TRANSAMERICA ADVISORS LIFE INSURANCE Co - FORM 10-Q

Attached files

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EX-32.1 - EXHIBIT 32.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co	d226708dex321.htm
EX-31.2 - EXHIBIT 31.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co	d226708dex312.htm
EX-31.1 - EXHIBIT 31.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co	d226708dex311.htm
EX-32.2 - EXHIBIT 32.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co	d226708dex322.htm
EXCEL - IDEA: XBRL DOCUMENT - TRANSAMERICA ADVISORS LIFE INSURANCE Co	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

COMMISSION FILE NUMBERS 33-26322; 33-46827; 33-52254; 33-60290;

33-58303; 333-33863; 333-34192; 333-133223; 333-133225

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(Exact name of Registrant as specified in its charter)

ARKANSAS

91-1325756

(State or other jurisdiction

of incorporation or organization)

(IRS Employer

Identification No.)

4333 Edgewood Road, NE

Cedar Rapids, Iowa

52499-0001

(Address of Principal Executive Offices)

(800) 346-3677

(Registrant 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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No ¨

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 ¨	Accelerated filer ¨	Non-accelerated filer þ	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

COMMON 250,000

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

PART 1. Financial Information

Item 1. Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

BALANCE SHEETS


*(dollars in thousands, except share data)*	September 30, 2011		December 31, 2010
	*(unaudited)*		*(audited)*
ASSETS
Investments
Fixed maturity available-for-sale securities, at estimated fair value (amortized cost: 2011 - $1,702,703; 2010 - $1,565,004)	$	1,846,420	$	1,628,394
Fixed maturity trading securities		2,542		23,138
Equity available-for-sale securities, at estimated fair value (cost: 2011 - $36,145; 2010 - $15,202)		30,806		12,990
Limited partnerships		10,541		9,687
Mortgage loans on real estate		56,399		62,890
Policy loans		803,462		827,638
Derivative assets		3,824		-

Total investments		2,753,994		2,564,737

Cash and cash equivalents		296,114		308,614
Accrued investment income		40,763		38,121
Deferred policy acquisition costs		44,053		31,437
Deferred sales inducements		10,152		7,270
Value of business acquired		315,526		335,051
Goodwill		2,800		2,800
Federal income taxes - deferred		-		4,467
Reinsurance receivables - net		705		4,158
Affiliated short-term note receivable		50,000		-
Receivable for investments sold - net		5,576		371
Other assets		34,306		32,241
Separate Accounts assets		6,793,453		8,163,032

Total Assets	$	10,347,442	$	11,492,299

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

BALANCE SHEETS - Continued


*(dollars in thousands, except share data)*	September 30, 2011			December 31, 2010
	*(unaudited)*			*(audited)*
LIABILITIES AND STOCKHOLDER’S EQUITY
Liabilities
Policyholder liabilities and accruals
Policyholder account balances	$	1,479,755		$	1,551,317
Future policy benefits		528,730			362,587
Claims and claims settlement expenses		43,326			33,677

Total policyholder liabilities and accruals		2,051,811			1,947,581

Other policyholder funds		3,841			3,380
Payables for collateral under securities loaned and reverse repurchase agreements		271,548			160,363
Payable for derivative collateral		2,717			-
Derivative liabilities		-			353
Federal income taxes - current		1,799			4,106
Federal income taxes - deferred		11,176			-
Affiliated payables - net		8,621			11,199
Other liabilities		6,271			5,783
Separate Accounts liabilities		6,793,453			8,163,032

Total Liabilities		9,151,237			10,295,797


Stockholder’s Equity
Common stock ($10 par value; authorized 1,000,000 shares; issued and outstanding: 250,000 shares)		2,500			2,500
Additional paid-in capital		1,366,636			1,366,636
Accumulated other comprehensive income, net of taxes		71,938			27,487
Retained deficit		(244,869	)		(200,121	)

Total Stockholder’s Equity		1,196,205			1,196,502

Total Liabilities and Stockholder’s Equity	$	10,347,442		$	11,492,299

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF INCOME


	Three Months Ended September 30,						Nine Months Ended September 30,
*(dollars in thousands)*	2011			2010			2011			2010
	*(unaudited)*
Revenues
Policy charge revenue	$	49,253		$	50,152		$	152,709		$	154,339
Net investment income		38,317			32,691			100,991			97,063
Net realized investment gains (losses)
Other-than-temporary impairment losses on securities		(1,813	)		(2,159	)		(3,601	)		(5,469	)
Portion of other-than-temporary impairment losses recognized in other comprehensive income		1,813			1,886			3,572			4,335
Portion of other-than-temporary impairments previously recognized in other comprehensive income		(79	)		-			(953	)		(423	)

Net other-than-temporary impairment losses on securities recognized in income		(79	)		(273	)		(982	)		(1,557	)
Net realized investment gains (losses), excluding other-than-temporary impairment losses on securities		19,253			(14,446	)		12,998			(7,288	)

Net realized investment gains (losses)		19,174			(14,719	)		12,016			(8,845	)

Total Revenues		106,744			68,124			265,716			242,557


Benefits and Expenses
Interest credited to policyholder liabilities		18,502			20,420			55,488			60,059
Policy benefits (net of reinsurance recoveries: 2011 - $3,852, $12,627; 2010 - $2,370, $15,048)		185,129			(50,480	)		219,378			58,941
Reinsurance premium ceded		2,387			2,997			8,442			10,458
Amortization (accretion) of deferred policy acquisition costs		(14,186	)		929			(12,258	)		(12,446	)
Amortization (accretion) of value of business acquired		(1,408	)		13,109			8,491			1,865
Insurance expenses and taxes		12,262			9,800			41,427			42,161

Total Benefits and Expenses		202,686			(3,225	)		320,968			161,038

Income (Loss) Before Taxes		(95,942	)		71,349			(55,252	)		81,519


Federal Income Tax Expense (Benefit)
Current		(136	)		(1,781	)		(1,802	)		(1,781	)
Deferred		(6,534	)		1,944			(8,702	)		(17,096	)

Federal Income Tax Expense (Benefit)		(6,670	)		163			(10,504	)		(18,877	)

Net Income (Loss)	$	(89,272	)	$	71,186		$	(44,748	)	$	100,396

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended September 30,						Nine Months Ended September 30,
*(dollars in thousands)*	2011			2010			2011			2010
	*(unaudited)*

Net Income (Loss)	$	(89,272	)	$	71,186		$	(44,748	)	$	100,396


Other Comprehensive Income (Loss)
Net unrealized gains (losses) on available-for-sale securities
Net unrealized holding gains arising during the period		58,164			59,435			78,692			125,072
Reclassification adjustment for (gains) losses included in net income		(864	)		2,428			(2,772	)		5,952

		57,300			61,863			75,920			131,024


Net unrealized other-than-temporary impairments on securities
Net unrealized other-than-temporary impairment losses arising during the period		(1,813	)		(1,886	)		(3,572	)		(4,335	)
Change in previously recognized unrealized other-than-temporary impairments		4,110			701			3,900			1,893
Reclassification adjustment for other-than-temporary impairments included in net income		79			-			953			423

		2,376			(1,185	)		1,281			(2,019	)


Adjustments
Policyholder liabilities		932			(294	)		1,609			(1,529	)
Value of business acquired		(9,117	)		(15,081	)		(10,014	)		(28,540	)
Deferred federal income taxes		(18,280	)		(16,082	)		(24,345	)		(35,123	)

		(26,465	)		(31,457	)		(32,750	)		(65,192	)

Total other comprehensive income, net of taxes		33,211			29,221			44,451			63,813

Comprehensive Income (Loss)	$	(56,061	)	$	100,407		$	(297	)	$	164,209

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF STOCKHOLDER’S EQUITY


*(dollars in thousands)*	September 30, 2011			December 31, 2010
	*(unaudited)*			*(audited)*

Common Stock	$	2,500		$	2,500

Additional Paid-in Capital	$	1,366,636		$	1,366,636

Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	$	27,487		$	(10,104	)
Total other comprehensive income, net of taxes		44,451			37,591

Balance at end of period	$	71,938		$	27,487


Retained Earnings (Deficit)
Balance at beginning of period	$	(200,121	)	$	(337,983	)
Net income (loss)		(44,748	)		137,862

Balance at end of period	$	(244,869	)	$	(200,121	)


Total Stockholder’s Equity	$	1,196,205		$	1,196,502

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,
*(dollars in thousands)*	2011			2010
	*(unaudited)*
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(44,748	)	$	100,396
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Change in deferred policy acquisition costs		(12,616	)		(13,205	)
Change in deferred sales inducements		(2,882	)		(2,935	)
Change in value of business acquired		8,491			1,865
Change in benefit reserves		163,974			4,754
Change in federal income tax accruals		(11,010	)		(18,489	)
Change in claims and claims settlement expenses		9,649			(4,513	)
Change in other policyholder funds		461			(4,753	)
Change in other operating assets and liabilities, net		(8,549	)		2,845
Amortization of investments		1,106			320
Limited partnership asset distributions		(1,152	)		(266	)
Interest credited to policyholder liabilities		55,488			60,059
Net change in fixed maturity trading securities		(348	)		-
Net realized investment (gains) losses		(12,016	)		8,845

Net cash and cash equivalents provided by operating activities		145,848			134,923


CASH FLOWS FROM INVESTING ACTIVITIES
Sales of available-for-sale securities and mortgage loans		142,961			416,074
Maturities of available-for-sale securities and mortgage loans		83,340			120,603
Purchases of available-for-sale securities		(374,776	)		(755,546	)
Sales of trading securities		20,944			-
Sales of limited partnerships		2,301			1,911
Change in affiliated short-term note receivable		(50,000	)		-
Change in payable for collateral under securities loaned and reverse repurchase agreements		111,185			71,879
Change in derivative collateral		2,717			-
Changes in derivative asset		(3,824	)		-
Change in derivative liability		(353	)		-
Policy loans on insurance contracts, net		24,176			31,778
Net settlement on futures contracts		8,313			(13,380	)
Other		(2,062	)		(1,274	)

Net cash and cash equivalents used in investing activities	$	(35,078	)	$	(127,955	)

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF CASH FLOWS - Continued


	Nine Months Ended September 30,
*(dollars in thousands)*	2011			2010
	*(unaudited)*
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder deposits	$	21,093		$	30,890
Policyholder withdrawals		(144,363	)		(169,590	)

Net cash and cash equivalents used in financing activities		(123,270	)		(138,700	)


Net decrease in cash and cash equivalents (1)		(12,500	)		(131,732	)
Cash and cash equivalents, beginning of year		308,614			428,848

Cash and cash equivalents, end of period	$	296,114		$	297,116

(1) Included in net decrease in cash and cash equivalents is interest received (2011 - $64; 2010 - $87); interest paid (2011 - $16; 2010 - $30); and Federal income taxes paid (2011 - $500; 2010 - $3,200); Federal income taxes received (2011 - $0; 2010 - $3,589).

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

NOTES TO FINANCIAL STATEMENTS (unaudited)

(Dollars in Thousands)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

Transamerica Advisors Life Insurance Company (“TALIC” or the “Company”) is a wholly owned subsidiary of AEGON USA, LLC (“AUSA”). AUSA is an indirect wholly owned subsidiary of AEGON N.V., a limited liability share company organized under Dutch law.

For a complete discussion of the Company’s 2010 Financial Statements and accounting policies, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

The interim Financial Statements for the three and nine month periods are unaudited; however in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the Financial Statements have been included. These unaudited Financial Statements should be read in conjunction with the audited Financial Statements included in the 2010 Annual Report on Form 10-K. The nature of the Company’s business is such that results of any interim period are not necessarily indicative of results for a full year.

Basis of Reporting

The accompanying financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The Company also submits financial statements to insurance industry regulatory authorities, which are prepared on the basis of statutory accounting principles (“SAP”). The significant accounting policies and related judgments underlying the Company’s financial statements are summarized below.

Certain reclassifications and format changes have been made to prior period financial statements, where appropriate, to conform to the current period presentation. These reclassifications have no effect on net income or stockholder’s equity of the prior periods.

Accounting Estimates and Assumptions

The preparation of financial statements requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain invested assets, asset valuation allowances, deferred policy acquisition costs, deferred sales inducements, value of business acquired, goodwill, policyholder liabilities, income taxes, and potential effects of unresolved litigated matters.

Reverse Repurchase Agreements

Subsequent Events

The financial statements are adjusted to reflect events that occurred between the balance sheet date and the date when the financial statements are issued, provided they give evidence of conditions that existed at the balance sheet date.

Events that are indicative of conditions that arose after the balance sheet date are disclosed, but do not result in an adjustment of the financial statements themselves.

Recent Accounting Guidance

Current Adoption of Recent Accounting Guidance

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures

On January 1, 2011, the Company adopted guidance (Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements) requiring separate presentation of information about purchases, sales, issuances, and settlements in the Level 3 reconciliation for fair value measurements using significant unobservable inputs. The adoption affected disclosures but did not impact the Company’s results of operations or financial position.

ASC 944, Financial Services—Insurance

On January 1, 2011, the Company adopted guidance (ASU 2010-15, How Investments Held Through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments) clarifying that an insurance entity should not consider any separate account interest held for the benefit of policyholders in an investment to be the insurer’s interest and should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation. The adoption did not have a material impact on the Company’s results of operations and financial position.

ASC 350, Intangibles—Goodwill and Other

On January 1, 2011, the Company adopted guidance (ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts), which requires entities with a zero or negative carrying value to assess, considering qualitative factors, whether it is more likely than not that a goodwill impairment exists. If an entity concludes that it is more likely than not that a goodwill impairment exists, the entity must perform step 2 of the goodwill impairment test. The adoption did not have a material impact on the Company’s results of operations and financial position.

ASC 310, Receivables

On April 1, 2011, the Company early adopted guidance retrospectively to January 1, 2011, (ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring), which provides clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. Additionally, the Company is now required to provide the previously deferred qualitative and quantitative disclosures about troubled debt restructurings in accordance with ASU 2010-20, including how financing receivables were modified and the financial effects of the modifications. The adoption did not have a material impact on the Company’s results of operations and financial position.

Accounting Guidance Adopted in 2010

ASC 310, Receivables

The Company adopted guidance (ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses) which requires new and expanded financial statement disclosures for the period ended December 31, 2010. An entity is required to provide qualitative and quantitative disclosures about the allowance for credit losses, credit quality, impaired loans, modifications, and nonaccrual and past due financing receivables. In addition, the disclosures must be disaggregated by portfolio segment or class of financing receivable based on how a company develops its allowance for credit losses and how it manages its credit exposure. The adoption required updates to the Company’s financial statement disclosures, but did not impact the Company’s results of operations or financial position. In January 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that deferred the disclosures relating to troubled debt restructuring.

ASC 820, Fair Value Measurements and Disclosures

The Company adopted guidance (ASU 2010-06, Improving Disclosures about Fair Value Measurements) which included new disclosures and clarifications of existing disclosures about fair value measurements for the period ended March 31, 2010. The guidance requires disclosure of significant transfers in and out of Levels 1 and 2 of the fair value hierarchy and reasons for the transfers. Additionally, the ASU clarifies the level of disaggregation for fair value disclosures, requiring disclosures for each class of assets and liabilities. The guidance clarified that a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The adoption required updates to the Company’s financial statement disclosures, but did not impact the Company’s results of operations or financial position.

Future Adoption of Accounting Guidance

ASC 944, Financial Services—Insurance

In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This guidance modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. An insurance entity may only capitalize incremental direct costs of contract acquisition, the portion of employees’ compensation directly related to time spent performing specified acquisition activities for a contract that has actually been acquired, other costs related directly to specified activities that would not have been incurred had the acquisition contract transaction not occurred, and advertising costs that meet capitalization criteria in other GAAP guidance. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company will adopt the guidance prospectively on January 1, 2012. The adoption is not expected to have a material impact on the Company’s results of operations and financial position.

ASC 860, Transfers and Servicing

In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements, which modifies the criteria for determining whether a repurchase transaction should be accounted for as a secured borrowing or as a sale. The amendments in this ASU remove from the assessment of effective control 1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and 2) the collateral maintenance implementation guidance related to that criterion. The guidance is effective for the first interim or annual period beginning after December 15, 2011. The Company will adopt the guidance on January 1, 2012 and is currently evaluating its impact on the Company’s results of operations and financial position.

ASC 820, Fair Value Measurements and Disclosures

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which amends current guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. Some of the amendments represent clarifications of existing requirements. Other amendments change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the guidance on January 1, 2012 and is currently evaluating its impact on the Company’s results of operations and financial position.

ASC 220, Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. The guidance requires an entity to report components of comprehensive income in either a single, continuous statement of comprehensive income or two separate but consecutive statements. Under the two statement approach, the first statement would include components of net income and the second statement would include components of other comprehensive income (“OCI”). Regardless of format, an entity is required to present items that are reclassified from OCI to net income in both net income and OCI. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company will adopt the guidance on January 1, 2012 and anticipates no impact on the Company’s results of operations and financial position.

ASC 350, Intangibles—Goodwill and Other

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which gives entities the option of performing a qualitative assessment to determine whether it is necessary to perform the two-step goodwill impairment test. If, after assessing qualitative factors, a company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the company does not need to perform further testing. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the company would have to perform the two step goodwill impairment test. The option is unconditional so it may be skipped in any reporting period and an entity may resume performing the qualitative assessment in any subsequent period. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning on or after December 15, 2011. The Company will adopt the guidance on January 1, 2012 and does not expect the adoption to have a material impact on the Company’s results of operations and financial position.

Note 2. Fair Value of Financial Instruments

Fair Value Measurements

ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.

Fair Value Hierarchy

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

Assets and liabilities recorded at fair value on the Balance Sheets are categorized as follows:

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

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

Quoted prices for similar assets or liabilities in active markets

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

Inputs other than quoted market prices that are observable

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

Level 3. Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

The Company recognizes transfers between levels at the beginning of the quarter.

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis:


	September 30, 2011
	Level 1		Level 2		Level 3		Total
Assets
Fixed maturity available-for-sale (“AFS”) securities (a)
Corporate securities	$	-	$	1,154,468	$	-	$	1,154,468
Asset-backed securities		-		99,590		9,995		109,585
Commercial mortgage-backed securities		-		128,003		-		128,003
Residential mortgage-backed securities		-		86,558		1,721		88,279
Municipals		-		1,200		-		1,200
Government and government agencies
United States		354,790		-		-		354,790
Foreign		3,795		6,300		-		10,095

Total fixed maturity AFS securities (a)		358,585		1,476,119		11,716		1,846,420
Fixed maturity trading securities (a) - corporate securities		-		2,542		-		2,542
Equity securities (a)
Banking securities		-		24,661		-		24,661
Other financial services securities		-		368		-		368
Industrial securities		-		5,777		-		5,777

Total equity securities (a)		-		30,806		-		30,806
Cash equivalents (b)		-		304,859		-		304,859
Derivative assets (f)		-		3,824		-		3,824
Limited partnerships (c)		-		-		10,541		10,541
Separate Accounts assets (d)		6,793,453		-		-		6,793,453
Total assets	$	7,152,038	$	1,818,150	$	22,257	$	8,992,445

Liabilities
Future policy benefits (embedded derivatives only) (e)	$	-	$	-	$	24,692	$	24,692

Total liabilities	$	-	$	-	$	24,692	$	24,692


	December 31, 2010
	Level 1		Level 2		Level 3			Total
Assets
Fixed maturity AFS securities (a)
Corporate securities	$	-	$	1,120,974	$	-		$	1,120,974
Asset-backed securities		-		91,210		11,244			102,454
Commercial mortgage-backed securities		-		139,330		504			139,834
Residential mortgage-backed securities		-		101,263		2,886			104,149
Municipals		-		1,475		-			1,475
Government and government agencies
United States		149,652		-		-			149,652
Foreign		3,699		6,157		-			9,856

Total fixed maturity AFS securities (a)		153,351		1,460,409		14,634			1,628,394
Fixed maturity trading securities (a) - corporate securities		-		23,138		-			23,138
Equity securities (a)
Banking securities		-		7,054		-			7,054
Other financial services securities		-		520		-			520
Industrial securities		-		5,416		-			5,416

Total equity securities (a)		-		12,990		-			12,990
Cash equivalents (b)		-		317,321		-			317,321
Limited partnerships (c)		-		-		9,415			9,415
Separate Accounts assets (d)		8,163,032		-		-			8,163,032

Total assets	$	8,316,383	$	1,813,858	$	24,049		$	10,154,290


Liabilities
Future policy benefits (embedded derivatives only) (e)	$	-	$	-	$	(25,416	)	$	(25,416	)
Derivative liabilities (f)		-		353		-			353


Total liabilities	$	-	$	353	$	(25,416	)	$	(25,063	)

(a)

Securities are classified as Level 1 if the fair value is determined by observable inputs that reflect quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date. Level 1 securities primarily include highly liquid U.S. Treasury and U.S. government agency securities. Securities are classified as Level 2 if the fair value is determined by observable inputs, other than quoted prices included in Level 1, for the asset or prices for similar assets. Securities are classified as Level 3 if the valuations are derived from techniques in which one or more of the significant inputs are unobservable. Level 3 consists principally of fixed maturity securities whose fair value is estimated based on non-binding broker quotes and internal models. These models primarily use projected cash flows discounted using relevant risk spreads and market interest rate curves. At September 30, 2011, less than 0.5% of fixed maturity AFS securities were valued using internal models.

(b)	Cash equivalents are primarily valued at amortized cost, which approximates fair value. Operating cash is not included in the abovementioned table.

(c)	The Company has an investment in a limited partnership for which the fair value was derived from management’s review of the underlying financial statements that were prepared on a GAAP basis. The remaining limited partnership is carried at cost and is not included in the abovementioned table.

(d)	Separate Accounts assets are carried at the net asset value provided by the fund managers.

(e)

The Company issued contracts containing guaranteed minimum withdrawal benefit riders (“GMWB”) and obtained reinsurance on guaranteed minimum income benefit riders (“GMIB reinsurance”). GMWB and GMIB reinsurance are treated as embedded derivatives and are required to be reported separately from the host variable annuity contract. The fair value of these guarantees is calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees, their fair values are determined using stochastic techniques under a variety of market return, discount rates and actuarial

assumptions. Since many of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 of the fair value hierarchy.

(f)

Derivative assets and liabilities are classified as Level 1 if the fair value is determined by observable inputs that reflect quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date. Derivatives are classified as Level 2 if the fair value is determined by observable inputs, other than quoted prices included in Level 1, for the identical asset or prices for similar assets. Derivatives are classified as Level 3 if the valuations are derived from techniques in which one or more of the significant inputs are unobservable. Level 2 derivatives include variance swaps for which the Company utilized readily accessible quoted index levels and broker quotes. The fair value for the variance swaps is calculated as the difference between the estimated volatility of the underlying Standard & Poor’s (“S&P”) index at maturity to the actual volatility of the underlying S&P index at initiation (i.e., strike) multiplied by the notional value of the swap.

During 2011, there were no transfers between Level 1 and 2, respectively.

The following table provides a summary of the change in fair value of the Company’s Level 3 assets at September 30, 2011 and December 31, 2010:


	September 30, 2011						December 31, 2010
	Limited Partnership			Fixed Maturity AFS Securities			Limited Partnership			Fixed Maturity AFS Securities
Balance at beginning of period (a)	$	9,415		$	14,634		$	7,604		$	37,041

Change in unrealized gains (b)		-			868			-			4,125
Purchases		-			-			-			27,941
Sales		(2,088	)		(3,310	)		(712	)		(3,781	)
Transfers into Level 3		-			4			-			3,256
Transfers out of Level 3		-			(508	)		-			(54,058	)
Changes in valuation (c)		2,062			28			2,137			110
Net realized investment gains (d)		1,152			-			386			-


Balance at end of period (a)	$	10,541		$	11,716		$	9,415		$	14,634

(a)	Recorded as a component of limited partnerships and fixed maturity AFS securities in the Balance Sheets.

(b)	Recorded as a component of other comprehensive income (loss).

(c)	Recorded as a component of net investment income in the Statements of Income.

(d)	Recorded as a component of net realized investment gains (losses) for fixed maturity AFS securities and net investment income for limited partnerships in the Statements of Income.

In certain circumstances, the Company will obtain non-binding broker quotes from brokers to assist in the determination of fair value. If those quotes can be corroborated by other market observable data, the investments will be classified as Level 2 investments. If not, the investments are classified as Level 3 due to the unobservable nature of the brokers’ valuation processes. The decrease in Level 3 fixed maturity AFS securities at September 30, 2011 was primarily due to sales and availability of market observable data (Level 2). At December 31, 2010, the decrease was also due to an increase in market activity.

The Company’s Level 3 liabilities (assets) consist of provisions for GMWB and GMIB reinsurance. The fair value of these guarantees is calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees which are unlike instruments available in financial markets, their fair values are determined using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions.

The expected returns are based on risk-free rates, such as the current London Inter-Bank Offered Rate (“LIBOR”) forward curve. The credit spread is set by using the credit default swap (“CDS”) spreads of a reference portfolio of life insurance companies, adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level (who have priority in payments to other creditors).

For equity volatility, the Company uses a term structure assumption with market-based implied volatility inputs for the first five years and a long-term forward rate assumption of 25% thereafter. The volume of observable option trading from which volatilities are derived generally declines as the contracts’ term increases, therefore, the volatility curve grades from implied volatilities for five years to the ultimate rate. The resulting volatility assumption in year 20 for the S&P 500 index (expressed as a spot rate) was 25.6% at September 30, 2011 and 24.8% at December 31, 2010. Correlations of market returns across underlying indices are based on historical market returns and their inter-relationships over a number of years preceding the valuation date. Assumptions regarding policyholder behavior, such as lapses, included in the models are derived in the same way as the assumptions used to measure insurance liabilities. These assumptions are reviewed at each valuation date and updated based on historical experience and observable market data as required.

The following table provides a summary of the changes in fair value of the Company’s Level 3 liabilities (assets) at September 30, 2011 and December 31, 2010:


	September 30, 2011					December 31, 2010
	GMWB		GMIB Reinsurance			GMWB			GMIB Reinsurance
Balance at beginning of period (b)	$	31,001	$	(56,417	)	$	45,987		$	(58,746	)

Changes in interest rates (a)		60,596		(28,533	)		20,355			(8,533	)
Changes in equity markets (a)		32,414		(14,864	)		(10,022	)		4,653
Other (a)		495		-			(25,319	)		6,209


Balance at end of period (b)	$	124,506	$	(99,814	)	$	31,001		$	(56,417	)

(a)	Recorded as a component of policy benefits in the Statements of Income.

(b)	Recorded as a component of future policy benefits in the Balance Sheets.

During the nine months ended September 30, 2011, the increase in the GMWB and GMIB reinsurance reserves was primarily driven by the reduction in interest rates and lower than expected equity market performance during third quarter 2011. During 2010, the decrease in the GMWB and GMIB reinsurance reserves was principally driven by the improved equity markets and updated policyholder behavior assumptions offset by a decline in risk neutral rates.

Note 3. Investments

Fixed Maturity and Equity Securities

The amortized cost/cost and estimated fair value of investments in fixed maturity and equity AFS securities at September 30, 2011 and December 31, 2010 were:


	September 30, 2011
			Gross Unrealized					Estimated
	Amortized Cost/Cost		Gains		Losses/ OTTI (1)			Fair Value
Fixed maturity AFS securities
Corporate securities	$	1,066,968	$	91,065	$	(3,565	)	$	1,154,468
Asset-backed securities		109,639		6,828		(6,882	)		109,585
Commercial mortgage-backed securities		119,590		8,600		(187	)		128,003
Residential mortgage-backed securities		87,022		4,231		(2,974	)		88,279
Municipals		1,125		75		-			1,200
Government and government agencies
United States		309,438		45,352		-			354,790
Foreign		8,921		1,174		-			10,095

Total fixed maturity AFS securities	$	1,702,703	$	157,325	$	(13,608	)	$	1,846,420


Equity securities - preferred stocks
Banking securities	$	30,189	$	-	$	(5,528	)	$	24,661
Other financial services securities		165		203		-			368
Industrial securities		5,791		-		(14	)		5,777

Total equity securities	$	36,145	$	203	$	(5,542	)	$	30,806


	December 31, 2010
			Gross Unrealized					Estimated
	Amortized Cost/Cost		Gains		Losses/ OTTI (1)			Fair Value
Fixed maturity AFS securities
Corporate securities	$	1,069,082	$	55,530	$	(3,638	)	$	1,120,974
Asset-backed securities		102,964		7,062		(7,572	)		102,454
Commercial mortgage-backed securities		131,362		8,501		(29	)		139,834
Residential mortgage-backed securities		104,486		3,145		(3,483	)		104,149
Municipals		1,462		13		-			1,475
Government and government agencies
United States		146,585		4,771		(1,704	)		149,652
Foreign		9,063		794		-			9,856

Total fixed maturity AFS securities	$	1,565,004	$	79,816	$	(16,426	)	$	1,628,394

Equity securities - preferred stocks
Banking securities	$	9,246	$	-	$	(2,192	)	$	7,054
Other financial services securities		165		355		-			520
Industrial securities		5,791		-		(375	)		5,416

Total equity securities	$	15,202	$	355	$	(2,567	)	$	12,990

(1) Subsequent unrealized gains (losses) on other-than-temporary impairments (“OTTI”) securities are included in OCI-OTTI.

Excluding investments in U.S. government and government agencies, the Company is not exposed to any significant concentration of credit risk in its fixed maturity securities portfolio.

The amortized cost and estimated fair value of fixed maturity AFS securities by investment grade at September 30, 2011 and December 31, 2010 were:


	September 30, 2011				December 31, 2010
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Investment grade	$	1,634,222	$	1,785,304	$	1,484,533	$	1,555,503
Below investment grade		68,481		61,116		80,471		72,891

Total fixed maturity AFS securities	$	1,702,703	$	1,846,420	$	1,565,004	$	1,628,394

The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to S&P BBB- or higher (or similar rating agency). At September 30, 2011 and December 31, 2010, the estimated fair value of fixed maturity securities rated BBB- were $60,779 and $55,760, respectively, which is the lowest investment grade rating given by S&P.

The amortized cost and estimated fair value of fixed maturity AFS securities at September 30, 2011 and December 31, 2010 by contractual maturities were:


	September 30, 2011				December 31, 2010
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Fixed maturity AFS securities
Due in one year or less	$	34,521	$	35,072	$	8,271	$	8,350
Due after one year through five years		231,890		245,364		250,194		263,865
Due after five years through ten years		895,577		963,260		823,396		858,024
Due after ten years		224,464		276,857		144,331		151,718

		1,386,452		1,520,553		1,226,192		1,281,957
Mortgage-backed securities and other asset-backed securities		316,251		325,867		338,812		346,437


Total fixed maturity AFS securities	$	1,702,703	$	1,846,420	$	1,565,004	$	1,628,394

In the preceding table fixed maturity securities not due at a single maturity date have been included in the year of final maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

During the three and nine months ended September 30, 2011, there was $90 and $581, respectively, of investment income on fixed maturity trading securities and ($759) and $416, respectively, of income (loss) recognized from the change in the fair value on fixed maturity trading securities recorded in net investment income in the Statements of Income. The Company did not recognize any gains or losses during the three months ended September 30, 2011. The Company recognized losses of $98, during the nine months ended September 30, 2011 on the conversion of fixed maturity trading securities to preferred stock in the first and second quarters of 2011.

Unrealized Gains (Losses) on Fixed Maturity and Equity Securities

The Company’s investments in fixed maturity and equity securities classified as AFS are carried at estimated fair value with unrealized gains and losses included in stockholder’s equity as a component of accumulated other comprehensive income (loss), net of taxes.

The estimated fair value and gross unrealized losses and OTTI of fixed maturity and equity AFS securities aggregated by length of time that individual securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010 were as follows:

		0Losses and0		0Losses and0		0Losses and0
	September 30, 2011
	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI (1)
Less than or equal to six months
Fixed maturity AFS securities
Corporate securities	$	96,766	$	99,974	$	(3,208	)
Asset-backed securities		32,093		32,439		(346	)
Commercial mortgage-backed securities		8,291		8,478		(187	)
Residential mortgage-backed securities		59		60		(1	)
Equity securities
Banking securities		20,355		23,558		(3,203	)
Industrial securities		5,777		5,791		(14	)

Total fixed maturity and equity securities		163,341		170,300		(6,959	)


Greater than six months but less than or equal to one year
Fixed maturity AFS securities - corporate securities		2,163		2,220		(57	)

Total fixed maturity and equity securities		2,163		2,220		(57	)


Greater than one year
Fixed maturity AFS securities
Corporate securities		11,971		12,271		(300	)
Asset-backed securities		11,847		18,383		(6,536	)
Residential mortgage-backed securities		15,808		18,781		(2,973	)
Equity securities - banking securities		4,305		6,630		(2,325	)

Total fixed maturity and equity securities		43,931		56,065		(12,134	)

Total fixed maturity and equity securities	$	209,435	$	228,585	$	(19,150	)


	December 31, 2010
	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI (1)
Less than or equal to six months
Fixed maturity AFS securities
Corporate securities	$	69,662	$	72,628	$	(2,966	)
Asset-backed securities		10,276		10,297		(21	)
Commercial mortgage-backed securities		1,022		1,051		(29	)
Residential mortgage-backed securities		9,371		10,074		(703	)
Government and government agencies - United States		644		656		(12	)
Equity securities - banking securities		2,558		2,616		(58	)

Total fixed maturity and equity securities	$	93,533	$	97,322	$	(3,789	)

		0Losses and0		0Losses and0		0Losses and0
	December 31, 2010
(continued)	Estimated Fair Value		Amortized Cost		Gross Unrealized Losses and OTTI (1)
Greater than six months but less than or equal to one year
Fixed maturity AFS securities - corporate securities	$	5,205	$	5,366	$	(161	)

Total fixed maturity and equity securities		5,205		5,366		(161	)


Greater than one year
Fixed maturity AFS securities
Corporate securities		11,553		12,064		(511	)
Asset-backed securities		15,001		22,552		(7,551	)
Residential mortgage-backed securities		15,499		18,279		(2,780	)
Government and government agencies - United States		30,846		32,538		(1,692	)
Equity securities
Banking securities		4,497		6,631		(2,134	)
Industrial securities		5,416		5,791		(375	)

Total fixed maturity and equity securities		82,812		97,855		(15,043	)

Total fixed maturity and equity securities	$	181,550	$	200,543	$	(18,993	)

(1)	Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.

The total number of securities in an unrealized loss position was 74 and 74 at September 30, 2011 and December 31, 2010, respectively.

The estimated fair value, gross unrealized losses, OTTI and number of securities where the fair value had declined below amortized cost by greater than 20% and greater than 40% at September 30, 2011 and December 31, 2010 were as follows:

		Number of		Number of			Number of
	September 30, 2011
	Estimated Fair Value		Gross Unrealized Losses/ OTTI (1)			Number of Securities
Decline > 20%
Less than or equal to six months	$	2,288	$	(728	)		2
Greater than one year		14,936		(8,751	)		6

Total	$	17,224	$	(9,479	)		8


Decline > 40%
Greater than one year	$	4,040	$	(3,387	)		2

Total	$	4,040	$	(3,387	)		2

		Number of		Number of			Number of
	December 31, 2010
	Estimated Fair Value		Gross Unrealized Losses/ OTTI (1)			Number of Securities
Decline > 20%
Less than or equal to six months	$	995	$	(314	)		1
Greater than one year		15,849		(9,467	)		6

Total	$	16,844	$	(9,781	)		7


Decline > 40%
Greater than one year	$	4,284	$	(2,969	)		2

Total	$	4,284	$	(2,969	)		2

(1)	Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.

Unrealized gains (losses) incurred during 2011 and 2010 were primarily due to price fluctuations resulting from changes in interest rates and credit spreads. If the Company has the intent to sell or it is more likely than not that the Company will be required to sell these securities prior to the anticipated recovery of the amortized cost, securities are written down to fair value. If cash flow models indicate a credit event will impact future cash flows, the security is impaired to discounted cash flows. As the remaining unrealized losses in the portfolio relate to holdings where the Company expects to receive full principal and interest, the Company does not consider the underlying investments to be impaired.

The components of net unrealized gains (losses) and OTTI included in accumulated other comprehensive income, net of taxes, at September 30, 2011 and December 31, 2010 were as follows:


	September 30, 2011			December 31, 2010
Assets
Fixed maturity securities	$	143,717		$	63,390
Equity securities		(5,339	)		(2,212	)
Value of business acquired		(29,843	)		(19,829	)

		108,535			41,349


Liabilities
Policyholder account balances		2,997			1,387
Federal income taxes - deferred		(39,594	)		(15,249	)

		(36,597	)		(13,862	)


Stockholder’s equity
Accumulated other comprehensive income, net of taxes	$	71,938		$	27,487

The Company records certain adjustments to policyholder account balances in conjunction with the unrealized holding gains or losses on investments classified as available-for-sale. The Company adjusts a portion of these liabilities as if the unrealized holding gains or losses had actually been realized, with corresponding credits or charges reported in accumulated other comprehensive loss, net of taxes.

Mortgage Loans on Real Estate

Mortgage loans on real estate consist entirely of mortgages on commercial real estate. Prepayment premiums are collected when borrowers elect to prepay their debt prior to the stated maturity. There were no prepayment premiums collected during the three months ended September 30, 2011. There were $75 of prepayment premiums collected during the nine months ended September 30, 2011. There were no prepayment premiums during the three and nine months ended September 30, 2010. Prepayment premiums are included in net realized investment gains (losses), excluding OTTI on securities in the Statements of Income.

The fair value for mortgage loans on real estate is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and/or similar remaining maturities. The estimated fair value of the mortgages on commercial real estate at September 30, 2011 and December 31, 2010 was $63,203 and $66,713, respectively.

Loans are considered impaired when it is probable that based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. A valuation allowance is established when a loan is impaired for the excess carrying value of the loan over its estimated collateral value. In addition to the valuation allowance for specific loans, a general reserve is estimated based on a percent of the outstanding loan balance. The general reserve at September 30, 2011 and December 31, 2010 was $28 and $33, respectively. The change in the reserve is reflected in net realized investment gains (losses), excluding OTTI on securities in the Statements of Income. There were no impaired mortgage loans at September 30, 2011. There was one impaired mortgage loan at December 31, 2010, with a specific reserve of $633 with an unpaid principal balance of $3,275. As this loan was impaired at December 31, 2010, there was no interest income recorded subsequent to the impairment. The impaired mortgage loan was sold during first quarter 2011 resulting in a recovery of $163. The change in the credit loss allowances on mortgage loans by type of property at September 30, 2011 and December 31, 2010 was as follows:

		September 30,			September 30,
Commercial	September 30, 2011			December 31, 2010
Beginning balance	$	666		$	41

Charge offs		(633	)		(889	)
Provision		(5	)		1,514


Ending balance	$	28		$	666

The commercial mortgages are geographically diversified throughout the United States with the largest concentrations in Pennsylvania, New Hampshire, Virginia, Ohio, California and Delaware which account for approximately 83% of mortgage loans at September 30, 2011.

The credit quality of mortgage loans by type of property at September 30, 2011 and December 31, 2010 was as follows:

		September 30,			September 30,
Commercial	September 30, 2011			December 31, 2010
AAA - AA	$	22,205		$	24,709
A		22,713			26,026
BBB		11,509			12,188

Total mortgage loans on real estate		56,427			62,923
General reserve		(28	)		(33	)

Total mortgage loans on real estate, net	$	56,399		$	62,890

The credit quality for the commercial mortgage loans was determined based on an internal credit rating model which assigns a letter rating to each mortgage loan in the portfolio as an indicator of the quality of the mortgage loan. The internal credit rating model was designed based on rating agency methodology, then modified for credit risk associated with the Company’s mortgage lending process, taking into account such factors as projected future cash flows, net operating income, and collateral value. The model produces a rating score and an associated letter rating which is intended to align with S&P ratings as closely as possible. Information supporting the risk rating process is updated at least annually. While mortgage loans with a lower rating carry a higher risk of loss, adequate reserves for loan losses have been established to cover those risks.

Policy Loans

Policy loans on insurance contracts are stated at unpaid principal balances. The Company estimates the fair value of policy loans as equal to the book value of the loans. The estimated fair value of the policy loans at September 30, 2011 and December 31, 2010 was $803,462 and $827,638, respectively. Policy loans are fully collateralized by the account value of the associated insurance contracts, and the spread between the policy loan interest rate and the interest rate credited to the account value held as collateral is fixed.

Securities Lending

The Company loans securities under securities lending agreements. The amortized cost of securities out on loan at September 30, 2011 and December 31, 2010 was $227,656 and $150,463, respectively. The estimated fair value of securities out on loan at September 30, 2011 and December 31, 2010 was $257,172 and $156,440, respectively.

Reverse Repurchase Agreements

The Company enters into dollar roll repurchase agreement transactions. The amortized cost of the reverse repurchase agreements at September 30, 2011 was $6,426. The estimated fair value of the securities that were pledged was $6,456 at September 30, 2011. There were no reverse repurchase agreements at December 31, 2010.

Derivatives

The Company uses derivatives to manage the capital market risk associated with the GMWB. The derivatives, which are S&P 500 Composite Stock Price Index futures contracts, are used to hedge the equity risk associated with these types of variable guaranteed products, in particular the claim and/or revenue risks of the liability portfolio. The Company will not seek hedge accounting on these hedges because, in most cases, the derivatives’ change in value will create a natural offset in the Statements of Income with the change in reserves. Net settlements on the futures occur daily. The Company also entered into variance swaps during 2010 to hedge the costs of the volatility of the S&P market. At September 30, 2011, the Company had 720 outstanding short futures contracts with a notional value of $202,680. At September 30, 2011, the Company has variance swaps with a notional value of $5 and a net fair value of $3,824. The Company recognized $6,340 and $2,462 of realized gains from the change in fair value of the variance swaps in net investment income in the Statements of Income during the three and nine months ended September 30, 2011, respectively. At December 31, 2010, the Company had 360 outstanding short futures contracts with a notional value of $112,770. At December 31, 2010, the Company had two variance swaps with a notional value of $7 and a net fair value of ($353). The Company recognized $353 of losses from the change in fair value of the variance swaps in net investment income in the Statements of Income during 2010.

The Company can also receive collateral related to derivative transactions that it enters into. At September 30, 2011, the Company has variance swaps with a net fair value of $3,824. The credit support agreement contains a fair value threshold of $1,000 over which collateral needs to be pledged by the Company or its counterparty. At September 30, 2011, cash collateral of $2,717 was received on derivative transactions in accordance with the credit support agreement due to market value swings on variance swaps. At December 31, 2010, the Company did not pledge or receive collateral on derivative transactions.

Realized Investment Gains (Losses)

The Company considers fair value at the date of sale to be equal to proceeds received. Proceeds and gross realized investment gains (losses) from the sale of AFS securities for the three and nine months ended September 30 were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Proceeds	$	66,027		$	113,494		$	140,087		$	416,074
Gross realized investment gains		2,782			4,236			5,752			9,140
Gross realized investment losses		(11	)		(750	)		(231	)		(2,596	)

Proceeds on AFS securities sold at a realized loss		1,584			15,608			5,447			106,160

Net realized investment gains (losses) for the three and nine months ended September 30 were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Fixed maturity AFS securities	$	2,692		$	3,203		$	4,510		$	4,717
Equity securities		-			10			29			10
Limited partnerships		(58	)		-			(58	)		660
Mortgages		1			6			242			6
Derivatives		16,539			(18,414	)		8,313			(13,381	)
Adjustment related to value of business acquired		-			476			(1,020	)		(857	)

Net realized investment gains (losses)	$	19,174		$	(14,719	)	$	12,016		$	(8,845	)

OTTI

If management determines that a decline in the value of an AFS equity security is other-than-temporary, the cost basis is adjusted to estimated fair value and the decline in value is recorded as a net realized investment loss. For debt securities, the manner in which an OTTI is recorded depends on whether management intends to sell a security or it is more likely than not that it will be required to sell a security in an unrealized loss position before its anticipated recovery. If management intends to sell or more likely than not will be required to sell the debt security before recovery, the OTTI is recognized in earnings for the difference

between amortized cost and fair value. If these criteria are not met, the OTTI is bifurcated into two pieces: a credit loss is recognized in earnings at an amount equal to the difference between the amortized cost of the debt security and the present value of the security’s anticipated cash flows, and a non credit loss is recognized in OCI for any difference between the fair value and the net present value of the debt security at the impairment measurement date.

The following table sets 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 OTTI loss was recognized in OCI, and the corresponding changes in such amounts at September 30, 2011 and December 31, 2010:


	September 30, 2011			December 31, 2010
Balance at beginning of period	$	2,014		$	1,445
Credit loss impairment recognized in the current period on securities not previously impaired		27			996
Additional credit loss impairments recognized in the current period on securities previously impaired through other comprehensive income		953			423
Accretion of credit loss impairments previously recognized		(512	)		(850	)

Balance at end of period	$	2,482		$	2,014

The components of OTTI reflected in the Statements of Income for the three and nine months ended September 30 were as follows:


	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
	OTTI Losses on Securities		Net OTTI Losses Recognized in OCI		Net OTTI Losses Recognized in Income		OTTI Losses on Securities			Net OTTI Loss Recognized in OCI		Net OTTI Losses Recognized in Income
Gross OTTI losses	$	1,892	$	1,813	$	79	$	4,554		$	3,572	$	982
Value of business acquired amortization		-		-		-		-			-		-

Net OTTI losses	$	1,892	$	1,813	$	79	$	4,554		$	3,572	$	982


	Three Months Ended September 30, 2010						Nine Months Ended September 30, 2010
	OTTI Losses on Securities		Net OTTI Losses Recognized in OCI		Net OTTI Losses Recognized in Income		OTTI Losses on Securities			Net OTTI Loss Recognized in OCI		Net OTTI Losses Recognized in Income
Gross OTTI losses	$	2,159	$	1,886	$	273	$	6,150		$	4,335	$	1,815
Value of business acquired amortization		-		-		-		(258	)		-		(258	)

Net OTTI losses	$	2,159	$	1,886	$	273	$	5,892		$	4,335	$	1,557

For the three and nine months ended September 30, 2011, the Company’s impairment losses recognized in the Statements of Income were $79 and $982, respectively, with no associated value of business acquired amortization. During the third quarter 2011, the Company impaired its holdings of previously OCI impaired 2006 vintage and two 2007 vintage subprime mortgage asset-back securities for $79 due to an adverse change in cash flows. During the second quarter 2011, the Company impaired its holdings of a 2006 vintage and two 2007 vintage subprime mortgage asset-backed securities for $27 and $546, respectively, and a corporate bond for $258 due to adverse changes in cash flows. During the first quarter 2011, the Company impaired its holding of a previously OCI impaired subprime mortgage asset-backed security for $72 due to an adverse change in cash flows.

For the three and nine months ended September 30, 2010, the Company’s impairment losses recognized in the Statements of Income were $273 and $1,557, respectively, net of associated value of business acquired amortization. During the third quarter 2010, the gross impairment losses were primarily driven by the impairment of a 2007 vintage subprime mortgage asset-backed security for $273 due to an adverse change in cash flows. During the second quarter 2010, the gross impairment losses were principally the result of the Company impairing its holding of a 2005 vintage residential mortgage-backed security for $722 due to an adverse change in cash flows. A corporate bond was also impaired for $397 due to the intent to sell or being more likely than

not required to sell during the second quarter. During the first quarter 2010, the Company impaired its holding of a previously OCI impaired 2007 vintage subprime mortgage asset-backed security for $423 due to an adverse change in cash flows.

Note 4. Value of Business Acquired (“VOBA”), Deferred Acquisition Costs (“DAC”) and Deferred Sales Inducements (“DSI”)

VOBA

VOBA reflects the estimated fair value of in force contracts acquired and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts in force at the acquisition date. VOBA is based on actuarially determined projections, for each block of business, of future policy and contract charges, premiums, mortality, Separate Accounts performance, surrenders, operating expenses, investment returns and other factors. Actual experience on the purchased business may vary from these projections. If estimated gross profits or premiums differ from expectations, the amortization of VOBA is adjusted to reflect actual experience. The long-term growth rate assumption for the amortization of VOBA, DAC and DSI was 9% at September 30, 2011 and 2010.

The change in the carrying amount of VOBA for the three and nine months ended September 30 was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Accretion (amortization) expense	$	43,222		$	(29,561	)	$	29,588		$	(16,711	)
Unlocking		(41,814	)		16,452			(38,079	)		14,846
Adjustment related to realized gains (losses) on investments		-			476			(1,020	)		(857	)
Adjustment related to unrealized gains and OTTI on investments		(9,117	)		(15,081	)		(10,014	)		(28,540	)

Change in VOBA carrying amount	$	(7,709	)	$	(27,714	)	$	(19,525	)	$	(31,262	)

The three months ended September 30, 2011 were impacted by negative gross profits, principally driven by unfavorable equity markets and long-term interest rate assumption changes, resulting in accretion and unfavorable unlocking. The nine months ended September 30, 2011, were driven by third quarter 2011 unfavorable unlocking partially offset by accretion. The three and nine months ended September 30, 2010, were impacted by positive future gross profits, principally driven by favorable equity market movement, resulting in amortization and favorable unlocking.

DAC and DSI

The change in the carrying amount of DAC and DSI for the three and nine months ended September 30 was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
DAC	2011			2010			2011			2010
Capitalization	$	80		$	255		$	358		$	758
Accretion (amortization) expense		14,631			(55	)		14,749			14,069
Unlocking		(445	)		(873	)		(2,491	)		(1,622	)

Change in DAC carrying amount	$	14,266		$	(673	)	$	12,616		$	13,205


	Three Months Ended September 30,						Nine Months Ended September 30,
DSI	2011			2010			2011			2010
Capitalization	$	14		$	(9	)	$	39		$	-
Accretion (amortization) expense		3,330			(13	)		3,357			3,247
Unlocking		(102	)		(201	)		(514	)		(312	)

Change in DSI carrying amount	$	3,242		$	(223	)	$	2,882		$	2,935

The three and nine months ended September 30, 2011, were impacted by negative gross profits, principally driven by unfavorable equity markets and long-term interest rate assumption changes, resulting in accretion and unfavorable unlocking. The accretion of DAC and DSI during the nine months ended September 30, 2010 was primarily driven by the increase in the GMWB reserve.

Note 5. Variable Contracts Containing Guaranteed Benefits

The Company records liabilities for contracts containing guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”) as a component of future policy benefits in the Balance Sheets and changes in the liabilities are included as a component of policy benefits in the Statements of Income.

The components of the changes in the variable annuity GMDB and GMIB liabilities for the three and nine months ended September 30 were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
GMDB	2011			2010			2011			2010
Guaranteed benefits incurred	$	8,223		$	9,943		$	25,424		$	28,591
Guaranteed benefits paid		(16,559	)		(8,371	)		(32,604	)		(31,668	)
Unlocking		68,149			(24,756	)		62,384			(7,215	)

Total	$	59,813		$	(23,184	)	$	55,204		$	(10,292	)


	Three Months Ended September 30,						Nine Months Ended September 30,
GMIB	2011			2010			2011			2010
Guaranteed benefits incurred	$	3,531		$	4,592		$	9,349		$	13,459
Unlocking		52,844			(19,848	)		49,360			(14,207	)

Total	$	56,375		$	(15,256	)	$	58,709		$	(748	)

The three and nine months ended September 30, 2011, were impacted by unfavorable equity market performance and long-term interest rate assumption changes resulting in unfavorable unlocking. Favorable unlocking for the three and nine months ended September 30, 2010 was primarily due to favorable equity market performance resulting in lower estimates of future benefit amounts, partially offset by changes in policyholder behavior assumptions.

The variable annuity GMDB liability at September 30, 2011 and December 31, 2010 was $169,732 and $114,528, respectively. The variable annuity GMIB liability at September 30, 2011 and December 31, 2010 was $90,700 and $31,991, respectively.

The Company has issued variable life contracts in which the Company contractually guarantees to the contract owner a GMDB. In general, contracts containing GMDB provisions provide a death benefit equal to the amount specified in the contract regardless of the level of the contract’s account value. For the three and nine months ended September 30, 2011 and 2010, an insignificant amount of variable life guaranteed benefits were recorded as policy benefits in the Statements of Income as incurred or paid.

Note 6. Federal Income Taxes

The effective tax rate was 19% and (23%) for the nine months ended September 30, 2011 and 2010, respectively. Differences between the effective rate and the U.S. statutory rate of 35% principally were the result of Separate Accounts dividends-received deduction (“DRD”) and the valuation allowance on net operating loss carryforward.

The valuation allowance for deferred tax assets at September 30, 2011 and December 31, 2010 was $111,873 and $92,950, respectively. The valuation allowance is related to a net operating loss carryforward and other deferred tax assets that, in the judgment of management, are not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.

The Company has analyzed all material tax positions under the guidance of ASC 740, Income Taxes, related to the accounting for uncertainty in income tax, and determined there were tax benefits of $2,522 (gross $7,206) and $4,299 (gross $12,283), that should not be recognized at September 30, 2011 and December 31, 2010, respectively, which primarily relate to uncertainty regarding the sustainability of certain deductions taken on the 2010, 2009 and 2008 U.S. Federal income tax returns. To the extent these

unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate in a future period. It is not anticipated that the total amounts of unrecognized tax benefits will significantly increase within twelve months of the reporting date.

The components of the change in the unrecognized tax benefits were as follows:


	September 30, 2011		December 31, 2010
Unrecognized tax benefits, opening balance	$	4,299	$	3,623
Additions for tax positions of prior years		-		676
Reductions for tax positions of prior years		(1,777)		-

Unrecognized tax benefits, ending balance	$	2,522	$	4,299

At September 30, 2011 and December 31, 2010, the Company had an operating loss carryforward for federal income tax purposes of $556,451 (net of the ASC 740 reduction of $7,206) and $290,009 (net of the ASC 740 reduction of $12,283), respectively, with a carryforward period of fifteen years that expire at various dates up to 2026. In addition, at September 30, 2011, the Company did not have a capital loss carryforward for federal income tax purposes. At December 31, 2010, the Company had a capital loss carryforward for federal income tax purposes of $3,597. At September 30, 2011 and December 31, 2010, the Company had a foreign tax credit carryforward of $5,409 and $4,645, respectively, with a carryforward period of ten years that will expire at various dates up to 2021. Also, the Company has an Alternative Minimum Tax tax credit carryforward for federal income tax purposes of $2,488 and $2,518 at September 30, 2011 and December 31, 2010, respectively, with an indefinite carryforward period.

The Company classifies interest and penalties related to income taxes as interest expense and penalty expense, respectively. The Company has not incurred or recognized any penalties in its financial statements at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011 and December 31, 2010, the Company recognized interest expense of $2 and ($119), respectively. The 2010 accrued interest expense related to federal income tax was released during 2010 based on the expectation that the net operating loss will offset any taxable income generated by the uncertain tax position for the Company in future tax periods.

The Company files a separate federal income tax return for the years 2008 through 2012. Beginning in 2013 and assuming no changes in ownership, the Company will join the affiliated consolidated tax group. A tax return has been filed for 2010, 2009 and 2008, but no examination by the Internal Revenue Service has commenced.

Note 7. Stockholder’s Equity and Statutory Accounting Principles

The Company’s statutory financial statements are presented on the basis of accounting practices prescribed or permitted by the Insurance Department of the State of Arkansas. The State of Arkansas has adopted the National Association of Insurance Commissioners (“NAIC”) statutory accounting principles as the basis of its statutory accounting principles.

The Company’s statutory net income (loss) for the nine months ended September 30, 2011 and 2010 was ($377,815) and $69,361, respectively. Statutory capital and surplus at September 30, 2011 and December 31, 2010 was $469,374 and $813,142, respectively.

During the first nine months of 2011 and 2010, the Company did not pay any dividends to AUSA or receive any capital contributions from AUSA.

A financial exam of the Company, for the period January 1, 2005 through December 31, 2009, was completed on February 7, 2011. The Examination Report, as of December 31, 2009, was adopted by the Insurance Department of the State of Arkansas on May 13, 2011. There were no changes to the Company’s financial statements as a result of the exam.

Note 8. Reinsurance

In the normal course of business, the Company seeks to limit its exposure to loss on any single insured life and to recover a portion of benefits paid by ceding mortality risk to other insurance enterprises or reinsurers under indemnity reinsurance agreements, primarily quota share coverage and coinsurance agreements. The maximum amount of mortality risk retained by the Company is approximately $1,000 on single and joint life policies.

Indemnity reinsurance agreements do not relieve the Company from its obligations to contract owners. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company regularly evaluates the financial condition of its reinsurers so as to minimize its exposure to significant losses from reinsurer insolvencies. At September 30, 2011 and December 31, 2010, net reinsurance receivables were $705 and $4,158 respectively. At September 30, 2011 and December 31, 2010, the reinsurance reserve was $428 and $780, respectively.

The Company is party to an indemnity reinsurance agreement with an unaffiliated insurer whereby the Company coinsures, on a modified coinsurance basis, 50% of the unaffiliated insurer’s variable annuity contracts sold from January 1, 1997 to June 30, 2001.

In addition, the Company seeks to limit its exposure to guaranteed benefit features contained in certain variable annuity contracts. Specifically, the Company reinsures certain GMIB and GMDB provisions to the extent reinsurance capacity is available in the marketplace. At September 30, 2011, 41% and 5% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured. At December 31, 2010, 44% and 6% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured.

Note 9. Related Party Transactions

At September 30, 2011, the Company had the following related party agreements in effect:

The Company is party to a common cost allocation service agreement between AUSA companies in which various affiliated companies may perform specified administrative functions in connection with the operation of the Company, in consideration of reimbursement of actual costs of services rendered. During the three and nine months ended September 30, 2011, the Company incurred $2,048 and $6,391, respectively, in expenses under this agreement. During the three and nine months ended September 30, 2010, the Company incurred $707 and $8,478, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts capitalized.

The Company is party to intercompany short-term note receivable arrangements with its parent and affiliates at various times during the year. On March 30, 2011, the Company entered into an intercompany short-term note receivable of $50,000 with an interest rate of 0.25% that is due March 30, 2012. During the three and nine months ended September 30, 2011, the Company accrued and/or received $32 and $32 of interest, respectively. On April 29, 2010, the Company entered into an intercompany short-term note receivable of $40,000 with an interest rate of 0.21% that was paid off in December 2010. On June 29, 2009, the Company entered into an intercompany short-term note receivable of $40,000 with an interest rate of 0.30% that was paid off in April 2010. During the three and nine months ended September 30, 2010, the Company accrued and/or received less than $21 and $92 of interest, respectively. Interest related to these arrangements is included in net investment income.

AEGON USA Realty Advisors, LLC acts as the manager and administrator for the Company’s mortgage loans on real estate under an administrative and advisory agreement with the Company. Charges attributable to this agreement are included in net investment income. During the three and nine months ended September 30, 2011, the Company incurred $32 and $100, respectively, under this agreement. During the three and nine months ended September 30, 2010, the Company incurred $38 and $114, respectively, under this agreement. There were no mortgage loan origination fees during the three and nine months ended September 30, 2011 and 2010, respectively. Mortgage loan origination fees are amortized into net investment income over the life of the mortgage loans.

AEGON USA Investment Management, LLC acts as a discretionary investment manager under an investment management agreement with the Company. During the three and nine months ended September 30, 2011, the Company incurred $554 and $1,648, respectively, in expenses under this agreement. During the three and nine months ended September 30, 2010, the Company incurred $544 and $1,601, respectively, in expenses under this agreement. Charges attributable to this agreement are included in net investment income.

Transamerica Capital, Inc. provides underwriting and distribution services for the Company under an underwriting agreement. During the three and nine months ended September 30, 2011, the Company incurred $8,400 and $29,515, respectively, in expenses under this agreement. During the three and nine months ended September 30, 2010, the Company incurred $7,366 and $26,006, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts capitalized.

Transamerica Asset Management, Inc. acts as the investment advisor for certain related party funds in the Company’s Separate Accounts under multiple service agreements. During the three and nine months ended September 30, 2011, the Company incurred

$105 and $324, respectively, in expenses under these agreements. During the three and nine months ended September 30, 2010, the Company did not incur any expenses under these agreements.

The Company has a participation agreement with Transamerica Series Trust to offer certain funds in the Company’s Separate Accounts. Transamerica Capital, Inc. acts as the distributor for said related party funds. The Company has entered into a distribution and shareholder services agreement for certain of the said funds. During the three and nine months ended September 30, 2011, the Company received $454 and $1,404, respectively, in revenue under this agreement. During the three and nine months ended September 30, 2010, the Company received $48 and $142, respectively, in revenue under this agreement. Revenue attributable to this agreement is included in policy charge revenue.

The Company has a reinsurance agreement with Transamerica Life Insurance Company. During the three and nine months ended September 30, 2011, the Company incurred $5 and $16, respectively, in reinsurance premium ceded expense under this agreement and there were no reinsurance recoveries on death claims incurred. During the three and nine months ended September 30, 2010, the Company incurred $7 and $47, respectively, in reinsurance premium ceded expense under this agreement and there were no reinsurance recoveries on death claims incurred.

The Company is party to the purchasing and selling of investments between various affiliated companies. The investments are purchased and sold at fair value and are included in fixed maturity AFS securities and mortgage loans on real estate in the Balance Sheets. During the three months ended September 30, 2011, the Company did not sell any fixed maturity AFS securities or mortgage loans on real estate to affiliated companies. During the nine months ended September 30, 2011, the Company sold $2,800 of mortgage loans on real estate to affiliated companies. During the three months ended September 30, 2010, the Company did not sell any fixed maturity AFS securities or mortgage loans on real estate to affiliated companies. During the nine months ended September 30, 2010, the Company sold $48,177 of fixed maturity AFS securities to affiliated companies.

While management believes that the service agreements referenced above are calculated on a reasonable basis, they may not necessarily be indicative of the costs that would have been incurred with an unrelated third party. Affiliated agreements generally contain reciprocal indemnity provisions pertaining to each party’s representations and contractual obligations thereunder.

Note 10. Segment Information

In reporting to management, the Company’s operating results are categorized into two business segments: Annuity and Life Insurance. The Company’s Annuity segment consists of variable annuities and interest-sensitive annuities. The Company’s Life Insurance segment consists of variable life insurance products and interest-sensitive life insurance products. The accounting policies of the business segments are the same as those for the Company’s financial statements included herein. All revenue and expense transactions are recorded at the product level and accumulated at the business segment level for review by management. The following tables summarize each business segment’s contribution to select Statements of Income information for the period ended:


	Annuity			Life Insurance			Total
Three months ended September 30, 2011
Net revenues (a)	$	69,646		$	18,596		$	88,242
Amortization (accretion) of VOBA		(12,385	)		10,977			(1,408	)
Policy benefits (net of reinsurance recoveries)		175,307			9,822			185,129
Federal income tax benefit		(5,716	)		(954	)		(6,670	)
Net loss		(85,536	)		(3,736	)		(89,272	)

Three months ended September 30, 2010
Net revenues (a)	$	28,390		$	19,314		$	47,704
Amortization of VOBA		11,372			1,737			13,109
Policy benefits (net of reinsurance recoveries)		(58,582	)		8,102			(50,480	)
Federal income tax expense (benefit)		1,548			(1,385	)		163
Net income		63,259			7,927			71,186


	Annuity			Life Insurance			Total
Nine months ended September 30, 2011
Net revenues (a)	$	152,334		$	57,894		$	210,228
Amortization (accretion) of VOBA		(5,336	)		13,827			8,491
Policy benefits (net of reinsurance recoveries)		193,832			25,546			219,378
Federal income tax expense (benefit)		(12,509	)		2,005			(10,504	)
Net income (loss)		(51,950	)		7,202			(44,748	)

Nine months ended September 30, 2010
Net revenues (a)	$	123,368		$	59,130		$	182,498
Amortization (accretion) of VOBA		(1,603	)		3,468			1,865
Policy benefits (net of reinsurance recoveries)		32,579			26,362			58,941
Federal income tax benefit		(18,091	)		(786	)		(18,877	)
Net income		81,655			18,741			100,396

(a)	Net revenues include total revenues net of interest credited to policyholder liabilities.

Item 2. Management’s Narrative Analysis of Results of Operations

This Management’s Narrative Analysis of Results of Operations should be read in conjunction with the Financial Statements and Notes to Financial Statements included herein.

Forward Looking Statements

Certain statements in this report may be considered forward-looking, including those about management expectations, strategic objectives, growth opportunities, business prospects, anticipated financial results and other similar matters. These forward-looking statements represent only management’s beliefs regarding future performance, which is inherently uncertain. There are a variety of factors, many of which are beyond the Company’s control, which affect its operations, performance, business strategy and results and could cause its actual results and experience to differ materially from the expectations and objectives expressed in any forward-looking statements. These factors include, but are not limited to, actions and initiatives taken by current and potential competitors, general economic conditions, the effects of current, pending and future legislation, regulation and regulatory actions, and the other risks and uncertainties detailed in this report. See Risk Factors in the 2010 Annual Report on Form 10-K. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. The Company does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. The reader should, however, consult further disclosures the Company may make in future filings of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Business

Overview

Transamerica Advisors Life Insurance Company (“TALIC”, “Registrant”, the “Company”, “we”, “our”, or “us”) is a wholly owned subsidiary of AEGON USA, LLC (“AUSA”). AUSA is an indirect wholly owned subsidiary of AEGON N.V., a limited liability share company organized under Dutch law. The Company is domiciled in Arkansas.

TALIC conducts its business primarily in the annuity markets and to a lesser extent in the life insurance markets of the financial services industry. The Company offered the following guaranteed benefits within its variable annuity product suite: guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”) and guaranteed minimum withdrawal benefits (“GMWB”).

The Company’s gross earnings are principally derived from two sources:

•

the charges imposed on variable annuity and variable life insurance contracts, and

•

the net earnings from investment of fixed rate life insurance and annuity contract owner deposits less interest credited to contract owners, commonly known as interest spread.

The costs associated with acquiring contract owner deposits (deferred policy acquisition costs) are amortized over the period in which the Company anticipates holding those funds, as noted in the Critical Accounting Policies and Estimates section below. Insurance expenses and taxes reported in the Statements of Income are net of amounts deferred. In addition, the Company incurs expenses associated with the maintenance of in force contracts.

Deposits

Total direct deposits (including internal exchanges) were $8.4 million and $25.5 million, respectively, for the three and nine months ended September 30, 2011. Total direct deposits (including internal exchanges) were $11.4 million and $34.3 million, respectively, for the three and nine months ended September 30, 2010. Deposits are currently limited to additions to existing policies which will result in fluctuations period over period. Internal exchanges during the three and nine months ended September 30, 2011 were $1.6 million and $4.4 million, respectively. Internal exchanges during the three and nine months ended September 30, 2010 were $0.8 million and $3.5 million, respectively.

Financial Condition

At September 30, 2011, the Company’s assets were $10.3 billion or $1.2 billion lower than the $11.5 billion in assets at December 31, 2010. Assets excluding Separate Accounts assets increased $225.3 million. Separate Accounts assets, which represent 66% of total assets, decreased $1.4 billion to $6.8 billion.

Changes in Separate Accounts assets were as follows:


(dollars in millions)	Nine Months Ended September 30, 2011

Investment performance	$	(543.9	)
Deposits		24.8
Policy fees and charges		(132.2	)
Surrenders, benefits and withdrawals		(718.3	)


Net change	$	(1,369.6	)

During the first nine months of 2011 and 2010, fixed contract owner deposits were $0.1 million and $0.2 million, respectively, and fixed contract owner withdrawals were $87.7 million and $88.6 million, respectively.

Environment

The Company’s financial position and/or results of operations are primarily impacted by the following economic factors: equity market performance, fluctuations in medium term interest rates, and the corporate credit environment via credit quality and fluctuations in credit spreads. The following discusses the impact of each economic factor.

Equity Market Performance

The investment performance of the underlying U.S. equity-based mutual funds supporting the Company’s variable products do not replicate the returns of any specific U.S. equity market index. However, investment performance will generally increase or decrease with corresponding increases or decreases of the overall U.S. equity market. There are several standard indices published on a daily basis that measure performance of selected components of the U.S. equity market. Examples include the Dow Jones Industrial Average (“Dow”), the NASDAQ Composite Index (“NASDAQ”) and the Standard & Poor’s 500 Composite Stock Price Index (“S&P”). The Dow, NASDAQ and S&P ended September 30, 2011 with decreases of 12%, 13% and 14%, respectively from June 30, 2011, and decreases of 6%, 9% and 10%, respectively, from December 31, 2010.

Changes in the U.S. equity market directly affect the values of the underlying U.S. equity-based mutual funds supporting Separate Accounts assets and, accordingly, the values of variable contract owner account balances. Approximately 76% of Separate Accounts assets were invested in equity-based mutual funds at September 30, 2011. Since asset-based fees collected on in force variable contracts represent a significant source of revenue, the Company’s financial condition will be impacted by fluctuations in investment performance of equity-based Separate Accounts assets.

During the nine months ended September 30, 2011, average variable account balances decreased $126.8 million to $7.9 billion as compared to the same period in 2010.

Fluctuations in the U.S. equity market also directly impact the Company’s exposure to guaranteed benefit provisions contained in the variable contracts it manufactures. Minimal or negative investment performance generally results in greater exposure to guarantee provisions. Prolonged periods of minimal or negative investment performance will result in greater guaranteed benefit costs as compared to assumptions. If the Company determines that it needs to increase its estimated long term cost of guaranteed benefits, it will result in establishing greater guaranteed benefit liabilities as compared to current practice.

Medium Term Interest Rates, Corporate Credit and Credit Spreads

Changes in interest rates affect the value of investments, primarily fixed maturity securities and preferred equity securities, as well as interest-sensitive liabilities. Changes in interest rates have an inverse relationship to the value of investments and interest-sensitive liabilities. Also, since the Company has certain fixed products that contain guaranteed minimum crediting rates, decreases in interest rates can decrease the amount of interest spread earned.

Changes in the corporate credit environment directly impact the value of the Company’s investments, primarily fixed maturity securities. The Company primarily invests in investment-grade corporate debt to support its fixed rate product liabilities.

Credit spreads represent the credit risk premiums required by market participants for a given credit quality, i.e., the additional yield that a debt instrument issued by a AA-rated entity must produce over a risk-free alternative (e.g., U.S. Treasury instruments). Changes in credit spreads have an inverse relationship to the value of interest sensitive investments.

The impact of changes in medium term interest rates, corporate credit and credit spreads on market valuations were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Average medium term interest rate yield (a)		0.45%			0.65%			0.45%			0.65%
Decrease in medium term interest rates (in basis points)		(35	)		(25	)		(52	)		(78	)
Credit spreads (in basis points) (b)		279			179			279			179
Expanding (contracting) of credit spreads (in basis points)		106			(29	)		104			(21	)

Increase (decrease) on market valuations (in millions)
AFS investment securities	$	59.7		$	60.7		$	77.2		$	129.0
Interest-sensitive policyholder liabilities		0.9			(0.3	)		1.6			(1.5	)

Net change on market valuations	$	60.6		$	60.4		$	78.8		$	127.5

(a)	The Company defines medium term interest rates as the average interest rate on U.S. Treasury securities with terms of one to five years.

(b)	The Company defines credit spreads according to the Merrill Lynch U.S. Corporate Bond Index for BBB-A Rated bonds with three to five year maturities.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amounts of revenues and expenses. Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ and could have a material impact on the financial statements, and it is possible that such changes could occur in the near term.

The Company’s critical accounting policies and estimates are discussed below. For a full description of these and other accounting policies see Note 1 of the 2010 Annual Report on Form 10-K.

Valuation of Fixed Maturity and Equity Securities

The Company’s investments consist of fixed maturity and equity securities that are classified as available-for-sale (“AFS”) which are reported at estimated fair value. In addition, the Company holds fixed maturity securities which contain a conversion to equity feature, which is considered an embedded derivative. These fixed maturity securities have been classified as trading and are reported at estimated fair value. The fair values of fixed maturity and equity securities are determined by management after taking into consideration several sources of data. The Company’s valuation policy dictates that publicly available prices are initially sought from several third party pricing services. In the event that pricing is not available from these services, those securities are submitted to brokers to obtain quotes. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows.

Each month, the Company performs an analysis of the information obtained from third party services and brokers to ensure that the information is reasonable and produces a reasonable estimate of fair value. The Company considers both qualitative and quantitative factors as part of this analysis, including but not limited to, recent transactional activity for similar fixed maturities, review of pricing statistics and trends, and consideration of recent relevant market events.

The Company’s portfolio of private placement securities is valued using a matrix pricing methodology. The pricing methodology is obtained from a third party service and indicates current spreads for securities based on weighted average life, credit rating and industry sector. Monthly the Company reviews the matrix to ensure the spreads are reasonable by comparing them to observed spreads for similar securities traded in the market. In order to account for the illiquid nature of these securities, illiquidity premiums are included in the valuation and are determined based upon the pricing of recent transactions in the private placement market as well as comparing the value of the privately offered security to a similar public security. The impact of the illiquidity premium to the overall valuation is less than 1% of the value.

At September 30, 2011 and December 31, 2010, approximately $192.4 million (or 11%) and $184.5 million (or 11%), respectively, of the Company’s fixed maturity and equity securities portfolio consisted of non-publicly traded securities. Since significant judgment is required for the valuation of non-publicly traded securities, the estimated fair value of these securities may differ from amounts realized upon an immediate sale.

Changes in the fair value of fixed maturity and equity securities deemed AFS are reported as a component of accumulated other comprehensive income (loss), net of taxes on the Balance Sheets and are not reflected in the Statements of Income until a sale transaction occurs or when credit-related declines in estimated fair value are deemed other-than-temporary. Changes in fair value of fixed maturity securities deemed trading are reported as a component of net investment income.

Other-Than-Temporary Impairment (“OTTI”) Losses on Investments

The Company regularly reviews each investment in its fixed maturity and equity AFS securities portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. Management makes this determination through a series of discussions with the Company’s portfolio managers and credit analysts, and information obtained from external sources (i.e., company announcements, ratings agency announcements, or news wire services). For fixed maturity AFS securities, the Company also considers whether it is more likely than not that it will not be required to sell the debt security before its anticipated recovery. The factors that may give rise to a potential OTTI include, but are not limited to, i) certain credit-related events such as default of principal or interest payments by the issuer, ii) bankruptcy of issuer, iii) certain security restructurings, and iv) fair market value less than cost or amortized cost for an extended period of time. In the absence of a readily ascertainable market value, the estimated fair value on these securities represents management’s best estimate and is based on comparable securities and other assumptions as appropriate. Management bases this determination on the most recent information available.

For equity securities, once management determines a decline in the value of an AFS security is other-than-temporary, the cost basis of the equity security is reduced to its fair value, with a corresponding charge to earnings.

For fixed maturity AFS securities, an OTTI must be recognized in earnings when an entity either: a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For fixed maturity AFS securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows. If the net present value is less than the amortized cost of the investment, an OTTI is recorded. The OTTI is separated into two pieces: an amount representing the credit loss, where the present value of cash flows expected to be collected is less than the amortized cost basis of the security, and an amount related to all other factors (referred to as the non credit portion). The credit loss is recognized in earnings and the non credit loss is recognized in other comprehensive income (“OCI”), net of applicable taxes and value of business acquired. Management records subsequent changes in the estimated fair value (positive and negative) of fixed maturity AFS securities for which non credit OTTI was previously recognized in OCI in OCI-OTTI.

For the three and nine months ended September 30, 2011, the Company recorded an OTTI in income of $0.1 million and $1.0 million, respectively, with no associated value of business acquired amortization. For the three and nine months ended September 30, 2010, the Company recorded an OTTI in income of $0.3 million and $1.6 million, respectively, net of associated value of business acquired amortization.

Mortgage Loans on Real Estate

Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of premiums and accretion of discounts and are net of valuation allowances and general reserves. The fair value for mortgage loans on real estate is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and/or similar remaining maturities. Interest income is accrued on the principal balance of the loan based on the loan’s contractual interest rate. Premiums and discounts are amortized using the effective yield method over the life of the loan. Interest income and amortization of premiums and discounts are reported in net investment income along with mortgage loan fees, which are recorded as they are incurred.

Loans are considered impaired when it is probable that based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. When the Company determines that a loan is impaired, a valuation allowance is established for the excess carrying value of the loan over its estimated collateral value. Changing economic conditions impact our valuation of mortgage loans. Changing vacancies and rents are incorporated into the discounted cash flow analysis that the Company performs for monitored loans and may contribute to the establishment of (or an increase or

decrease in) an allowance for losses. In addition, the Company continues to monitor the entire commercial mortgage loan portfolio to identify risk. Areas of emphasis are properties that have deteriorating credits or have experienced debt coverage reduction. Where warranted, the Company has established or increased loss reserves based upon this analysis. The Company does not accrue interest on loans ninety days past due. The Company also establishes a general reserve based on a percentage of the outstanding loan balance.

At September 30, 2011 and December 31, 2010, there was $56.4 million and $62.9 million, respectively, in mortgage loans on real estate recorded on the Balance Sheet. The estimated fair value of the mortgage loans on real estate at September 30, 2011 and December 31, 2010 was $63.2 million and $66.7 million, respectively. There were no impaired mortgage loans at September 30, 2011. A valuation allowance of $0.6 million was established for an impaired mortgage loan during 2010 which was then sold during first quarter 2011 resulting in a recovery of $0.2 million. In addition, during the fourth quarter 2010, a mortgage loan was impaired for $0.6 million and then sold. The general reserve at September 30, 2011 and December 31, 2010 was less than $0.1 million, respectively. The change in the valuation allowance and the general reserve is reflected in net realized investment gains (losses), excluding OTTI losses on securities in the Statements of Income. At September 30, 2011 and December 31, 2010, there were no mortgage loans that were two or more payments delinquent. See Note 3 to the Financial Statements for further discussion.

Derivative Instruments

Derivatives are financial instruments in which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date. The Company has entered into exchange traded derivatives, such as futures, and variance swaps to hedge the costs of the volatility of the S&P market. Variance swaps are used to hedge the gamma risk created when delta hedging the minimum guarantee benefit riders associated with variable annuity products. These variance swaps are similar to volatility options where the underlying index provides for the market value movements. All derivatives recognized on the Balance Sheets are carried at fair value with changes in fair value recognized in the Statements of Income. The fair value for exchange traded derivatives, such as futures, are calculated net of the interest accrued to date and is based on quoted market prices. Net settlements on the futures occur daily. The fair value of variance swaps is calculated as the difference between the estimated volatility of the underlying S&P index at maturity to the actual volatility of the underlying S&P index at initiation (i.e. strike) multiplied by the notional value of the swap. At termination the final fair value is recorded as a realized investment gain (loss) in the Statements of Income. Variance swaps do not accrue interest, and typically, no cash is exchanged at initiation.

At September 30, 2011, the Company had 720 outstanding short futures contracts with a notional amount of $202.7 million. At September 30, 2011, the Company had variance swaps with a notional value of $5 thousand and a net fair value of $3.8 million. The Company recognized $6.3 million and $2.5 million of gains from the change in fair value of the variance swaps in net investment income in the Statements of Income during the three and nine months ended September 30, 2011, respectively. At December 31, 2010, the Company had 360 outstanding short futures contracts with a notional value of $112,770. At December 31, 2010, the Company had two variance swaps with a notional value of $7 and a net fair value of ($0.4) million. The Company recognized $0.4 million of losses from the change in fair value of the variance swaps in net investment income in the Statements of Income during 2010.

The Company can also receive collateral related to derivative transactions that it enters into. The credit support agreement contains a fair value threshold of $1.0 million over which collateral needs to be pledged by the Company or its counterparty. At September 30, 2011, cash collateral of $2.7 million was received on derivative transactions in accordance with the credit support agreement due to market value swings on variance swaps. At December 31, 2010, the Company did not pledge or receive collateral on derivative transactions.

Securities Lending

Financial assets that are lent to a third party or that are transferred subject to a repurchase agreement at a fixed price are not derecognized as the Company retains substantially all the risks and rewards of asset ownership. The lent securities are included in fixed maturity AFS securities in the Balance Sheets. A liability is recognized for cash collateral received, required initially at 102%, on which interest is accrued. If the fair value of the collateral is at any time less than 102% of the fair value of the loaned securities, the counterparty is mandated to deliver additional collateral, the fair value of which, together with the collateral already held in connection with the lending transaction, is at least equal to 102% of the fair value of the loaned securities. At September 30, 2011 and December 31, 2010, the payable for collateral under securities loaned was $265.1 million and $160.4 million, respectively.

Reverse Repurchase Agreements

The Company enters into dollar roll repurchase agreement transactions whereby the Company takes delivery of mortgage-backed securities (“MBS”) pools and sells them to a counterparty along with an agreement to repurchase substantially the same pools at some point in the future, typically one month forward. These transactions are accounted for as collateralized borrowings and the repurchase agreement liability is included in the Balance Sheet in payables for collateral under securities loaned and reverse repurchase agreements. At September 30, 2011 the amortized cost of the reverse repurchase agreements was $6.4 million. The estimated fair value of the securities that were pledged to the counterparty to support the initial dollar roll was $6.5 million at September 30, 2011. There were no reverse repurchase agreements at December 31, 2010.

Value of Business Acquired (“VOBA”), Deferred Policy Acquisition Costs (“DAC”), and Deferred Sales Inducements (“DSI”)

VOBA

VOBA represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the insurance and annuity contracts in force at the acquisition date. VOBA is based on actuarially determined projections, for each block of business, of future policy and contract charges, premiums, mortality, policyholder behavior, Separate Account performance, operating expenses, investment returns, and other factors. Actual experience on the purchased business may vary from these projections. Revisions in estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in the impairment of the asset and a charge to income if estimated future gross profits are less than the unamortized balance. At September 30, 2011 and December 31, 2010, the Company’s VOBA asset was $315.5 million and $335.1 million, respectively. For the three and nine months ended September 30, 2011, the unfavorable impact to pre-tax income related to VOBA unlocking was $41.8 million and $38.1 million, respectively. For the three and nine months ended September 30, 2010, the favorable impact to pre-tax income related to VOBA unlocking was $16.5 million and $14.8 million, respectively. See Note 4 to the Financial Statements for a further discussion.

DAC

The costs of acquiring business, principally commissions, certain expenses related to policy issuance, and certain variable sales expenses that relate to and vary with the production of new and renewal business are deferred and amortized based on the estimated future gross profits for a group of contracts. DAC are subject to recoverability testing at the time of policy issuance and loss recognition testing at the end of each reporting period. At September 30, 2011 and December 31, 2010, variable annuities accounted for the Company’s entire DAC asset of $44.1 million and $31.4 million, respectively.

DAC for variable annuities is amortized with interest over the anticipated lives of the insurance contracts in relation to the present values of estimated future gross profits from asset-based fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for guaranteed death and living benefit expenses, policy maintenance expenses, and non-capitalized commissions. Future gross profit estimates are subject to periodic evaluation with necessary revisions applied against amortization to date. The impact of revisions and assumptions to estimates on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as “unlocking”. Changes in assumptions can have a significant impact on the amount of DAC reported and the related amortization patterns. In general, increases in the estimated Separate Accounts return and decreases in surrender or mortality assumptions increase the expected future profitability of the underlying business and may lower the rate of DAC amortization. Conversely, decreases in the estimated Separate Accounts returns and increases in surrender or mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization. For the three and nine months ended September 30, 2011, there was an unfavorable impact to pre-tax income related to DAC unlocking of $0.4 million and $2.5 million, respectively. For the three and nine months ended September 30, 2010, there was an unfavorable impact to pre-tax income related to DAC unlocking of $0.9 million and $1.6 million, respectively. See Note 4 to the Financial Statements for a further discussion.

DSI

The Company offers a sales inducement whereby the contract owner receives a bonus which increases the initial account balance by an amount equal to a specified percentage of the contract owner’s deposit. This amount may be subject to recapture under certain circumstances. Consistent with DAC, sales inducements for variable annuity contracts are deferred and amortized based on the estimated future gross profits for each group of contracts. These future gross profit estimates are subject to periodic evaluation by the Company, with necessary revisions applied against amortization to date. The impact of these revisions on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as “unlocking”. It is reasonably possible that estimates of future gross profits could be reduced in the future, resulting in a material reduction in the carrying amount of the deferred sales inducement asset.

The expense and the subsequent capitalization and amortization (accretion) are recorded as a component of policy benefits in the Statements of Income. At September 30, 2011 and December 31, 2010, variable annuities accounted for the Company’s entire

DSI asset of $10.2 million and $7.3 million, respectively. For the three and nine months ended September 30, 2011, there was an unfavorable impact to pre-tax income related to DSI unlocking of $0.1 million and $0.5 million, respectively. For the three and nine months ended September 30, 2010, there was an unfavorable impact to pre-tax income related to DSI unlocking of $0.2 million and $0.3 million, respectively. See Note 4 to the Financial Statements for a further discussion.

The long-term growth rate assumption for the amortization of VOBA, DAC and DSI was 9% at September 30, 2011 and 2010.

Policyholder Account Balances

The Company’s liability for policyholder account balances represents the contract value that has accrued to the benefit of policyholders at the Balance Sheet date. The liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Policyholder account balances at September 30, 2011 and December 31, 2010 were $1.5 billion and $1.6 billion, respectively.

Future Policy Benefits

Future policy benefits are actuarially determined liabilities, which are calculated to meet future obligations and are generally payable over an extended period of time. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, surrender rates, policy expenses, equity returns, interest rates, and inflation. These estimates and assumptions are influenced by historical experience, current developments and anticipated market trends. At September 30, 2011 and December 31, 2010, future policy benefits were $528.7 million and $362.6 million, respectively.

Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issues. At September 30, 2011 and December 31, 2010, GMDB and GMIB liabilities included within future policy benefits were as follows:


(dollars in millions)	September 30, 2011		December 31, 2010
GMDB liability	$	169.7	$	114.5
GMIB liability		90.7		32.0

The Company regularly evaluates the assumptions used to establish these liabilities, as well as actual experience and adjusts GMDB and GMIB liabilities with a related charge or credit to earnings (“unlocking”), if actual experience or evidence suggests that the assumptions should be revised. For the three and nine months ended September 30, 2011, the unfavorable impact to pre-tax income related to GMDB and GMIB unlocking was $121.0 million and $111.7 million, respectively. For the three and nine months ended September 30, 2010, the favorable impact to pre-tax income related to GMDB and GMIB unlocking was $44.6 million and $21.4 million, respectively.

Future policy benefits also include liabilities, which can be either positive or negative, for contracts containing GMWB provisions and for the reinsurance of GMIB provisions (“GMIB reinsurance”) for variable annuities based on the fair value of the underlying benefit. GMWB and GMIB reinsurance are treated as embedded derivatives and are required to be reported separately from the host variable annuity contract. The fair value of these guarantees are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees, which are unlike instruments available in financial markets, their fair values are determined using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions.

At September 30, 2011 and December 31, 2010, GMWB liability and GMIB reinsurance asset included within future policy benefits were as follows:


(dollars in millions)	September 30, 2011			December 31, 2010
GMWB liability	$	124.5		$	31.0
GMIB reinsurance asset		(99.8	)		(56.4	)

Federal Income Taxes

The Company uses the asset and liability method in providing income taxes on all transactions that have been recognized in the financial statements. The asset and liability method requires that deferred taxes be adjusted to reflect the tax rates at which future taxable amounts will be settled or realized. The Company provides for federal income taxes based on amounts it believes it will

ultimately owe. Inherent in the provision for federal income taxes are estimates regarding the realization of certain tax deductions and credits.

Specific estimates include the realization of dividend-received deductions (“DRD”) and foreign tax credits (“FTC”). A portion of the Company’s investment income related to Separate Accounts business qualifies for the DRD and FTC. Information necessary to calculate these tax adjustments is typically not available until the following year. However, within the current year’s provision, management makes estimates regarding the future tax deductibility of these items. These estimates are primarily based on recent historic experience. See Note 6 to the Financial Statements for a further discussion.

The valuation allowance for deferred tax assets at September 30, 2011 and December 31, 2010 was $111.9 million and $93.0 million, respectively. The valuation allowance is related to a net operating loss carryforward and other deferred tax assets that, in the judgment of management, is not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of further taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.

The Company files a return in the U.S. federal tax jurisdiction and various state tax jurisdictions.

Recent Accounting Guidance

The following outlines the adoption of recent accounting guidance in 2011. See Note 1 to the Financial Statements for a further discussion.

•

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosure - Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurement – requires separate presentation of information about purchases, sales, issuances, and settlements in the Level 3 reconciliation for fair value measurements using significant unobservable inputs – adopted January 1, 2011.

•

ASC 944, Financial Services—Insurance – ASU 2010-15, How Investments Held Through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments – clarifies that an insurance entity should not consider any separate account interest held for the benefit of policyholders in an investment to be the insurer’s interest and should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation – adopted January 1, 2011.

•

ASC 350, Intangibles—Goodwill and Other – ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts – requires entities with a zero or negative carrying value to perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists – adopted January 1, 2011.

•

ASC 310, Receivables – ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring – clarifies when a loan modification or restructuring is considered a troubled debt restructuring – adopted April 1, 2011, applied retrospectively to January 1, 2011.

The following outlines the adoption of accounting guidance in 2010. See Note 1 to the Financial Statements for a further discussion.

•

ASC 820, Fair Value Measurements and Disclosure, ASU 2010-06, Improving Disclosures about Fair Value Measurements – guidance on new disclosures and clarifications of existing disclosures about fair value measurements – adopted January 1, 2010.

•

ASC 310, Receivables, ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses) – guidance requires new and expanded disclosures about the allowance for credit losses, credit quality, impaired loans, modifications, and nonaccrual and past due financing receivables – adopted December 31, 2010.

In addition, the following is accounting guidance that will be adopted in the future. See Note 1 to the Financial Statements for a further discussion.

•

ASC 944, Financial Services—Insurance – ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts – modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts – will be adopted January 1, 2012.

•

ASC 860, Transfers and Servicing – ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements – modifies the criteria for determining when a repurchase transaction should be accounted for as a secured borrowing or as a sale – will be adopted January 1, 2012.

•

ASC 820, Fair Value Measurements and Disclosures – ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS – amends current guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards – will be adopted January 1, 2012.

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ASC 220, Comprehensive Income – ASU 2011-05, Presentation of Comprehensive Income – requires an entity to report components of comprehensive income in either a single continuous statement of comprehensive income or two separate but consecutive statements – will be adopted January 1, 2012.

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ASC 350, Intangibles—Goodwill and Other – ASU 2011-08, Testing Goodwill for Impairment – gives entities the option of performing a qualitative assessment to determine whether it is necessary to perform the two-step goodwill impairment test – will be adopted January 1, 2012.

Investments

The Company maintains a conservative general account investment portfolio comprised primarily of investment grade fixed maturity securities, policy loans, cash and cash equivalents and mortgage loans on real estate.

Fixed Maturity and Equity Securities

The amortized cost/cost and estimated fair value of investments in fixed maturity and equity securities at September 30, 2011 and December 31, 2010 were:


	September 30, 2011
										% of Estimated Fair Value
			Gross Unrealized					Estimated Fair Value
(dollars in millions)	Amortized Cost/Cost		Gains		Losses/ OTTI (1)			Estimated Fair Value
Fixed maturity AFS securities
Corporate securities
Financial services	$	276.2	$	13.3	$	(1.5	)	$	288.0		15%
Industrial		699.9		66.9		(1.8	)		765.0		42
Utility		90.9		10.8		(0.2	)		101.5		5
Asset-backed securities
Housing related		44.5		1.8		(6.9	)		39.4		2
Credit cards		42.2		4.3		-			46.5		2
Structured settlements		4.2		0.5		-			4.7		-
Autos		18.3		0.2		-			18.5		1
Student loan		0.1		-		-			0.1		-
Timeshare		0.4		-		-			0.4		-
Commercial mortgage-backed securities - non agency backed		119.6		8.6		(0.2	)		128.0		7
Residential mortgage-backed securities
Agency backed		68.3		4.2		-			72.5		4
Non agency backed		18.7		-		(3.0	)		15.7		1
Municipals - tax exempt		1.1		0.1		-			1.2		-
Government and government agencies
United States		309.4		45.4		-			354.8		19
Foreign		8.9		1.2		-			10.1		1

Total fixed maturity AFS securities		1,702.7		157.3		(13.6	)		1,846.4		99

Equity securities
Banking securities		30.1		-		(5.5	)		24.6		1
Other financial services securities		0.2		0.2		-			0.4		-
Industrial securities		5.8		-		-			5.8		-

Total equity securities		36.1		0.2		(5.5	)		30.8		1

Total fixed maturity and equity securities	$	1,738.8	$	157.5	$	(19.1	)	$	1,877.2		100%


	December 31, 2010
			Gross Unrealized					Estimated		% of Estimated
(dollars in millions)	Amortized Cost/Cost		Gains		Losses/ OTTI (1)			Fair Value		Fair Value
Fixed maturity AFS securities
Corporate securities
Financial services	$	266.9	$	12.7	$	(0.4	)	$	279.2		17%
Industrial		698.7		35.1		(2.7	)		731.1		45
Utility		103.4		7.7		(0.5	)		110.6		7
Asset-backed securities
Housing related		49.8		1.7		(7.6	)		43.9		3
Credit cards		40.0		4.8		-			44.8		3
Structured settlements		4.6		0.3		-			4.9		-
Autos		5.0		0.3		-			5.3		-
Student loan		3.0		-		-			3.0		-
Timeshare		0.6		-		-			0.6		-
Commercial mortgage-backed securities - non agency backed		131.3		8.5		-			139.8		9
Residential mortgage-backed securities
Agency backed		82.9		3.1		(0.2	)		85.8		5
Non agency backed		21.6		-		(3.3	)		18.3		1
Municipals - tax exempt		1.5		-		-			1.5		-
Government and government agencies
United States		146.6		4.8		(1.7	)		149.7		9
Foreign		9.1		0.8		-			9.9		1

Total fixed maturity AFS securities		1,565.0		79.8		(16.4	)		1,628.4		100

Equity securities
Banking securities		9.2		-		(2.2	)		7.0		-
Other financial services securities		0.2		0.4		-			0.6		-
Industrial securities		5.8		-		(0.4	)		5.4		-

Total equity securities		15.2		0.4		(2.6	)		13.0		-

Total fixed maturity and equity securities	$	1,580.2	$	80.2	$	(19.0	)	$	1,641.4		100%

(1)	Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.

The Company regularly monitors industry sectors and individual debt securities for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4) covenant violations, 5) high probability of bankruptcy of the issuer, 6) nationally recognized credit rating agency downgrades, and/or 7) intent and ability to hold to recovery. Additionally, for structured securities (asset-backed securities (“ABS”), residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”)), cash flow trends and underlying levels of collateral are monitored. A security is impaired if there is objective evidence that a loss event has occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows. A specific security is considered to be impaired when it is determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled. For debt securities, an OTTI must be recognized in earnings when an entity either a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For debt securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The Company has evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss, and unless otherwise noted, does not consider these investments to be impaired at September 30, 2011.

Seven issuers represent more than 5% of the total unrealized loss position, comprised of four subprime ABS-housing holdings, one corporate bond, one corporate financial services bond and one RMBS holding. The Company owns an investment grade corporate non-convertible security, issued by Telefonica Emisiones with an unrealized loss of $0.7 million. The Company’s corporate

financial services bond unrealized loss is $1.0 million and relates to an investment grade security issued by Goldman Sachs. The Company’s ABS - subprime housing unrealized loss is $6.5 million on holdings that have been impaired to discounted cash flows. The Company’s subprime asset-backed securities consist of four below investment grade deals whereby the collateral is comprised of 2006-2007 fixed-rate, first lien subprime mortgages. The Company’s RMBS unrealized loss is $2.6 million and relates to a securitized portfolio of prime hybrid mortgages that contain fixed income positions where our holding is rated below investment grade and has been impaired to discounted cash flows.

At September 30, 2011 and December 31, 2010, approximately $72.5 million (or 34%) and $85.8 million (or 35%), respectively, of RMBS and CMBS holdings were fully collateralized by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. RMBS and CMBS securities are structured to allow the investor to determine, within certain limits, the amount of interest rate risk, prepayment risk and default risk that the investor is willing to accept. It is this level of risk that determines the degree to which the yields on RMBS and CMBS will exceed the yields that can be obtained from corporate securities with similar credit ratings.

Details underlying securities in a continuous gross unrealized loss and OTTI position for investment grade AFS securities were as follows:


	September 30, 2011
(dollars in millions)	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI (1)
Investment grade AFS securities
Less than or equal to six months
Corporate securities
Financial services	$	52.7	$	54.1	$	(1.4	)
Industrial		37.8		38.9		(1.1	)
Asset-backed securities
Housing related		14.9		15.3		(0.4	)
Credit cards		9.0		9.0		-
Autos		8.1		8.2		(0.1	)
Commercial mortgage-backed securities - non agency backed		8.3		8.5		(0.2	)
Residential mortgage-backed securities - agency backed		0.1		0.1		-
Equity securities
Banking securities		20.4		23.6		(3.2	)
Industrial securities		5.8		5.8		-

Total fixed maturity and equity securities		157.1		163.5		(6.4	)


Greater than six months but less than or equal to one year
Corporate securities
Financial services		1.0		1.1		(0.1	)
Industrial		0.1		0.1		-

Total fixed maturity and equity securities	$	1.1	$	1.2	$	(0.1	)


	September 30, 2011
(dollars in millions)	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI (1)
Investment grade AFS securities (continued)
Greater than one year
Corporate securities
Financial services	$	4.0	$	4.0	$	-
Utility		2.6		2.6		-

Total fixed maturity and equity securities		6.6		6.6		-


Total of all investment grade AFS securities
Corporate securities
Financial services		57.7		59.2		(1.5	)
Industrial		37.9		39.0		(1.1	)
Utility		2.6		2.6		-
Asset-backed securities
Housing related		14.9		15.3		(0.4	)
Credit cards		9.0		9.0		-
Autos		8.1		8.2		(0.1	)
Commercial mortgage-backed securities - non agency backed		8.3		8.5		(0.2	)
Residential mortgage-backed securities - agency backed		0.1		0.1		-
Equity securities
Banking securities		20.4		23.6		(3.2	)
Industrial securities		5.8		5.8		-

Total fixed maturity and equity securities	$	164.8	$	171.3	$	(6.5	)


Total number of securities in a continuous unrealized loss position						53

	December 31, 2010
(dollars in millions)	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI (1)
Investment grade AFS securities
Less than or equal to six months
Corporate securities
Financial services	$	4.4	$	4.5	$	(0.1	)
Industrial		53.9		56.1		(2.2	)
Utility		6.7		7.0		(0.3	)
Asset-backed securities
Housing related		2.8		2.8		-
Credit cards		7.5		7.5		-
Commercial mortgage-backed securities - non agency backed		1.0		1.0		-
Residential mortgage-backed securities - agency backed		6.5		6.7		(0.2	)
Government and government agencies - United States		0.7		0.7		-
Equity securities - banking securities		2.5		2.6		(0.1	)

Total fixed maturity and equity securities		86.0		88.9		(2.9	)


Greater than six months but less than or equal to one year
Corporate securities - utility		0.2		0.2		-

Total fixed maturity and equity securities	$	0.2	$	0.2	$	-


	December 31, 2010
(dollars in millions)	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI (1)
Investment grade AFS securities (continued)
Greater than one year
Corporate securities
Financial services	$	8.4	$	8.7	$	(0.3	)
Utility		2.9		2.9		-
Asset-backed securities - housing related		2.5		2.5		-
Government and government agencies - United States		30.8		32.5		(1.7	)
Equity securities - industrial securities		5.4		5.8		(0.4	)

Total fixed maturity and equity securities		50.0		52.4		(2.4	)


Total of all investment grade AFS securities
Corporate securities
Financial services		12.8		13.2		(0.4	)
Industrial		53.9		56.1		(2.2	)
Utility		9.8		10.1		(0.3	)
Asset-backed securities
Housing related		5.3		5.3		-
Credit cards		7.5		7.5		-
Commercial mortgage-backed securities - non agency backed		1.0		1.0		-
Residential mortgage-backed securities - agency backed		6.5		6.7		(0.2	)
Government and government agencies - United States		31.5		33.2		(1.7	)
Equity securities
Banking securities		2.5		2.6		(0.1	)
Industrial securities		5.4		5.8		(0.4	)

Total fixed maturity and equity securities	$	136.2	$	141.5	$	(5.3	)


Total number of securities in a continuous unrealized loss position						58

(1)	Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.

Details underlying securities in a continuous gross unrealized loss and OTTI position for below investment grade AFS securities were as follows:


	September 30, 2011
(dollars in millions)	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI (1)
Below investment grade AFS securities
Less than or equal to six months
Corporate securities - industrial	$	6.2	$	6.8	$	(0.6	)

Total fixed maturity and equity securities		6.2		6.8		(0.6	)


Greater than six months but less than or equal to one year
Corporate bonds - industrial		1.1		1.1		-

Total fixed maturity and equity securities	$	1.1	$	1.1	$	-


	September 30, 2011
(dollars in millions)	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI (1)
Below investment grade AFS securities (continued)
Greater than one year
Corporate securities
Industrial	$	5.1	$	5.2	$	(0.1	)
Utility		0.3		0.5		(0.2	)
Asset-backed securities - housing related		11.9		18.4		(6.5	)
Residential mortgage-backed securities - non agency backed		15.8		18.8		(3.0	)
Equity securities - banking securities		4.3		6.6		(2.3	)

Total fixed maturity and equity securities		37.4		49.5		(12.1	)


Total of all below investment grade AFS securities
Corporate securities
Industrial		12.4		13.1		(0.7	)
Utility		0.3		0.5		(0.2	)
Asset-backed securities - housing related		11.9		18.4		(6.5	)
Residential mortgage-backed securities - non agency backed		15.8		18.8		(3.0	)
Equity securities - banking securities		4.3		6.6		(2.3	)

Total fixed maturity and equity securities	$	44.7	$	57.4	$	(12.7	)


Total number of securities in a continuous unrealized loss position						21

	December 31, 2010
(dollars in millions)	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI (1)
Below investment grade AFS securities
Less than or equal to six months
Corporate securities - industrial	$	4.7	$	5.1	$	(0.4	)
Residential mortgage-backed securities - non agency backed		2.8		3.3		(0.5	)

Total fixed maturity and equity securities		7.5		8.4		(0.9	)


Greater than six months but less than or equal to one year
Corporate securities - industrial		5.0		5.2		(0.2	)

Total fixed maturity and equity securities		5.0		5.2		(0.2	)


Greater than one year
Corporate securities - utility		0.3		0.5		(0.2	)
Asset-backed securities - housing related		12.5		20.0		(7.5	)
Residential mortgage-backed securities - non agency backed		15.5		18.3		(2.8	)
Equity securities - banking securities		4.5		6.6		(2.1	)

Total fixed maturity and equity securities	$	32.8	$	45.4	$	(12.6	)


	December 31, 2010
(dollars in millions)	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI (1)
Below investment grade AFS securities (continued)
Total of all below investment grade AFS securities
Corporate securities
Industrial	$	9.7	$	10.3	$	(0.6	)
Utility		0.3		0.5		(0.2	)
Asset-backed securities - housing related		12.5		20.0		(7.5	)
Residential mortgage-backed securities - non agency backed		18.3		21.6		(3.3	)
Equity securities - banking securities		4.5		6.6		(2.1	)

Total fixed maturity and equity securities	$	45.3	$	59.0	$	(13.7	)


Total number of securities in a continuous unrealized loss position						16

(1)	Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.

Gross unrealized losses and OTTI on below investment grade AFS securities represented 66% and 71% of total gross unrealized losses and OTTI on all AFS securities at September 30, 2011 and December 31, 2010, respectively. Generally, below investment grade securities are more likely than investment grade securities to develop credit concerns. The ratios of estimated fair value to amortized cost reflected in the table below were not necessarily indicative of the market value to amortized cost relationships for the securities throughout the entire time that the securities have been in an unrealized loss position nor are they necessarily indicative of these ratios subsequent to September 30, 2011.

Details underlying AFS securities below investment grade and in an unrealized loss and OTTI position were as follows:


		September 30, 2011
(dollars in millions)	Ratio of Amortized Cost to Estimated Fair Value	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI (1)
Less than or equal to six months	70% to 100%	$	6.2	$	6.8	$	(0.6	)

			6.2		6.8		(0.6	)


Greater than six months but less than or equal to one year	70% to 100%		1.1		1.1		-

			1.1		1.1		-

Greater than one year
	70% to 100%		27.6		32.8		(5.2	)
	40% to 70%		9.8		16.7		(6.9	)

			37.4		49.5		(12.1	)

Total		$	44.7	$	57.4	$	(12.7	)


		December 31, 2010
(dollars in millions)	Ratio of Amortized Cost to Estimated Fair Value	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI (1)
Less than or equal to six months	70% to 100%	$	7.5	$	8.4	$	(0.9	)

			7.5		8.4		(0.9	)


Greater than six months but less than or equal to one year	70% to 100%		5.0		5.2		(0.2	)

			5.0		5.2		(0.2	)


Greater than one year
	70% to 100%		17.3		20.5		(3.2	)
	40% to 70%		15.5		24.9		(9.4	)

			32.8		45.4		(12.6	)

Total		$	45.3	$	59.0	$	(13.7	)

(1)	Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.

The assets depressed over 20% as well as over 40% and greater than one year at September 30, 2011 are related to ABS backed by subprime mortgages and preferred stock (ABN AMRO) with exposure to the banking sector. In regards to the ABS backed by subprime mortgages, as there has been no impact to expected future cash flows, the Company does not consider the underlying investments to be impaired at September 30, 2011. The drop in price for the ABN AMRO preferred stock was primarily due to high illiquidity in the markets in general due to the European debt crisis.

The amortized cost and estimated fair value of fixed maturity AFS securities at September 30, 2011 and December 31, 2010 by rating agency equivalent were:


	September 30, 2011				December 31, 2010
(dollars in millions)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
AAA	$	463.5	$	519.5	$	400.5	$	415.5
AA		253.3		274.8		190.0		199.2
A		611.4		660.4		619.6		646.0
BBB		306.0		330.6		274.4		294.8
Below investment grade		68.5		61.1		80.5		72.9

Total fixed maturity AFS securities	$	1,702.7	$	1,846.4	$	1,565.0	$	1,628.4


Investment grade		96%		97%		95%		96%
Below investment grade		4%		3%		5%		4%

The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to S&P’s BBB- or higher (or similar rating agency). At September 30, 2011 and December 31, 2010, approximately $60.8 million (or 3%) and $55.8 million (or 3%), respectively, of fixed maturity securities were rated BBB-, which is the lowest investment grade rating given by S&P. Below investment grade securities are speculative and are subject to significantly greater risks related to the creditworthiness of the issuers and the liquidity of the market for such securities. The Company closely monitors such investments.

During the three and nine months ended September 30, 2011 there was $0.1 million and $0.6 million, respectively, of investment income on fixed maturity trading securities and ($0.8) million and $0.4 million, respectively, of income (loss) recognized from the change in the fair value on fixed maturity trading securities recorded in net investment income in the Statements of Income. The Company did not recognize any gains or losses during the three months ended September 30, 2011. The Company recognized

losses of $0.1 million, during the nine months ended September 30, 2011 on the conversion of fixed maturity trading securities to preferred stock in the first and second quarters of 2011.

Subprime Mortgage Investments

Subprime mortgages are loans to homebuyers who have weak or impaired credit histories. Through 2008, the market for these loans had expanded rapidly. During that time, however, lending practices and credit assessment standards grew steadily weaker. As a result, the market experienced a sharp increase in the number of loan defaults. Investors in subprime mortgage assets include not only mortgage lenders, but also brokers, hedge funds, and insurance companies. The Company does not currently invest in or originate whole loan residential mortgages. The Company categorizes ABS issued by a securitization trust as having subprime mortgage exposure when the average credit score of the underlying mortgage borrowers in a securitization trust is below 660 at issuance. The Company also categorizes ABS issued by a securitization trust with second lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien mortgage borrowers may not necessarily have credit scores below 660 at issuance.

The following tables provide the ABS subprime mortgage exposure by rating and estimated fair value by vintage at September 30, 2011 and December 31, 2010:


	September 30, 2011
(dollars in millions)	Amortized Cost		Estimated Fair Value		Net Unrealized Gains (Losses) and OTTI
First lien - fixed
AAA	$	18.3	$	18.4	$	0.1
Below BBB		18.4		11.8		(6.6	)
Second lien (a)
Below BBB		3.7		5.3		1.6

Total	$	40.4	$	35.5	$	(4.9	)


	December 31, 2010
(dollars in millions)	Amortized Cost		Estimated Fair Value		Net Unrealized Gains (Losses) and OTTI
First lien - fixed
AAA	$	20.6	$	20.9	$	0.3
Below BBB		20.0		12.5		(7.5	)
Second lien (a)
Below BBB		5.1		6.4		1.3

Total	$	45.7	$	39.8	$	(5.9	)


	September 30, 2011
	Estimated Fair Value by Vintage
(dollars in millions)	2004&Prior		2005		2006		2007		Total
First lien - fixed
AAA	$	12.9	$	5.5	$	-	$	-	$	18.4
Below BBB		-		-		2.9		8.9		11.8
Second lien (a)
Below BBB		-		-		5.3		-		5.3

Total	$	12.9	$	5.5	$	8.2	$	8.9	$	35.5


	December 31, 2010
	Estimated Fair Value by Vintage
(dollars in millions)	2004&Prior		2005		2006		2007		Total
First lien - fixed
AAA	$	15.4	$	5.5	$	-	$	-	$	20.9
Below BBB		-		-		3.4		9.1		12.5
Second lien (a)
Below BBB		-		-		6.4		-		6.4

Total	$	15.4	$	5.5	$	9.8	$	9.1	$	39.8

(a) Second lien collateral primarily composed of loans to prime and Alt A borrowers.

OTTI

The Company’s impairment losses were $0.1 million and $1.0 million for the three and nine months ended September 30, 2011, respectively, with no associated VOBA amortization. During the third quarter the Company impaired its holding of a previously OCI impaired 2006 vintage and two 2007 vintage subprime mortgage ABS for $0.1 million due to adverse change in cash flows. During the second quarter 2011, the Company impaired its holdings of a 2006 vintage and two 2007 vintage subprime mortgage ABS for less than $0.1 million and $0.5 million, respectively, and a corporate bond for $0.3 million due to adverse changes in cash flows. During the first quarter 2011, the Company impaired its holding of a previously OCI impaired subprime mortgage ABS due to an adverse change in cash flows.

The Company’s impairment losses were $0.3 million and $1.6 million for the three and nine months ended September 30, 2010, respectively, net of associated VOBA amortization. The gross impairment losses recognized in the Statement of Income during the third quarter 2010 were primarily driven by the impairment of a 2007 vintage subprime mortgage ABS for $0.3 million due to an adverse change in cash flows. During the second quarter 2010, the Company impaired its holding of a 2005 vintage RMBS security for $0.7 million due to an adverse change in cash flows. A corporate bond was also impaired for $0.4 million due to the intent to sell or being more likely than not required to sell during the second quarter. During the first quarter 2010, the Company impaired its holding of a 2007 vintage subprime mortgage ABS for $0.4 million.

Liquidity and Capital Resources

Liquidity

The Company’s liquidity requirements include the payment of sales commissions and other underwriting expenses and the funding of its contractual obligations for the life insurance and annuity contracts it has in force. The Company has developed and utilizes a cash flow projection system and regularly performs asset/liability duration matching in the management of its asset and liability portfolios. The Company anticipates funding its cash requirements utilizing cash from operations, normal investment maturities and anticipated calls and repayments, consistent with prior years. At September 30, 2011 and December 31, 2010, the Company’s assets included $2.2 billion and $1.9 billion, respectively, of cash, short-term investments and investment grade publicly traded AFS securities that could be liquidated if funds were required.

Capital Resources

During the first nine months of 2011 and 2010, the Company did not receive a capital contribution from AUSA nor did the Company pay a dividend to AUSA.

Ratings

Ratings are an important factor in establishing the competitive position in the insurance and financial services marketplace. Rating agencies rate insurance companies based on financial strength and the ability to pay claims, factors more relevant to contract holders than investors.

The insurer financial strength rating scales of S&P, A.M. Best, and Fitch Ratings (“Fitch”) are characterized as follows:

•

S&P – AAA to R

•

A.M. Best – A++ to S

•

Fitch – AAA to C

On August 19, 2011, S&P upgraded the Company’s outlook from negative to stable. The Company’s financial strength rating remained the same.

The following table summarizes the Company’s ratings at November 14, 2011:


S&P	AA-	(4th out of 21)
A.M. Best	A +	(2nd out of 16)
Fitch	AA-	(4th out of 19)

A downgrade of our financial strength rating could affect our competitive position in the insurance industry as customers may select companies with higher financial strength ratings. These ratings are not a recommendation to buy or hold any of the Company’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization.

Commitments and Contingencies

The following table summarizes the Company’s policyholders’ obligations at September 30, 2011:


(dollars in millions)	Less Than One Year		One To Three Years		Four To Five Years		More Than Five Years		Total
General accounts (a)	$	218.1	$	397.2	$	357.8	$	2,152.2	$	3,125.3
Separate Accounts (a)		812.5		1,469.1		1,345.5		5,428.4		9,055.5

	$	1,030.6	$	1,866.3	$	1,703.3	$	7,580.6	$	12,180.8

(a)

The policyholder liabilities include benefit and claim liabilities of which a significant portion represents policies and contracts that do not have a stated contractual maturity. The projected cash benefit payments in the table above are based on management’s best estimates of the expected gross benefits and expenses, partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefit payments are based on mortality and lapse assumptions comparable with the Company’s historical experience, modified for recently observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance. The liability amounts in the Company’s financial statements reflect the discounting for interest as well as adjustments for the timing of other factors as described above. As a result, the sum of the cash benefit payments shown for all years in the table above exceeds the corresponding policyholder liability amounts.

The Company has utilized public information to estimate the future assessments it will incur as a result of life insurance company insolvencies. At September 30, 2011 and December 31, 2010, the Company’s estimated liability for future guaranty fund assessments was $5.1 million and $5.1 million, respectively, with an offsetting receivable for future premium tax deductions of $4.0 million and $4.0 million, respectively. The Company regularly monitors public information regarding insurer insolvencies and adjusts its estimated liability as appropriate.

In the normal course of business, the Company is subject to various claims and assessments. Management believes the settlement of these matters would not have a material effect on the financial position, results of operations or cash flows of the Company.

Results of Operations

For the three months ended September 30, 2011 and 2010, the Company recorded net income (loss) of ($89.3) million and $71.2 million, respectively. For the nine months ended September 30, 2011 and 2010, the Company recorded net income (loss) of ($44.7) million and $100.4 million, respectively. The decline in net income in 2010 to a net loss in 2011 was principally driven by unfavorable equity market movements in the third quarter 2011 which resulted in higher policy benefits partially offset by net realized investment gains in 2011 as compared with losses in 2010.

Policy charge revenue decreased $0.9 million and $1.6 million during the three and nine months ended September 30, 2011 as compared to the same periods in 2010. The following table provides the changes in policy charge revenue by type for each respective period:


(dollars in millions)	Three Months 2011 vs. 2010			Nine Months 2011 vs. 2010
Asset-based policy charge revenue	$	(1.4	)	$	(0.8	)
Guaranteed benefit based policy charge revenue		0.9			0.8
Non-asset based policy charge revenue		(0.4	)		(1.6	) (a)

Total policy charge revenue	$	(0.9	)	$	(1.6	)

(a)	The decrease in non-asset based policy charge revenue is primarily due to a decline in surrender fee revenue and assumed reinsurance fee revenue.

Net realized investment gains (losses) increased $34.0 million and $20.9 million during the three and nine months ended September 30, 2011 as compared to the same periods in 2010. The following table provides the changes in net realized investment gains (losses) by type:


(dollars in millions)	Three Months 2011 vs. 2010			Nine Months 2011 vs. 2010
Credit related gains (losses)	$	0.2		$	0.4
Interest related gains (losses)		(0.7	)		(0.4	)
Equity related gains (losses)		35.0			21.0	(a)
Associated amortization of VOBA		(0.5	)		(0.1	)

Total net realized investment gains (losses)	$	34.0		$	20.9


Write-downs for OTTI included in net realized investment gains (losses)	$	0.2		$	0.8

(a)	The change in equity related losses principally relates to net gains on futures contracts during 2011 as compared to net losses in 2010. Short future contracts fluctuate inversely to the volatility in the S&P 500 index.

Policy benefits increased $235.6 million and $160.4 million during the three and nine months ended September 30, 2011 as compared to the same periods in 2010. The following table provides the changes in policy benefits by type:


(dollars in millions)	Three Months 2011 vs. 2010			Nine Months 2011 vs. 2010
Annuity benefit unlocking	$	165.6		$	133.1	(a)
Annuity benefit expense		71.7			28.0	(b)
Amortization (accretion) of deferred sales inducements		(3.4	)		0.1
Life insurance mortality expense		1.7			(0.8	)

Total policy benefits	$	235.6		$	160.4

(a)	See the Critical Accounting Policies and Estimates section above for further discussion of annuity benefit unlocking.

(b)	The increase in annuity benefit expense was primarily due to the decrease in interest rates and lower than expected market performance which resulted in an increase in guaranteed benefits in 2011 as compared to the same period in 2010.

Accretion of DAC was $14.2 million and $12.3 million for the three and nine months ended September 30, 2011, respectively, which included unfavorable unlocking of $0.5 million and $2.5 million, respectively. The three and nine months ended September 30, 2011, were impacted by negative gross profits, principally driven by unfavorable equity markets and long-term interest rate assumption changes, resulting in accretion and unfavorable unlocking. During the three and nine months ended September 30, 2010, amortization (accretion) of DAC was $0.9 million and ($12.4) million, respectively, which included unfavorable unlocking of $0.9 million and $1.6 million, respectively. During the nine months ended September 30, 2010, unfavorable equity market

movements in the second quarter of 2010 resulted in negative future gross profits which resulted in accretion and negative unlocking.

Amortization (accretion) of VOBA was ($1.4) million and $8.5 million for the three and nine months ended September 30, 2011, respectively, which included unfavorable unlocking of $41.8 million and $38.1 million, respectively. Amortization of VOBA was $13.1 million and $1.9 million for the three and nine months ended September 30, 2010, respectively, which included favorable unlocking of $16.5 million and $14.8 million, respectively. The three months ended September 30, 2011 were impacted by negative gross profits, principally driven by unfavorable equity markets and long-term interest rate assumption changes, resulting in accretion and unfavorable unlocking. The nine months ended September 30, 2011 were driven by third quarter 2011 unfavorable unlocking partially offset by accretion. The three and nine months ended September 30, 2010, were impacted by positive future gross profits, principally driven by favorable equity market movement, resulting in amortization and favorable unlocking.

Insurance expenses and taxes increased (decreased) $2.5 million and ($0.7) million in the three and nine months ended September 30, 2011, respectively, as compared to the same periods in 2010. The following table provides the changes in insurance expenses and taxes for each respective period:


(dollars in millions)	Three Months 2011 vs. 2010		Nine Months 2011 vs. 2010
Commissions	$	1.4	$	4.2	(a)
General insurance expenses		0.5		(5.5	) (b)
Taxes, licenses, and fees		0.6		0.6

Total insurance expenses and taxes	$	2.5	$	(0.7	)

(a)	The increase in commissions is primarily due to increased trail commissions resulting from the 2010 system conversion.

(b)	The decrease in general insurance expenses is primarily due to 2010 transition and system conversion related expenses.

Segment Information

The products that comprise the Annuity and Life Insurance segments generally possess similar economic characteristics. As such, the financial condition and results of operations of each business segment are generally consistent with the Company’s consolidated financial condition and results of operations presented herein.

ITEM 4. Controls and Procedures

The Company’s Disclosure Committee assists with the monitoring and evaluation of its disclosure controls and procedures. The Company’s President, Chief Financial Officer and Disclosure Committee have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on that evaluation, the Company’s President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the third fiscal quarter of 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II Other Information

Item 1. Legal Proceedings.

Nothing to report.

Item 1A. Risk Factors.

The risk factors set forth below update the risk factors section previously disclosed in Part 1, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2010. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition, and/or operating results.

Uncertainty about the timing and strength of a recovery in the U.S. and global economy continues to affect our operating environment. Our results, financial condition and statutory capital remain sensitive to equity market volatility and performance, and expectations are that market conditions will continue to pressure returns in our investment portfolio. Concerns over the European debt crisis, the ability of the U.S. Government to manage the U.S. deficit, prolonged high unemployment and a stagnant U.S. real estate market have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These events may have an adverse effect on us given our equity market exposure and our revenues may decline in such circumstances. In addition, we may experience an elevated instance of claims and lapses or surrenders of our polices. Adverse changes in the economy could affect earnings negatively and could have a material adverse effect on our results of operations and financial condition.

Item 5. Other Information.

(a) Nothing to report.

(b) Nothing to report.

Item 6. Exhibits.


2.1		Merrill Lynch Life Insurance Company Board of Directors Resolution in Connection with the Merger between Merrill Lynch Life Insurance Company and Tandem Insurance Group, Inc. (Incorporated by reference to Exhibit 2.1, filed September 5, 1991, as part of Post-Effective Amendment No. 4 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

2.2		Plan and Agreement of Merger between Merrill Lynch Life Insurance Company and Tandem Insurance Group, Inc. (Incorporated by reference to Exhibit 2.1a, filed September 5, 1991, as part of Post-Effective Amendment No. 4 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

3.1		Articles of Amendment, Restatement and Redomestication of the Articles of Incorporation of Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 6(a) to Post-Effective Amendment No. 10 to Merrill Lynch Life Variable Annuity Separate Account A’s registration statement on Form N-4, File No. 33-43773, filed December 10, 1996.)

3.2		Articles of Amendment of the Articles of Incorporation of Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q of Transamerica Advisors Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-34192, 333-133223, and 333-133225, filed on August 12, 2010.)

3.3		Amended By-Laws of Transamerica Advisors Life Insurance Company. (Incorporated by reference to Exhibit 3.3 to the Quarterly Report on Form 10-Q of Transamerica Advisors Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-34192, 333-133223, and 333-133225, filed on August 12, 2010.)

4.1		Group Modified Guaranteed Annuity Contract, ML-AY-361. (Incorporated by reference to Exhibit 4.1, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.2		Individual Certificate, ML-AY-362. (Incorporated by reference to Exhibit 4.2, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.2a		Individual Certificate, ML-AY-362 KS. (Incorporated by reference to Exhibit 4.2a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.2b		Individual Certificate, ML-AY-378. (Incorporated by reference to Exhibit 4.2b, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.2c		Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4(a), filed August 18, 1997, as part of the Registrant’s registration statement on Form S-3, File No. 333-33863.)


4.3		Individual Tax-Sheltered Annuity Certificate, ML-AY-372. (Incorporated by reference to Exhibit 4.3, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.3a		Individual Tax-Sheltered Annuity Certificate, ML-AY-372 KS. (Incorporated by reference to Exhibit 4.3a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.4		Qualified Retirement Plan Certificate, ML-AY-373. (Incorporated by reference to Exhibit 4.4 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.4a		Qualified Retirement Plan Certificate, ML-AY-373 KS. (Incorporated by reference to Exhibit 4.4a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.5		Individual Retirement Annuity Certificate, ML-AY-374. (Incorporated by reference to Exhibit 4.5 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.5a		Individual Retirement Annuity Certificate, ML-AY-374 KS. (Incorporated by reference to Exhibit 4.5a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.5b		Individual Retirement Annuity Certificate, ML-AY-375 KS. (Incorporated by reference to Exhibit 4.5b, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.5c		Individual Retirement Annuity Certificate, ML-AY-379. (Incorporated by reference to Exhibit 4.5c, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.6		Individual Retirement Account Certificate, ML-AY-375. (Incorporated by reference to Exhibit 4.6, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.6a		Individual Retirement Account Certificate, ML-AY-380. (Incorporated by reference to Exhibit 4.6a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.7		Section 457 Deferred Compensation Plan Certificate, ML-AY-376. (Incorporated by reference to Exhibit 4.7 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.7a		Section 457 Deferred Compensation Plan Certificate, ML-AY-376 KS. (Incorporated by reference to Exhibit 4.7a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.8		Tax-Sheltered Annuity Endorsement, ML-AY-366. (Incorporated by reference to Exhibit 4.8 to the Registrant’s registration statement on Form S-1, File No. 33- 26322, filed January 3, 1989.)

4.8a		Tax-Sheltered Annuity Endorsement, ML-AY-366 190. (Incorporated by reference to Exhibit 4.8a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.8b		Tax-Sheltered Annuity Endorsement, ML-AY-366 1096. (Incorporated by reference to Exhibit 4(h)(3), filed March 27, 1997, as part of Post-Effective Amendment No. 2 to the Registrant’s registration statement on Form S-1, File No. 33-58303.)

4.9		Qualified Retirement Plan Endorsement, ML-AY-364. (Incorporated by reference to Exhibit 4.9 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.10		Individual Retirement Annuity Endorsement, ML-AY-368. (Incorporated by reference to Exhibit 4.10 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.10a		Individual Retirement Annuity Endorsement, ML-AY-368 190. (Incorporated by reference to Exhibit 4.10a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.10b		Individual Retirement Annuity Endorsement, ML009. (Incorporated by reference to Exhibit 4(j)(3) to Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-60290, filed March 31, 1994.)

4.10c		Individual Retirement Annuity Endorsement. (Incorporated by reference to Exhibit 4(b) to Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-3, File No. 333-33863, filed October 31, 1997.)

4.11		Individual Retirement Account Endorsement, ML-AY-365. (Incorporated by reference to Exhibit 4.11 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)


4.11a		Individual Retirement Account Endorsement, ML- AY-365 190. (Incorporated by reference to Exhibit 4.11a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.12		Section 457 Deferred Compensation Plan Endorsement, ML-AY-367. (Incorporated by reference to Exhibit 4.12 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.12a		Section 457 Deferred Compensation Plan Endorsement, ML-AY-367 190. (Incorporated by reference to Exhibit 4.12a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.13		Qualified Plan Endorsement, ML-AY-369. (Incorporated by reference to Exhibit 4.13 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.13a		Qualified Plan Endorsement, ML-AY-448. (Incorporated by reference to Exhibit 4.13a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.13b		Qualified Plan Endorsement. (Incorporated by reference to Exhibit 4(c), filed October 31, 1997, as part of Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-3, File No. 333-33863.)

4.14		Application for Group Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4.14 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.15		Annuity Application for Individual Certificate Under Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4.15 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.15a		Application for Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4(d), filed August 18, 1997, as part of the Registrant’s registration statement on Form S-3, File No. 333-33863.)

4.16		Form of Company Name Change Endorsement. (Incorporated by reference to Exhibit 4.16, filed September 5, 1991, as part of Post-Effective Amendment No. 4 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.17		Group Modified Guaranteed Annuity Contract, ML-AY-361/94. (Incorporated by reference to Exhibit 4(a)(2), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

4.18		Individual Certificate, ML-AY-362/94. (Incorporated by reference to Exhibit 4(b)(4), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

4.19		Individual Tax-Sheltered Annuity Certificate, ML-AY-372/94. (Incorporated by reference to Exhibit 4(c)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

4.20		Qualified Retirement Plan Certificate, ML-AY-373/94. (Incorporated by reference to Exhibit 4(d)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

4.21		Individual Retirement Annuity Certificate, ML-AY-374/94. (Incorporated by reference to Exhibit 4(e)(5), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

4.22		Individual Retirement Account Certificate, ML-AY-375/94. (Incorporated by reference to Exhibit 4(f)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

4.23		Section 457 Deferred Compensation Plan Certificate, ML-AY-376/94. (Incorporated by reference to Exhibit 4(g)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

4.24		Qualified Plan Endorsement, ML-AY-448/94. (Incorporated by reference to Exhibit 4(m)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

10.1		Management Services Agreement between Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.1 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

10.2		General Agency Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10.2, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

10.3		Service Agreement among Merrill Lynch Insurance Group, Inc., Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.3, filed March 13, 1991, as part of Post-Effective Amendment No. 2 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

10.3a		Amendment to Service Agreement among Merrill Lynch Insurance Group, Inc., Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10(c)(2) to Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-60290, filed March 31, 1994.)


10.4		Indemnity Reinsurance Agreement between Merrill Lynch Life Insurance Company and Family Life Insurance Company. (Incorporated by reference to Exhibit 10.4, filed March 13, 1991, as part of Post-Effective Amendment No. 2 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

10.5		Assumption Reinsurance Agreement between Merrill Lynch Life Insurance Company, Tandem Insurance Group, Inc. and Royal Tandem Life Insurance Company and Family Life Insurance Company. (Incorporated by reference to Exhibit 10.6, filed April 24, 1991, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

10.6		Amended General Agency Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10(g) to the Registrant’s registration statement on Form S-1, File No. 33-46827, filed March 30, 1992.)

10.7		Indemnity Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10(h) to the Registrant’s registration statement on Form S-1, File No. 33-46827, filed March 30, 1992.)

10.8		Management Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Asset Management, Inc. (Incorporated by reference to Exhibit 10(i) to the Registrant’s registration statement on Form S-1, File No. 33-46827, filed March 30, 1992.)

10.9		Amendment No. 1 to Indemnity Reinsurance Agreement between Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.5, filed April 24, 1991, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

10.10		Insurance Administrative Services Agreement between Merrill Lynch Life Insurance Company and Liberty Insurance Services Corporation. (Incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 30, 2005.)

10.11		Master Distribution Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.2 to Merrill Lynch Life Insurance Company’s Current Report on Form 8-K, File No. 33-26322, filed January 4, 2008.)

10.12		Wholesaling Agreement between Merrill Lynch Life Insurance Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Transamerica Capital. (Incorporated by Reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 27, 2008.)

10.13		Selling Agreement between Merrill Lynch Life Insurance Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Merrill Lynch Life Agency, Inc. (Incorporated by Reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 27, 2008.)

10.14		Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.1 to Merrill Lynch Life Insurance Company’s Current Report on Form 8-K, File No. 33-26322, filed August 17, 2007.)

10.15		First Amendment to Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.1 to Merrill Lynch Life Insurance Company’s Current Report on Form 8-K, File No. 33-26322, filed January 4, 2008.)

10.16		Principal Underwriting Agreement between Transamerica Capital, Inc. and Merrill Lynch Life Insurance Company. (Incorporated by reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, 333-133225, filed on March 26, 2009.)

10.17		Amended and Restated Principal Underwriting Agreement between Transamerica Capital, Inc. and Transamerica Advisors Life Insurance Company. (Incorporated by reference to the Annual Report on Form 10-K of Transamerica Advisors Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-34192, 333-133223, and 333-133225, filed March 25, 2011.)

10.18		Investment Management Services Agreement among Transamerica Asset Management, Inc., Transamerica Advisors Life Insurance Company and Transamerica Advisors Life Insurance Company of New York. (Incorporated by reference to the Annual Report on Form 10-K of Transamerica Advisors Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-34192, 333-133223, and 333-133225, filed March 25, 2011.)

31.1		Certification by the Chief Executive Officer pursuant to Rule 15d-14(a).

31.2		Certification by the Chief Financial Officer pursuant to Rule 15d-14(a).

32.1		Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase.

101.DEF		XBRL Taxonomy Definition Linkbase.

101.LAB		XBRL Taxonomy Extension Label Linkbase.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Transamerica Advisors Life Insurance

Company

/s/ Eric J. Martin

Eric J. Martin

Vice President, Treasurer,

Chief Financial Officer, and Controller

Date: November 14, 2011

EXHIBIT INDEX


31.1		Certification by the Chief Executive Officer pursuant to Rule 15d-14(a).

31.2		Certification by the Chief Financial Officer pursuant to Rule 15d-14(a).

32.1		Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase.

101.DEF		XBRL Taxonomy Definition Linkbase.

101.LAB		XBRL Taxonomy Extension Label Linkbase.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase.

TRANSAMERICA ADVISORS LIFE INSURANCE Co - FORM 10-Q - November 14, 2011

Attached files

TRANSAMERICA ADVISORS LIFE INSURANCE Co Reports