3,206       3,468  
Other invested assets
    5,902       9,721       21,067       29,821  
     
Investment revenue
    304,211       224,282       820,765       686,126  
Investment expense
    (4,740 )     (4,034 )     (13,462 )     (11,484 )
     
Investment income, net of related expenses
  $ 299,471     $ 220,248     $ 807,303     $ 674,642  
     
Investment Related Gains (Losses), Net
Investment related gains (losses), net consist of the following (dollars in thousands):
                                 
    Three months ended   Nine months ended
    September 30,   September 30,
    2009   2008   2009   2008
     
Fixed maturities and equity securities available for sale:
                               
Other-than-temporary impairment losses on fixed maturities
  $ (16,945 )   $ (92,388 )   $ (88,282 )   $ (98,087 )
Portion of loss recognized in accumulated other comprehensive income (before taxes)
    (4,000 )           12,135        
     
Net other-than-temporary impairment losses on fixed maturities recognized in earnings
    (20,945 )     (92,388 )     (76,147 )     (98,087 )
Impairment losses on equity securities
          (16,895 )     (5,430 )     (16,895 )
Gain on investment activity
    31,823       6,169       69,334       22,178  
Loss on investment activity
    (23,782 )     (8,564 )     (62,259 )     (18,303 )
Derivatives and other, net
    55,263       (129,629 )     122,787       (292,539 )
     
Net gains (losses)
  $ 42,359     $ (241,307 )   $ 48,285     $ (403,646 )
     
The other-than-temporary impairments in 2008 and 2009 are due to the continued turmoil in the U.S. and global financial markets which has resulted in bankruptcies, consolidations and government interventions. The increase in derivative gains is primarily due to a decrease in the fair value of embedded derivative liabilities associated with modified coinsurance and funds withheld treaties.
During the three months ended September 30, 2009 and 2008, the Company sold fixed maturity securities and equity securities with fair values of $191.7 million and $97.3 million at losses of $23.8 million and $8.6 million, respectively, or at 89.0% and 91.9% of amortized cost, respectively. During the nine months ended September 30, 2009 and 2008, the Company sold fixed maturity securities and equity securities with fair values of $514.3 and $489.2 million at losses of $62.3 million and $18.3 million, respectively, or at 89.2% and 96.4% of amortized cost, respectively. The Company 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 and government actions and other similar factors. This process also involves monitoring late payments, pricing levels, downgrades by rating agencies, 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;

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(3) the financial position and access to capital of the issuer, including the current and future impact of any specific events 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 13 — “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. The way in which impairment losses on fixed maturity securities are recognized in the financial statements is dependent on the facts and circumstances related to the 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, less any current period credit loss, it recognizes an other-than-temporary impairment in net income for the difference between amortized cost and fair value. 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 months ended September 30, 2009, the Company recognized $20.9 million of credit related losses in various asset-backed and U.S. corporate securities. For the six-month period between the Date of Adoption and September 30, 2009, the Company recognized $41.8 million of credit-related losses in asset-backed and U.S. corporate securities. 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 loss was recognized in AOCI, and the corresponding changes in such amounts (dollars in thousands):
         
    Three Months Ended  
    September 30, 2009  
Balance as of July 1, 2009
  $ (23,936 )
Credit losses for which an other-than-temporary impairment was not previously recognized
     
Credit losses for which an other-than-temporary impairment was previously recognized
    (13,935 )
 
     
Balance as of September 30, 2009
  $ (37,871 )
 
     
         
    Six Months Ended  
    September 30, 2009  
Balance as of April 1, 2009
  $ (17,132 )
Credit losses for which an other-than-temporary impairment was not previously recognized
    (3,242 )
Credit losses for which an other-than-temporary impairment was previously recognized
    (17,497 )
 
     
Balance as of September 30, 2009
  $ (37,871 )
 
     

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Fixed Maturities 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, 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 2009 table below. The following tables provide information relating to investments in fixed maturity securities and equity securities by sector as of September 30, 2009 and December 31, 2008 (dollars in thousands):
                                                 
September 30, 2009
                                            Other-than-
                            Estimated           temporary
    Amortized   Unrealized   Unrealized   Fair   % of   impairment
    Cost   Gains   Losses   Value   Total   in AOCI
Available-for-sale:
                                               
U.S. corporate securities
  $ 3,703,343     $ 204,678     $ 203,884     $ 3,704,137       33.7 %   $  
Canadian and Canadian provincial governments
    1,859,671       498,065       4,925       2,352,811       21.4        
Residential mortgage-backed securities
    1,350,539       39,341       60,812       1,329,068       12.1       (12,038 )
Foreign corporate securities
    1,572,534       93,221       36,536       1,629,219       14.8        
Asset-backed securities
    545,194       10,656       106,598       449,252       4.1       (2,628 )
Commercial mortgage-backed securities
    1,086,558       16,769       220,977       882,350       8.0       (4,333 )
U.S. government and agencies
    93,058       2,782       131       95,709       0.9        
State and political subdivisions
    107,450       2,043       10,115       99,378       0.9        
Other foreign government securities
    452,175       5,497       12,771       444,901       4.1        
     
Total fixed maturity securities
  $ 10,770,522     $ 873,052     $ 656,749     $ 10,986,825       100.0 %   $ (18,999 )
     
Non-redeemable preferred stock
  $ 157,341     $ 2,637     $ 29,212     $ 130,766       74.4 %        
Common stock
    44,670       1,615       1,253       45,032       25.6          
             
Total equity securities
  $ 202,011     $ 4,252     $ 30,465     $ 175,798       100.0 %        
             
                                         
December 31, 2008
                            Estimated    
    Amortized   Unrealized   Unrealized   Fair   % of
    Cost   Gains   Losses   Value   Total
Available-for-sale:
                                       
U.S. corporate securities
  $ 3,577,116     $ 34,262     $ 598,745     $ 3,012,633       35.3 %
Canadian and Canadian provincial governments
    1,500,511       397,899       7,171       1,891,239       22.2  
Residential mortgage-backed securities
    1,231,123       24,838       106,776       1,149,185       13.5  
Foreign corporate securities
    1,112,018       14,335       152,920       973,433       11.4  
Asset-backed securities
    484,577       2,098       147,297       339,378       4.0  
Commercial mortgage-backed securities
    1,085,062       2,258       326,730       760,590       8.9  
U.S. government and agencies
    7,555       876             8,431       0.1  
State and political subdivisions
    46,537             7,883       38,654       0.4  
Other foreign government securities
    338,349       20,062       150       358,261       4.2  
     
Total fixed maturity securities
  $ 9,382,848     $ 496,628     $ 1,347,672     $ 8,531,804       100.0 %
     
Non-redeemable preferred stock
  $ 187,510     $ 49     $ 64,160     $ 123,399       77.4 %
Common stock
    40,582             4,607       35,975       22.6  
     
Total equity securities
  $ 228,092     $ 49     $ 68,767     $ 159,374       100.0 %
     
As of September 30, 2009, the Company held securities with a fair value of $411.5 million issued by the Federal National Mortgage Corporation, $941.6 million that were issued by the Canadian province of Ontario and $661.2

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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, 2008, the Company held securities with a fair value of $383.0 million issued by the Federal Home Loan Mortgage Corporation, $396.2 million issued by the Federal National Mortgage Corporation, $661.2 million that were issued by the Canadian province of Ontario, $521.5 million in one entity that were guaranteed by the Canadian province of Quebec, and $275.1 million issued 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 September 30, 2009 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 call or prepayment penalties.
At September 30, 2009, 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
  $ 136,079     $ 138,221  
Due after one year through five years
    1,398,851       1,422,928  
Due after five years through ten years
    2,210,800       2,316,572  
Due after ten years
    4,042,501       4,448,433  
Asset and mortgage-backed securities
    2,982,291       2,660,671  
     
Total
  $ 10,770,522     $ 10,986,825  
     
The table below depicts the major industry types and weighted average credit ratings, which comprise the U.S. and foreign corporate fixed maturity holdings at (dollars in thousands):
                                 
September 30, 2009
            Estimated           Average Credit
    Amortized Cost   Fair Value   % of Total   Ratings
     
Finance
  $ 1,443,700     $ 1,345,772       25.2 %     A-  
Industrial
    1,665,422       1,736,378       32.6     BBB+
Foreign (1)
    1,572,534       1,629,219       30.6       A  
Utility
    587,942       615,353       11.5     BBB+
Other
    6,279       6,634       0.1       A-  
     
Total
  $ 5,275,877     $ 5,333,356       100.0 %     A-  
     
                                 
December 31, 2008
            Estimated           Average Credit
    Amortized Cost   Fair Value   % of Total   Ratings
     
Finance
  $ 1,475,205     $ 1,155,906       29.0 %     A  
Industrial
    1,520,330       1,339,200       33.6     BBB+
Foreign (1)
    1,112,018       973,433       24.4       A  
Utility
    542,737       480,809       12.1     BBB+
Other
    38,844       36,718       0.9     AA-
     
Total
  $ 4,689,134     $ 3,986,066       100.0 %     A-  
     
 
(1)   Includes U.S. dollar-denominated debt obligations of foreign obligors and other foreign investments.
At September 30, 2009 and December 31, 2008, the Company had $687.2 million and $1,416.4 million, respectively, of gross unrealized losses related to its fixed maturity and equity securities. These securities are concentrated, calculated as a percentage of gross unrealized losses, as follows:

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    September 30,   December 31,
    2009   2008
     
Sector:
               
U.S. corporate securities
    34 %     46 %
Canadian and Canada provincial governments
    1       1  
Residential mortgage-backed securities
    9       7  
Foreign corporate securities
    5       12  
Asset-backed securities
    16       10  
Commercial mortgage-backed securities
    32       23  
State and political subdivisions
    3       1  
     
Total
    100 %     100 %
     
                 
Industry:
               
Finance
    30 %     33 %
Asset-backed
    15       10  
Industrial
    8       19  
Mortgage-backed
    41       31  
Government
    4       1  
Utility
    2       6  
     
Total
    100 %     100 %
     
The following table presents total gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for 1,075 and 1,716 fixed maturity securities and equity securities as of September 30, 2009 and December 31, 2008, respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):
                                                 
    September 30, 2009   December 31, 2008
            Gross                   Gross    
    Number of   Unrealized           Number of   Unrealized    
    Securities   Losses   % of Total   Securities   Losses   % of Total
     
Less than 20%
    805     $ 224,732       32.7 %     980     $ 324,390       22.9 %
20% or more for less than nine months
    38       69,125       10.1       561       796,747       56.3  
20% or more for nine months or greater
    232       393,357       57.2       175       295,302       20.8  
     
Total
    1,075     $ 687,214       100.0 %     1,716     $ 1,416,439       100.0 %
     
As of September 30, 2009, 74.9% of these securities were investment grade and 32.7% were less than 20% below cost. The amount of the unrealized loss on these securities was primarily attributable to increases in interest rates, including a widening of credit default spreads, since the time securities were purchased. The increase in the number of securities at a loss greater than 20% or more for nine months or greater reflects the continued effects of adverse economic conditions.
While all of these securities are monitored for potential impairment, the Company believes due to continued distressed market conditions and liquidity concerns, and the 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. Under current market conditions, the Company’s determination of whether a decline in value is other-than-temporary places greater emphasis on the Company’s analysis of the underlying credit versus 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 1,075 and 1,716 fixed maturity securities and equity securities that have estimated fair values below amortized cost as of September 30, 2009 and December 31, 2008, respectively.

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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.
                                                 
    As of September 30, 2009
                    Equal to or greater than    
    Less than 12 months   12 months   Total
            Gross           Gross           Gross
    Estimated   Unrealized   Estimated   Unrealized   Estimated   Unrealized
(dollars in thousands)   Fair Value   Losses   Fair Value   Losses   Fair Value   Losses
Investment grade securities:
                                               
U.S. corporate securities
  $ 98,012     $ 26,450     $ 900,618     $ 127,413     $ 998,630     $ 153,863  
Canadian and Canadian provincial governments
    36,958       1,394       136,521       3,532       173,479       4,926  
Residential mortgage-backed securities
    245,299       13,887       217,167       19,063       462,466       32,950  
Foreign corporate securities
    223,515       9,395       151,591       20,156       375,106       29,551  
Asset-backed securities
    31,893       7,005       169,722       76,358       201,615       83,363  
Commercial mortgage-backed securities
    24,783       13,621       548,066       162,913       572,849       176,534  
U.S. government and agencies
    24,375       131                   24,375       131  
State and political subdivisions
    19,726       861       46,893       5,493       66,619       6,354  
Other foreign government securities
    246,323       12,397       4,102       374       250,425       12,771  
             
Investment grade securities
    950,884       85,141       2,174,680       415,302       3,125,564       500,443  
             
 
                                               
Non-investment grade securities:
                                               
U.S. corporate securities
    30,159       13,228       184,881       36,794       215,040       50,022  
Asset-backed securities
    5,006       3,960       12,086       19,274       17,092       23,234  
Foreign corporate securities
                6,959       6,985       6,959       6,985  
Residential mortgage-backed securities
    9,342       1,001       60,430       26,860       69,772       27,861  
Commercial mortgage-backed securities
                17,594       44,443       17,594       44,443  
State and political subdivisions
                4,300       3,761       4,300       3,761  
             
Non-investment grade securities
    44,507       18,189       286,250       138,117       330,757       156,306  
             
Total fixed maturity securities
  $ 995,391     $ 103,330     $ 2,460,930     $ 553,419     $ 3,456,321     $ 656,749  
             
Non-redeemable preferred stock
  $ 3,612     $ 971     $ 99,408     $ 28,241     $ 103,020     $ 29,212  
Common Stock
    6,597       80       4,562       1,173       11,159       1,253  
             
Total equity securities
  $ 10,209     $ 1,051     $ 103,970     $ 29,414     $ 114,179     $ 30,465  
             
Total number of securities in an unrealized loss position
    226               849               1,075          
 
                                               

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    As of December 31, 2008
                    Equal to or greater than    
    Less than 12 months   12 months   Total
            Gross           Gross           Gross
    Estimated   Unrealized   Estimated   Unrealized   Estimated   Unrealized
(dollars in thousands)   Fair Value   Losses   Fair Value   Losses   Fair Value   Losses
Investment grade securities:
                                               
U.S. corporate securities
  $ 1,407,547     $ 240,299     $ 810,115     $ 281,947     $ 2,217,662     $ 522,246  
Canadian and Canadian provincial governments
    114,754       2,751       89,956       4,420       204,710       7,171  
Residential mortgage-backed securities
    190,525       58,026       213,310       39,794       403,835       97,820  
Foreign corporate securities
    508,102       82,490       140,073       59,816       648,175       142,306  
Asset-backed securities
    118,608       40,139       173,505       99,147       292,113       139,286  
Commercial mortgage-backed securities
    523,475       200,567       188,638       126,163       712,113       326,730  
State and political subdivisions
    20,403       1,947       18,250       5,936       38,653       7,883  
Other foreign government securities
    16,419       33       4,125       117       20,544       150  
             
Investment grade securities
    2,899,833       626,252       1,637,972       617,340       4,537,805       1,243,592  
             
Non-investment grade securities:
                                               
U.S. corporate securities
    140,426       36,615       60,378       39,884       200,804       76,499  
Asset-backed securities
    3,465       2,060       11,156       5,951       14,621       8,011  
Foreign corporate securities
    24,637       7,227       2,032       3,387       26,669       10,614  
Residential mortgage-backed securities
    8,089       5,944       4,496       3,012       12,585       8,956  
             
Non-investment grade securities
    176,617       51,846       78,062       52,234       254,679       104,080  
             
Total fixed maturity securities
  $ 3,076,450     $ 678,098     $ 1,716,034     $ 669,574     $ 4,792,484     $ 1,347,672  
             
Non-redeemable preferred stock
  $ 49,376     $ 22,316     $ 61,249     $ 41,844     $ 110,625     $ 64,160  
Common Stock
    11,804       4,607                   11,804       4,607  
             
Total equity securities
  $ 61,180     $ 26,923     $ 61,249     $ 41,844     $ 122,429     $ 68,767  
             
Total number of securities in an unrealized loss position
    1,039               677               1,716          
 
                                               
As of September 30, 2009, the Company does not intend to sell the fixed maturity securities and does not believe it is more likely than not that it will be required to sell the 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 diversification, credit quality, yield enhancement, asset-liability management and liquidity profile. As of September 30, 2009, 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 diversification, credit quality and liquidity profile.

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5. Derivative Instruments
The following table presents the notional amounts and fair value of derivative instruments (dollars in thousands):
                                                 
    September 30, 2009     December 31, 2008  
            Carrying Value/             Carrying Value/  
    Notional     Fair Value     Notional     Fair Value  
    Amount     Assets     Liabilities     Amount     Assets     Liabilities  
Derivatives not designated as hedging instruments:
                                               
Interest rate swaps(1)
  $ 1,016,226     $ 27,748     $     $ 672,716     $ 155,189     $ 241  
Financial futures(1)
    193,833                   260,568              
Foreign currency forwards(1)
    40,500       3,317             31,300       2,209        
Consumer price index (“CPI”) swaps(1)
    140,630       1,126                          
Credit default swaps(1)
    317,500       126       545       290,000             7,705  
Embedded derivatives in:
                                               
Modified coinsurance or funds withheld arrangements(2)
                437,522                   512,888  
Indexed annuity products(3)
          60,142       514,963             66,716       530,986  
Variable annuity products(3)
                69,868                   276,445  
 
                                   
Total non-hedging derivatives
    1,708,689       92,459       1,022,898       1,254,584       224,114       1,328,265  
 
                                   
 
                                               
Derivatives designated as hedging instruments:
                                               
Interest rate swaps(1)
    21,783             1,125       21,783             2,243  
Foreign currency swaps(1)
    226,715             3,644       296,497       48,943        
 
                                   
Total hedging derivatives
    248,498             4,769       318,280       48,943       2,243  
 
                                   
Total derivatives
  $ 1,957,187     $ 92,459     $ 1,027,667     $ 1,572,864     $ 273,057     $ 1,330,508  
 
                                   
 
(1)   Carried on the Company’s condensed consolidated balance sheets in other invested assets or other liabilities, at fair value.
 
(2)   Embedded asset 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
As of September 30, 2009 and December 31, 2008, the Company held interest rate swaps that were designated and qualified as fair value hedges of interest rate risk. As of December 31, 2008, the Company held foreign currency swaps that were designated and qualified as fair value hedges of a portion of its net investment in its Canada operation. Those foreign currency swaps were terminated during the second quarter of 2009 and the related unrealized gains of $50.0 million continue to be reflected in AOCI. During the third quarter, the Company entered into new derivative instruments, and as of September 30, 2009, held foreign currency swaps that were designated and qualified as fair value hedges of a portion of its net investments in its Canada and Australia operations. As of September 30, 2009 and December 31, 2008, 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 2008 annual report on Form 10-K for a detailed discussion of the accounting treatment for derivative instruments, including embedded derivatives. The Company does not enter into derivative instruments for speculative purposes. Derivative instruments are carried at fair value and generally require an insignificant amount of cash at inception of the contract.

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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 nine months ended September 30, 2009 were (dollars in thousands):
                             
For the three months ended September 30, 2009
Type of   Derivative   Hedge Gain       Hedged Item    
Fair Value   Gain (loss)   (Loss)       Gain (Loss)   Hedged Item Gain
Hedge   Location   Recognized   Hedged Item   Location   (Loss) Recognized
 
Interest rate swaps
  Investment related
gains (losses), net
  $ (346 )   Fixed rate fixed
maturity securities
  Investment related
gains (losses), net
  $ 498  
                             
For the nine months ended September 30, 2009
Type of   Derivative   Hedge Gain       Hedged Item    
Fair Value   Gain (loss)   (Loss)       Gain (Loss)   Hedged Item Gain
Hedge   Location   Recognized   Hedged Item   Location   (Loss) Recognized
 
Interest rate swaps
  Investment related
gains (losses), net
  $ 1,119     Fixed rate fixed
maturity securities
  Investment related
gains (losses), net
  $ (958 )
The Company’s investment related gains (losses), net representing the ineffective portion of all fair value hedges was immaterial for the three and nine months ended September 30, 2009. The Company had no fair value hedges for the period ended September 30, 2008.
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.
Hedges of Net Investments in Foreign Operations
The Company uses foreign currency swaps to hedge a portion of its net investment in certain foreign operations against adverse movements in exchange rates. The following tables illustrate the Company’s net investments in foreign operations (“NIFO”) hedges for the three and nine months ended September 30, 2009 (dollars in thousands):
                         
For the three months ended September 30, 2009
Effective Portion   Ineffective Portion
            Location of Gain   Gain (Loss)   Income    
Type of   Derivative   (Loss)   Reclassified from   Statement    
NIFO   Gain (Loss)   Reclassified From   accumulated OCI into   Location of Gain   Ineffective Gain
Hedge   in OCI   Accumulated OCI   income   (Loss)   (Loss) in Income
     
Foreign currency swaps
  $ (4,000 )   None   $—   Investment income   $—
                         
For the nine months ended September 30, 2009
Effective Portion   Ineffective Portion
            Location of Gain   Gain (Loss)   Income    
Type of   Derivative   (Loss)   Reclassified from   Statement    
NIFO   Gain (Loss)   Reclassified From   accumulated OCI into   Location of Gain   Ineffective Gain
Hedge   in OCI   Accumulated OCI   income   (Loss)   (Loss) in Income
     
Foreign currency swaps
  $ (2,356 )   None   $—   Investment income   $—

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The Company measures ineffectiveness on the foreign currency swaps based upon the change in forward rates. There was no ineffectiveness recorded in the periods presented herein.
The Company’s other comprehensive income for the three months ended September 30, 2009 and 2008, include gains (losses) of $(4.0) million and $14.6 million, respectively, and $(2.4) million and $18.8 million for the nine months ended September 30, 2009 and 2008, respectively, related to foreign currency swaps used to hedge its net investment in its Canada and Australia operations. The cumulative foreign currency translation gain recorded in accumulated other comprehensive income related to these hedges was $46.3 million and $48.6 million at September 30, 2009 and December 31, 2008, respectively. When net investments in foreign operations are sold or substantially liquidated, the amounts in accumulated other comprehensive income are reclassified to the consolidated statements of income. A pro rata portion will be reclassified upon partial sale of the net investments in foreign operations.
Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging
The Company uses various other derivative instruments for risk management purposes that either do not qualify for hedge accounting treatment or have not currently been qualified by the Company 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 September 30, 2009 and 2008, the Company recognized investment related gains (losses) of $(5.7) million and $11.6 million, respectively, and $(162.0) million and $7.7 million for the nine months ended September 30, 2009 and 2008, respectively, related to derivatives that do not qualify or have not been qualified for hedge accounting. The amounts recognized exclude embedded derivatives.
Interest Rate Swaps
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 as calculated by reference to an agreed notional principal amount. 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.
Financial Futures
Exchange-traded equity futures are used primarily to economically hedge liabilities embedded in certain variable annuity products assumed by the Company. 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
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 also uses foreign currency swaps to economically hedge the foreign currency risk associated with certain of its net investments in foreign operations.
Foreign Currency Forwards
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

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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
CPI swaps are used by the Company primarily to economically hedge liabilities embedded in certain insurance products assumed by the Company whose 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.
Credit Default Swaps
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 125 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.
Embedded Derivatives
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 nine months ended September 30, 2009 and 2008 are reflected in the following table (dollars in thousands):
                                 
    Three months ended   Nine months ended
    September 30,   September 30,
    2009   2008   2009   2008
     
Embedded derivatives in modified coinsurance or funds withheld arrangements and variable annuity contracts included in investment related gains (losses)
  $ 61,581     $ (139,130 )   $ 281,943     $ (300,045 )
After the associated amortization of DAC and taxes, the related amounts included in net income
    11,173       (21,884 )     (21,423 )     (44,582 )
                                 
Amounts related to embedded derivatives in equity-indexed annuities included in benefits and expenses
    (23,144 )     41,930       (11,680 )     24,547  
After the associated amortization of DAC and taxes, the related amounts included in net income
    (17,305 )     10,394       (18,058 )     20,502  
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 nine months ended September 30, 2009 is as follows (dollars in thousands):

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            Gain (Loss)  
            For the Three Months  
Type of Non-hedging Derivative
  Income Statement Location of Gain (Loss)     Ended September 30, 2009  
Interest rate swaps
  Investment related gains (losses), net   $ 26,378  
Financial futures
  Investment related gains (losses), net     (36,951 )
Foreign currency forwards
  Investment related gains (losses), net     1,910  
CPI swaps
  Investment related gains (losses), net     61  
Credit default swaps
  Investment related gains (losses), net     2,919  
Embedded derivatives in:
               
Modified coinsurance or funds withheld arrangements
  Investment related gains (losses), net     51,454  
Indexed annuity products
  Policy acquisition costs and other insurance expenses     1,001  
Indexed annuity products
  Interest credited     (24,145 )
Variable annuity products
  Investment related gains (losses), net     10,127  
 
             
Total non-hedging derivatives
          $ 32,754  
 
             
 
            Gain (Loss)  
            For the Nine Months  
Type of Non-hedging Derivative
  Income Statement Location of Gain (Loss)     Ended September 30, 2009  
Interest rate swaps
  Investment related gains (losses), net   $ (111,502 )
Financial futures
  Investment related gains (losses), net     (62,699 )
Foreign currency forwards
  Investment related gains (losses), net     1,032  
CPI swaps
  Investment related gains (losses), net     915  
Credit default swaps
  Investment related gains (losses), net     10,296  
Embedded derivatives in:
               
Modified coinsurance or funds withheld arrangements
  Investment related gains (losses), net     75,366  
Indexed annuity products
  Policy acquisition costs and other insurance expenses     (1,495 )
Indexed annuity products
  Interest credited     (10,185 )
Variable annuity products
  Investment related gains (losses), net     206,577  
 
             
Total non-hedging derivatives
          $ 108,305  
 
             
Credit Risk
The Company may be exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. Generally, the current credit exposure of the Company’s derivative contracts is limited to the fair value at the reporting date. The credit exposure of the Company’s derivative transactions is represented by the fair value of contracts after consideration of any collateral received with a net positive fair value at the reporting date.
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. Because 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 to such derivative instruments.
The Company enters into various collateral arrangements, which require both the posting and accepting of collateral in connection with its derivative instruments. As of September 30, 2009, and December 31, 2008, the Company held cash collateral under its control of $23.7 million and $159.8 million, respectively. This unrestricted cash collateral is included in cash and cash equivalents and the obligation to return it is included in other liabilities in the consolidated balance sheets. From time to time, the Company has accepted collateral consisting of various securities; however, there were no securities held as collateral as of September 30, 2009, and December 31, 2008. Collateral agreements contain attachment thresholds that vary depending on the posting party’s financial strength

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ratings. As of September 30, 2009, the Company had pledged collateral of $1.4 million to counterparties on swaps, which is included in other assets or other liabilities, net. There was no collateral pledged to swap counterparties as of December 31, 2008.
In addition, the Company has exchange-traded futures, which require the maintenance of a margin account. As of September 30, 2009 and December 31, 2008, the Company pledged collateral of $17.4 and $25.9 million, respectively, which is included in cash and cash equivalents.
6. Fair Value Disclosures
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2009 and December 31, 2008. Fair values have been determined by using available market information and the valuation techniques described below. Considerable judgment is often required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein may not necessarily be indicative of amounts that could be realized in a current market exchange. The use of different assumptions or valuation techniques may have a material effect on the estimated fair value amounts (dollars in thousands):
                                 
    September 30, 2009   December 31, 2008
            Estimated Fair           Estimated Fair
    Carrying Value   Value   Carrying Value   Value
Assets:
                               
Fixed maturity securities
  $ 10,986,825     $ 10,986,825     $ 8,531,804     $ 8,531,804  
Mortgage loans on real estate
    736,982       714,637       775,050       755,383  
Policy loans
    1,079,051       1,079,051       1,096,713       1,096,713  
Funds withheld at interest
    4,820,534       4,964,189       4,520,398       4,494,716  
Short-term investments
    89,372       89,372       58,123       58,123  
Other invested assets
    516,079       500,291       628,649       638,087  
Cash and cash equivalents
    546,882       546,882       875,403       875,403  
Accrued investment income
    151,744       151,744       87,424       87,424  
Reinsurance ceded receivables
    104,830       181,159       115,445       187,465  
Liabilities:
                               
Interest-sensitive contract liabilities
  $ 5,647,019     $ 5,782,577     $ 5,664,488     $ 4,890,669  
Long-term and short-term debt
    816,648       731,436       918,246       606,890  
Collateral finance facility
    850,025       484,500       850,035       493,000  
Company-obligated mandatorily redeemable preferred securities
    159,168       214,542       159,035       186,082  
Publicly traded fixed maturity securities are valued based upon quoted market prices or estimates from independent pricing services, independent broker quotes and pricing matrices. Private placement fixed maturity securities are valued based on the credit quality and duration of marketable securities deemed comparable by the Company’s investment advisor, which may be of another issuer. The fair value of mortgage loans on real estate is estimated using discounted cash flows. Policy loans typically carry an interest rate that is adjusted annually based on a market index and therefore carrying value approximates fair value. The carrying value of funds withheld at interest approximates fair value except where the funds withheld are specifically identified in the agreement. When funds withheld are specifically identified in the agreement, the fair value is based on the fair value of the underlying assets which are held by the ceding company. The carrying values of cash and cash equivalents and short-term investments approximates fair values due to the short-term maturities of these instruments. Common and preferred equity investments and derivative financial instruments included in other invested assets are reflected at fair value on the consolidated balance sheets based primarily on quoted market prices, while limited partnership interests are carried at cost. The fair value of limited partnerships is based on net asset values. The carrying value for accrued investment income approximates fair value.
The carrying and fair values of interest-sensitive contract liabilities exclude contracts with significant mortality risk. The fair value of the Company’s interest-sensitive contract liabilities and related reinsurance ceded receivables is based on the cash surrender value of the liabilities, adjusted for recapture fees. The fair value of the Company’s long-term debt is estimated based on either quoted market prices or quoted market prices for the debt of corporations with similar credit quality. The fair values of the Company’s collateral finance facility and company-obligated mandatorily redeemable preferred securities are estimated using discounted cash flows.

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General accounting principles for Fair Value Measurements and Disclosures define fair value as the exchange price that would be received for 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. In accordance with these principles, valuation techniques utilized by management for invested assets and embedded derivatives reported at fair value are generally categorized into three types:
Market Approach. Market approach valuation techniques use prices and other relevant information from market transactions involving identical or comparable assets or liabilities. Valuation techniques consistent with the market approach include comparables and matrix pricing. Comparables use market multiples, which might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering both quantitative and qualitative factors specific to the measurement. Matrix pricing is a mathematical technique used principally to value certain securities without relying exclusively on quoted prices for the specific securities but comparing the securities to benchmark or comparable securities.
Income Approach. Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. These techniques rely on current expectations of future amounts. Examples of income approach valuation techniques include present value techniques, option-pricing models and binomial or lattice models that incorporate present value techniques.
Cost Approach. Cost approach valuation techniques are based upon the amount that, at present, would be required to replace the service capacity of an asset, or the current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility.
The three approaches described above are consistent with generally accepted valuation techniques. While all three approaches are not applicable to all assets or liabilities reported at fair value, where appropriate and possible, one or more valuation techniques may be used. The selection of the valuation technique(s) to apply considers the definition of an exit price and the nature of the asset or liability being valued and significant expertise and judgment is required. The Company performs regular analysis and review of the various techniques utilized in determining fair value to ensure that the valuation approaches utilized are appropriate and consistently applied, and that the various assumptions are reasonable. The Company also utilizes information from third parties, such as pricing services and brokers, to assist in determining fair values for certain assets and liabilities; however, management is ultimately responsible for all fair values presented in the Company’s financial statements. The Company performs analysis and review of the information and prices received from third parties to ensure that the prices represent a reasonable estimate of the fair value. This process involves quantitative and qualitative analysis and is overseen by the Company’s investment and accounting personnel. Examples of procedures performed include, but are not limited to, initial and ongoing review of third party pricing services and techniques, review of pricing trends and monitoring of recent trade information. In addition, the Company utilizes both internal and external cash flow models to analyze the reasonableness of fair values utilizing credit spread and other market assumptions, where appropriate. As a result of the analysis, if the Company determines there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly.
For invested assets reported at fair value, when available, fair values are based on quoted prices in active markets that are regularly and readily obtainable. Generally, these are very liquid investments and the valuation does not require management judgment. When quoted prices in active markets are not available, fair value is based on the market valuation techniques described above, primarily a combination of the market approach, including matrix pricing and the income approach. The assumptions and inputs used by management in applying these techniques include, but are not limited to: interest rates, credit standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund requirements, maturity, estimated duration and assumptions regarding liquidity and future cash flows.
The significant inputs to the market standard valuation techniques for certain types of securities with reasonable levels of price transparency are inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Such observable inputs include benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are not active and observable yields and spreads in the market.
When observable inputs are not available, the market standard valuation techniques for determining the estimated fair value of certain types of securities that trade infrequently, and therefore have little or no price transparency, rely

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on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs can be based in large part on management judgment or estimation, and cannot be supported by reference to market activity. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and are consistent with what other market participants would use when pricing such securities.
The use of different techniques, assumptions and inputs may have a material effect on the estimated fair values of the Company’s securities holdings.
For embedded derivative liabilities associated with the underlying products in reinsurance treaties, primarily equity-indexed and variable annuity treaties, the Company utilizes a market standard technique, which includes an estimate of future equity option purchases and an adjustment for the Company’s own credit risk that takes into consideration the Company’s financial strength rating, also commonly referred to as a claims paying rating. The capital market inputs to the model, such as equity indexes, equity volatility, interest rates and the Company’s credit adjustment, are generally observable. However, the valuation models also use inputs requiring certain actuarial assumptions such as future interest margins, policyholder behavior, including future equity participation rates, and explicit risk margins related to non-capital market inputs, that are generally not observable and may require use of significant management judgment. Changes in interest rates, equity indices, equity volatility, the Company’s own credit risk, and actuarial assumptions regarding policyholder behavior may result in significant fluctuations in the value of embedded derivatives liabilities associated with equity-indexed annuity reinsurance treaties.
The fair value of embedded derivatives associated with funds withheld reinsurance treaties is determined based upon a total return swap technique with reference to the fair value of the investments held by the ceding company that support the Company’s funds withheld at interest asset. The fair value of the underlying assets is generally based on market observable inputs using market standard valuation techniques. However, the valuation also requires certain significant inputs based on actuarial assumptions about policyholder behavior, which are generally not observable.
For the quarter ended September 30, 2009, the application of valuation techniques applied to similar assets and liabilities has been consistent.
General accounting principles for Fair Value Measurements and Disclosures also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
     
Level 1
  Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets and liabilities include investment securities and derivative contracts that are traded in exchange markets.
 
   
Level 2
  Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or market standard valuation techniques and assumptions with significant inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Such observable inputs include benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are not active and observable yields and spreads in the market. The Company’s Level 2 assets and liabilities include investment securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose values are determined using market standard valuation techniques. This category primarily includes U.S. and foreign corporate securities, Canadian and Canadian provincial government securities, and residential and commercial mortgage-backed securities, among others. Management values most of these securities using inputs that are market observable.
 
   
Level 3
  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the related assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using market standard valuation techniques described above. When observable inputs are not available, the market standard techniques for determining the estimated fair value of certain securities that trade infrequently, and therefore have little transparency, rely on inputs that are significant to the estimated fair value and that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs can be based in large part on management judgment or estimation and cannot be supported by reference to market activity. Even though

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  unobservable, management believes these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what other market participants would use when pricing similar assets and liabilities. For the Company’s invested assets, this category generally includes U.S. and foreign corporate securities (primarily private placements), asset-backed securities (including those with exposure to subprime mortgages), and to a lesser extent, certain residential and commercial mortgage-backed securities, among others. Additionally, the Company’s embedded derivatives, all of which are associated with reinsurance treaties, are classified in Level 3 since their values include significant unobservable inputs associated with actuarial assumptions regarding policyholder behavior. Embedded derivatives are reported with the host instruments on the condensed consolidated balance sheet.
When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest priority level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, gains and losses for such assets and liabilities categorized within Level 3 may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008 are summarized below (dollars in thousands).
                                 
    September 30, 2009
            Fair Value Measurements Using:
    Total   Level 1   Level 2   Level 3
     
Assets:
                               
Fixed maturity securities — available-for-sale:
                               
U.S. corporate securities
  $ 3,704,137     $     $ 2,801,538     $ 902,599  
Canadian and Canadian provincial governments
    2,352,811             2,343,463       9,348  
Residential mortgage-backed securities
    1,329,068             1,227,997       101,071  
Foreign corporate securities
    1,629,219       3,331       1,247,739       378,149  
Asset-backed securities
    449,252             142,888       306,364  
Commercial mortgage-backed securities
    882,350             810,863       71,487  
U.S. government and agencies securities
    95,709       60,495       35,214        
State and political subdivision securities
    99,378       6,564       6,519       86,295  
Other foreign government securities
    444,901       128,740       200,650       115,511  
     
Total fixed maturity securities — available-for-sale
    10,986,825       199,130       8,816,871       1,970,824  
Funds withheld at interest — embedded derivatives
    (437,522 )                 (437,522 )
Short-term investments
    12,777       698       11,550       529  
Other invested assets — non-redeemable preferred stock
    130,766       93,674       25,526       11,566  
Other invested assets — common stock
    45,032       55       30,752       14,225  
Other invested assets — derivatives
    32,317             32,317        
Reinsurance ceded receivable — embedded derivatives
    60,142                   60,142  
     
Total
  $ 10,830,337     $ 293,557     $ 8,917,016     $ 1,619,764  
     
 
                               
Liabilities:
                               
Interest sensitive contract liabilities — embedded derivatives
  $ (584,831 )   $     $     $ (584,831 )
Other liabilities — derivatives
    (5,314 )           (5,314 )      
     
Total
  $ (590,145 )   $     $ (5,314 )   $ (584,831 )
     

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    December 31, 2008
            Fair Value Measurements Using:
    Total   Level 1   Level 2   Level 3
     
Assets:
                               
Fixed maturity securities — available-for-sale:
                               
U.S. corporate securities
  $ 3,012,633     $     $ 2,196,348     $ 816,285  
Canadian and Canadian provincial governments
    1,891,239             1,881,274       9,965  
Residential mortgage-backed securities
    1,149,185             1,118,761       30,424  
Foreign corporate securities
    973,433       1,714       795,111       176,608  
Asset-backed securities
    339,378             107,509       231,869  
Commercial mortgage-backed securities
    760,590             701,549       59,041  
U.S. government and agencies securities
    8,431       3,072       5,359        
State and political subdivision securities
    38,654       6,167             32,487  
Other foreign government securities
    358,261       85,606       167,216       105,439  
     
Sub-total
    8,531,804       96,559       6,973,127       1,462,118  
Funds withheld at interest — embedded derivatives
    (512,888 )                 (512,888 )
Short-term investments
    570             218       352  
Other invested assets — non-redeemable preferred stock
    123,399       99,527       18,479       5,393  
Other invested assets — common stock
    35,975       4,999       18,920       12,056  
Other invested assets — derivatives
    206,341             206,341        
Reinsurance ceded receivable — embedded derivatives
    66,716                   66,716  
     
Total
  $ 8,451,917     $ 201,085     $ 7,217,085     $ 1,033,747  
     
 
                               
Liabilities:
                               
Interest sensitive contract liabilities — embedded derivatives
  $ (807,431 )   $     $     $ (807,431 )
Other liabilities — derivatives
    (10,189 )           (10,189 )      
     
Total
  $ (817,620 )   $     $ (10,189 )   $ (807,431 )
     
As of September 30, 2009 and December 31, 2008, respectively, the Company classified approximately 17.9% and 17.1% of its fixed maturity securities in the Level 3 category. These securities primarily consist of private placement corporate securities with an inactive trading market. Additionally, the Company has included asset-backed securities with sub-prime exposure in the Level 3 category due to the current market uncertainty associated with these securities and the Company’s utilization of information from third parties for the valuation of these securities.
The tables below present reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2009 and 2008 (dollars in thousands).
                                                 
    Total Fair Value Measurements for the three months ended September 30, 2009
            Total gains/losses            
            (realized/unrealized)            
            included in:            
                            Purchases,        
                    Other   issuances   Transfers in   Balance
    Balance   Earnings,   comprehensive   and   and/or out of   September
    July 1, 2009   net   income   disposals   Level 3   30, 2009
     
Assets:
                                               
Fixed maturity securities — available-for-sale
                                               
U.S. corporate securities
  $ 845,525     $ (554 )   $ 74,775     $ (22,374 )   $ 5,227     $ 902,599  
Canadian and Canadian provincial governments
    5,190       62       134       (3,079 )     7,041       9,348  
Residential mortgage-backed securities
    53,653       (4,157 )     9,858       20,855       20,862       101,071  
Foreign corporate securities
    294,711       (1,018 )     11,971       71,183       1,302       378,149  
Asset-backed securities
    227,777       (10,087 )     24,976       27,278       36,420       306,364  
Commercial mortgage-backed securities
    110,822       (1,223 )     6,776       (1,261 )     (43,627 )     71,487  
State and political subdivision securities
    84,333       4       4,313       1,584       (3,939 )     86,295  
Other foreign government securities
    145,133       71       399       (25,386 )     (4,706 )     115,511  
     
Sub-total
    1,767,144       (16,902 )     133,202       68,800       18,580       1,970,824  

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Continued
                                                 
    Total Fair Value Measurements for the three months ended September 30, 2009
            Total gains/losses            
            (realized/unrealized)            
            included in:            
                            Purchases,        
                    Other   issuances   Transfers in   Balance
    Balance   Earnings,   comprehensive   and   and/or out of   September
    July 1, 2009   net   income   disposals   Level 3   30, 2009
     
Funds withheld at interest — embedded derivatives
    (488,977 )     51,454             1             (437,522 )
Short-term investments
    688       (14 )     97       (242 )           529  
Other invested assets — non-redeemable preferred stock
    9,348       2       (143 )     3,412       (1,053 )     11,566  
Other invested assets — common stock
    13,267             958                   14,225  
Reinsurance ceded receivable — embedded derivatives
    60,075       2,369             (2,302 )           60,142  
     
Total
  $ 1,361,545     $ 36,909     $ 134,114     $ 69,669     $ 17,527     $ 1,619,764  
     
                                                 
Liabilities:
                                               
Interest sensitive contract liabilities - embedded derivatives
  $ (575,225 )   $ (16,363 )   $     $ 6,757     $     $ (584,831 )
     
Total
  $ (575,225 )   $ (16,363 )   $     $ 6,757     $     $ (584,831 )
     
                                                 
    Total Fair Value Measurements for the three months ended September 30, 2008
            Total gains/losses            
            (realized/unrealized) included in:            
                            Purchases,        
                    Other   issuances   Transfers in   Balance
    Balance           comprehensive   and   and/or out of   September
    July 1, 2008   Earnings, net   loss   disposals   Level 3   30, 2008
     
Assets:
                                               
Fixed maturity securities available-for-sale
  $ 1,502,373     $ (56,953 )   $ (75,744 )   $ 86,606     $ 219,050     $ 1,675,332  
Funds withheld at interest — embedded derivatives
    (245,070 )     (106,797 )                       (351,867 )
Short-term investments
                            976       976  
Other invested assets — equity securities
    11,339       8       (1,717 )     1,370       (180 )     10,820  
Reinsurance ceded receivable — embedded derivatives
    81,163       (11,552 )           1,730             71,341  
     
Total
  $ 1,349,805     $ (175,294 )   $ (77,461 )   $ 89,706     $ 219,846     $ 1,406,602  
     
                                                 
Liabilities:
                                               
Interest sensitive contract liabilities — embedded derivatives
  $ (588,870 )   $ 19,544     $     $ 989     $     $ (568,337 )
     
Total
  $ (588,870 )   $ 19,544     $     $ 989     $     $ (568,337 )
     

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    Total Fair Value Measurements for the nine months ended September 30, 2009
            Total gains/losses            
            (realized/unrealized)            
            included in:            
                            Purchases,        
    Balance           Other   issuances   Transfers in   Balance
    January 1,   Earnings,   comprehensive   and   and/or out of   September
    2009   net   income   disposals   Level 3   30, 2009
     
Assets:
                                               
Fixed maturity securities — available-for-sale
                                               
U.S. corporate securities
  $ 816,285     $ (28,355 )   $ 146,109     $ (26,971 )   $ (4,469 )   $ 902,599  
Canadian and Canadian provincial governments
    9,965       62       100       1,242       (2,021 )     9,348  
Residential mortgage-backed securities
    30,424       (14,466 )     22,053       9,412       53,648       101,071  
Foreign corporate securities
    176,608       (3,131 )     14,326       214,304       (23,958 )     378,149  
Asset-backed securities
    231,869       (22,765 )     16,327       38,964       41,969       306,364  
Commercial mortgage-backed securities
    59,041       (1,170 )     25,963       (11,148 )     (1,199 )     71,487  
State and political subdivision securities
    32,487       23       14,338       3,266       36,181       86,295  
Other foreign government securities
    105,439       1,348       (4,179 )     31,400       (18,497 )     115,511  
     
Sub-total
    1,462,118       (68,454 )     235,037       260,469       81,654       1,970,824  
 
                                               
Funds withheld at interest — embedded derivatives
    (512,888 )     75,366                         (437,522 )
 
                                               
Short-term investments
    352       (471 )     709       (61 )           529  
Other invested assets — non-redeemable preferred stock
    5,393       (4,786 )     7,305       2,481       1,173       11,566  
Other invested assets — common stock
    12,056       (564 )     737       1,901       95       14,225  
Reinsurance ceded receivable — embedded derivatives
    66,716       1,778             (8,352 )           60,142  
     
Total
  $ 1,033,747     $ 2,869     $ 243,788     $ 256,438     $ 82,922     $ 1,619,764  
     
 
                                               
Liabilities:
                                               
Interest sensitive contract liabilities - embedded derivatives
  $ (807,431 )   $ 190,781     $     $ 31,819     $     $ (584,831 )
     
Total
  $ (807,431 )   $ 190,781     $     $ 31,819     $     $ (584,831 )
     
     
    Total Fair Value Measurements for the nine months ended September 30, 2008
            Total gains/losses            
            (realized/unrealized) included in:            
    Balance           Other   Purchases,   Transfers in   Balance
    January 1,           comprehensive   issuances and   and/or out of   September
    2008   Earnings, net   loss   disposals   Level 3   30, 2008
     
Assets:
                                               
Fixed maturity securities available-for-sale
  $ 1,500,054     $ (64,504 )   $ (153,528 )   $ 213,694     $ 179,616     $ 1,675,332  
Funds withheld at interest — embedded derivatives
    (85,090 )     (266,777 )                       (351,867 )
Short-term investments
                            976       976  
Other invested assets — equity securities
    13,950       9       (3,436 )     15,100       (14,803 )     10,820  
     
Reinsurance ceded receivable — embedded derivatives
    68,298       (6,966 )           10,009             71,341  
     
Total
  $ 1,497,212     $ (338,238 )   $ (156,964 )   $ 238,803     $ 165,789     $ 1,406,602  
     
 
                                               
Liabilities:
                                               
Interest sensitive contract liabilities - embedded derivatives
  $ (531,160 )   $ (18,152 )   $     $ (19,025 )   $     $ (568,337 )
     
Total
  $ (531,160 )   $ (18,152 )   $     $ (19,025 )   $     $ (568,337 )
     

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The tables below summarize gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recorded in earnings for Level 3 assets and liabilities for the three and nine months ended September 30, 2009 and 2008 (dollars in thousands).
                                                 
    Total Gains and Losses
    Classification of gains/losses (realized/unrealized) included in earnings for the three months
    ended September 30, 2009
                                    Policy    
                                    acquisition    
    Investment           Claims           costs and    
    income, net of   Investment   & other           other    
    related   related gains   policy   Interest   insurance    
    expenses   (losses), net   benefits   credited   expenses   Total
     
Assets:
                                               
Fixed maturity securities — available-for-sale
                                               
U.S. corporate securities
  $ 595     $ (1,149 )   $     $     $     $ (554 )
Canadian and Canadian provincial governments
    (3 )     65                         62  
Residential mortgage-backed securities
    428       (4,585 )                       (4,157 )
Foreign corporate securities
    93       (1,111 )                       (1,018 )
Asset-backed securities
    366       (10,453 )                       (10,087 )
Commercial mortgage-backed securities
    121       (1,344 )                       (1,223 )
State and political subdivision securities
    7       (3 )                       4  
Other foreign government securities
    (435 )     506                         71  
     
Sub-total
    1,172       (18,074 )                       (16,902 )
Funds withheld at interest — embedded derivatives
          51,454                         51,454  
Short-term investments
    (88 )     74                         (14 )
Other invested assets — non-redeemable preferred stock
    2                               2  
Reinsurance ceded receivable — embedded derivatives
                            2,369       2,369  
     
Total
  $ 1,086     $ 33,454     $     $     $ 2,369     $ 36,909  
     
 
                                               
Liabilities:
                                               
Interest sensitive contract liabilities - embedded derivatives
  $     $ 10,127     $ (1,299 )   $ (25,191 )   $     $ (16,363 )
     
Total
  $     $ 10,127     $ (1,299 )   $ (25,191 )   $     $ (16,363 )
     
     
    Total Gains and Losses
    Classification of gains/losses (realized/unrealized) included in earnings for the three months ended
    September 30, 2008
    Investment                           Policy acquisition    
    income, net   Investment   Claims &           costs and other    
    of related   related gains   other policy   Interest   insurance    
    expenses   (losses), net   benefits   credited   expenses   Total
     
Assets:
                                               
Fixed maturity securities — available-for-sale
  $ 194     $ (57,147 )   $     $       $     $ (56,953 )
Funds withheld at interest — embedded derivatives
          (106,797 )                       (106,797 )
 
                                               
Other invested assets — equity securities
    8                               8  
 
                                               
Reinsurance ceded receivable — embedded derivatives
                            (11,552 )     (11,552 )
     
Total
  $ 202     $ (163,944 )   $       $       $ (11,552 )   $ (175,294 )
     
 
                                               
Liabilities:
                                               
Interest sensitive contract liabilities — embedded derivatives
  $     $ (34,209 )   $ 699     $ 53,054     $     $ 19,544  
     
Total
  $     $ (34,209 )   $ 699     $ 53,054     $     $ 19,544  
     

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    Total Gains and Losses
    Classification of gains/losses (realized/unrealized) included in earnings for the nine months
    ended September 30, 2009
                                    Policy    
                                    acquisition    
    Investment           Claims           costs and    
    income, net of   Investment   & other           other    
    related   related gains   policy   Interest   insurance    
    expenses   (losses), net   benefits   credited   expenses   Total
     
Assets:
                                               
Fixed maturity securities — available-for-sale
                                               
U.S. corporate securities
  $ 1,408     $ (29,763 )   $     $     $     $ (28,355 )
Canadian and Canadian provincial governments
    (3 )     65                         62  
Residential mortgage-backed securities
    868       (15,334 )                       (14,466 )
Foreign corporate securities
    183       (3,314 )                       (3,131 )
Asset-backed securities
    3,368       (26,133 )                       (22,765 )
Commercial mortgage-backed securities
    278       (1,448 )                       (1,170 )
State and political subdivision securities
    28       (5 )                       23  
Other foreign government securities
    (737 )     2,085                         1,348  
     
Sub-total
    5,393       (73,847 )                       (68,454 )
Funds withheld at interest — embedded derivatives
          75,366                         75,366  
Short-term investments
    152       (623 )                       (471 )
Other invested assets — non-redeemable preferred stock
    (58 )     (4,728 )                       (4,786 )
Other invested assets — common stock
    (142 )     (422 )                       (564 )
Reinsurance ceded receivable — embedded derivatives
                            1,778       1,778  
     
Total
  $ 5,345     $ (4,254 )   $     $     $ 1,778     $ 2,869  
     
 
                                               
Liabilities:
                                               
Interest sensitive contract liabilities - embedded derivatives
  $     $ 206,577     $ (2,260 )   $ (13,536 )   $     $ 190,781  
     
Total
  $     $ 206,577     $ (2,260 )   $ (13,536 )   $     $ 190,781  
     
     
    Total Gains and Losses
    Classification of gains/losses (realized/unrealized) included in earnings for the nine months ended
    September 30, 2008
                                Policy    
    Investment                           acquisition costs    
    income, net of   Investment   Claims &           and other    
    related   related gains   other policy   Interest   insurance    
    expenses   (losses), net   benefits   credited   expenses   Total
     
Assets:
                                               
Fixed maturity securities — available-for-sale
  $ 352     $ (64,856 )   $     $     $     $ (64,504 )
Funds withheld at interest — embedded derivatives
          (266,777 )                       (266,777 )
 
                                               
Other invested assets — equity securities
    9                               9  
 
                                               
Reinsurance ceded receivable — embedded derivatives
                            (6,966 )     (6,966 )
     
Total
  $ 361     $ (331,633 )   $     $     $ (6,966 )   $ (338,238 )
     
 
                                               
Liabilities:
                                               
Interest sensitive contract liabilities - embedded derivatives
  $     $ (33,268 )   $ 2,420     $ 12,696     $     $ (18,152 )
     
Total
  $     $ (33,268 )   $ 2,420     $ 12,696     $     $ (18,152 )
     

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The tables below summarize changes in unrealized gains or losses recorded in earnings for the three and nine months ended September 30, 2009 and 2008 for Level 3 assets and liabilities that were still held at September 30, 2009 and 2008 (dollars in thousands).
                                                 
    Changes in Unrealized Gains and Losses
    Changes in unrealized gains/losses relating to assets and liabilities still held at the reporting
    date for the three months ended September 30, 2009
                                    Policy    
                                    acquisition    
    Investment           Claims           costs and    
    income, net of   Investment   & other           other    
    related   related gains   policy   Interest   insurance    
    expenses   (losses), net   benefits   credited   expenses   Total
     
Assets:
                                               
Fixed maturity securities — available-for-sale
                                               
U.S. corporate securities
  $ 564     $ (914 )   $     $     $     $ (350 )
Canadian and Canadian provincial governments
    (4 )                             (4 )
Residential mortgage-backed securities
    412       (4,290 )                       (3,878 )
Foreign corporate securities
    87       (967 )                       (880 )
Asset-backed securities
    130       (8,968 )                       (8,838 )
Commercial mortgage-backed securities
    123       (2,646 )                       (2,523 )
State and political subdivision securities
    7                               7  
Other foreign government securities
    (312 )                             (312 )
     
Sub-total
    1,007       (17,785 )                       (16,778 )
Funds withheld at interest — embedded derivatives
          51,454                         51,454  
Short-term investments
    3                               3  
Other invested assets — non-redeemable preferred stock
    2                               2  
Reinsurance ceded receivable — embedded derivatives
                            4,706       4,706  
     
Total
  $ 1,012     $ 33,669     $     $     $ 4,706     $ 39,387  
     
 
                                               
Liabilities:
                                               
Interest sensitive contract liabilities - embedded derivatives
  $     $ 10,127     $ (2,915 )   $ (35,710 )   $     $ (28,498 )
     
Total
  $     $ 10,127     $ (2,915 )   $ (35,710 )   $     $ (28,498 )
     
     
    Changes in Unrealized Gains and Losses
    Changes in unrealized gains/losses relating to assets and liabilities still held at the reporting date for the
    three months ended September 30, 2008
    Investment                        
    income, net of   Investment   Claims &           Policy acquisition    
    related   related gains   other policy   Interest   costs and other    
    expenses   (losses), net   benefits   credited   insurance expenses   Total
     
Assets:
                                               
Fixed maturity securities — available-for-sale
  $ 129     $ (56,098 )   $     $     $     $ (55,969 )
Funds withheld at interest — embedded derivatives
          (106,797 )                       (106,797 )
 
                                               
Other invested assets — equity securities
    8                               8  
 
                                               
Reinsurance ceded receivable — embedded derivatives
                            (10,242 )     (10,242 )
     
Total
  $ 137     $ (162,895 )   $     $     $ (10,242 )   $ (173,000 )
     
 
                                               
Liabilities:
                                               
 
                                               
Interest sensitive contract liabilities - embedded derivatives
  $     $ (34,209 )   $ 1,351     $ 41,315     $     $ 8,457  
     
Total
  $     $ (34,209 )   $ 1,351     $ 41,315     $     $ 8,457  
     

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    Changes in Unrealized Gains and Losses
    Changes in unrealized gains/losses relating to assets and liabilities still held at the reporting
    date for the nine months ended September 30, 2009
                                    Policy    
                                    acquisition    
    Investment           Claims           costs and    
    income, net of   Investment   & other           other    
    related   related gains   policy   Interest   insurance    
    expenses   (losses), net   benefits   credited   expenses   Total
     
Assets:
                                               
Fixed maturity securities — available-for-sale
                                               
U.S. corporate securities
  $ 1,341     $ (20,769 )   $     $     $     $ (19,428 )
Canadian and Canadian provincial governments
    (3 )                             (3 )
Residential mortgage-backed securities
    851       (17,271 )                       (16,420 )
Foreign corporate securities
    173       (2,272 )                       (2,099 )
Asset-backed securities
    2,680       (29,803 )                       (27,123 )
Commercial mortgage-backed securities
    292       (2,873 )                       (2,581 )
State and political subdivision securities
    28                               28  
Other foreign government securities
    (583 )                             (583 )
     
Sub-total
    4,779       (72,988 )                       (68,209 )
Funds withheld at interest — embedded derivatives
          75,366                         75,366  
Short-term investments
    244       (409 )                       (165 )
Other invested assets — non-redeemable preferred stock
    (58 )     (3,858 )                       (3,916 )
Other invested assets — common stock
    (142 )     (425 )                       (567 )
Reinsurance ceded receivable — embedded derivatives
                            9,205       9,205  
     
Total
  $ 4,823     $ (2,314 )   $     $     $ 9,205     $ 11,714  
     
 
                                               
Liabilities:
                                               
Interest sensitive contract liabilities - embedded derivatives
  $     $ 206,577     $ (7,872 )   $ (43,076 )   $     $ 155,629  
     
Total
  $     $ 206,577     $ (7,872 )   $ (43,076 )   $     $ 155,629  
     
 
    Changes in Unrealized Gains and Losses
    Changes in unrealized gains/losses relating to assets and liabilities still held at the reporting date for the
    nine months ended September 30, 2008
    Investment                           Policy acquisition    
    income, net of   Investment   Claims &           costs and other    
    related   related gains   other policy   Interest   insurance    
    expenses   (losses), net   benefits   credited   expenses   Total
     
Assets:
                                               
Fixed maturity securities — available-for-sale
  $ 285     $ (58,193 )   $     $     $     $ (57,908 )
Funds withheld at interest — embedded derivatives
          (266,777 )                       (266,777 )
Other invested assets — equity securities
    9                               9  
Reinsurance ceded receivable — embedded derivatives
                            (2,745 )     (2,745 )
     
Total
  $ 294     $ (324,970 )   $     $     $ (2,745 )   $ (327,421 )
     
 
                                               
Liabilities:
                                               
Interest sensitive contract liabilities - embedded derivatives
  $     $ (33,268 )   $ 3,841     $ (31,775 )   $     $ (61,202 )
     
Total
  $     $ (33,268 )   $ 3,841     $ (31,775 )   $     $ (61,202 )
     

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7. Segment Information
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 2 of the consolidated financial statements accompanying the 2008 Annual Report. Effective January 1, 2009, due to immateriality, the discontinued accident and health operations are included in the results of the Corporate and Other segment. The Company measures segment performance primarily based on profit or loss from operations before income taxes. There are no intersegment reinsurance transactions and the Company does not have any material long-lived assets. Investment income is allocated to the segments based upon average assets and related capital levels deemed appropriate to support the segment business volumes.
The Company allocates capital to its segments based on an internally developed economic capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model considers the unique and specific nature of the risks inherent in the Company’s businesses. As a result of the economic capital allocation process, a portion of investment income and investment related gains and losses are credited to the segments based on the level of allocated equity. In addition, the segments are charged for excess capital utilized above the allocated economic capital basis. This charge is included in policy acquisition costs and other insurance expenses.
Information related to total revenues, income (loss) from continuing operations before income taxes, and total assets of the Company for each reportable segment are summarized below (dollars in thousands).
                                 
    Three months ended   Nine months ended
    September 30,   September 30,
    2009   2008   2009   2008
     
Total revenues
                               
U.S.
  $ 1,082,838     $ 710,303     $ 3,094,496     $ 2,364,652  
Canada
    186,246       167,872       551,793       531,255  
Europe & South Africa
    213,041       180,579       582,389       572,336  
Asia Pacific
    265,900       265,759       778,120       811,628  
Corporate & Other
    30,956       (14,218 )     116,189       33,297  
     
Total
  $ 1,778,981     $ 1,310,295     $ 5,122,987     $ 4,313,168  
     
                                 
    Three months ended   Nine months ended
    September 30,   September 30,
    2009   2008   2009   2008
     
Income (loss) from continuing operations before income taxes
                               
U.S.
  $ 104,406     $ (11,289 )   $ 223,481     $ 113,162  
Canada
    18,847       29,733       60,547       80,182  
Europe & South Africa
    6,981       20,791       27,879       43,875  
Asia Pacific
    30,925       21,225       60,018       61,044  
Corporate & Other
    21,392       (27,914 )     60,255       (38,065 )
     
Total
  $ 182,551     $ 32,546     $ 432,180     $ 260,198  
     
                 
    September 30, 2009   December 31, 2008
     
Total assets                
U.S.
  $ 15,391,239     $ 15,061,753  
Canada
    2,750,956       2,710,187  
Europe & South Africa
    1,363,442       1,134,990  
Asia Pacific
    1,943,305       1,413,611  
Corporate and Other
    2,713,171       1,338,277  
     
Total
  $ 24,162,113     $ 21,658,818  
     
8. Commitments and Contingent Liabilities
The Company has commitments to fund investments in mortgage loans and limited partnerships in the amount of $83.9 million and $91.7 million, respectively, at September 30, 2009. The Company anticipates that the majority of these amounts will be invested over the next five years; however, contractually these commitments could become

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due at the request of the counterparties. Investments in limited partnerships are carried at cost and included in other invested assets in the condensed consolidated balance sheets.
The Company is subject to litigation in the normal course of its business. The Company currently has no material litigation. However, if such material litigation did arise, it is possible that an adverse outcome on any particular arbitration or litigation situation could have a material adverse effect on the Company’s consolidated financial position and/or net income in a particular reporting period.
The Company has obtained letters of credit, issued by banks, in favor of various affiliated and unaffiliated insurance companies from which the Company assumes business. These letters of credit represent guarantees of performance under the reinsurance agreements and allow ceding companies to take statutory reserve credits. At September 30, 2009 and December 31, 2008, there were approximately $24.9 million and $26.6 million, respectively, of outstanding bank letters of credit in favor of third parties. Additionally, the Company utilizes letters of credit to secure reserve credits when it retrocedes business to its subsidiaries, including Parkway Reinsurance Company, RGA Americas Reinsurance Company, Ltd., RGA Reinsurance Company (Barbados) Ltd. and RGA Atlantic Reinsurance Company, Ltd. The Company cedes business to its affiliates to help reduce the amount of regulatory capital required in certain jurisdictions, such as the U.S. and the United Kingdom. The capital required to support the business in the affiliates reflects more realistic expectations than the original jurisdiction of the business, where capital requirements are often considered to be quite conservative. As of September 30, 2009 and December 31, 2008, $759.3 million and $428.8 million, respectively, in letters of credit from various banks were outstanding between the various subsidiaries of the Company. The Company maintains a syndicated revolving credit facility with an overall capacity of $750.0 million, which is scheduled to mature in September 2012. The Company may borrow cash and may obtain letters of credit in multiple currencies under this facility. As of September 30, 2009, the Company had $516.2 million in issued, but undrawn, letters of credit under this facility, which is included in the total above. Applicable letter of credit fees and fees payable for the credit facility depend upon the Company’s senior unsecured long-term debt rating. Fees associated with the Company’s other letters of credit are not fixed for periods in excess of one year and are based on the Company’s ratings and the general availability of these instruments in the marketplace. On September 30, 2009, the Company entered into a ten-year, $200.0 million letter of credit facility agreement. This letter of credit is expected to be fully utilized though 2016 and then amortize to zero by 2019. As of September 30, 2009, the Company had $200.0 million in issued, but undrawn, letters of credit under this new facility, which is included in the total above. Letter of credit fees for this facility are fixed for the term of the facility.
RGA has issued guarantees to third parties on behalf of its subsidiaries’ performance for the payment of amounts due under certain credit facilities, reinsurance treaties and office lease obligations, whereby if a subsidiary fails to meet an obligation, RGA or one of its other subsidiaries will make a payment to fulfill the obligation. In limited circumstances, treaty guarantees are granted to ceding companies in order to provide them additional security, particularly in cases where RGA’s subsidiary is relatively new, unrated, or not of a significant size. Liabilities supported by the treaty guarantees, before consideration for any legally offsetting amounts due from the guaranteed party, totaled $313.5 million and $273.6 million as of September 30, 2009 and December 31, 2008, respectively, and are reflected on the Company’s condensed consolidated balance sheets in future policy benefits. Potential guaranteed amounts of future payments will vary depending on production levels and underwriting results. Guarantees related to trust preferred securities and credit facilities provide additional security to third parties should a subsidiary fail to make principal and/or interest payments when due. As of September 30, 2009, RGA’s exposure related to these guarantees was $159.2 million.
In addition, the Company indemnifies its directors and officers as provided in its charters and by-laws. Since this indemnity generally is not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount due under this indemnity in the future.
9. Income Tax
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the nine months ended September 30, 2009 is as follows (dollars in thousands):

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            Unrecognized Tax Benefits That, If
    Total Unrecognized Tax   Recognized, Would Affect The
    Benefits   Effective Tax Rate
     
Balance at January 1, 2009
  $ 206,665     $ 28,106  
Additions for tax positions of prior years
    25,148        
Reductions for tax positions of prior years
    (14,711 )     (14,711 )
Additions for tax positions of current year
    2,953       2,953  
Reductions for tax positions of current year
           
Settlements with tax authorities
           
     
Balance at September 30, 2009
  $ 220,055     $ 16,348  
     
During the second quarter of 2009, the Company recognized a tax benefit of approximately $12.0 million, including after-tax interest, related to the release of an uncertain tax position. Following the evaluation of new information that was not available in a previous financial reporting period, the Company believed this position to be a highly certain tax position for which no uncertainty currently exists.
During the third quarter of 2009, the Company recognized tax benefits associated with uncertain tax positions that are effectively settled of approximately $3.8 million, including after-tax interest. The Company also increased its accrual by approximately $25.1 million for unrecognized tax benefits that are timing in nature and have no impact on the Company’s effective tax rate.
10. Employee Benefit Plans
The components of net periodic benefit costs were as follows (dollars in thousands):
                                 
    Three months ended   Nine months ended
    September 30,   September 30,
    2009   2008   2009   2008
     
Net periodic pension benefit cost:
                               
Service cost
  $ 1,349     $ 1,072     $ 3,173     $ 2,552  
Interest cost
    1,149       921       2,639       2,092  
Expected return on plan assets
    (364 )     (705 )     (1,459 )     (1,643 )
Amortization of prior service cost
    7       78       22       232  
Amortization of prior actuarial  loss
    1,068       238       1,317       402  
     
Net periodic pension benefit cost
  $ 3,209     $ 1,604     $ 5,692     $ 3,635  
     
 
                               
Net periodic other benefits cost:
                               
Service cost
  $ 158     $ 159     $ 474     $ 474  
Interest cost
    159       188       478       478  
Expected return on plan assets
                       
Amortization of prior service cost
                       
Amortization of prior actuarial (gain) loss
    23       (2 )     69       69  
     
Net periodic other benefits cost
  $ 340     $ 345     $ 1,021     $ 1,021  
     
The Company made pension contributions of $4.0 million during the first quarter of 2009 and expects this to be the only contribution for the year.
11. Equity Based Compensation
Equity compensation expense was $2.6 million and $3.0 million in the third quarter of 2009 and 2008, respectively, and $9.1 million and $10.8 million in the first nine months of 2009 and 2008, respectively. In the first quarter of 2009, the Company granted 0.7 million stock options at $32.20 weighted average per share and 0.3 million performance contingent units to employees. Additionally, non-employee directors were granted a total of 7,600 shares of common stock. As of September 30, 2009, 1.8 million share options at $34.90 weighted average per share were vested and exercisable with a remaining weighted average exercise period of 3.4 years. As of September 30, 2009, the total compensation cost of non-vested awards not yet recognized in the financial statements was $18.5 million. It is estimated that these costs will vest over a weighted average period of 1.7 years.

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12. Repurchase of Long-term Debt
During the second quarter of 2009, the Company repurchased $80.2 million face amount of its 6.75% junior subordinated debentures for $39.2 million. The debt was purchased by RGA Reinsurance Company, a subsidiary of RGA. As a result, the Company recorded a pre-tax gain of $38.9 million, after fees and unamortized discount, in other revenues in the second quarter of 2009.
13. New Accounting Standards
In June 2009, the Financial Accounting Standards Board (“FASB”) issued “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles”. Effective July 1, 2009, FASB Accounting Standards Codification™ (“Codification”) has become the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission for public companies. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted Codification on September 30, 2009 and has updated all disclosures to reference Codification herein.
Consolidation and Business Combinations
In June 2009, the FASB amended the general accounting principles for Consolidation as it relates to the assessment of a variable interest entity. This amendment also requires additional disclosures to provide transparent information regarding the involvement in a variable interest entity. The amendment is effective for fiscal years and interim periods beginning after November 15, 2009. The Company is currently evaluating the impact of this amendment on its condensed consolidated financial statements.
In December 2007, the FASB amended the general accounting principles for Business Combinations. This amendment establishes principles and requirements for how an acquirer recognizes and measures certain items in a business combination, as well as disclosures about the nature and financial effects of a business combination. The FASB also amended the general accounting principles for Consolidation as it relates to noncontrolling interests in consolidated financial statements. This amendment establishes accounting and reporting standards surrounding noncontrolling interest, or minority interests, which are the portions of equity in a subsidiary not attributable, directly or indirectly, to a parent. The amendments are effective for fiscal years beginning on or after December 15, 2008 and apply prospectively to business combinations. Presentation and disclosure requirements related to noncontrolling interests must be retrospectively applied. The adoption of these amendments did not have a material impact on the Company’s condensed consolidated financial statements.
Investments
In April 2009, the FASB amended the general accounting principles for Investments as it relates to the recognition and presentation of other-than-temporary impairments. This amendment updates the other-than-temporary impairment guidance for debt securities to make it more operational and to improve the presentation and disclosure of other-than-temporary impairments (“OTTI”) on debt and equity securities in the financial statements. The recognition provisions apply only to debt securities classified as available-for-sale and held-to-maturity, while the presentation and disclosure requirements apply to both debt and equity securities. An impaired debt security will be considered other-than-temporarily impaired if the Company has the intent to sell or it more likely than not will be required to sell prior to recovery of the amortized cost. If the holder of a debt security does not expect recovery of the entire cost basis, even if there is no intention to sell the security, an OTTI has occurred. This amendment also changes how an entity recognizes an OTTI for a debt security by separating the loss between the amount representing the credit loss and the amount relating to other factors, 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 will be recognized in net income and losses relating to other factors will be recognized in accumulated other comprehensive income (“AOCI”). If the Company has the intent to sell or it more likely than not will be required to sell before its recovery of amortized cost less any current period credit loss, the entire OTTI will be recognized in net income. This amendment is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this amendment resulted in a net after-tax increase to retained earnings and a decrease to accumulated other comprehensive income of $4.4 million, as of April 1, 2009. The required disclosures are provided in Note 4 — “Investments”.

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In January 2009, the FASB amended the general accounting principles for Investments as it relates to determining other-than-temporary impairments on purchased beneficial interests and beneficial interests that continue to be held by a transferor in securitized financial assets. The primary effect of this amendment was to remove the requirement that a holder attempt to determine the underlying cash flows on an asset-backed security based on the assumptions that a market participant would make in determining the current fair value of the instrument. Instead, the focus has been placed on determining the estimated cash flows as determined by the holder for all sources including its own comprehensive credit analysis. The provisions of this amendment were required to be applied prospectively for interim periods and fiscal years ending after December 15, 2008. The adoption of this amendment did not have a significant impact on how the Company values its structured investment securities.
Transfers and Servicing
In June 2009, the FASB amended the general accounting principles for Transfers and Servicing as it relates to the transfers of financial assets. This amendment also requires additional disclosures to address concerns regarding the transparency of transfers of financial assets. The amendment is effective for fiscal years and interim periods beginning after November 15, 2009. The Company is currently evaluating the impact of this amendment on its condensed consolidated financial statements.
In February 2008, the FASB amended the general accounting principles for Transfers and Servicing as it relates to the accounting for transfers of financial assets and repurchase financing transactions. This amendment provides guidance for evaluating whether to account for a transfer of a financial asset and repurchase financing as a single transaction or as two separate transactions. The amendment is effective prospectively for financial statements issued for fiscal years beginning after November 15, 2008. The adoption of this amendment did not have a material impact on the Company’s condensed consolidated financial statements.
Derivatives and Hedging
In March 2008, the FASB amended the general accounting principles for Derivatives and Hedging as it relates to the disclosures about derivative instruments and hedging activities. This amendment requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The amendment is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this amendment in the first quarter of 2009.
Fair Value Measurements and Disclosures
In September 2009, the FASB amended the general accounting principles for Fair Value Measurements and Disclosures as it relates to the fair value measurement of investments in certain entities that calculate net asset value per share. This amendment allows the fair value of certain investments to be measured on the basis of the net asset value. It also requires disclosure, by major category type, of the attributes of those investments, such as the nature of any restrictions on redemption, any unfunded commitments, and the investment strategies of the investees. The amendment is effective for interim and annual reporting periods ending after December 15, 2009. The Company is currently evaluating the impact of this amendment on its condensed consolidated financial statements.
In August 2009, the FASB amended the general accounting principles for Fair Value Measurements and Disclosures as it relates to measuring liabilities at fair value. This amendment provides guidance for measuring liabilities at fair value when a quoted price in an active market for the identical liability is not available. It also clarifies that the inclusion of a separate input, used in the fair value measurement, relating to the existence of a restriction that prevents the transfer of a liability is not necessary. The amendment is effective for interim and annual reporting beginning after issuance. The adoption of this amendment is not expected to have an impact on the condensed consolidated financial statements.
In April 2009, the FASB amended the general accounting principles for Fair Value Measurements and Disclosures as it relates to determining fair value when the volume and level of activity for asset or liability have significantly decreased and identifying transactions that are not orderly. This amendment provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased in relation to normal market activity for the asset or liability and clarifies that the use of multiple valuation techniques may be appropriate. It also provides additional guidance on circumstances that may indicate a transaction is not orderly. Further, it requires additional disclosures about fair value measurements in annual and interim reporting

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periods. This amendment is effective prospectively for interim and annual reporting periods ending after June 15, 2009. The adoption of this amendment did not have a material impact on the Company’s condensed consolidated financial statements. The required disclosures are provided in Note 6 — “Fair Value Disclosures”.
In October 2008, the FASB amended the general accounting principles for Fair Value Measurements and Disclosures as it relates to determining the fair value of a financial asset when the market for that asset is not active. This amendment clarifies the application of fair value in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The amendment was effective upon issuance on October 10, 2008, including prior periods for which financial statements had not been issued. The Company did not consider it necessary to change any valuation techniques as a result of the amendment. The Company also adopted an amendment that delayed the effective date of fair value measurement for certain nonfinancial assets and liabilities that are recorded at fair value on a nonrecurring basis. The effective date was delayed until January 1, 2009 and impacts balance sheet items including nonfinancial assets and liabilities in a business combination and the impairment testing of goodwill and long-lived assets. The adoption of this amendment did not have a material impact on the Company’s condensed consolidated financial statements.
Financial Instruments
In April 2009, the FASB amended the general accounting principles for Financial Instruments as it relates to interim disclosures about fair value of financial instruments. This amendment expands existing disclosures regarding fair value of financial instruments required in annual reports to interim periods. The disclosures required are effective for interim reporting periods ending after June 15, 2009. The adoption of this amendment did not have a material impact on the Company’s condensed consolidated financial statements. The required disclosures are provided in Note 6 — “Fair Value Disclosures”.
Compensation
In December 2008, the FASB amended the general accounting principles for Compensation as it relates to employers disclosures about postretirement benefit plan assets. This amendment provides guidance for disclosure of the types of assets and associated risks in retirement plans. The new disclosures are designed to provide additional insight into the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period, significant concentrations of risk within plan assets and how investment decisions are made, including factors necessary to understanding investment policies and strategies. The disclosures about plan assets required by this amendment is effective for financial statements with fiscal years ending after December 15, 2009. The Company is currently evaluating the impact of this amendment on its condensed consolidated financial statements.
Subsequent Events
In May 2009, the FASB amended the general accounting principles for Subsequent Events. This amendment provides guidance on the Company’s assessment of subsequent events. It also requires the disclosure of the date through which subsequent events have been evaluated. This amendment is effective for annual and interim periods ending after June 15, 2009. The adoption of this amendment did not have a material impact on the Company’s condensed consolidated financial statements. See Note 1 — “Organization and Basis of Presentation” for additional information.
14. Subsequent Event
On October 16, 2009, the Company announced an agreement with ReliaStar Life Insurance Company, a subsidiary of ING Groep N.V., whereby the Company will acquire ReliaStar’s U.S. and Canadian group life, accident and health reinsurance business. The acquisition was structured as an indemnity coinsurance agreement and is expected to be effective January 1, 2010, subject to regulatory approvals. The Company will fund the acquisition with existing capital of approximately $115 million and expects the business to generate returns of between 15 and 19 percent beginning in 2010. The acquisition is expected to enhance the Company’s expertise and product offerings in the North American market, but is expected to contribute less than 3 percent to the Company’s consolidated assets, liabilities and income in 2010.

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking and Cautionary Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, among others, statements relating to projections of the strategies, earnings, revenues, income or loss, ratios, future financial performance, and growth potential of the Company. The words “intend,” “expect,” “project,” “estimate,” “predict,” “anticipate,” “should,” “believe,” and other similar expressions also are intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results, performance, and achievements could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements.
Numerous important factors could cause actual results and events to differ materially from those expressed or implied by forward-looking statements including, without limitation, (1) adverse capital and credit market conditions and their impact on the Company’s liquidity, access to capital and cost of capital, (2) the impairment of other financial institutions and its effect on the Company’s business, (3) requirements to post collateral or make payments due to declines in market value of assets subject to the Company’s collateral arrangements, (4) the fact that the determination of allowances and impairments taken on the Company’s investments is highly subjective, (5) adverse changes in mortality, morbidity, lapsation or claims experience, (6) changes in the Company’s financial strength and credit ratings and the effect of such changes on the Company’s future results of operations and financial condition, (7) inadequate risk analysis and underwriting, (8) general economic conditions or a prolonged economic downturn affecting the demand for insurance and reinsurance in the Company’s current and planned markets, (9) the availability and cost of collateral necessary for regulatory reserves and capital, (10) market or economic conditions that adversely affect the value of the Company’s investment securities or result in the impairment of all or a portion of the value of certain of the Company’s investment securities, that in turn could affect regulatory capital, (11) market or economic conditions that adversely affect the Company’s ability to make timely sales of investment securities, (12) risks inherent in the Company’s risk management and investment strategy, including changes in investment portfolio yields due to interest rate or credit quality changes, (13) fluctuations in U.S. or foreign currency exchange rates, interest rates, or securities and real estate markets, (14) adverse litigation or arbitration results, (15) the adequacy of reserves, resources and accurate information relating to settlements, awards and terminated and discontinued lines of business, (16) the stability of and actions by governments and economies in the markets in which the Company operates, (17) competitive factors and competitors’ responses to the Company’s initiatives, (18) the success of the Company’s clients, (19) successful execution of the Company’s entry into new markets, (20) successful development and introduction of new products and distribution opportunities, (21) the Company’s ability to successfully integrate and operate reinsurance business that the Company acquires, (22) regulatory action that may be taken by state Departments of Insurance with respect to the Company, (23) the Company’s dependence on third parties, including those insurance companies and reinsurers to which the Company cedes some reinsurance, third-party investment managers and others, (24) the threat of natural disasters, catastrophes, terrorist attacks, epidemics or pandemics anywhere in the world where the Company or its clients do business, (25) changes in laws, regulations, and accounting standards applicable to the Company, its subsidiaries, or its business, (26) the effect of the Company’s status as an insurance holding company and regulatory restrictions on its ability to pay principal of and interest on its debt obligations, and (27) other risks and uncertainties described in this document and in the Company’s other filings with the Securities and Exchange Commission (“SEC”).
Forward-looking statements should be evaluated together with the many risks and uncertainties that affect the Company’s business, including those mentioned in this document and the cautionary statements described in the periodic reports the Company files with the SEC. These forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligations to update these forward-looking statements, even though the Company’s situation may change in the future. The Company qualifies all of its forward-looking statements by these cautionary statements. For a discussion of these risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements, you are advised to see Item 1A — “Risk Factors” in the 2008 Annual Report.

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Overview
Reinsurance Group of America, Incorporated (“RGA”) is an insurance holding company that was formed on December 31, 1992. RGA and its subsidiaries (collectively, the “Company”) are primarily engaged in the life reinsurance business, which involves reinsuring life insurance policies that are often in force for the remaining lifetime of the underlying individuals insured, with premiums earned typically over a period of 10 to 30 years. Each year, however, a portion of the business under existing treaties terminates due to, among other things, lapses or surrenders of underlying policies, deaths of policyholders, and the exercise of recapture options by ceding companies.
The Company derives revenues primarily from renewal premiums from existing reinsurance treaties, new business premiums from existing or new reinsurance treaties, income earned on invested assets, and fees earned from financial reinsurance transactions. The Company believes that industry trends have not changed materially from those discussed in its 2008 Annual Report.
The Company’s profitability primarily depends on the volume and amount of death claims incurred and its ability to adequately price the risks it assumes. While death claims are reasonably predictable over a period of years, claims become less predictable over shorter periods and are subject to significant fluctuation from quarter to quarter and year to year. The maximum amount of coverage the Company retains per life is $8.0 million. Claims in excess of this retention amount are retroceded to retrocessionaires; however, the Company remains fully liable to the ceding company for the entire amount of risk it assumes. The Company believes its sources of liquidity are sufficient to cover potential claims payments on both a short-term and long-term basis.
The Company measures performance based on income or loss from continuing operations before income taxes for each of its five segments. The Company’s U.S., Canada, Europe & South Africa and Asia Pacific operations provide traditional life reinsurance to clients. The Company’s U.S. operations also provide asset-intensive and financial reinsurance products. The Company also provides insurers with critical illness reinsurance in its Canada, Europe & South Africa and Asia Pacific operations. Asia Pacific operations also provide financial reinsurance. The Corporate and Other segment results include among other things, the corporate investment activity, general corporate expenses, interest expense of RGA, operations of RGA Technology Partners, Inc., a wholly-owned subsidiary that develops and markets technology solutions for the insurance industry, investment income and expense associated with the Company’s collateral finance facility and the provision for income taxes. Effective January 1, 2009, due to immateriality, the discontinued accident and health operations are included in the results of the Corporate and Other segment. Prior to 2009, the results of the Company’s discontinued accident and health operations were reflected as discontinued operations.
The Company allocates capital to its segments based on an internally developed economic capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model considers the unique and specific nature of the risks inherent in RGA’s businesses. As a result of the economic capital allocation process, a portion of investment income and investment related gains and losses are credited to the segments based on the level of allocated capital. In addition, the segments are charged for excess capital utilized above the allocated economic capital basis. This charge is included in policy acquisition costs and other insurance expenses.
Results of Operations
Consolidated income from continuing operations before income taxes increased $150.0 million, or 460.9%, and $172.0 million, or 66.1%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. These increases were primarily due to a decrease in investment impairments and a favorable change in the value of embedded derivatives within the U.S. segment due to the impact of tightening credit spreads in the U.S. debt markets. Also contributing to the favorable results were increased net premiums and investment income. The increase in the first nine months also reflects the recognition in other revenues of a gain on the repurchase of long-term debt of $38.9 million. These increases were partially offset by unfavorable foreign currency fluctuations. Foreign currency exchange fluctuations resulted in a decrease to income from continuing operations before income taxes of approximately $2.0 million and $28.3 million for the third quarter and first nine months of 2009, respectively.

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The Company recognizes in consolidated income from continuing operations, changes in the value of embedded derivatives on modified coinsurance or funds withheld treaties, equity-indexed annuity treaties (“EIAs”) and variable annuity products. The change in the value of embedded derivatives related to reinsurance treaties written on a modified coinsurance or funds withheld basis are subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives. The unrealized gains and losses associated with these embedded derivatives, after adjustment for deferred acquisition costs, had a favorable effect on income before income taxes of $51.8 million and $102.7 million for the third quarter and first nine months of 2009, respectively, as compared to the same periods in 2008. Changes in risk free rates used in the fair value estimates of embedded derivatives associated with EIAs affect the amount of unrealized gains and losses the Company recognizes. The unrealized gains and losses associated with EIAs, after adjustment for deferred acquisition costs and retrocession, affected income before income taxes unfavorably by $8.1 million in the third quarter and favorably by $9.7 million in the first nine months of 2009, respectively, as compared to the same periods in 2008. The change in the Company’s liability for variable annuities associated with guaranteed minimum living benefits affects the amount of unrealized gains and losses the Company recognizes. The unrealized gains and losses associated with guaranteed minimum living benefits, after adjustment for deferred acquisition costs, affected income before income taxes favorably by $2.5 million in the third quarter and unfavorably by $63.6 million in the first nine months of 2009, respectively, as compared to the same periods in 2008.
The combined changes in these three types of embedded derivatives, after adjustment for deferred acquisition costs and retrocession, resulted in increases of approximately $46.2 million and approximately $48.8 million in consolidated income from continuing operations before income taxes in the third quarter and first nine months of 2009, respectively, as compared to the same periods in 2008. These fluctuations do not affect current cash flows, crediting rates or spread performance on the underlying treaties. Therefore, management believes it is helpful to distinguish between the effects of changes in these embedded derivatives and the primary factors that drive profitability of the underlying treaties, namely investment income, fee income, and interest credited.
Consolidated net premiums increased $101.6 million, or 7.8%, and $166.2 million, or 4.2%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008, due to growth in life reinsurance in force. Foreign currency fluctuations unfavorably affected net premiums by approximately $41.5 million and $289.4 million for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. Consolidated assumed insurance in force increased to $2,274.6 billion as of September 30, 2009 from $2,176.5 billion as of September 30, 2008 due to new business production. The Company added new business production, measured by face amount of insurance in force, of $70.3 billion and $73.8 billion during the third quarter of 2009 and 2008, respectively, and $216.9 billion and $221.8 billion during the first nine months of 2009 and 2008, respectively. Management believes industry consolidation, reduced capital levels in the life insurance industry and the established practice of reinsuring mortality risks should continue to provide opportunities for growth, albeit at rates less than historically experienced.
Consolidated investment income, net of related expenses, increased $79.2 million, or 36.0%, and $132.7 million, or 19.7%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008, primarily due to market value changes related to the Company’s funds withheld at interest investment associated with the reinsurance of certain equity-indexed annuity products, which are substantially offset by a corresponding change in interest credited to policyholder account balances resulting in a negligible effect on net income. The third quarter and first nine months increases in investment income also reflect a larger average invested asset base offset by a lower effective investment portfolio yield. Average invested assets at amortized cost at September 30, 2009 totaled $12.8 billion, a 10.2% increase over September 30, 2008. The average yield earned on investments, excluding funds withheld, decreased to 5.71%, for the third quarter of 2009 from 6.01% for the third quarter of 2008. The average yield earned on investments, excluding funds withheld, decreased to 5.71% for the first nine months of 2009 from 6.05% for the first nine months of 2008. The average yield will vary from quarter to quarter and year to year depending on a number of variables, including the prevailing interest rate and credit spread environment, changes in the mix of the underlying investments and cash balances, and the timing of dividends and distributions on certain investments.
Total investment related gains (losses), net improved by $283.7 million and $451.9 million, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The improvement for the third quarter is primarily due to favorable changes in the embedded derivatives related to reinsurance treaties written on a

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modified coinsurance or funds withheld basis and guaranteed minimum living benefits of $204.2 million and a decrease in investment impairments, net of non-credit adjustments, of $71.4 million, partially offset by an increase in net hedging losses related to the liabilities associated with guaranteed minimum living benefits of $24.4 million. The improvement for the first nine months is due to favorable changes in the value of embedded derivatives associated with reinsurance treaties written on a modified coinsurance or funds withheld basis and guaranteed minimum living benefits of $585.4 million, a decrease in investment impairments, net of non-credit related adjustments, of $21.9 million partially offset by an increase in net hedging losses related to the liabilities associated with guaranteed minimum living benefits of $179.1 million. See Note 4 — “Investments” and Note 5 — “Derivatives” in the Notes to Condensed Consolidated Financial Statements for additional information on the impairment losses and derivatives. Investment income and investment related gains and losses are allocated to the operating segments based upon average assets and related capital levels deemed appropriate to support the segment business volumes.
The effective tax rate on a consolidated basis was 35.3% and 22.4% for the third quarter of 2009 and 2008, respectively, and 31.8% and 33.7% for the first nine months of 2009 and 2008, respectively. The 2009 effective tax rates were affected by the recognition of a previously uncertain tax position and by an adverse tax adjustment related to an adjustment of prior period tax accruals. This was offset by the earnings of non-U.S. subsidiaries in which the Company is permanently reinvested whose statutory tax rates are less than the U.S. statutory tax rate.
Critical Accounting Policies
The Company’s accounting policies are described in the Summary of Significant Accounting Policies in Note 2 of the consolidated financial statements accompanying the 2008 Annual Report. The Company believes its most critical accounting policies include the capitalization and amortization of deferred acquisition costs (“DAC”); the establishment of liabilities for future policy benefits, other policy claims and benefits, including incurred but not reported claims; the valuation of fixed maturity investments, embedded derivatives and investment impairments, if any; accounting for income taxes; and the establishment of arbitration or litigation reserves. The balances of these accounts require extensive use of assumptions and estimates, particularly related to the future performance of the underlying business.
Additionally, for each of the Company’s reinsurance contracts, it must determine if the contract provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. The Company must review all contractual features, particularly those that may limit the amount of insurance risk to which the Company is subject or features that delay the timely reimbursement of claims. If the Company determines that the possibility of a significant loss from insurance risk will occur only under remote circumstances, it records the contract under a deposit method of accounting with the net amount receivable or payable reflected in premiums receivable and other reinsurance balances or other reinsurance liabilities on the condensed consolidated balance sheets. Fees earned on the contracts are reflected as other revenues, as opposed to net premiums, on the condensed consolidated statements of income.
Differences in experience compared with the assumptions and estimates utilized in the justification of the recoverability of DAC, in establishing reserves for future policy benefits and claim liabilities, or in the determination of other-than-temporary impairments to investment securities can have a material effect on the Company’s results of operations and financial condition.
Deferred Acquisition Costs (“DAC”)
Costs of acquiring new business, which vary with and are primarily related to the production of new business, have been deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. DAC amounts reflect the Company’s expectations about the future experience of the business in force and include commissions and allowances as well as certain costs of policy issuance and underwriting. Some of the factors that can affect the carrying value of DAC include mortality assumptions, interest spreads and policy lapse rates. For traditional life and related coverages, the Company performs periodic tests to determine that DAC remains recoverable, and the cumulative amortization is re-estimated and, if necessary, adjusted by a cumulative charge or credit to current operations. For its asset-intensive business, the Company updates the estimated gross profits with actual gross profits each reporting period, resulting in an increase or decrease to DAC to reflect the difference in the actual gross profits versus the previously estimated gross profits.

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Liabilities for Future Policy Benefits and Other Policy Liabilities
Liabilities for future policy benefits under long-term life insurance policies (policy reserves) are computed based upon expected investment yields, mortality and withdrawal (lapse) rates, and other assumptions, including a provision for adverse deviation from expected claim levels. The Company primarily relies on its own valuation and administration systems to establish policy reserves. The policy reserves the Company establishes may differ from those established by the ceding companies due to the use of different mortality and other assumptions. However, the Company relies upon its ceding company clients to provide accurate data, including policy-level information, premiums and claims, which is the primary information used to establish reserves. The Company’s administration departments work directly with its clients to help ensure information is submitted by them in accordance with the reinsurance contracts. Additionally, the Company performs periodic audits of the information provided by ceding companies. The Company establishes reserves for processing backlogs with a goal of clearing all backlogs within a ninety-day period. The backlogs are usually due to data errors the Company discovers or computer file compatibility issues, since much of the data reported to the Company is in electronic format and is uploaded to its computer systems.
The Company periodically reviews actual historical experience and relative anticipated experience compared to the assumptions used to establish aggregate policy reserves. Further, the Company establishes premium deficiency reserves if actual and anticipated experience indicates that existing aggregate policy reserves, together with the present value of future gross premiums, are not sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover unamortized acquisition costs. The premium deficiency reserve is established through a charge to income, as well as a reduction to unamortized acquisition costs and, to the extent there are no unamortized acquisition costs, an increase to future policy benefits. Because of the many assumptions and estimates used in establishing reserves and the long-term nature of the Company’s reinsurance contracts, the reserving process, while based on actuarial science, is inherently uncertain. If the Company’s assumptions, particularly on mortality, are inaccurate, its reserves may be inadequate to pay claims and there could be a material adverse effect on its results of operations and financial condition.
Other policy claims and benefits include claims payable for incurred but not reported losses, which are determined using case-basis estimates and lag studies of past experience. These estimates are periodically reviewed and any adjustments to such estimates, if necessary, are reflected in current operations. The time lag from the date of the claim or death to the date when the ceding company reports the claim to the Company can be several months and can vary significantly by ceding company and business segment. The Company updates its analysis of incurred but not reported claims, including lag studies, on a periodic basis and adjusts its claim liabilities accordingly. The adjustments in a given period are generally not significant relative to the overall policy liabilities.
Valuation of Fixed Maturity Securities
The Company primarily invests in fixed maturity securities, including bonds and redeemable preferred stocks. These securities are classified as available-for-sale and accordingly are carried at fair value on the condensed consolidated balance sheets. The difference between amortized cost and fair value is reflected as an unrealized gain or loss, less applicable deferred taxes as well as related adjustments to deferred acquisition costs, if applicable, in accumulated other comprehensive income (“AOCI”) in stockholders’ equity. The determinations of fair value may require extensive use of assumptions and inputs. In addition, other-than-temporary impairment losses related to non-credit factors are recognized in AOCI.
The Company performs regular analysis and review of the various techniques, assumptions and inputs utilized in determining fair value to ensure that the valuation approaches utilized are appropriate and consistently applied, and that the various assumptions are reasonable. The Company also utilizes information from third parties, such as pricing services and brokers, to assist in determining fair values for certain assets and liabilities; however, management is ultimately responsible for all fair values presented in the Company’s financial statements. The Company performs analysis and review of the information and prices received from third parties to ensure that the prices represent a reasonable estimate of the fair value. This process involves quantitative and qualitative analysis and is overseen by the Company’s investment and accounting personnel. Examples of procedures performed include, but are not limited to, initial and ongoing review of third party pricing services and techniques, review of pricing trends and monitoring of recent trade information. In addition, the Company utilizes both internal and

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external cash flow models to analyze the reasonableness of fair values utilizing credit spread and other market assumptions, where appropriate. As a result of the analysis, if the Company determines there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly.
When available, fair values are based on quoted prices in active markets that are regularly and readily obtainable. Generally, these are very liquid investments and the valuation does not require management judgment. When quoted prices in active markets are not available, fair value is based on market standard valuation techniques, primarily a combination of a market approach, including matrix pricing and an income approach. The assumptions and inputs used by management in applying these techniques include, but are not limited to: interest rates, credit standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund requirements, maturity, estimated duration and assumptions regarding liquidity and future cash flows.
The significant inputs to the market standard valuation techniques for certain types of securities with reasonable levels of price transparency are inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Such observable inputs include benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are not active and observable yields and spreads in the market.
When observable inputs are not available, the market standard valuation techniques for determining the estimated fair value of certain types of securities that trade infrequently, and therefore have little or no price transparency, rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs can be based in large part on management judgment or estimation, and cannot be supported by reference to market activity. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and are consistent with what other market participants would use when pricing such securities.
The use of different techniques, assumptions and inputs may have a material effect on the estimated fair values of the Company’s securities holdings.
Additionally, the Company evaluates its intent to sell fixed maturity securities and whether it is more likely than not that it will be required to sell fixed maturity securities, along with factors such as the financial condition of the issuer, payment performance, the extent to which the market value has been below amortized cost, compliance with covenants, general market and industry sector conditions, and various other factors. Securities, based on management’s judgments, with an other-than-temporary impairment in value are written down to management’s estimate of fair value.
Valuation of Embedded Derivatives
The Company reinsures certain annuity products that contain terms that are deemed to be embedded derivatives, primarily equity-indexed annuities and variable annuities with guaranteed minimum benefits. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated under the general accounting principles for Derivatives and Hedging. If the instrument would not be accounted for in its entirety at fair value and it is determined that the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract and reported separately. Such embedded derivatives are carried on the condensed consolidated balance sheets at fair value with the host contract.
The valuation of the various embedded derivatives requires complex calculations based on actuarial and capital market inputs assumptions related to estimates of future cash flows. Such assumptions include, but are not limited to, assumptions regarding equity market performance, equity market volatility, interest rates, credit spreads, benefits and related contract charges, mortality, lapses, withdrawals, benefit selections and non-performance risk. These assumptions have a significant impact on the value of the embedded derivatives. For example, independent future decreases in equity market returns, future decreases in interest rates and future increases in equity market volatilities would increase the value of the embedded liability derivative associated with guaranteed minimum withdrawal benefits on variable annuities, resulting in an increase in investment related losses. See “Market Risk” disclosures in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

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Additionally, reinsurance treaties written on a modified coinsurance or funds withheld basis are subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives. The majority of the Company’s funds withheld at interest balances are associated with its reinsurance of annuity contracts, the majority of which are subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives. Management believes the embedded derivative feature in each of these reinsurance treaties is similar to a total return swap on the assets held by the ceding companies. The valuation of these embedded derivatives is sensitive to the credit spread environment. Decreases or increases in credit spreads result in an increase or decrease in value of the embedded derivative and therefore an increase in investment related gains or losses, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the U.S. Asset-Intensive Segment for additional information.
Income Taxes
Income taxes represent the net amount of income taxes that the Company expects to pay to or receive from various taxing jurisdictions in connection with its operations. The Company provides for federal, state and foreign income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. The Company’s accounting for income taxes represents management’s best estimate of various events and transactions.
Deferred tax assets and liabilities resulting from temporary differences between the financial reporting and tax bases of assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse.
The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction. The Company has significant deferred tax assets related to net operating and capital losses. Most of the Company’s exposure related to its deferred tax assets are within legal entities that file a consolidated United States federal income tax return. The Company has projected its ability to utilize its net operating losses and has determined that all of these losses are expected to be utilized prior to their expiration. The Company has also done extensive analysis of its capital losses and has determined that sufficient unrealized capital gains exist within its investment portfolios that should offset any capital loss realized. It is also the Company’s intention to hold all unrealized loss securities until maturity or until their market value recovers.
The Company will establish a valuation allowance when management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation allowances should be established as well as the amount of such allowances. When making such determination, consideration is given to, among other things, the following:
(i)   future taxable income exclusive of reversing temporary differences and carryforwards;
 
(ii)   future reversals of existing taxable temporary differences;
 
(iii)   taxable income in prior carryback years; and
 
(iv)   tax planning strategies.
The Company may be required to change its provision for income taxes in certain circumstances. Examples of such circumstances include when the ultimate deductibility of certain items is challenged by taxing authorities, when it becomes clear that certain items will not be challenged, or when estimates used in determining valuation allowances on deferred tax assets significantly change or when receipt of new information indicates the need for adjustment in valuation allowances. Additionally, future events such as changes in tax legislation could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in the condensed consolidated financial statements in the period these changes occur.
Arbitration and Litigation Reserves
The Company at times is a party to various litigation and arbitrations. The Company cannot predict or determine the ultimate outcome of any pending litigation or arbitrations or even provide useful ranges of potential losses. However, it is possible that an adverse outcome on any particular arbitration or litigation situation could have a material adverse effect on the Company’s consolidated financial position and/or net income in a particular reporting period.
Further discussion and analysis of the results for 2009 compared to 2008 are presented by segment.

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U.S. OPERATIONS
U.S. operations consist of two major sub-segments: Traditional and Non-Traditional. The Traditional sub-segment primarily specializes in mortality-risk reinsurance. The Non-Traditional sub-segment consists of Asset-Intensive and Financial Reinsurance.
For the three months ended September 30, 2009
                                         
            Non-Traditional   Total        
            Asset-   Financial   U.S.        
(dollars in thousands)   Traditional   Intensive   Reinsurance   Operations        
     
Revenues:
                                       
Net premiums
  $ 801,406     $ 1,744     $     $ 803,150          
Investment income (loss), net of related expenses
    107,088       115,777       (56 )     222,809          
Investment related gains (losses), net:
                                       
Other-than-temporary impairments on fixed maturity securities
    (13,246 )     (745 )     (37 )     (14,028 )        
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income
    (3,484 )     (183 )     (9 )     (3,676 )        
Other investment related gains (losses), net
    (4,150 )     54,776       48       50,674          
     
Total investment related gains (losses), net
    (20,880 )     53,848       2       32,970          
Other revenues
    586       19,452       3,871       23,909          
     
Total revenues
    888,200       190,821       3,817       1,082,838          
     
 
                                       
Benefits and expenses:
                                       
Claims and other policy benefits
    686,057       872             686,929          
Interest credited
    15,983       69,170             85,153          
Policy acquisition costs and other insurance expenses
    108,685       80,368       289       189,342          
Other operating expenses
    13,692       2,537       779       17,008          
     
Total benefits and expenses
    824,417       152,947       1,068       978,432          
     
 
                                       
Income before income taxes
  $ 63,783     $ 37,874     $ 2,749     $ 104,406          
     
For the three months ended September 30, 2008
                                         
            Non-Traditional   Total        
            Asset-   Financial   U.S.        
(dollars in thousands)   Traditional   Intensive   Reinsurance   Operations        
     
Revenues:
                                       
Net premiums
  $ 740,502     $ 1,719     $     $ 742,221          
Investment income, net of related expenses
    99,991       43,727       192       143,910          
Investment related gains (losses), net:
                                       
Other-than-temporary impairments on fixed maturity securities
    (60,102 )     (6,214 )     (343 )     (66,659 )        
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income
                               
Other investment related gains (losses), net
    (1,963 )     (126,066 )     207       (127,822 )        
     
Total investment related gains (losses), net
    (62,065 )     (132,280 )     (136 )     (194,481 )        
Other revenues
    (42 )     15,051       3,644       18,653          
     
Total revenues
    778,386       (71,783 )     3,700       710,303          
     
 
                                       
Benefits and expenses:
                                       
Claims and other policy benefits
    632,258       2,040             634,298          
Interest credited
    15,221       (6,005 )           9,216          
Policy acquisition costs and other insurance expenses (income)
    107,199       (45,043 )     252       62,408          
Other operating expenses
    12,756       2,167       747       15,670          
     
Total benefits and expenses
    767,434       (46,841 )     999       721,592          
     
 
                                       
Income (loss) before income taxes
  $ 10,952     $ (24,942 )   $ 2,701     $ (11,289 )        
     

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For the nine months ended September 30, 2009
                                         
            Non-Traditional   Total        
            Asset-   Financial   U.S.        
(dollars in thousands)   Traditional   Intensive   Reinsurance   Operations        
     
Revenues:
                                       
Net premiums
  $ 2,395,335     $ 5,092     $     $ 2,400,427          
Investment income (loss), net of related expenses
    314,265       276,771       (220 )     590,816          
Investment related gains (losses), net:
                                       
Other-than-temporary impairments on fixed maturity securities
    (65,195 )     (6,532 )     (166 )     (71,893 )        
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income
    9,860       861       22       10,743          
Other investment related gains (losses), net
    (20,707 )     116,721       216       96,230          
     
Total investment related gains (losses), net
    (76,042 )     111,050       72       35,080          
Other revenues
    2,076       51,537       14,560       68,173          
     
Total revenues
    2,635,634       444,450       14,412       3,094,496          
     
 
                                       
Benefits and expenses:
                                       
Claims and other policy benefits
    2,050,859       1,805             2,052,664          
Interest credited
    46,917       147,967             194,884          
Policy acquisition costs and other insurance expenses
    315,543       256,181       889       572,613          
Other operating expenses
    40,895       7,700       2,259       50,854          
     
Total benefits and expenses
    2,454,214       413,653       3,148       2,871,015          
     
 
                                       
Income before income taxes
  $ 181,420     $ 30,797     $ 11,264     $ 223,481          
     
For the nine months ended September 30, 2008
                                         
            Non-Traditional   Total        
            Asset-   Financial   U.S.        
(dollars in thousands)   Traditional   Intensive   Reinsurance   Operations        
     
Revenues:
                                       
Net premiums
  $ 2,218,726     $ 4,974     $     $ 2,223,700          
Investment income, net of related expenses
    294,884       149,678       588       445,150          
Investment related gains (losses), net:
                                       
Other-than-temporary impairments on fixed maturity securities
    (60,940 )     (7,986 )     (345 )     (69,271 )        
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income
                               
Other investment related gains (losses), net
    (4,270 )     (282,892 )     206       (286,956 )        
     
Total investment related gains (losses), net
    (65,210 )     (290,878 )     (139 )     (356,227 )        
Other revenues
    570       40,757       10,702       52,029          
     
Total revenues
    2,448,970       (95,469 )     11,151       2,364,652          
     
 
                                       
Benefits and expenses:
                                       
Claims and other policy benefits
    1,908,418       3,090             1,911,508          
Interest credited
    44,935       100,958             145,893          
Policy acquisition costs and other insurance expenses (income)
    296,480       (149,707 )     700       147,473          
Other operating expenses
    38,115       6,341       2,160       46,616          
     
Total benefits and expenses
    2,287,948       (39,318 )     2,860       2,251,490          
     
 
                                       
Income (loss) before income taxes
  $ 161,022     $ (56,151 )   $ 8,291     $ 113,162          
     
Income before income taxes for the U.S. operations segment increased by $115.7 million and $110.3 million for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. These increases were primarily due to a favorable change in investment related gains (losses), after adjustment for related deferred acquisition costs. Excluding embedded derivatives associated with treaties written on a modified coinsurance or funds withheld basis and guaranteed minimum benefits riders, investment related losses, net of deferred acquisition costs, decreased $46.6 million for the third quarter and increased $13.9 million for the first nine months, compared to the same prior periods. The change in value of embedded derivatives associated with reinsurance treaties written on a modified coinsurance or funds withheld basis, decreased $51.8 million and $102.7 million for the third quarter

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and first nine months of 2009, respectively, net of deferred acquisition costs. Investment related losses associated with guaranteed minimum benefits riders decreased $2.5 million and increased $31.1 million, after adjustment for deferred acquisition costs, for the third quarter and first nine months, respectively.
Traditional Reinsurance
The U.S. Traditional sub-segment provides life reinsurance to domestic clients for a variety of life products through yearly renewable term, coinsurance and modified coinsurance agreements. These reinsurance arrangements may involve either facultative or automatic agreements. This sub-segment added new business production, measured by face amount of insurance in force, of $31.2 billion and $30.4 billion during the third quarters, and $92.5 billion and $100.7 billion during the first nine months of 2009 and 2008, respectively. Management believes industry consolidation, reduced capital levels in the life insurance industry and the established practice of reinsuring mortality risks should continue to provide opportunities for growth, albeit at rates less than historically experienced.
Income before income taxes for the U.S. Traditional sub-segment increased by $52.8 million and $20.4 million for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The increase in the third quarter was primarily due to a $41.2 million reduction in investment related losses as compared to the prior year. The increase for the first nine months of 2009 was primarily driven by an increase in business and improved mortality as compared to the same period in 2008. This was offset somewhat by increased investment related losses in 2009.
Net premiums for the U.S. Traditional sub-segment grew $60.9 million, or 8.2%, and $176.6 million, or 8.0% for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. These increases in net premiums were driven primarily by the growth of total U.S. Traditional business in force, which totaled $1.3 trillion of face amount as of September 30, 2009. This represents a 1.3% increase over the amount in force on September 30, 2008.
Net investment income increased $7.1 million, or 7.1%, and $19.4 million, or 6.6%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. These increases can be primarily attributed to growth in the invested asset base. Investment related losses decreased $41.2 million, or 66.4%, and increased $10.8 million, or 16.6% for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The increase in investment related losses year over year was due to the aforementioned investment impairments, net of non-credit adjustments, recognized in 2009.
Investment income and investment related gains and losses are allocated to the various operating segments based on average assets and related capital levels deemed appropriate to support the segment business volumes. Investment performance varies with the composition of investments and the relative allocation of capital to the operating segments.
Claims and other policy benefits as a percentage of net premiums (“loss ratios”) were 85.6% and 85.4% for the third quarter of 2009 and 2008, and 85.6% and 86.0% for the nine months ended September 30, 2009 and 2008, respectively. The decrease in the percentage for the first nine months of 2009 reflects slightly better mortality experience than 2008. Although reasonably predictable over a period of years, death claims can be volatile over shorter periods. Management views recent experience as normal short-term volatility that is inherent in the business.
Interest credited expense increased $0.8 million, or 5.0%, and $2.0 million, or 4.4%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. These increases were driven by a treaty with a minor increase in asset base and a constant credited loan rate of 5.6%. Interest credited in this sub-segment relates to amounts credited on cash value products which also have a significant mortality component.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 13.6% and 14.5% for the third quarter of 2009 and 2008, respectively, and 13.2% and 13.4% for the nine months ended September 30, 2009 and 2008, respectively. Overall, while these ratios are expected to remain in a predictable range, they may fluctuate from period to period due to varying allowance levels within coinsurance-type arrangements. In addition, the amortization pattern of previously capitalized amounts, which are subject to the form of the reinsurance agreement and the underlying insurance policies, may vary. Finally, the mix of first year coinsurance business versus yearly renewable term business can cause the percentage to fluctuate from period to period.

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Other operating expenses increased $0.9 million, or 7.3%, and $2.8 million, or 7.3%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. Other operating expenses, as a percentage of net premiums were 1.7% for the third quarter and nine months ended September 30, 2009 and 2008.
Asset-Intensive Reinsurance
The U.S. Asset-Intensive sub-segment assumes investment risk within underlying annuities and corporate-owned life insurance policies. Most of these agreements are coinsurance, coinsurance with funds withheld or modified coinsurance of non-mortality risks whereby the Company recognizes profits or losses primarily from the spread between the investment income earned and the interest credited on the underlying deposit liabilities.
Income before income taxes for this sub-segment increased by $62.8 million, and $86.9 million for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The increase for the third quarter and first nine months can be primarily attributed to the favorable change in the value of embedded derivatives associated with reinsurance treaties written on a modified coinsurance or funds withheld basis of $51.8 million and $102.7 million, respectively, net of deferred acquisitions costs. During the current quarter, this change was partially offset by an unfavorable change in the fair value estimates of embedded derivatives associated with EIAs of $8.1 million, net of deferred acquisition costs. Also contributing to the positive variance for the quarter was a decrease in unrealized losses related to guaranteed minimum benefits, net of deferred acquisition costs and related hedging activity, of $2.5 million. For the first nine months, the change in value of embedded derivatives associated with EIAs was $9.7 million favorable, after adjustments for related deferred acquisition costs. For the year, unrealized losses related to guaranteed minimum benefits, net of deferred acquisition costs and related hedging activity, increased $31.1 million. The combined changes in these embedded derivatives, after adjustment for deferred acquisition costs, retrocession and hedging, resulted in a increase of approximately $46.2 million and $81.3 million in income before income taxes in the third quarter and first nine months of 2009, respectively, as compared to the same periods in 2008. These fluctuations do not affect current cash flows, crediting rates or spread performance on the underlying treaties. Therefore, management believes it is helpful to distinguish between the effects of changes in these embedded derivatives and the primary factors that drive profitability of the underlying treaties, namely investment income, fee income, and interest credited.
Excluding the impact of changes in the embedded derivatives and related hedging activities discussed above, income before income taxes increased $16.6 million and $5.6 million, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The increase in the third quarter and the first nine months is due primarily to improvement in the broader U.S. financial markets and related favorable impact on the underlying annuity account values reinsured by the Company. In addition, investment related losses, excluding embedded derivatives related to reinsurance treaties written on a modified coinsurance or funds withheld basis and variable annuities, net of related deferred acquisition costs and related hedging activity, decreased $5.2 million for the third quarter of 2009, but increased $3.2 million first nine months of 2009, after adjustments for deferred acquisition costs.
Total revenues, which are comprised primarily of investment income and investment related losses, net, increased $262.6 million and $539.9 million for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The increase for both periods is primarily due to the $158.3 million and $342.1 million favorable change associated with embedded derivatives associated with reinsurance treaties written on a modified coinsurance or funds withheld basis. Excluding the change in embedded derivatives associated with reinsurance treaties written on a modified coinsurance or funds withheld basis, revenues increased $104.3 million and $197.8 million for the third quarter and nine month periods, respectively. This increase is primarily due to an increase in investment income related to equity option income on a funds withheld equity-indexed annuity treaty. The increase in investment income related to equity options is mostly offset by a corresponding increase in interest credited. Additionally, investment related gains associated with guaranteed minimum benefits contributed $21.5 million and $64.2 million to the increase in the third quarter and first nine months, respectively.
The average invested asset base supporting this sub-segment decreased to $5.1 billion in the third quarter of 2009 from $5.3 billion in the third quarter of 2008. Annuity contract surrenders led to a decline in the account value and related invested asset base. This decline was somewhat offset by new business written on one existing equity-indexed treaty. As of September 30, 2009, $3.5 billion of the invested assets were funds withheld at interest, of which 93.5% is associated with one client.

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Total benefits and expenses, which are comprised primarily of interest credited and policy acquisition costs, increased $199.8 million and $453.0 million for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. Contributing to these increases was an increase in policy acquisition costs related to embedded derivatives associated with reinsurance treaties written on a modified coinsurance or funds withheld basis of $106.5 million and $239.5 million coupled with an increase in policy acquisition costs associated with guaranteed minimum benefits of $19.1 million and $95.2 million for the third quarter and first nine months, respectively. The current market environment has created a situation in which income earned related to guaranteed minimum benefits is more than offset by DAC unlocking, and thus results in reduced income for this sub-segment. Interest credited increased $75.2 million and $47.0 million for the third quarter and first nine months, respectively. In both the third quarter and first nine months, the portion of interest credited related to market value changes in certain equity-indexed annuity products increased and was mostly offset in investment income. Also contributing to the increase during the quarter was an increase in interest credited related to the change in the fair value of the EIA embedded liability as discussed above. For the first nine months, interest credited related to the change in fair value of the EIA embedded liability decreased.
Financial Reinsurance
The U.S. Financial Reinsurance sub-segment income consists primarily of net fees earned on financial reinsurance transactions. The majority of the financial reinsurance risks are assumed by the U.S. segment and retroceded to other insurance companies or brokered business in which the Company does not participate in the assumption of risk. The fees earned from financial reinsurance contracts are reflected in other revenues, and the fees paid to retrocessionaires are reflected in policy acquisition costs and other insurance expenses. Fees earned on brokered business are reflected in other revenues.
Income before income taxes was virtually unchanged for the three months and increased $3.0 million, or 35.9%, for the nine months ended September 30, 2009, as compared to the same periods in 2008. The increase in the first nine months was primarily related to a one time fee received at inception of a new treaty signed in the first quarter of 2009. At September 30, 2009 and 2008, the amount of reinsurance provided, as measured by pre-tax statutory surplus, was $0.9 billion and $0.5 billion, respectively. The pre-tax statutory surplus amounts indicated include all business assumed or brokered by the Company in the U.S. Fees earned from this business can vary significantly depending on the size of the transactions and the timing of their completion and therefore can fluctuate from period to period.
CANADA OPERATIONS
The Company conducts reinsurance business in Canada through RGA Life Reinsurance Company of Canada (“RGA Canada”), a wholly-owned subsidiary. RGA Canada assists clients with capital management activity and mortality and morbidity risk management, and is primarily engaged in traditional individual life reinsurance, as well as creditor, critical illness, and group life and health reinsurance. Creditor insurance covers the outstanding balance on personal, mortgage or commercial loans in the event of death, disability or critical illness and is generally shorter in duration than traditional life insurance.
                                 
    For the three months ended   For the nine months ended
    September 30,   September 30,
(dollars in thousands)   2009   2008   2009   2008
     
Revenues:
                               
Net premiums
  $ 153,430     $ 128,930     $ 446,348     $ 407,452  
Investment income, net of related expenses
    34,412       35,836       96,887       107,561  
Investment related gains (losses), net:
                               
Other-than-temporary impairments on fixed maturity securities
    (31 )     (2,592 )     (107 )     (2,593 )
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income
    (8 )           12        
Other investment related gains (losses), net
    (1,488 )     1,409       7,643       1,329  
     
Total investment related gains (losses), net
    (1,527 )     (1,183 )     7,548       (1,264 )
Other revenues
    (69 )     4,289       1,010       17,506  
     
Total revenues
    186,246       167,872       551,793       531,255  
     

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Continued
                                 
    For the three months ended   For the nine months ended
    September 30,   September 30,
(dollars in thousands)   2009   2008   2009   2008
     
Benefits and expenses:
                               
Claims and other policy benefits
    123,357       104,339       367,304       353,756  
Interest credited
          77       75       297  
Policy acquisition costs and other insurance expenses
    38,244       27,591       107,678       79,543  
Other operating expenses
    5,798       6,132       16,189       17,477  
     
Total benefits and expenses
    167,399       138,139       491,246       451,073  
     
 
                               
Income before income taxes
  $ 18,847     $ 29,733     $ 60,547     $ 80,182  
     
Income before income taxes decreased by $10.9 million, or 36.6%, and $19.6 million, or 24.5%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. In 2009, a weaker Canadian dollar resulted in a decrease in income before income taxes of $1.4 million and $12.0 million in the third quarter and first nine months of 2009, respectively. In addition, the decrease in income in the third quarter of 2009 reflects the favorable net effect of $4.3 million from the recapture of a previously assumed block of individual life business in the third quarter of 2008 as well as an increase in net investment related losses of $0.3 million. In the first nine months, the segment’s results reflect slightly adverse mortality experience, excluding creditor business, compared to very favorable mortality in 2008. In addition, the decrease in income in 2009 reflects the favorable net effect of $6.8 million from the recapture of a previously assumed block of individual life business and a previously retroceded block of creditor business in the first nine months of 2008. This decrease was offset by an increase in net investment related gains of $8.8 million for the first nine months of 2009, compared to 2008.
Net premiums increased $24.5 million, or 19.0%, and $38.9 million, or 9.5%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. On a Canadian dollar basis, net premiums increased approximately 25.1% for the third quarter and first nine months of 2009 compared to 2008. A weaker Canadian dollar contributed to a decrease in net premiums of approximately $7.8 million and $63.5 million in the third quarter and first nine months of 2009 compared to 2008. This decrease was offset by new business from both new and existing treaties. In addition, an increase in premiums from creditor treaties contributed $18.4 million and $64.6 million in the third quarter and first nine months of 2009, respectively. Creditor and group life and health premiums represented 29.1% and 19.7% of net premiums for the third quarter of 2009 and 2008, respectively and 29.7% and 19.7% for the nine months ended September 30, 2009 and 2008 respectively. Premium levels can be significantly influenced by large transactions, mix of business and reporting practices of ceding companies and therefore may fluctuate from period to period.
Net investment income decreased $1.4 million, or 4.0%, and $10.7 million, or 9.9%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. A weaker Canadian dollar resulted in a decrease in net investment income of approximately $2.0 million and $14.8 million in the third quarter and first nine months of 2009 compared to 2008. Investment income and investment related gains and losses are allocated to the segments based upon average assets and related capital levels deemed appropriate to support the segment business volumes. Investment performance varies with the composition of investments and the relative allocation of capital to the operating segments. The increase in investment income, excluding the impact of foreign exchange, was mainly the result of an increase in the allocated asset base due to growth in the underlying business volume.
Other revenues decreased $4.4 million, and $16.5 million, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The decreases in 2009 were primarily the result of a $3.3 million fee from the recapture of a previously assumed block of individual life business in the third quarter of 2008 and a $12.9 million fee from the recapture of a previously retroceded block of creditor business in the first nine months of 2008.
Loss ratios for this segment were 80.4% and 80.9% for the third quarter of 2009 and 2008, respectively, and 82.3% and 86.8% for the nine months ended September 30, 2009 and 2008, respectively. The loss ratios on creditor reinsurance business are normally lower than traditional reinsurance, while allowances are normally higher as a percentage of premiums. Loss ratios for creditor business were 37.7% and 42.3% for the third quarter of 2009 and 2008, respectively, and 41.1% and 57.4% for the nine months ended September 30, 2009 and 2008, respectively. The decreases in 2009 were primarily the result of the release of retroceded reserves of $10.4 million from the recapture of a previously retroceded block of creditor business in 2008. Excluding creditor business, the loss ratios

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for this segment were 94.9% and 89.1% for the third quarter of 2009 and 2008, respectively, and 97.6% and 93.3% for the nine months ended September 30, 2009 and 2008. The higher loss ratios in 2009 are primarily the result of adverse mortality experience compared to the prior year’s favorable mortality experience. Historically, the loss ratio increased primarily as the result of several large permanent level premium in force blocks assumed in 1997 and 1998. These blocks are mature blocks of permanent level premium business in which mortality as a percentage of net premiums is expected to be higher than historical ratios. The nature of permanent level premium policies requires the Company to set up actuarial liabilities and invest the amounts received in excess of early-year mortality costs to fund claims in the later years when premiums, by design, continue to be level as compared to expected increasing mortality or claim costs. Claims and other policy benefits, as a percentage of net premiums and investment income were 65.7% and 63.3% in the third quarter of 2009 and 2008, respectively, and 67.6% and 68.7% for the nine months ended September 30, 2009 and 2008, respectively.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 24.9% and 21.4% for the third quarter of 2009 and 2008, respectively, and 24.1% and 19.5% for the nine months ended September 30, 2009 and 2008, respectively. Policy and acquisition costs and other insurance expenses as a percentage of net premiums for creditor business were 55.3% and 51.3% for the third quarter of 2009 and 2008, respectively, 53.6% and 48.8% for the nine months ended September 30, 2009 and 2008, respectively. Excluding creditor business, policy acquisition costs and other insurance expenses as a percentage of net premiums were 14.6% and 15.0% for the third quarter of 2009 and 2008, respectively, and 13.2% and 13.0% for the nine months ended September 30, 2009 and 2008, respectively. Overall, while these ratios are expected to remain in a predictable range, they may fluctuate from period to period due to varying allowance levels and product mix. In addition, the amortization pattern of previously capitalized amounts, which are subject to the form of the reinsurance agreement and the underlying insurance policies, may vary.
Other operating expenses decreased by $0.3 million, or 5.4%, and $1.3 million, or 7.4%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. A weaker Canadian dollar contributed approximately $0.3 million and $1.9 million to the decrease in operating expenses in the third quarter and first nine months of 2009, respectively. Other operating expenses as a percentage of net premiums were 3.8% and 4.8% for the third quarter of 2009 and 2008, respectively, and 3.6% and 4.3% for the nine months ended September 30, 2009 and 2008, respectively.
EUROPE & SOUTH AFRICA OPERATIONS
The Europe & South Africa segment has operations in France, Germany, India, Italy, Mexico, the Netherlands, Poland, Spain, South Africa and the United Kingdom (“UK”). The segment provides life reinsurance for a variety of products through yearly renewable term and coinsurance agreements, and reinsurance of critical illness coverage and to a lesser extent, the reinsurance of longevity risk on payout annuities. Reinsurance agreements may be either facultative or automatic agreements covering primarily individual risks and in some markets, group risks.
                                 
    For the three months ended   For the nine months ended
    September 30,   September 30,
(dollars in thousands)   2009   2008   2009   2008
     
Revenues:
                               
Net premiums
  $ 204,169     $ 176,184     $ 557,442     $ 550,870  
Investment income, net of related expenses
    8,502       9,065       23,371       25,394  
Investment related gains (losses), net:
                               
Other-than-temporary impairments on fixed maturity securities
    (676 )     (4,882 )     (2,533 )     (4,916 )
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income
    (135 )           361        
Other investment related gains (losses), net
    1,079       179       2,848       827  
     
Total investment related gains (losses), net
    268       (4,703 )     676       (4,089 )
Other revenues
    102       33       900       161  
     
Total revenues
    213,041       180,579       582,389       572,336  
     

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Continued
                                 
    For the three months ended   For the nine months ended
    September 30,   September 30,
(dollars in thousands)   2009   2008   2009   2008
     
Benefits and expenses:
                               
Claims and other policy benefits
    164,118       122,521       455,354       425,516  
Policy acquisition costs and other insurance expenses
    21,277       21,559       42,463       54,815  
Other operating expenses
    20,665       15,708       56,693       48,130  
     
Total benefits and expenses
    206,060       159,788       554,510       528,461  
     
 
                               
Income before income taxes
  $ 6,981     $ 20,791     $ 27,879     $ 43,875  
     
Income before income taxes decreased by $13.8 million, or 66.4% and by $16.0 million, or 36.5%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. Unfavorable foreign currency exchange fluctuations contributed to a decrease to income before income taxes totaling approximately $0.6 million and $6.8 million for the third quarter and first nine months of 2009, respectively. The decrease in income before income taxes for the third quarter was primarily due to an increase in claims and other policy benefits. The decrease in the nine month income before income taxes was primarily due to an increase in claims and other policy benefits as well as an unfavorable foreign currency exchange fluctuation partially offset by a decrease in policy acquisition costs and other insurance expenses.
Net premiums increased $28.0 million, or 15.9%, and $6.6 million, or 1.2%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. During 2009, there was an unfavorable foreign currency exchange fluctuation, particularly with the British pound, the euro and the South African rand weakening against the U.S. dollar when compared to the same periods in 2008, which decreased net premiums by approximately $24.7 million in the third quarter of 2009, and $122.8 million for the nine months ended September 30, 2009, as compared to the same periods in 2008. The unfavorable foreign currency exchange fluctuations were largely offset by an increase in net premiums, primarily the result of new business from both new and existing treaties.
A significant portion of the net premiums for the segment, in each period presented, relates to reinsurance of critical illness coverage, primarily in the UK. This coverage provides a benefit in the event of the diagnosis of a pre-defined critical illness. Net premiums earned from this coverage totaled $54.2 million and $59.2 million in the third quarter of 2009 and 2008, respectively, and $153.2 million and $187.0 million for the nine months ended September 30, 2009 and 2008, respectively. Premium levels are significantly influenced by large transactions and reporting practices of ceding companies and therefore can fluctuate from period to period.
Net investment income decreased $0.6 million, or 6.2%, and $2.0 million, or 8.0%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. These decreases can be primarily attributed to a decrease in the portfolio return. Investment income and investment related gains and losses are allocated to the various operating segments based on average assets and related capital levels deemed appropriate to support the segment business volumes. Investment performance varies with the composition of investments and the relative allocation of capital to the operating segments.
Loss ratios for this segment were 80.4% and 69.5% for the third quarter of 2009 and 2008, respectively, and 81.7% and 77.2% for the nine months ended September 30, 2009 and 2008, respectively. The increase in loss ratios for the third quarter and first nine months was due to unfavorable claims experience, primarily in the UK. Although reasonably predictable over a period of years, death claims can be volatile over shorter periods. Management views recent experience as normal short-term volatility that is inherent in the business.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 10.4% and 12.2% for the third quarter of 2009 and 2008, respectively, and 7.6% and 10.0% for the nine months ended September 30, 2009 and 2008, respectively. These percentages fluctuate due to timing of client company reporting, variations in the mixture of business being reinsured and the relative maturity of the business. In addition, as the segment grows, renewal premiums, which have lower allowances than first-year premiums, represent a greater percentage of the total net premiums.
Other operating expenses increased $5.0 million, or 31.6%, and $8.6 million, or 17.8%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. Other operating expenses as a

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percentage of net premiums totaled 10.1% and 8.9% for the third quarter of 2009 and 2008, respectively, and 10.2% and 8.7% for the nine months ended September 30, 2009 and 2008, respectively. These increases were due to higher costs associated with maintaining and supporting the segment’s increase in business over the past several years and the Company’s recent expansion into central Europe. The Company believes that sustained growth in net premiums should lessen the burden of start-up expenses and expansion costs over time.
ASIA PACIFIC OPERATIONS
The Asia Pacific segment has operations in Australia, Hong Kong, Japan, Malaysia, Singapore, New Zealand, South Korea, Taiwan and mainland China. The principal types of reinsurance for this segment are life, critical illness, disability income, superannuation, and financial reinsurance. Superannuation is the Australian government mandated compulsory retirement savings program. Superannuation funds accumulate retirement funds for employees, and in addition, offer life and disability insurance coverage. Reinsurance agreements may be facultative or automatic agreements covering primarily individual risks and in some markets, group risks.
                                 
    For the three months ended   For the nine months ended
    September 30,   September 30,
(dollars in thousands)   2009   2008   2009   2008
     
Revenues:
                               
Net premiums
  $ 242,350     $ 254,497     $ 715,508     $ 773,148  
Investment income, net of related expenses
    15,654       12,272       43,228       36,083  
Investment related losses, net:
                               
Other-than-temporary impairments on fixed maturity securities
    (691 )     (4,502 )     (4,642 )     (4,556 )
Other-than temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income
    (370 )           462        
Other investment related gains (losses), net
    4,015       681       4,422       (261 )
     
Total investment related gains (losses), net
    2,954       (3,821 )     242       (4,817 )
Other revenues
    4,942       2,811       19,142       7,214  
     
Total revenues
    265,900       265,759       778,120       811,628  
     
 
                               
Benefits and expenses:
                               
Claims and other policy benefits
    182,070       201,707       574,040       620,387  
Policy acquisition costs and other insurance expenses
    31,833       25,053       88,788       81,520  
Other operating expenses
    21,072       17,774       55,274       48,677  
     
Total benefits and expenses
    234,975       244,534       718,102       750,584  
     
 
                               
Income before income taxes
  $ 30,925     $ 21,225     $ 60,018     $ 61,044  
     
Income before income taxes increased by $9.7 million, or 45.7%, and decreased by $1.0 million, or 1.7%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. Favorable results, primarily due to lower than expected claims and benefits in Australia, contributed to the increase in income before income taxes for the third quarter 2009 compared to the same period in 2008. Unfavorable results in the first quarter of 2009, primarily related to increased claims and other policy benefits throughout the segment, compared to better than expected results in the first quarter of 2008, led to the unfavorable variance between the first nine months of 2009 compared to the same period in 2008. Foreign currency exchange fluctuations resulted in an increase to income before income taxes totaling approximately $0.9 million and a decrease of approximately $3.1 million for the third quarter and first nine months of 2009, respectively.
Net premiums decreased $12.1 million, or 4.8%, and $57.6 million, or 7.5%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. Premiums in the third quarter of 2009 decreased by $26.5 million, collectively, in Australia, Korea and Taiwan and were partially offset by increased premiums of $14.0 million in Japan and Hong Kong, as compared to the same period in 2008. Premiums in the first nine months of 2009 decreased by $76.7 million, collectively, in Korea, Taiwan and New Zealand and were partially offset increased premiums of $19.3 million in Japan and Hong Kong, as compared to the same period in 2008.
Foreign currencies in certain significant markets, particularly the Australian dollar, New Zealand dollar, Korean won and Taiwanese dollar, have weakened against the U.S. dollar during 2009 compared to 2008. The overall

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effect of changes in Asia Pacific segment currencies was a decrease in net premiums of approximately $9.0 million and $103.3 million for the third quarter and first nine months of 2009, respectively. The unfavorable foreign currency exchange fluctuation was partially offset by an increase in net premiums that was primarily the result of new business from both new and existing treaties.
A portion of the net premiums for the segment, in each period presented, relates to reinsurance of critical illness coverage. This coverage provides a benefit in the event of the diagnosis of a pre-defined critical illness. Reinsurance of critical illness in the Asia Pacific operations is offered primarily in South Korea, Australia and Hong Kong. Net premiums earned from this coverage totaled $45.5 million and $52.0 million in the third quarter of 2009 and 2008, respectively and $128.8 million and $165.2 million for the first nine months of 2009 and 2008, respectively. Premium levels are significantly influenced by large transactions and reporting practices of ceding companies and can fluctuate from period to period.
Net investment income increased $3.4 million, or 27.6%, and $7.1 million, or 19.8%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. This increase can be primarily attributed to growth in the invested asset base. Investment income and investment related gains and losses are allocated to the various operating segments based on average assets and related capital levels deemed appropriate to support the segment business volumes. Investment performance varies with the composition of investments and the relative allocation of capital to the operating segments.
Other revenues increased by $2.1 million, and $11.9 million for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The primary source of other revenues is fees from financial reinsurance treaties in Japan. At September 30, 2009 and 2008, the amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, was $0.5 billion and $0.6 billion, respectively. Fees earned from this business can vary significantly depending on the size of the transactions and the timing of their completion and therefore can fluctuate from period to period.
Loss ratios for this segment were 75.1% and 79.3% for the third quarter of 2009 and 2008, respectively and 80.2% for the nine months ended September 30, 2009 and 2008, respectively. The decrease in the loss ratio for the third quarter of 2009 compared to 2008 is primarily attributable to lower claim levels in Australia in 2009 compared to 2008. The loss ratios for the first nine months of 2009 and 2008 are relatively consistent. Although reasonably predictable over a period of years, death claims can be volatile over shorter periods. Management views recent experience as normal short-term volatility that is inherent in the business. Loss ratios will fluctuate due to timing of client company reporting, variations in the mixture of business being reinsured and the relative maturity of the business.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 13.1% and 9.8% for the third quarter of 2009 and 2008, respectively, and 12.4% and 10.5% for the nine months ended September 30, 2009 and 2008, respectively. The ratio of policy acquisition costs and other insurance expenses as a percentage of net premiums should generally decline as the business matures; however, the percentage does fluctuate periodically due to timing of client company reporting and variations in the mixture of business being reinsured.
Other operating expenses increased $3.3 million, or 18.6%, and $6.6 million, or 13.6%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. Other operating expenses as a percentage of net premiums totaled 8.7% and 7.0% for the third quarter of 2009 and 2008, respectively and 7.7% and 6.3% for the nine months ended September 30, 2009 and 2008, respectively. The timing of premium flows and the level of costs associated with the entrance into and development of new markets in the growing Asia Pacific segment may cause other operating expenses as a percentage of net premiums to fluctuate over periods of time.
CORPORATE AND OTHER
Corporate and Other revenues include investment income from invested assets not allocated to support segment operations and undeployed proceeds from the Company’s capital raising efforts, in addition to unallocated investment related gains and losses. Corporate expenses consist of the offset to capital charges allocated to the operating segments within the policy acquisition costs and other insurance expenses line item, unallocated overhead and executive costs, and interest expense related to debt and trust preferred securities. Additionally, Corporate and Other includes results from, among others, RGA Technology Partners, Inc., a wholly-owned subsidiary that develops and markets technology solutions for the insurance industry and the investment income and expense

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associated with the Company’s collateral finance facility. Effective January 1, 2009, due to immateriality, the discontinued accident and health operations are included in the results of the Corporate and Other segment.
                                 
    For the three months ended   For the nine months ended
    September 30,   September 30,
(dollars in thousands)   2009   2008   2009   2008
     
Revenues:
                               
Net premiums
  $ 2,080     $ 1,758     $ 6,682     $ 5,040  
Investment income, net of related expenses
    18,094       19,165       53,001       60,454  
Investment related gains (losses), net
                               
Other-than-temporary impairments on fixed maturity securities
    (1,519 )     (13,753 )     (9,107 )     (16,751 )
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income
    189             557        
Other investment related gains (losses), net
    9,024       (23,366 )     13,289       (20,498 )
     
Total investment related gains (losses), net
    7,694       (37,119 )     4,739       (37,249 )
Other revenues
    3,088       1,978       51,767       5,052  
     
Total revenues
    30,956       (14,218 )     116,189       33,297  
     
 
                               
Benefits and expenses:
                               
Claims and other policy benefits
    (663 )     83       (111 )     120  
Policy acquisition costs and other insurance expenses (income)
    (8,907 )     (11,775 )     (32,549 )     (32,981 )
Other operating expenses
    11,860       8,602       35,237       28,323  
Interest expense
    5,243       9,935       46,955       54,609  
Collateral finance facility expense
    2,031       6,851       6,402       21,291  
     
Total benefits and expenses
    9,564       13,696       55,934       71,362  
     
 
                               
Income (loss) before income taxes
  $ 21,392     $ (27,914 )   $ 60,255     $ (38,065 )
     
Income before income taxes increased by $49.3 million and $98.3 million, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The increase for the third quarter is primarily due to a $44.8 million increase in investment related gains, a $4.8 million decrease in collateral finance facility expense and a $4.7 million decrease in interest expense slightly offset by a $3.3 million increase in other expenses. The increase for the first nine months is primarily due to a $42.0 million increase in investment related gains, a $46.7 million increase in other revenues, a $14.9 million decrease in collateral finance facility expense and a $7.7 million decrease in interest expense slightly offset by a $7.5 million decrease in net investment income and a $6.9 million increase in other expenses.
Total revenues increased by $45.2 million and $82.9 million, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. These increases were largely due to an increase in investment related gains, reflecting improved economic conditions, slightly offset by a decrease in net investment income. The decrease in investment income is largely due to lower returns on variable interest investments used to fund the Company’s collateral finance facility which is offset by the lower collateral finance facility expense. Also contributing to the nine month increase in revenues was an increase in other revenues related to the recognition of a gain on the repurchase of long-term debt of $38.9 million and a $4.8 million foreign exchange gain on the repayment of debt related to the Company’s credit facility denominated in British pounds.
Total benefits and expenses decreased by $4.1 million, or 30.2%, and $15.4 million, or 21.6%, for the three and nine months ended September 30, 2009, as compared to the same periods in 2008. The decrease for the third quarter was primarily due to a $4.8 million decrease in collateral finance facility expense related to substantially reduced variable interest rates in the current year, decreased interest expense of $4.7 million due to lower interest provisions for income taxes related to uncertain tax positions and a lower debt outstanding from the debt repurchase and repayment and. These decreases were partially offset by a $3.3 million increase in other expenses, primarily due to increased compensation. The decrease for the first nine months was primarily due to a $14.9 million decrease in collateral finance facility expense due to the reduced variable interest rates in the current year and decreased interest expense of $7.7 million due to lower debt outstanding from the debt repurchase and repayment, and lower interest provisions for income taxes related to uncertain tax positions. These decreases were partially offset by a $6.9 million increase in other expenses due to increased compensation.

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Liquidity and Capital Resources
Current Market Environment
During 2008, the capital and credit markets experienced extreme volatility and disruption. Since September 2008 through the end of the first quarter of 2009, the volatility and disruptions intensified significantly. This environment was driven by, among other things, heightened concerns over conditions in the U.S. housing and mortgage markets, the availability and cost of credit, the health of U.S. and global financial institutions, a decline in business and consumer confidence and increased unemployment. Turmoil in the U.S. and global financial markets resulted in bankruptcies, consolidations and government interventions. There has been significant improvement in the U.S. and global financial markets during the second and third quarters of 2009.
The recent market conditions have adversely affected the Company’s results of operations and financial position. From the third quarter of 2008 through the first nine months of 2009, the Company incurred significant investment related losses as a result of impairments. Results of operations in 2008 also reflected a significant unfavorable change in the value of embedded derivatives, which is a direct result of widening credit spreads and changes in the risk-free rates in the U.S. debt markets. However, results of operations for the first nine months of 2009 reflect a favorable change in the value of these embedded derivatives as credit spreads tightened significantly in the second and third quarters. Gross unrealized losses in the Company’s fixed maturity and equity securities available-for-sale have improved from $1,552.8 million at March 31, 2009 and $1,416.4 million at December 31, 2008 to $687.2 million at September 30, 2009.
The Company continues to be in a position to hold its investment securities until recovery, provided it remains comfortable with the credit of the issuer. The Company’s operations do not rely on short-term funding or commercial paper, and therefore, to date, it has experienced no liquidity pressure, nor does it anticipate such pressure in the foreseeable future. The Company has selectively reduced its exposure to distressed security issuers through security sales. In addition, the U.S. government, and governments in many foreign markets where the Company operates, have responded to address market imbalances and taken meaningful steps intended to eventually restore confidence. Although management believes the Company’s current capital base is adequate to support its business at current operating levels, it continues to monitor new business opportunities and any associated new capital needs that could arise from the changing financial landscape.
The Holding Company
RGA is a holding company whose primary uses of liquidity include, but are not limited to, the immediate capital needs of its operating companies associated with the Company’s primary businesses, dividends paid by RGA to its shareholders, interest payments on its indebtedness, and repurchases of RGA common stock under a plan approved by the board of directors. The primary sources of RGA’s liquidity include proceeds from its capital raising efforts, interest income on undeployed corporate investments, interest income received on surplus notes with two operating subsidiaries, and dividends from operating subsidiaries. As the Company continues its expansion efforts, RGA will continue to be dependent on these sources of liquidity.
The Company believes that it has sufficient liquidity to fund its cash needs under various scenarios that include the potential risk of the early recapture of a reinsurance treaty by the ceding company and significantly higher than expected death claims. Historically, the Company has generated positive net cash flows from operations. However, in the event of significant unanticipated cash requirements beyond normal liquidity, the Company has multiple liquidity alternatives available based on market conditions and the amount and timing of the liquidity need. These options include borrowings under committed credit facilities, secured borrowings, the ability to issue long-term debt, capital securities or common equity and, if necessary, the sale of invested assets.
Cash Flows
The Company’s net cash flows provided by operating activities for the periods ended September 30, 2009 and 2008 were $902.9 million and $465.1 million, respectively. Cash flows from operating activities are affected by the timing of premiums received, claims paid, and working capital changes. The $437.8 million net increase in operating cash flows during the nine months of 2009 compared to the same period in 2008 was primarily a result of cash inflows related to premiums and investment income increasing and cash outflows related to claims, acquisition costs, income taxes and other operating expenses decreasing. Cash from premiums and investment income increased $136.6 million and $133.2 million, respectively, while operating cash outlays decreased by $168.0 million

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for the current nine month period. The Company believes the short-term cash requirements of its business operations will be sufficiently met by the positive cash flows generated. Additionally, the Company believes it maintains a high quality fixed maturity portfolio that can be sold, if necessary, to meet the Company’s short- and long-term obligations.
Net cash used in investing activities were $924.9 million and $845.3 million in the first nine months of 2009 and the comparable prior-year period, respectively. The sales and purchases of fixed maturity securities are related to the management of the Company’s investment portfolios and the investment of excess cash generated by operating and financing activities.
Net cash provided by (used in) financing activities was $(323.4) million and $399.0 million in the first nine months of 2009 and 2008, respectively. The increase in cash used in financing activities was largely due to a $137.4 million decrease in the cash collateral received under derivative contracts due to a change in the value of the underlying derivatives and $62.5 million related to the repurchase and repayment of long-term debt. The remaining increase in cash used in financing activities is primarily due to payments under investment type contracts.
Debt and Preferred Securities
As of September 30, 2009 and December 31, 2008, the Company had $816.6 million and $918.2 million, respectively, in outstanding borrowings under its debt agreements and was in compliance with all covenants under those agreements.
The Company maintains three revolving credit facilities. The largest is a syndicated credit facility with an overall capacity of $750.0 million that expires in September 2012. The Company may borrow cash and may obtain letters of credit in multiple currencies under this facility. As of September 30, 2009, the Company had no cash borrowings outstanding and $516.2 million in issued, but undrawn, letters of credit under this facility. The Company’s other credit facilities consist of a £15.0 million credit facility that expires in May 2011, and an A$50.0 million Australian credit facility that expires in March 2011, both with no outstanding balances as of September 30, 2009.
As of September 30, 2009, the average interest rate on all long-term and short-term debt outstanding, excluding the Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures of the Company (“Trust Preferred Securities”), was 6.34%. Interest is expensed on the face amount, or $225 million, of the Trust Preferred Securities at a rate of 5.75%.
Collateral Finance Facility
In June 2006, RGA’s subsidiary, Timberlake Financial, L.L.C. (“Timberlake Financial”), issued $850.0 million of Series A Floating Rate Insured Notes due June 2036 in a private placement. The notes were issued to fund the collateral requirements for statutory reserves required by the U.S. Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX) on specified term life insurance policies reinsured by RGA Reinsurance Company (“RGA Reinsurance”). Proceeds from the notes, along with a $112.8 million direct investment by the Company, have been deposited into a series of trust accounts that collateralize the notes and are not available to satisfy the general obligations of the Company. Interest on the notes will accrue at an annual rate of 1-month LIBOR plus a base rate margin, payable monthly. The payment of interest and principal on the notes is insured by a monoline insurance company through a financial guaranty insurance policy. The notes represent senior, secured indebtedness of Timberlake Financial without legal recourse to RGA or its other subsidiaries. Timberlake Financial will rely primarily upon the receipt of interest and principal payments on a surplus note and dividend payments from its wholly-owned subsidiary, Timberlake Reinsurance Company II (“Timberlake Re”), a South Carolina captive insurance company, to make payments of interest and principal on the notes. The ability of Timberlake Re to make interest and principal payments on the surplus note and dividend payments to Timberlake Financial is contingent upon South Carolina regulatory approval, the return on Timberlake Re’s investment assets and the performance of specified term life insurance policies with guaranteed level premiums retroceded by RGA’s subsidiary, RGA Reinsurance, to Timberlake Re.
Asset / Liability Management
The Company actively manages its cash and invested assets using an approach that is intended to balance quality, diversification, asset/liability matching, liquidity and investment return. The goals of the investment process are to optimize after-tax, risk-adjusted investment income and after-tax, risk-adjusted total return while managing the assets and liabilities on a cash flow and duration basis.
The Company has established target asset portfolios for each major insurance product, which represent the investment strategies intended to profitably fund its liabilities within acceptable risk parameters. These strategies

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include objectives for effective duration, yield curve sensitivity and convexity, liquidity, asset sector concentration and credit quality.
The Company’s liquidity position (cash and cash equivalents and short-term investments) was $636.3 million and $933.5 million at September 30, 2009 and December 31, 2008, respectively. The decrease in the Company’s liquidity position from December 31, 2008 is primarily due to the timing of investment activity. Liquidity needs are determined from valuation analyses conducted by operational units and are driven by product portfolios. Periodic evaluations of demand liabilities and short-term liquid assets are designed to adjust specific portfolios, as well as their durations and maturities, in response to anticipated liquidity needs.
The Company occasionally enters into sales of investment securities under agreements to repurchase the same securities. These arrangements are used for purposes of short-term financing. There were no securities subject to these agreements outstanding at September 30, 2009 and December 31, 2008. The Company also occasionally enters into arrangements to purchase securities under agreements to resell the same securities. Amounts outstanding, if any, are reported in cash and cash equivalents. These agreements are primarily used as yield enhancement alternatives to other cash equivalent investments. There were no agreements outstanding at September 30, 2009 and December 31, 2008. Further, the Company occasionally enters into securities lending agreements whereby certain securities are loaned to third parties, primarily major brokerage firms, in order to earn additional yield. The Company requires a minimum of 102% of the fair value of the loaned securities as collateral in the form of either cash or securities held by the Company or a trust. The cash collateral is reported in cash and the offsetting collateral repayment obligation is reported in other liabilities. There were no securities lending agreements outstanding at September 30, 2009 and December 31, 2008.
RGA Reinsurance is a member of the Federal Home Loan Bank of Des Moines (“FHLB”) and holds $18.9 million of common stock of the FHLB, which is included in other invested assets on the Company’s condensed consolidated balance sheets. RGA Reinsurance occasionally enters into traditional funding agreements with the FHLB, but had no outstanding traditional funding agreements with the FHLB at September 30, 2009 and December 31, 2008.
In addition, RGA Reinsurance has also entered into a funding agreement with the FHLB under a guaranteed investment contract whereby RGA Reinsurance has issued the funding agreement in exchange for cash and for which the FHLB has been granted a blanket lien on RGA Reinsurance’s commercial mortgage-backed securities used to collateralize RGA Reinsurance’s obligations under the funding agreement. RGA Reinsurance maintains control over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The funding agreement and the related security agreement represented by this blanket lien provide that upon any event of default by RGA Reinsurance, the FHLB’s recovery is limited to the amount of RGA Reinsurance’s liability under the outstanding funding agreement. The amount of the Company’s liability for the funding agreements with the FHLB under guaranteed investment contracts was $199.3 million at September 30, 2009 and December 31, 2008, which is included in interest sensitive contract liabilities. The advance on this agreement is collateralized primarily by commercial mortgage-backed securities.
Future Liquidity and Capital Needs
Based on the historic cash flows and the current financial results of the Company, subject to any dividend limitations which may be imposed by various insurance regulations, management believes RGA’s cash flows from operating activities, together with undeployed proceeds from its capital raising efforts, including interest and investment income on those proceeds, interest income received on surplus notes with two operating subsidiaries, and its ability to raise funds in the capital markets, will be sufficient to enable RGA to make dividend payments to its shareholders, to make interest payments on its senior indebtedness, Trust Preferred Securities and junior subordinated notes, repurchase RGA common stock under the board of director approved plan and meet its other obligations.
A sustained general economic downturn or a downturn in the equity and other capital markets could adversely affect the market for many annuity and life insurance products. Because the Company obtains substantially all of its revenues through reinsurance arrangements that cover a portfolio of life insurance products, as well as annuities, its business could be harmed if the market for annuities or life insurance were adversely affected for an extended period of time.

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Investments
The Company had total cash and invested assets of $18.8 billion and $16.5 billion at September 30, 2009 and December 31, 2008, respectively, as illustrated below (dollars in thousands):
                 
    September 30, 2009   December 31, 2008
     
Fixed maturity securities, available-for-sale
  $ 10,986,825     $ 8,531,804  
Mortgage loans on real estate
    736,982       775,050  
Policy loans
    1,079,051       1,096,713  
Funds withheld at interest
    4,820,534       4,520,398  
Short-term investments
    89,372       58,123  
Other invested assets
    516,079       628,649  
Cash and cash equivalents
    546,882       875,403  
     
Total cash and invested assets
  $ 18,775,725     $ 16,486,140  
     
The following table presents consolidated average invested assets at amortized cost, net investment income and investment yield, excluding funds withheld. Funds withheld assets are primarily associated with the reinsurance of annuity contracts on which the Company earns a spread. Fluctuations in the yield on funds withheld assets are generally offset by a corresponding adjustment to the interest credited on the liabilities (dollars in thousands).
                                                 
    Three months ended September 30,   Nine months ended September 30,
                    Increase/                   Increase/
    2009   2008   (Decrease)   2009   2008   (Decrease)
Average invested assets at amortized cost
  $ 13,340,365     $ 12,185,216       9.5 %   $ 12,816,614     $ 11,632,451       10.2 %
 
                                               
Net investment income
    186,457       179,193       4.1 %     544,580       523,681       4.0 %
 
                                               
Investment yield (ratio of net investment income to average invested assets)
    5.71 %     6.01 %   (30)  bps     5.71 %     6.05 %   (34)  bps
Investment yield decreased for the three months ended September 30, 2009, as the decline of certain key indices such as LIBOR, resulted in lower investment returns on the Company’s floating rate investments. In addition, recent economic conditions, notably the tightening of credit, has resulted in new mandates to maintain a higher level of liquidity. Thus, the Company invested in highly liquid assets with shorter maturities than what was previously held in the portfolio, which, has also contributed to the decrease in the average yield of the portfolio.
All investments held by RGA and its subsidiaries 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, to provide adequate liquidity for expected reinsurance obligations, and to 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. See Note 4 — “Investments” in the Notes to Consolidated Financial Statements of the 2008 Annual Report for additional information regarding the Company’s investments.
Fixed Maturities and Equity Securities Available-for-Sale
The following tables provide information relating to investments in fixed maturity securities and equity securities by sector as of September 30, 2009 and December 31, 2008 (dollars in thousands):

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September 30, 2009
                                            Other-than-
                            Estimated           temporary
    Amortized   Unrealized   Unrealized   Fair   % of   impairment
    Cost   Gains   Losses   Value   Total   in AOCI
Available-for-sale:
                                               
U.S. corporate securities
  $ 3,703,343     $ 204,678     $ 203,884     $ 3,704,137       33.7 %   $  
Canadian and Canadian provincial governments
    1,859,671       498,065       4,925       2,352,811       21.4        
Residential mortgage-backed securities
    1,350,539       39,341       60,812       1,329,068       12.1       (12,038 )
Foreign corporate securities
    1,572,534       93,221       36,536       1,629,219       14.8        
Asset-backed securities
    545,194       10,656       106,598       449,252       4.1       (2,628 )
Commercial mortgage-backed securities
    1,086,558       16,769       220,977       882,350       8.0       (4,333 )
U.S. government and agencies
    93,058       2,782       131       95,709       0.9        
State and political subdivisions
    107,450       2,043       10,115       99,378       0.9        
Other foreign government securities
    452,175       5,497       12,771       444,901       4.1        
     
Total fixed maturity securities
  $ 10,770,522     $ 873,052     $ 656,749     $ 10,986,825       100.0 %   $ (18,999 )
     
Non-redeemable preferred stock
  $ 157,341     $ 2,637     $ 29,212     $ 130,766       74.4 %        
Common stock
    44,670       1,615       1,253       45,032       25.6          
             
Total equity securities
  $ 202,011     $ 4,252     $ 30,465     $ 175,798       100.0 %        
             
 
(1)   See Note 4 — “Investments” under Fixed Maturities and Equity Securities Available-for-Sale in the Notes to Condensed Consolidated Financial Statements for additional information regarding AOCI.
                                         
December 31, 2008
                            Estimated    
    Amortized   Unrealized   Unrealized   Fair   % of
    Cost   Gains   Losses   Value   Total
Available-for-sale:
                                       
U.S. corporate securities
  $ 3,577,116     $ 34,262     $ 598,745     $ 3,012,633       35.3 %
Canadian and Canadian provincial governments
    1,500,511       397,899       7,171       1,891,239       22.2  
Residential mortgage-backed securities
    1,231,123       24,838       106,776       1,149,185       13.5  
Foreign corporate securities
    1,112,018       14,335       152,920       973,433       11.4  
Asset-backed securities
    484,577       2,098       147,297       339,378       4.0  
Commercial mortgage-backed securities
    1,085,062       2,258       326,730       760,590       8.9  
U.S. government and agencies
    7,555       876             8,431       0.1  
State and political subdivisions
    46,537             7,883       38,654       0.4  
Other foreign government securities
    338,349       20,062       150       358,261       4.2  
     
Total fixed maturity securities
  $ 9,382,848     $ 496,628     $ 1,347,672     $ 8,531,804       100.0 %
     
Non-redeemable preferred stock
  $ 187,510     $ 49     $ 64,160     $ 123,399       77.4 %
Common stock
    40,582             4,607       35,975       22.6  
     
Total equity securities
  $ 228,092     $ 49     $ 68,767     $ 159,374       100.0 %
     
The Company’s fixed maturity securities are invested primarily in commercial and industrial bonds, public utilities, U.S. and Canadian government securities, as well as mortgage- and asset-backed securities. As of September 30, 2009 and December 31, 2008, approximately 95.0% and 96.7%, respectively, of the Company’s consolidated investment portfolio of fixed maturity securities was investment grade. Important factors in the selection of investments include diversification, quality, yield, total rate of return potential and call protection. The relative importance of these factors is determined by market conditions and the underlying product or portfolio characteristics. Cash equivalents are invested in high-grade money market instruments. The largest asset class in which fixed maturities were invested was in corporate securities, including commercial, industrial, finance and utility bonds, which represented approximately 48.5% of fixed maturity securities as of September 30, 2009, compared to 46.7% at December 31, 2008. The table below shows the major industry types and weighted average credit ratings, which comprise the U.S. and foreign corporate fixed maturity holdings at (dollars in thousands):

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September 30, 2009
            Estimated           Average Credit
    Amortized Cost   Fair Value   % of Total   Ratings
     
Finance
  $ 1,443,700     $ 1,345,772       25.2 %   A-
Industrial
    1,665,422       1,736,378       32.6     BBB+
Foreign (1)
    1,572,534       1,629,219       30.6     A
Utility
    587,942       615,353       11.5     BBB+
Other
    6,279       6,634       0.1     A-
     
Total
  $ 5,275,877     $ 5,333,356       100.0 %   A-
     
                             
December 31, 2008
            Estimated           Average Credit
    Amortized Cost   Fair Value   % of Total   Ratings
     
Finance
  $ 1,475,205     $ 1,155,906       29.0 %   A
Industrial
    1,520,330       1,339,200       33.6     BBB+
Foreign (1)
    1,112,018       973,433       24.4     A
Utility
    542,737       480,809       12.1     BBB+
Other
    38,844       36,718       0.9     AA-
     
Total
  $ 4,689,134     $ 3,986,066       100.0 %   A-
     
 
(1)   Includes U.S. dollar-denominated debt obligations of foreign obligors and other foreign investments.
The National Association of Insurance Commissioners (“NAIC”) assigns securities quality ratings and uniform valuations called “NAIC Designations” which are used by insurers when preparing their annual statements. The NAIC assigns designations to publicly traded as well as privately placed securities. The designations assigned by the NAIC range from class 1 to class 6, with designations in classes 1 and 2 generally considered investment grade (BBB or higher rating agency designation). NAIC designations in classes 3 through 6 are generally considered below investment grade (BB or lower rating agency designation).
The quality of the Company’s available-for-sale fixed maturity securities portfolio, as measured at fair value and by the percentage of fixed maturity securities invested in various ratings categories, relative to the entire available-for-sale fixed maturity security portfolio, at September 30, 2009 and December 31, 2008 was as follows (dollars in thousands):
                                                         
            September 30, 2009   December 31, 2008
NAIC   Rating Agency   Amortized   Estimated   % of   Amortized   Estimated   % of
Designation   Designation   Cost   Fair Value   Total   Cost   Fair Value   Total
  1    
AAA/AA/A
  $ 7,669,832     $ 8,012,174       72.9 %   $ 7,001,968     $ 6,607,730       77.4 %
  2    
BBB
    2,413,362       2,430,079       22.1       1,991,276       1,649,513       19.3  
  3    
BB
    391,699       331,939       3.0       268,276       195,088       2.3  
  4    
B
    186,547       135,107       1.3       77,830       50,064       0.6  
  5    
CCC and lower
    95,973       64,093       0.6       33,945       22,538       0.3  
  6    
In or near default
    13,109       13,433       0.1       9,553       6,871       0.1  
                 
       
Total
  $ 10,770,522     $ 10,986,825       100.0 %   $ 9,382,848     $ 8,531,804       100.0 %
                 
The Company’s fixed maturity portfolio includes structured securities. The following table shows the types of structured securities the Company held at (dollars in thousands):

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    September 30, 2009   December 31, 2008
    Amortized   Estimated   Amortized   Estimated
    Cost   Fair Value   Cost   Fair Value
Residential mortgage-backed securities:
                               
Agency
  $ 754,676     $ 786,735     $ 851,507     $ 868,479  
Non-agency
    595,863       542,333       379,616       280,706  
     
Total residential mortgage-backed securities
    1,350,539       1,329,068       1,231,123       1,149,185  
Commercial mortgage-backed securities
    1,086,558       882,350       1,085,062       760,590  
Asset-backed securities
    545,194       449,252       484,577       339,378  
     
Total
  $ 2,982,291     $ 2,660,670     $ 2,800,762     $ 2,249,153  
     
The residential mortgage backed securities include agency-issued pass-through securities, collateralized mortgage obligations, a majority of which are guaranteed or otherwise supported by the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, or the Government National Mortgage Association. As of September 30, 2009 and December 31, 2008, the weighted average credit rating was “AA+”. The principal risks inherent in holding mortgage-backed securities are prepayment and extension risks, which will affect the timing of when cash will be received and are dependent on the level of mortgage interest rates. Prepayment risk is the unexpected increase in principal payments, primarily as a result of owner refinancing. Extension risk relates to the unexpected slowdown in principal payments. In addition, mortgage-backed securities face default risk should the borrower be unable to pay the contractual interest or principal on their obligation. The Company monitors its mortgage-backed securities to mitigate exposure to the cash flow uncertainties associated with these risks.
As of September 30, 2009 and December 31, 2008, the Company had exposure to commercial mortgage-backed securities with amortized costs totaling $1,604.2 million and $1,573.4 million, and estimated fair values of $1,307.7 million and $1,143.3 million, respectively. Those amounts include exposure to commercial mortgage-backed securities held directly in the Company’s investment portfolios within fixed maturity securities, as well as securities held by ceding companies that support the Company’s funds withheld at interest investment. The securities are highly rated with weighted average S&P credit ratings of approximately “AA+” at September 30, 2009 and December 31, 2008. Approximately 75.6% and 83.7%, based on estimated fair value, were classified in the “AAA” category at September 30, 2009 and December 31, 2008, respectively. The Company recorded other-than-temporary impairments of $2.6 million and $2.9 million, net of non-credit adjustments, in its direct investments in commercial mortgage-backed securities for the third quarter and first nine months ended September 30, 2009, respectively. The Company did not record any other-than-temporary impairments in its direct investments in commercial mortgage-backed securities during the first nine months of 2008. The following tables summarize the securities by rating and underwriting year at September 30, 2009 and December 31, 2008 (dollars in thousands):
                                                 
    September 30, 2009
    AAA   AA   A
            Estimated           Estimated           Estimated
Underwriting Year   Amortized Cost   Fair Value   Amortized Cost   Fair Value   Amortized Cost   Fair Value
2003 & Prior
  $ 251,993     $ 263,042     $ 23,517     $ 20,966     $ 18,270     $ 11,427  
2004
    53,264       51,074       444       215       11,589       4,879  
2005
    170,141       151,826       18,657       12,312       39,490       20,580  
2006
    268,897       242,019       21,748       12,953       44,178       34,119  
2007
    271,457       240,520       27,794       7,062       67,929       33,864  
2008
    35,709       36,529       27,584       20,048       3,034       543  
2009
    3,158       3,338                          
     
Total
  $ 1,054,619     $ 988,348     $ 119,744     $ 73,556     $ 184,490     $ 105,412  
     

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Continued
                                                 
    September 30, 2009
    BBB   Below Investment Grade   Total
    Amortized   Estimated           Estimated           Estimated
Underwriting Year   Cost   Fair Value   Amortized Cost   Fair Value   Amortized Cost   Fair Value
2003 & Prior
  $ 24,081     $ 16,695     $     $     $ 317,861     $ 312,130  
2004
    1,914       1,048                   67,211       57,216  
2005
    15,833       8,313       27,624       16,561       271,745       209,592  
2006
    16,662       10,112       30,682       17,045       382,167       316,248  
2007
    47,633       38,444       65,630       28,984       480,443       348,874  
2008
                15,279       3,216       81,606       60,336  
2009
                            3,158       3,338  
     
Total
  $ 106,123     $ 74,612     $ 139,215     $ 65,806     $ 1,604,191     $ 1,307,734  
     
                                                 
    December 31, 2008
    AAA   AA   A
            Estimated           Estimated           Estimated
Underwriting Year   Amortized Cost   Fair Value   Amortized Cost   Fair Value   Amortized Cost   Fair Value
2003 & Prior
  $ 250,720     $ 254,690     $ 24,276     $ 17,518     $ 28,432     $ 16,744  
2004
    50,245       46,737       2,147       999       10,603       3,835  
2005
    200,140       136,101       2,530       682       54,173       30,079  
2006
    306,478       234,575       16,219       6,074       45,346       31,379  
2007
    362,226       256,163       50,648       14,343       59,013       20,636  
2008
    30,017       28,501       23,387       10,698       18,342       11,186  
     
Total
  $ 1,199,826     $ 956,767     $ 119,207     $ 50,314     $ 215,909     $ 113,859  
     
                                                 
    BBB   Below Investment Grade   Total
            Estimated           Estimated           Estimated
Underwriting Year   Amortized Cost   Fair Value   Amortized Cost   Fair Value   Amortized Cost   Fair Value
2003 & Prior
  $ 18,144     $ 11,938     $     $     $ 321,572     $ 300,890  
2004
                            62,995       51,571  
2005
    3,679       776                   260,522       167,638  
2006
    15,283       8,709       1,305       941       384,631       281,678  
2007
                            471,887       291,142  
2008
                            71,746       50,385  
     
Total
  $ 37,106     $ 21,423     $ 1,305     $ 941     $ 1,573,353     $ 1,143,304  
     
Asset-backed securities include credit card and automobile receivables, subprime securities, home equity loans, manufactured housing bonds and collateralized debt obligations. The Company’s asset-backed securities are diversified by issuer and contain both floating and fixed rate securities and had a weighted average credit rating of “AA” at September 30, 2009 and December 31, 2008. The Company owns floating rate securities that represent approximately 20.1% and 20.0% of the total fixed maturity securities at September 30, 2009 and December 31, 2008, respectively. These investments have a higher degree of income variability than the other fixed income holdings in the portfolio due to the floating rate nature of the interest payments. The Company holds these investments to match specific floating rate liabilities primarily reflected in the condensed consolidated balance sheets as collateral finance facility. In addition to the risks associated with floating rate securities, principal risks in holding asset-backed securities are structural, credit and capital market risks. Structural risks include the securities’ priority in the issuer’s capital structure, the adequacy of and ability to realize proceeds from collateral, and the potential for prepayments. Credit risks include consumer or corporate credits such as credit card holders, equipment lessees, and corporate obligors. Capital market risks include general level of interest rates and the liquidity for these securities in the marketplace.
As of September 30, 2009 and December 31, 2008, the Company held investments in securities with subprime

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mortgage exposure with amortized costs totaling $188.3 million and $230.1 million, and estimated fair values of $102.7 million and $147.8 million, respectively. Those amounts include exposure to subprime mortgages through securities held directly in the Company’s investment portfolios within asset-backed securities, as well as securities backing the Company’s funds withheld at interest investment. The securities are highly rated with weighted average S&P credit ratings of approximately “BBB+” at September 30, 2009 and “AA-” at December 31, 2008. Additionally, the Company has largely avoided directly investing in securities originated since the second half of 2005, which management believes was a period of lessened underwriting quality. During the third quarter and first nine months ended September 30, 2009, the Company recorded $4.5 million and $25.3 million, respectively, of other-than-temporary impairments, net of non-credit adjustments, in its subprime portfolio due primarily to the increased likelihood that some or all of the remaining scheduled principal and interest payments on select securities will not be received. The Company recorded $11.6 million of other-than-temporary impairments in its subprime portfolio during the third quarter and first nine months ended September 30, 2008. The following tables summarize the securities by rating and underwriting year at September 30, 2009 and December 31, 2008 (dollars in thousands):
                                                 
    September 30, 2009
    AAA   AA   A
            Estimated           Estimated           Estimated
Underwriting Year   Amortized Cost   Fair Value   Amortized Cost   Fair Value   Amortized Cost   Fair Value
2003 & Prior
  $ 6,869     $ 5,323     $ 1,920     $ 1,465     $ 6,219     $ 3,539  
2004
                21,102       14,084              
2005
    16,141       12,698       26,816       17,291       6,507       2,223  
2006
                                   
2007
                                   
2008
                                   
2009
                                   
     
Total
  $ 23,010     $ 18,021     $ 49,838     $ 32,840     $ 12,726     $ 5,762  
     
                                                 
    BBB   Below Investment Grade   Total
            Estimated           Estimated           Estimated
Underwriting Year   Amortized Cost   Fair Value   Amortized Cost   Fair Value   Amortized Cost   Fair Value
2003 & Prior
  $     $     $ 2,800     $ 1,249     $ 17,808     $ 11,576  
2004
                23,447       14,072       44,549       28,156  
2005
    23,271       10,071       30,069       8,924       102,804       51,207  
2006
    9,485       4,089       543       66       10,028       4,155  
2007
    886       329       12,249       7,287       13,135       7,616  
2008
                                   
2009
                                   
     
Total
  $ 33,642     $ 14,489     $ 69,108     $ 31,598     $ 188,324     $ 102,710  
     
                                                 
    December 31, 2008
    AAA   AA   A
            Estimated           Estimated           Estimated
Underwriting Year   Amortized Cost   Fair Value   Amortized Cost   Fair Value   Amortized Cost   Fair Value
2003 & Prior
  $ 11,007     $ 9,116     $ 6,509     $ 4,320     $ 1,813     $ 1,227  
2004
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