Management's discussion and analysis reviews our unaudited consolidated financial position at September 30, 2009, and the unaudited consolidated results of operations for the three and nine month periods ended September 30, 2009 and 2008, and where appropriate, factors that may affect future financial performance. This analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q, and the audited consolidated financial statements, notes thereto and selected consolidated financial data appearing in our Annual Report on Form 10-K for the year ended December 31, 2008. All prior period amounts are presented as adjusted due to the adoption of Financial Accounting Standards Board ("FASB") guidance for accounting for convertible debt instruments that may be settled partially or totally in cash upon conversion.

All statements, trend analyses and other information contained in this report and elsewhere (such as in filings by us with the Securities and Exchange Commission ("SEC"), press releases, presentations by us or our management or oral statements) relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions, constitute forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things:

† general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance which may affect (among other things) our ability to sell our products, our ability to access capital resources and the costs associated therewith, the fair value of our investments, which could result in impairments and other than temporary impairments, and certain liabilities, and the lapse rate and profitability of policies;

†          customer response to new products and marketing initiatives;

†          changes in Federal income tax laws and regulations which may affect
the relative income tax advantages of our products;

†          increasing competition in the sale of annuities;

†          regulatory changes or actions, including those relating to regulation

† the risk factors or uncertainties listed from time to time in our filings with the SEC.

For a detailed discussion of these and other factors that might affect our performance, see "Risk Factors" in Part II, Item 1A and Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.

Overview

We specialize in the sale of individual annuities (primarily deferred annuities) and, to a lesser extent, we also sell life insurance policies. Under U.S. generally accepted accounting principles ("GAAP"), premium collections for deferred annuities are reported as deposit liabilities instead of as revenues. Similarly, cash payments to policyholders are reported as decreases in the liabilities for policyholder account balances and not as expenses. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender and other charges deducted from the account balances of policyholders in connection with withdrawals, realized gains and losses on investments and changes in fair value of derivatives. Components of expenses for products accounted for as deposit liabilities are interest credited to account balances, changes in fair value of embedded derivatives, amortization of deferred policy acquisition costs and deferred sales inducements, other operating costs and expenses and income taxes.

Annuity deposits by product type collected during the three months and nine months ended September 30, 2009 and 2008, were as follows:

                                   Three Months Ended         Nine Months Ended
                                     September 30,              September 30,
Product Type                        2009        2008         2009          2008
                                               (Dollars in thousands)
Fixed index annuities:
Index strategies                 $  434,233   $ 315,915   $ 1,163,375   $ 1,040,534
Fixed strategy                      482,034     247,122     1,462,926       669,052
                                    916,267     563,037     2,626,301     1,709,586
Fixed rate annuities:
Single-year rate guaranteed          37,462       7,379        76,878        21,350
Multi-year rate guaranteed           26,255       1,422        74,436         4,065
                                     63,717       8,801       151,314        25,415
Total before coinsurance ceded      979,984     571,838     2,777,615     1,735,001
Coinsurance ceded                   514,031         178       514,620         1,149
Net after coinsurance ceded      $  465,953   $ 571,660   $ 2,262,995   $ 1,733,852

Annuity deposits before coinsurance ceded increased 71% during the three months ended September 30, 2009 compared to the same period in 2008, and 60% during the nine months ended September 30, 2009 compared to the same period in 2008. We attribute these increases to several factors, including our continued strong relationships with our national marketing organizations and field force of licensed, independent insurance agents, the increased attractiveness of safe money products in volatile markets, lower interest rates on competing products such as bank certificates of deposit and product enhancements including a new generation of guaranteed income withdrawal benefit riders. In addition, we have benefitted during the first nine months of 2009 from the actions of several significant competitors who have restricted their capacity to accept new business. The extent to which this trend will be sustained in future periods is uncertain. While we have the capital resources to accept more business than was sold in 2008, our capacity is not unlimited and sales growth must be matched with available capital resources to maintain desired financial strength ratings from credit rating agencies and in particular, A.M. Best Company. Toward this end, effective June 1, 2009, we restructured our payment of commissions to agents on new sales by reducing the amount of commission paid at the time of sale but providing for additional commission payments on the first and second anniversaries of the date a policy was issued. This change will initially increase our statutory earnings and capital and surplus and our capacity to accept new business. It is uncertain what impact the change will have on the agents' willingness to sell business for us. During the second quarter of 2009 we also amended one of our reinsurance agreements with Hannover Life Reassurance Company of America to include certain policy forms that were not in existence in 2005 when the agreement was executed. This amendment increased the statutory reinsurance reserve credit by approximately $37.4 million at June 30, 2009. Effective July 1, 2009 we entered into two reinsurance arrangements with a newly formed reinsurance company to reinsure on a funds withheld coinsurance basis 20% of the annuity deposits received in 2009 from our two top selling index annuity products and 80% of the annuity deposits received after June 30, 2009 from a multi-year rate guaranteed fixed annuity product. Our objective with these agreements is to manage our new business growth to a maximum of $3 billion of net annuity deposits for 2009. These reinsurance arrangements resulted in the significant increases in coinsurance ceded annuity deposits for the 2009 periods in the table above.

Earnings from products accounted for as deposit liabilities are primarily generated from the excess of net investment income earned over the interest credited or the cost of providing index credits to the policyholder, or the "investment spread". Our investment spread is summarized as follows:

                                                          Nine Months Ended
                                                            September 30,
                                                           2009        2008

      Average yield on invested assets                       6.32 %      6.18 %
      Cost of money:
      Aggregate                                              3.29 %      3.45 %
      Cost of money for index annuities                      3.27 %      3.46 %
      Average crediting rate for fixed rate annuities:
      Annually adjustable                                    3.26 %      3.26 %
      Multi-year rate guaranteed                             3.90 %      3.90 %
      Investment spread:
      Aggregate                                              3.03 %      2.73 %
      Index annuities                                        3.05 %      2.72 %
      Fixed rate annuities:
      Annually adjustable                                    3.06 %      2.92 %
      Multi-year rate guaranteed                             2.42 %      2.28 %

The cost of money for index annuities and average crediting rates for fixed rate annuities are computed based upon policyholder account balances and do not include the impact of amortization of deferred sales inducements. See Critical Accounting Policies - Deferred Policy Acquisition Costs and Deferred Sales Inducements included in Management's Discussion and Analysis included in our Annual Report on Form 10-K for the year ended December 31, 2008. With respect to our index annuities, the cost of money includes the average crediting rate on amounts allocated to the fixed rate strategy, expenses we incur to fund the annual index credits and where applicable, minimum guaranteed interest credited. Proceeds received upon expiration or early termination of call options purchased to fund annual index credits are recorded as part of the change in fair value of derivatives, and are largely offset by an expense for interest credited to annuity policyholder account balances. See Critical Accounting Policies - Derivative Instruments - Index Products included in Management's Discussion and Analysis included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Our profitability depends in large part upon the amount of assets under our management, investment spreads we earn on our policyholder account balances, our ability to manage our investment portfolio to maximize returns and minimize risks such as interest rate changes and defaults or impairment of assets, our ability to manage interest rates credited to policyholders and costs of the options purchased to fund the annual index credits on our index annuities, our ability to manage the costs of acquiring new business (principally commissions to agents and bonuses credited to policyholders) and our ability to manage our operating expenses.

Results of Operations

Three and Nine Months Ended September 30, 2009 and 2008

Net income (loss) decreased 75% to $(3.0) million for the third quarter of 2009 and decreased 19% to $32.5 million for the nine months ended September 30, 2009 compared to $(11.7) million and $40.0 million for the same periods in 2008. Net income for the nine months ended September 30, 2008 includes the impact of the adoption of the fair value measurement accounting standards as discussed below. Net income for the nine months ended September 30, 2009 includes the impact of applying the FASB guidance for recognition and presentation of other than temporary impairments that was released in April 2009 as discussed below.

Net income has been positively impacted by the growth in the volume of business in force and the investment spread earned on this business. Average annuity account values outstanding increased 14% for the third quarter of 2009 and 13% for the nine months ended September 30, 2009 compared to the same periods in 2008. Our investment spread measured on a percentage basis was 3.13% for the third quarter of 2009 and 3.03% for the nine months ended September 30, 2009 compared to 2.83% and 2.73% for the same periods in 2008. The increase in

investment spread resulted from a higher investment yield earned on average assets due to higher yield on investments purchased throughout 2008 and during the first nine months of 2009 and a lower aggregate cost of money on our index annuities. The lower cost of money for index annuities during 2009 was due to adjustments we made throughout 2007 to caps, participation rates and asset fees to manage the cost of options purchased to fund the annual index credits. The benefit from these adjustments was not fully recognized until the fourth quarter of 2008.

The comparability of the amounts is significantly impacted by net realized gains on investments, net other than temporary impairment ("OTTI") losses recognized in operations, gain (loss) on extinguishment of debt and the impact of fair value accounting for index annuity derivatives and embedded derivatives. We estimate that these items increased (decreased) net income as follows:

                                         Three Months Ended             Nine Months Ended
                                            September 30,                 September 30,
                                         2009           2008           2009           2008
                                                      (Dollars in thousands)

Net realized gains and net
impairment losses on investments
recognized in operations             $    (11,491 )  $   (39,222 )  $   (10,954 )  $   (49,140 )
Gain (loss) on extinguishment of
debt                                            -            (16 )        1,812           (793 )
Change in fair value of index
annuity derivatives and embedded
derivatives                               (18,162 )        5,507        (27,007 )       33,093

Net realized gains on investments and net impairment losses recognized in operations fluctuate from period to period based upon changes in the interest rate and economic environment and the timing of the sale of investments or the recognition of other than temporary impairments. We adopted the FASB guidance for recognition and presentation of other than temporary impairments that was released in April 2009 on January 1, 2009, which amended the determination of the amount of other than temporary impairments recognized in the statement of operations resulting in the noncredit portion of other than temporary impairments being recognized in accumulated other comprehensive income for debt securities that we do not intend to sell and it is not more likely than not we will be required to sell but also do not expect to recover the entire amortized cost basis of the security. The amounts disclosed above are net of related reductions in amortization of deferred sales inducements and deferred policy acquisition costs and income taxes. The net loss for the nine months ended September 30, 2009 includes a benefit of $3.6 million for the reduction of the deferred tax valuation allowance related to other than temporary impairments.

Amounts attributable to fair value accounting for index annuity derivatives and embedded derivatives fluctuate from period to period based upon changes in fair values of call options purchased to fund annual index credits for index annuities and changes in the interest rates used to discount the embedded derivative liabilities. The amounts disclosed above are net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs and income taxes. The significant changes in the impact from this item disclosed above relate primarily to changes in the interest rates used to discount the embedded derivative liabilities. Pursuant to fair value measurements accounting standards adopted prospectively on January 1, 2008, the discount rates are based on risk-free interest rates adjusted for our non performance risk. These rates decreased materially in the three months and nine months ended September 30, 2009 resulting in decreases in net income for those periods. Prior to the adoption of the fair value measurements accounting standards, the discount rates used were risk-free interest rates without adjustment for our non performance risk. The change to discount rates including our non performance risk resulted in a decrease in policy benefit reserves on January 1, 2008 of $150.6 million. The net income impact of this decrease in reserves net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs and income taxes was $40.7 million.

We periodically revise assumptions used in the computations of amortization of deferred sales inducements and deferred policy acquisition costs, as applicable, through an "unlocking" process. Revisions are made based upon historical results and our best estimates of future experience. The impact of unlocking is recorded in the current period as an increase or decrease in amortization of the respective balances. The unlocking process can take place at any time as needs dictate. See Critical Accounting Policies - Deferred Policy Acquisition Costs and Deferred Sales Inducements included in Management's Discussion and Analysis included in our Annual Report on Form 10-K for the year ended December 31, 2008.

There was no unlocking necessary during the 2009 periods and the three months ended September 30, 2008. The impact of unlocking for the nine months ended September 30, 2008 was a $2.2 million decrease in the amortization of deferred sales inducements and a $4.6 million increase in amortization of deferred policy acquisition costs for a net

increase in amortization of $2.4 million. The impact of unlocking is primarily due to the impact of actual surrender experience on certain older business, offset in part by increases in the estimates of projected future interest margins and reductions in the estimates of projected future policy maintenance expenses.

Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for living income benefit riders) increased 19% to $15.8 million for the third quarter of 2009 and 27% to $47.5 million for the nine months ended September 30, 2009 compared to $13.3 million and $37.3 million for the same periods in 2008. Product charges for the three months and nine months ended September 30, 2009 include $1.7 million and $3.0 million, respectively, of fees deducted from policyholder account balances for living income benefit riders. Surrender charges fluctuate from period to period based upon policyholder behavior and have generally increased during the 2009 periods consistent with growth in the volume of business in force.

Net investment income increased 15% to $241.5 million in the third quarter of 2009 and 13% to $688.9 million for the nine months ended September 30, 2009 compared to $210.0 million and $607.5 million for the same periods in 2008. These increases were principally attributable to the growth in our annuity business and corresponding increases in our invested assets and the average yield earned on investments. Average invested assets (on an amortized cost basis) excluding derivative instruments increased 12% to $15.1 billion in the third quarter of 2009 and 11% to $14.5 billion for the nine months ended September 30, 2009 compared to $13.6 billions and $13.1 billion for the same periods in 2008. The average yield earned on average invested assets was 6.38% in the third quarter of 2009 and 6.32% for the nine months ended September 30, 2009 compared to 6.20% and 6.18% for the same periods in 2008. The increase in the yield earned on average invested assets was attributable to higher yields on investments purchased throughout 2008 and during the nine months ended September 30, 2009.

Change in fair value of derivatives (principally call options purchased to fund annual index credits on index annuities) is affected by the performance of the indices upon which our options are based and the aggregate cost of options purchased. The components of change in fair value of derivatives are as follows:

                                     Three Months Ended        Nine Months Ended
                                       September 30,             September 30,
                                      2009        2008         2009         2008
                                                (Dollars in thousands)

Call options:
Loss on option expiration          $  (65,118 ) $ (75,062 ) $ (197,182 ) $ (196,265 )
Change in unrealized gain (loss)      188,239      (8,536 )    307,201     (117,722 )
Interest rate swaps                    (1,614 )      (155 )     (1,841 )       (444 )
                                   $  121,507   $ (83,753 ) $  108,178   $ (314,431 )

The differences between the change in fair value of derivatives between years are primarily due to the performance of the indices upon which our call options are based. A substantial portion of our call options are based upon the S&P 500 Index with the remainder based upon other equity and bond market indices. The range of index appreciation for options expiring during the three months and nine months ended September 30, 2009 and 2008 is as follows:

                                    Three Months Ended              Nine Months Ended
                                       September 30,                  September 30,
                                   2009            2008           2009            2008
S&P 500 Index
Point-to-point strategy         0.0% - 0.0%    0.0% - 0.0%     0.0% - 0.0%    0.0% - 2.6%
Monthly average strategy        0.0% - 0.0%    0.0% - 0.0%     0.0% - 0.0%    0.0% - 6.4%
Monthly point-to-point
strategy                        0.0% - 0.0%    0.0% - 0.0%     0.0% - 0.0%    0.0% - 0.0%
Lehman Brothers U.S.
Aggregate and U.S. Treasury
indices 4.2% - 6.3%             6.0% - 6.4%    4.5% - 10.8%    1.6% - 6.4%    4.5% - 12.6%

Actual amounts credited to policyholder account balances may be less than the index appreciation due to contractual features in the index annuity policies (caps, participation rates and asset fees) which allow us to manage the cost of the options purchased to fund the annual index credits. The change in fair value of derivatives is also influenced by the aggregate cost of options purchased. The aggregate cost of options has increased primarily due to an increased amount of index annuities in force. The aggregate cost of options is also influenced by the amount of policyholder funds allocated to the various indices and market volatility which affects option pricing. Costs for options purchased during the nine months ended September 30, 2009 decreased compared to the same period in 2008 due to adjustments to caps, participation rates and asset fees. See Critical Accounting Policies - Derivative Instruments - Index Products included in Management's Discussion and Analysis included in our Annual Report on Form 10-K for the year ended December 31, 2008.

We had unsecured counterparty exposure in connection with options purchased from affiliates of Lehman Brothers ("Lehman") which declared bankruptcy during the third quarter of 2008. Except for a few options involving immaterial amounts, all options purchased from affiliates of Lehman have expired as of September 30, 2009. The amount of option proceeds due on expired options purchased from Lehman that we did not receive payment on was $2.6 million for the third quarter of 2009 and $12.0 million for the nine months ended September 30, 2009. No amount has been recognized for any recovery of these amounts that may result from our claim in Lehman's bankruptcy proceedings.

Net realized gains on investments, excluding OTTI losses include gains and losses on the sale of securities and impairment losses on mortgage loans on real estate and fluctuate from year to year due to changes in the interest rate and economic environment and the timing of the sale of investments. The components of net realized gains on investments for the three months and nine months ended September 30, 2009 and 2008 are set forth in the table that follows.

                                        Three Months Ended            Nine Months Ended
                                          September 30,                 September 30,
                                       2009           2008           2009           2008
                                                    (Dollars in thousands)
Available for sale fixed
maturity securities:
Gross realized gains                $     9,340    $     2,228    $    15,467    $    3,371
Gross realized losses                    (1,625 )         (170 )       (1,678 )        (283 )
                                          7,715          2,058         13,789         3,088
Equity securities:
Gross realized gains                      3,279            200          3,282           255
                                          3,279            200          3,282           255
Mortgage loans on real estate:
Impairment losses                        (5,484 )            -         (6,484 )           -
                                    $     5,510    $     2,258    $    10,587    $    3,343

Gross realized gains have increased in the 2009 periods due to tax planning strategies to generate taxable capital gains that will permit deduction of capital losses for income tax purposes. Gross realized losses in the 2009 periods primarily relate to two securities that experienced credit events in the three months ended September 30, 2009 resulting in the decision to sell the securities at a loss. See Financial Condition - Investments for additional discussion of impairment losses recognized on mortgage loans on real estate.

Net OTTI losses recognized in operations decreased 27% to $44.6 million in the third quarter of 2009 and 33% to $63.7 million for the nine months ended September 30, 2009 compared to $61.2 million and $94.8 million for the same periods in 2008. See Financial Condition - Investments for additional discussion of write downs of securities for other than temporary impairments.

Gain (loss) on extinguishment of debt includes a $3.1 million gain on an exchange of five million shares of our common stock for $37.2 million of our 5.25% contingent convertible senior notes in May 2009. The fair value of our common stock exchanged totaled $31.3 million and the notes extinguished carried unamortized debt issue costs and debt discount totaling $2.8 million. We used $32.3 million in cash, of which $0.4 million was assigned to reacquire the equity component of the debt, to extinguish $34.0 million of our 5.25% contingent convertible senior notes that carried unamortized debt discount and debt issue costs totaling $3.5 million during the nine months ended September 30, 2008. The 2008 transactions resulted in losses on extinguishment of debt of $1.4 million for nine months ended September 30, 2008.

Interest sensitive and index product benefits increased 49% to $75.3 million in the third quarter of 2009 and 34%

. . .