TRANSAMERICA ADVISORS LIFE INSURANCE Co - FORM 10-Q

TRANSAMERICA ADVISORS LIFE INSURANCE Co - FORM 10-Q - August 13, 2014

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TRANSAMERICA ADVISORS LIFE INSURANCE Co Reports

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EXCEL - IDEA: XBRL DOCUMENT - TRANSAMERICA ADVISORS LIFE INSURANCE Co	Financial_Report.xls
EX-31.2 - EX-31.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co	d747906dex312.htm
EX-32.2 - EX-32.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co	d747906dex322.htm
EX-32.1 - EX-32.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co	d747906dex321.htm
EX-31.1 - EX-31.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co	d747906dex311.htm

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 JUNE 30, 2014

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

33-58303; 333-33863; 333-34192; 333-133223; 333-133225; 333-177282; 333-185576

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)*	June 30, 2014		December 31, 2013
	*(unaudited)*
ASSETS
Investments
Fixed maturity available-for-sale securities, at estimated fair value (amortized cost: 2014 - $1,692,890; 2013 - $1,630,205)	$	1,845,691	$	1,718,305
Equity available-for-sale securities, at estimated fair value (cost: 2014 - $33,927; 2013 - $34,062)		36,929		34,603
Limited partnerships		30,214		5,044
Mortgage loans on real estate		43,864		46,432
Policy loans		692,331		710,087
Derivative assets		-		858

Total investments		2,649,029		2,515,329

Cash and cash equivalents		243,054		301,737
Accrued investment income		41,251		37,719
Deferred policy acquisition costs		33,753		33,139
Deferred sales inducements		7,697		7,544
Value of business acquired		275,205		286,702
Goodwill		2,800		2,800
Reinsurance receivables - net		3,293		-
Affiliated short-term note receivable		50,000		-
Receivable for investments sold - net		-		245
Other assets		34,591		28,355
Separate Accounts assets		7,166,355		7,342,243

Total Assets	$	10,507,028	$	10,555,813

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)*	June 30, 2014			December 31, 2013
	*(unaudited)*
LIABILITIES AND STOCKHOLDER’S EQUITY
Liabilities
Policyholder liabilities and accruals
Policyholder account balances	$	1,249,958		$	1,291,737
Future policy benefits		385,915			384,843
Claims and claims settlement expenses		31,750			28,288

Total policyholder liabilities and accruals		1,667,623			1,704,868

Payables for collateral under securities loaned		253,030			260,506
Checks not yet presented for payment		6,903			8,080
Derivative liabilities		41,492			50,930
Income taxes - net		79,446			42,038
Affiliated payables - net		7,163			5,344
Reinsurance payables - net		-			249
Payable for investments purchased - net		5,890			-
Other liabilities		7,257			2,754
Separate Accounts liabilities		7,166,355			7,342,243

Total Liabilities		9,235,159			9,417,012


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		1,465,955			1,366,636
Accumulated other comprehensive income, net of taxes		73,552			39,703
Retained deficit		(270,138	)		(270,038	)

Total Stockholder’s Equity		1,271,869			1,138,801

Total Liabilities and Stockholder’s Equity	$	10,507,028		$	10,555,813

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF INCOME


	Three Months Ended June 30,						Six Months Ended June 30,
*(dollars in thousands)*	2014			2013			2014			2013
	*(unaudited)*						*(unaudited)*
Revenues
Policy charge revenue	$	46,041		$	46,151		$	92,496		$	92,149
Net investment income		29,983			29,781			58,828			59,616
Net realized investment gains
Other-than-temporary impairment losses on securities		-			-			-			-
Portion of other-than-temporary impairment losses recognized in other comprehensive income		-			-			-			-
Portion of other-than-temporary impairments previously recognized in other comprehensive income		-			-			(100	)		(51	)

Net other-than-temporary impairment losses on securities recognized in income		-			-			(100	)		(51	)
Net realized investment gains, excluding other-than-temporary impairment losses on securities		545			289			1,103			304

Net realized investment gains		545			289			1,003			253

Net derivative losses		(37,924	)		(29,948	)		(51,993	)		(129,522	)

Total Revenues		38,645			46,273			100,334			22,496


Benefits and Expenses
Interest credited to policyholder liabilities		14,249			14,337			27,923			28,851
Policy benefits (net of reinsurance recoveries: 2014 - $4,046; 2013 - $4,652)		6,742			27,162			27,313			14,835
Reinsurance premium ceded		1,548			2,572			3,150			5,317
Amortization (accretion) of deferred policy acquisition costs		(346	)		2,709			(526	)		6,072
Amortization of value of business acquired		1,199			8,745			1,152			8,230
Insurance expenses and taxes		12,121			14,455			23,149			26,548

Total Benefits and Expenses		35,513			69,980			82,161			89,853

Income (Loss) Before Taxes		3,132			(23,707	)		18,173			(67,357	)


Income Tax Expense (Benefit)		4,514			9,234			18,273			(383	)

Net Loss	$	(1,382	)	$	(32,941	)	$	(100	)	$	(66,974	)

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 June 30,						Six Months Ended June 30,
*(dollars in thousands)*	2014			2013			2014			2013
	*(unaudited)*						*(unaudited)*

Net Loss	$	(1,382	)	$	(32,941	)	$	(100	)	$	(66,974	)


Other Comprehensive Income (Loss)
Net unrealized gains (losses) on available-for-sale securities
Net unrealized holding gains (losses) arising during the period		30,813			(80,074	)		68,363			(95,339	)
Reclassification adjustment for (gains) losses included in net loss		448			(987	)		97			(1,062	)

		31,261			(81,061	)		68,460			(96,401	)

Net unrealized losses on cash flow hedges
Net unrealized losses on cash flow hedges arising during the period		(2,912	)		-			(4,437	)		-
Reclassification adjustment for losses included in net loss		679			-			677			-

		(2,233	)		-			(3,760	)		-

Net unrealized other-than-temporary impairments on securities
Net unrealized other-than-temporary impairment losses arising during the period		-			-			-			-
Change in previously recognized unrealized other-than-temporary impairments		(492	)		876			(1,397	)		(560	)
Reclassification adjustment for other-than-temporary impairments included in net loss		-			-			100			51

		(492	)		876			(1,297	)		(509	)


Adjustments
Policyholder liabilities		-			16,187			-			12,914
Value of business acquired		(5,020	)		(848	)		(10,922	)		3,734
Deferred income taxes		(8,348	)		23,020			(18,632	)		28,493

		(13,368	)		38,359			(29,554	)		45,141

Total other comprehensive income (loss), net of taxes		15,168			(41,826	)		33,849			(51,769	)

Comprehensive Income (Loss)	$	13,786		$	(74,767	)	$	33,749		$	(118,743	)

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)*	Six Months Ended June 30, 2014			Twelve Months Ended December 31, 2013
	*(unaudited)*

Common Stock	$	2,500		$	2,500

Additional Paid-in Capital
Balance at beginning of period	$	1,366,636		$	1,366,636
Capital contribution from AEGON USA, LLC		99,319			-

Balance at end of period	$	1,465,955		$	1,366,636


Accumulated Other Comprehensive Income
Balance at beginning of period	$	39,703		$	96,710
Total other comprehensive income (loss), net of taxes		33,849			(57,007	)

Balance at end of period	$	73,552		$	39,703


Retained Deficit
Balance at beginning of period	$	(270,038	)	$	(15,586	)
Net loss		(100	)		(254,452	)

Balance at end of period	$	(270,138	)	$	(270,038	)


Total Stockholder’s Equity	$	1,271,869		$	1,138,801

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF CASH FLOWS


	Six Months Ended June 30,
*(dollars in thousands)*	2014			2013
	*(unaudited)*

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(100	)	$	(66,974	)
Adjustments to reconcile net loss to net cash and cash equivalents provided by operating activities:
Change in deferred policy acquisition costs		(614	)		5,894
Change in deferred sales inducements		(153	)		1,143
Change in value of business acquired		1,152			8,230
Change in benefit reserves		(8,321	)		(21,829	)
Change in income tax accruals		18,778			13,362
Change in claims and claims settlement expenses		3,462			6,319
Change in other operating assets and liabilities, net		(856	)		(15,319	)
Change in checks not yet presented for payment		(1,177	)		2,731
Amortization of investments		222			1,922
Interest credited to policyholder liabilities		27,923			28,851
Net derivative losses		51,993			129,522
Net realized investment gains		(1,003	)		(253	)

Net cash and cash equivalents provided by operating activities		91,306			93,599


CASH FLOWS FROM INVESTING ACTIVITIES
Sales of available-for-sale securities		47,612			22,302
Maturities of available-for-sale securities and mortgage loans		116,153			173,210
Purchases of available-for-sale securities		(223,544	)		(232,974	)
Sales of limited partnerships		-			797
Purchases of limited partnerships		(25,000	)		-
Change in affiliated short-term note receivable		(50,000	)		(50,000	)
Cash received in connection with derivatives		3,871			9,594
Cash paid in connection with derivatives		(63,417	)		(3,295	)
Policy loans on insurance contracts, net		17,756			21,963
Net settlement on futures contracts		(4,784	)		(19,923	)
Other		(170	)		431

Net cash and cash equivalents used in investing activities	$	(181,523	)	$	(77,895	)

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF CASH FLOWS - Continued


	Six Months Ended June 30,
*(dollars in thousands)*	2014			2013
	*(unaudited)*

CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder deposits	$	9,968		$	13,921
Policyholder withdrawals		(70,277	)		(97,146	)
Capital contributions from AEGON USA, LLC		99,319			-
Change in payables for collateral under securities loaned and reverse repurchase agreements		(7,476	)		99,220

Net cash and cash equivalents provided by financing activities		31,534			15,995


Net increase (decrease) in cash and cash equivalents ⁽¹⁾		(58,683	)		31,699
Cash and cash equivalents, beginning of year		301,737			303,396

Cash and cash equivalents, end of period	$	243,054		$	335,095

(1) Included in net increase (decrease) in cash and cash equivalents is interest received (2014 - $4; 2013 - $6); interest paid (2014 - $1; 2013 - $2); income taxes paid (2014 - $0; 2013 - $0); and income taxes received (2014 - $505; 2013 - $8,525).

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 2013 Financial Statements and accounting policies, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The interim Financial Statements for the three and six 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 2013 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 accounting principles generally accepted in the United States (“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. In the Balance Sheets, a liability balance representing outstanding checks has moved from the cash and cash equivalents line to a new line item called checks not yet presented for payment. In the Statements of Income, there is a reclassification between interest credited to policyholder liabilities and policy benefits of $1,390 and $4,541, respectively, for the three and six months ended June 30, 2013. In the Statements of Cash Flows the change in payables for collateral under securities loaned and reverse repurchase agreements has moved from cash flows from investing activities to cash flows from financing activities. These reclassifications have no effect on net income or stockholder’s equity of the prior period.

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.

Derivatives and Hedge Accounting

Derivatives are used by the Company to manage risk associated with interest rate or equity market risk or volatility. Freestanding derivatives are carried in the Balance Sheets at fair value. If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the fair value of the derivatives are reported in net derivative gains (losses) in the Statements of Income.

To qualify for hedge accounting, the hedge relationship is designated and formally documented at inception, detailing the particular risk management objective and strategy for the hedge (which includes the item and risk that is being hedged), the derivative that is being used and how hedge effectiveness is being assessed. For hedge accounting purposes, a distinction is made between fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation. Currently, the Company only has cash flow hedges.

A cash flow hedge is the hedge of the exposure to variability of cash flows to be received or paid related to a recognized asset or liability. For derivatives that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into the Statements of Income when the Company’s earnings are affected by the variability of the hedged item. Any hedge ineffectiveness is recognized as a component of net derivative gains (losses) in the Statements of Income.

Limited Partnerships

At June 30, 2014 the Company had investments in two limited partnerships that were not publicly traded. Both partnerships are carried at estimated fair value for which one is derived from management’s review of the underlying financial statements that were prepared on a GAAP basis and the other was derived from recent market activity.

Revenue Recognition

The Company sells a fixed contingent annuity (also sometimes referred to as a contingent deferred annuity (“CDA”)), which includes a stand-alone living benefit (“SALB”). Revenues for CDAs consist of fees assessed based on a percentage of the participants’ covered asset pool, which are assets that are not internally managed by the Company. Fees on CDAs are recognized as they are assessed or earned.

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.

Future Accounting Guidance

Accounting Standards Codification (“ASC”), Transfers and Servicing

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The guidance requires repurchase-to-maturity transactions to be accounted for as secured borrowings and amends accounting for repurchase financings. It also requires disclosure for (1) repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings and (2) certain transactions accounted for as a sale. The guidance will be effective for the Company on January 1, 2015, except for disclosure requirements for certain transactions accounted for as secured borrowings which will be effective on April 1, 2015. We do not expect the new accounting requirements to impact the Company’s results of operations or financial position. We are evaluating the impact that adoption will have on the Company’s disclosures.

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:


	June 30, 2014
	Level 1		Level 2		Level 3			Total
Assets
Fixed maturity available-for-sale (“AFS”) securities (a)
Corporate securities	$	-	$	1,178,827	$	-		$	1,178,827
Asset-backed securities		-		128,916		4,832			133,748
Commercial mortgage-backed securities		-		103,802		-			103,802
Residential mortgage-backed securities		-		48,730		-			48,730
Municipals		-		791		-			791
Government and government agencies
United States		369,768		-		-			369,768
Foreign		3,619		6,406		-			10,025

Total fixed maturity AFS securities (a)		373,387		1,467,472		4,832			1,845,691
Equity securities (a)
Banking securities		-		30,693		-			30,693
Industrial securities		-		6,236		-			6,236

Total equity securities (a)		-		36,929		-			36,929
Cash equivalents (b)		-		230,062		-			230,062
Limited partnerships (c)		-		25,000		5,214			30,214
Separate Accounts assets (d)		7,166,355		-		-			7,166,355

Total assets	$	7,539,742	$	1,759,463	$	10,046		$	9,309,251


Liabilities
Future policy benefits (embedded derivatives only) (e)	$	-	$	-	$	(24,874	)	$	(24,874	)
Derivative liabilities (f)		-		41,492		-			41,492

Total liabilities	$	-	$	41,492	$	(24,874	)	$	16,618


	December 31, 2013
	Level 1		Level 2		Level 3			Total
Assets
Fixed maturity AFS securities (a)
Corporate securities	$	-	$	1,155,637	$	1,596		$	1,157,233
Asset-backed securities		-		110,067		4,832			114,899
Commercial mortgage-backed securities		-		110,146		-			110,146
Residential mortgage-backed securities		-		51,634		-			51,634
Municipals		-		773		-			773
Government and government agencies
United States		273,781		-		-			273,781
Foreign		3,635		6,204		-			9,839

Total fixed maturity AFS securities (a)		277,416		1,434,461		6,428			1,718,305
Equity securities (a)
Banking securities		-		28,386		-			28,386
Industrial securities		151		6,066		-			6,217

Total equity securities (a)		151		34,452		-			34,603
Cash equivalents (b)		-		299,784		-			299,784
Derivative assets (f)		-		858		-			858
Limited partnerships (c)		-		-		5,044			5,044
Separate Accounts assets (d)		7,342,243		-		-			7,342,243

Total assets	$	7,619,810	$	1,769,555	$	11,472		$	9,400,837


Liabilities
Future policy benefits (embedded derivatives only) (e)	$	-	$	-	$	(22,528	)	$	(22,528	)
Derivative liabilities (f)		-		50,930		-			50,930


Total liabilities	$	-	$	50,930	$	(22,528	)	$	28,402

(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 internal models primarily use projected cash flows discounted using relevant risk spreads and market interest rate curves. At June 30, 2014 and December 31, 2013, 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 above table.

(c)

Limited partnership investments in which management is able to determine that observable market inputs have been used and can be redeemed at net asset value in 90 days or less are considered Level 2. The Company has an investment in a limited partnership for which the fair value is derived from management’s review of the underlying financial statements that were prepared on a GAAP basis and is considered a Level 3 measurement. The valuation utilizing these financial statements is on a one quarter lag.

(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 contract. In addition, the Company issues SALB contracts which are required to be reported at fair value. The fair value of these guarantees is calculated as the present value of future expected payments to policyholders less the present value of assessed 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)

Level 2 derivatives include inflation swaps, variance swaps, total return swaps and equity collars for which the Company utilized readily accessible quoted index levels and broker quotes. The fair value for inflation swaps is calculated as the difference between the consumer price index (or related readily accessible quoted inflation index level) at the reporting date from the last reset date, multiplied by the notional value of the swap. The fair value for the variance swaps is calculated as the difference between the estimated volatility of the underlying Standard & Poor’s 500 Composite Stock Price Index (“S&P”) 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. Total return swaps are valued based on the change in the underlying equity index as of the last reset date. Fair value for the equity collar’s put and call options is calculated using the Black-Scholes model using market observable inputs for the underlying market price and volatility surface.

For the six months ended June 30, 2014 and twelve months ended December 31, 2013, there were no transfers between Level 1 and 2, respectively.

The following table provides a summary of the change in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at June 30, 2014 and December 31, 2013:


	Six Months Ended					Twelve Months Ended
	June 30, 2014					December 31, 2013
			Fixed						Fixed
	Limited		Maturity AFS			Limited			Maturity AFS
	Partnership		Securities			Partnership			Securities
Balance at beginning of period (a)	$	5,044	$	6,428		$	6,548		$	91

Change in unrealized gains (losses) (b)		-		-			-			(404	)
Purchases		-		-			-			16,817
Sales		-		-			(1,351	)		(101	)
Transfers into Level 3		-		-			-			3,677
Transfers out of Level 3		-		(1,596	)		-			(13,668	)
Changes in valuation (c)		170		-			(153	)		16


Balance at end of period (a)	$	5,214	$	4,832		$	5,044		$	6,428

(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.

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

In certain circumstances, the Company will obtain non-binding 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. 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 June 30, 2014 was due to a security transferring from Level 3 to Level 2 due to the availability of market observable data. The increase in Level 3 fixed maturity AFS securities at December 31, 2013 was driven by the purchase of five securities at Level 3 within the period. The increase was partially offset by two securities transferring from Level 3 to Level 2 due to the availability of market observable data from an external source.

The Company’s Level 3 liabilities (assets) consist of provisions for GMWB, SALB 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 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. For GMWB and SALB, increases (decreases) in credit spread in isolation would result in a lower (higher) fair value measurement and increases (decreases) in volatility in isolation would result in a higher (lower) fair value measurement. Changes in the Company’s credit spread and volatility assumption have an inverse reaction for GMIB reinsurance, due to this reserve being an asset.

The expected returns are based on risk-free rates, such as the current London Inter-Bank Offered Rate (“LIBOR”) forward curve. The credit spread, which is the most significant unobservable input, 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). The credit spread was 30 basis points (“bps”) and 45 bps at June 30, 2014 and December 31, 2013, respectively.

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 (expressed as a spot rate) was 23.5% and 23.9% at June 30, 2014 and December 31, 2013, respectively. 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 June 30, 2014 and December 31, 2013:


	Six Months Ended								Twelve Months Ended
	June 30, 2014								December 31, 2013
	GMWB			GMIB Reinsurance			SALB		GMWB			GMIB Reinsurance			SALB
Balance at beginning of period (b)	$	18,176		$	(40,745	)	$	41	$	74,022		$	(91,419	)	$	41

Changes in interest rates (a)		13,230			(10,458	)		-		(35,661	)		26,663			-
Changes in equity markets (a)		(4,345	)		4,070			209		(15,488	)		25,483			-
Other (a)		(472	)		(4,580	)		-		(4,697	)		(1,472	)		-

Balance at end of period (b)	$	26,589		$	(51,713	)	$	250	$	18,176		$	(40,745	)	$	41

(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 six months ended June 30, 2014, the change in GMWB and GMIB reinsurance reserves was primarily driven by positive equity market performance and declining interest rates. During 2013, the change in GMWB and GMIB reinsurance reserves was primarily driven by increased interest rates, updated policyholder behavior assumptions and better than expected equity market performance. During the six months ended June 30, 2014 the change in the SALB reserve was due to increases in equity markets.

The following table provides a summary of the quantitative inputs and assumptions of the Company’s Level 3 assets and liabilities at June 30, 2014 and December 31, 2013:


	June 30,
	2014
Description	Estimated Fair Value			Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
Assets
Fixed maturity securities
Asset-backed securities	$	4,832

Total fixed maturity securities		4,832		Broker	Not applicable	Not applicable
Limited partnership		5,214		Not applicable ₍₁₎	Not applicable ₍₁₎	Not applicable ₍₁₎

Total assets	$	10,046


Liabilities
Future policy benefits (embedded derivatives) - GMWB	$	26,589		Discounted cash flows	Own credit risk	30 bps
					Long-term volatility	25%
Future policy benefits (embedded derivatives) - GMIB Reinsurance		(51,713)		Discounted cash flows	Own credit risk	30 bps
					Long-term volatility	25%
Future policy benefits - SALB		250		See comment below ₍₂₎	See comment below ₍₂₎	See comment below ₍₂₎
Total liabilities	$	(24,874	)


	December 31,
	2013
	Estimated			Valuation		Range
Description	Fair Value			Techniques	Unobservable Inputs	(Weighted Average)
Assets
Fixed maturity securities
Corporate securities	$	1,596
Asset-backed securities		4,832

Total fixed maturity securities		6,428		Broker	Not applicable	Not applicable
Limited partnership		5,044		Not applicable ₍₁₎	Not applicable ₍₁₎	Not applicable ₍₁₎

Total assets	$	11,472


Liabilities
Future policy benefits (embedded derivatives) - GMWB	$	18,176		Discounted cash flows	Own credit risk	45 bps
					Long-term volatility	25%
Future policy benefits (embedded derivatives) - GMIB Reinsurance		(40,745	)	Discounted cash flows	Own credit risk	45 bps
					Long-term volatility	25%
Future policy benefits - SALB		41		See comment below₍₂₎	See comment below ₍₂₎	See comment below ₍₂₎

Total liabilities	$	(22,528	)

(1)

The Company has an investment in a limited partnership for which the fair value is derived from management’s review of the underlying financial statements that were prepared on a GAAP basis. Management did not make any adjustments to the valuation from the underlying financial statements. As a result, inputs are not developed by management to determine the fair value measurement for this investment.

(2)	The SALB is a relatively new product with fewer than 100 policies. Due to the small size of this block the liability was determined based on fees earned.

The following table provides the estimated fair value of the Company’s assets not carried at fair value on the Balance Sheets at June 30, 2014 and December 31, 2013:


	June 30, 2014
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans on real estate (a)	$	-	$	-	$	49,190	$	49,190
Policy loans (b)		-		692,331		-		692,331

Total assets	$	-	$	692,331	$	49,190	$	741,521


	December 31, 2013
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans on real estate (a)	$	-	$	-	$	51,508	$	51,508
Policy loans (b)		-		710,087		-		710,087

Total assets	$	-	$	710,087	$	51,508	$	761,595

(a)	The fair value of 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.

(b)	Policy loans are stated at unpaid principal balance. Fair value is estimated as equal to the book value of the loan.

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 June 30, 2014 and December 31, 2013 were:


	June 30, 2014
			Gross Unrealized					Estimated
	Amortized Cost/Cost		Gains		Losses			Fair Value		OTTI in AOCI₍₁₎
Fixed maturity AFS securities
Corporate securities	$	1,075,626	$	106,237	$	(3,036	)	$	1,178,827	$	-
Asset-backed securities		129,593		4,406		(251	)		133,748		(83	)
Commercial mortgage-backed securities		98,998		5,399		(595	)		103,802		-
Residential mortgage-backed securities		44,797		3,935		(2	)		48,730		-
Municipals		917		-		(126	)		791		-
Government and government agencies
United States		334,244		35,558		(34	)		369,768		-
Foreign		8,715		1,310		-			10,025		-

Total fixed maturity AFS securities	$	1,692,890	$	156,845	$	(4,044	)	$	1,845,691	$	(83	)


Equity securities
Banking securities	$	28,136	$	2,604	$	(47	)	$	30,693	$	-
Industrial securities		5,791		445		-			6,236		-

Total equity securities	$	33,927	$	3,049	$	(47	)	$	36,929	$	-


	December 31, 2013
			Gross Unrealized					Estimated Fair Value		OTTI in AOCI₍₁₎
	Amortized Cost/Cost		Gains		Losses			Estimated Fair Value		OTTI in AOCI₍₁₎
Fixed maturity AFS securities
Corporate securities	$	1,083,348	$	82,645	$	(8,760	)	$	1,157,233	$	-
Asset-backed securities		112,018		3,862		(981	)		114,899		(726	)
Commercial mortgage-backed securities		106,041		6,136		(2,031	)		110,146		-
Residential mortgage-backed securities		47,862		3,773		(1	)		51,634		-
Municipals		919		-		(146	)		773		-
Government and government agencies
United States		271,261		10,585		(8,065	)		273,781		-
Foreign		8,756		1,083		-			9,839		-

Total fixed maturity AFS securities	$	1,630,205	$	108,084	$	(19,984	)	$	1,718,305	$	(726	)


Equity securities
Banking securities	$	28,136	$	1,070	$	(820	)	$	28,386	$	-
Industrial securities		5,926		291		-			6,217		-

Total equity securities	$	34,062	$	1,361	$	(820	)	$	34,603	$	-

(1) Represents other-than-temporary impairments (“OTTI”) in Accumulated Other Comprehensive Income (“AOCI”), which were not included in earnings. Amount excludes $1,576 and $922 of unrealized gains at June 30, 2014 and December 31, 2013.

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 June 30, 2014 and December 31, 2013 were:


	June 30, 2014				December 31, 2013
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Investment grade	$	1,604,646	$	1,750,446	$	1,571,119	$	1,654,010
Below investment grade		88,244		95,245		59,086		64,295

Total fixed maturity AFS securities	$	1,692,890	$	1,845,691	$	1,630,205	$	1,718,305

At June 30, 2014 and December 31, 2013 the estimated fair value of fixed maturity securities rated BBB- were $112,629 and $117,465, respectively, 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.

The amortized cost and estimated fair value of fixed maturity AFS securities at June 30, 2014 and December 31, 2013 by contractual maturities were:


	June 30, 2014				December 31, 2013
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Fixed maturity AFS securities
Due in one year or less	$	24,786	$	25,378	$	11,751	$	11,992
Due after one year through five years		455,282		492,566		344,357		369,929
Due after five years through ten years		487,977		532,550		586,004		628,131
Due after ten years		451,457		508,917		422,172		431,574

		1,419,502		1,559,411		1,364,284		1,441,626
Mortgage-backed securities and other asset-backed securities		273,388		286,280		265,921		276,679

Total fixed maturity AFS securities	$	1,692,890	$	1,845,691	$	1,630,205	$	1,718,305

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.

Unrealized 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 June 30, 2014 and December 31, 2013 were as follows:


	June 30, 2014
	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	$	31,475	$	31,876	$	(401	)
Asset-backed securities		26,854		26,939		(85	)
Residential mortgage-backed securities		11		11		-
Government and government agencies - United States		27,170		27,204		(34	)

Total fixed maturity and equity securities		85,510		86,030		(520	)


Greater than six months but less than or equal to one year
Fixed maturity AFS securities
Corporate securities		17,263		18,551		(1,288	)
Asset-backed securities		4,832		4,998		(166	)
Residential mortgage-backed securities		8		8		-
Municipals		791		917		(126	)
Equity securities - banking securities		1,749		1,796		(47	)

Total fixed maturity and equity securities		24,643		26,270		(1,627	)


Greater than one year
Fixed maturity AFS securities
Corporate securities		41,451		42,798		(1,347	)
Asset-backed securities		1,999		1,999		-
Commercial mortgage-backed securities		21,205		21,800		(595	)
Residential mortgage-backed securities		66		68		(2	)

Total fixed maturity and equity securities		64,721		66,665		(1,944	)

Total fixed maturity and equity securities	$	174,874	$	178,965	$	(4,091	)


	December 31, 2013
	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	$	87,670	$	91,425	$	(3,755	)
Asset-backed securities		63,709		64,265		(556	)
Commercial mortgage-backed securities		1,478		1,526		(48	)
Residential mortgage-backed securities		9		9		-
Municipals		773		919		(146	)
Government and government agencies - United States		168,312		176,377		(8,065	)
Equity securities - banking		9,476		10,296		(820	)

Total fixed maturity and equity securities		331,427		344,817		(13,390	)


Greater than six months but less than or equal to one year
Fixed maturity AFS securities
Corporate securities		46,542		50,577		(4,035	)
Asset-backed securities		3,164		3,207		(43	)
Commercial mortgage-backed securities		21,230		23,213		(1,983	)
Residential mortgage-backed securities		7		7		-

Total fixed maturity and equity securities		70,943		77,004		(6,061	)


Greater than one year
Fixed maturity AFS securities
Corporate securities		17,768		18,738		(970	)
Asset-backed securities		7,018		7,400		(382	)
Residential mortgage-backed securities		80		81		(1	)

Total fixed maturity and equity securities		24,866		26,219		(1,353	)

Total fixed maturity and equity securities	$	427,236	$	448,040	$	(20,804	)

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

The total number of securities in an unrealized loss position was 79 and 113 at June 30, 2014 and December 31, 2013, respectively.

There were two securities which have been in a continuous unrealized loss position where fair value had declined below amortized cost by greater than 20% at June 30, 2014. The two investments had an estimated fair value of $12 with unrealized losses of $9. At December 31, 2013 there was one security in a continuous unrealized loss position where fair value had declined below amortized cost by greater than 20%. The security had an estimated fair value of $1,695 with an unrealized loss of $461.

Unrealized gains (losses) incurred during the first six months of 2014 and 2013 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 (loss), net of taxes, at June 30, 2014 and December 31, 2013 were as follows:


	June 30, 2014			December 31, 2013
Assets
Fixed maturity securities	$	152,801		$	88,100
Equity securities		3,002			541
Cash flow hedges		(1,947	)		1,813
Value of business acquired		(40,341	)		(29,418	)

		113,515			61,036


Liabilities
Income taxes - deferred		(39,963	)		(21,333	)

		(39,963	)		(21,333	)

Stockholder’s equity
Accumulated other comprehensive income, net of taxes	$	73,552		$	39,703

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 income (loss), net of taxes. At June 30, 2014 and December 31, 2013, there were no adjustments to policyholder account balances in conjunction with the unrealized holding gains or losses on investments classified as available-for-sale.

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 and are included in net realized investment gains (losses), excluding OTTI on securities in the Statements of Income. There were no prepayment premiums collected during the three and six months ended June 30, 2014 and 2013.

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 June 30, 2014 and December 31, 2013 was $22 and $27, respectively. The change in the reserve is reflected in net realized investment gains (losses), excluding OTTI on securities in the Statements of Income. There was one impaired mortgage loan at June 30, 2014 with a specific reserve of $1,140 and an unpaid principal balance of $2,669. For the three and six months ended June 30, 2014 the impaired mortgage loan recorded interest income of $63 and $65, respectively, subsequent to the impairment which is reflected in net investment income on the Statements of Income. There were no impaired mortgage loans at December 31, 2013.

The change in the credit loss allowances on mortgage loans by type of property at June 30, 2014 and December 31, 2013 was as follows:


Commercial	June 30, 2014		December 31, 2013
Balance at beginning of period	$	27	$	25
Provision		1,135		2

Balance at end of period	$	1,162	$	27

The commercial mortgages are geographically diversified throughout the United States with the largest concentrations in Pennsylvania, New Hampshire, Virginia, California, and Delaware which account for approximately 82% of mortgage loans at June 30, 2014.

The credit quality of mortgage loans by type of property at June 30, 2014 and December 31, 2013 was as follows:


Commercial	June 30, 2014			December 31, 2013
AAA - AA	$	9,399		$	16,758
A		31,818			20,053
BBB		3,809			9,648

Total mortgage loans on real estate		45,026			46,459
Less: reserves		(1,162	)		(27	)

Total mortgage loans on real estate, net	$	43,864		$	46,432

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.

Securities Lending

Financial assets that are loaned 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 loaned 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 June 30, 2014 and December 31, 2013, the payable for collateral under securities loaned was $253,030 and $260,506, respectively. The amortized cost of securities out on loan at June 30, 2014 and December 31, 2013 was $217,693 and $251,183, respectively. The estimated fair value of securities out on loan at June 30, 2014 and December 31, 2013 was $245,201 and $247,221, respectively.

Derivatives and Hedge Accounting

The Company uses several types of derivatives to manage the capital market risk associated with the GMWB.

S&P 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. Net settlements on the futures occur daily. The realized gains (losses) on settlement of these futures have been recorded in net derivative losses in the Statements of Income.

The Company uses variance swaps to hedge equity risk. During 2013, the Company also entered into total return swaps which are based on the S&P. The Company recognizes gains (losses) from the change in fair value of the variance swaps and total return swaps in net derivative losses in the Statements of Income.

The Company also uses equity collars to hedge equity risk. These derivatives were purchased in the fourth quarter of 2012 as part of a hedging program which, with a zero cost at issue, hedges a portion of equity market decline by selling a portion of market upside above the Company’s long-term expected return. The Company recognizes gains (losses) from the change in fair value of the equity collars in net derivative losses in the Statements of Income. The equity collars were disposed of during the fourth quarter of 2013 due to changing market conditions and business needs.

During the third quarter of 2013, the Company entered into cash flow hedging transactions on Treasury Inflation Protected Securities (“TIPS”) utilizing interest rate swaps to lengthen portfolio duration and to hedge the variability of cash flows due to changes in inflation.

The following table presents the notional and fair value for hedging instruments as of June 30, 2014 and December 31, 2013:


	Notional						Fair Value
	June 30,			December 31,			June 30,			December 31,
Derivative Type	2014			2013			2014			2013
Non-qualifying hedges
Short futures	$	54,667		$	55,877		$	-		$	-
Variance swaps		1,200			1,000			(5,234	)		(5,579	)
Total return swaps		862,302			686,679			(33,577	)		(46,249	)

Total non-qualifying hedges		918,169			743,556			(38,811	)		(51,828	)

Cash flow hedges
Interest rate swaps		49,884			49,884			(2,681	)		1,756

Total cash flow hedges		49,884			49,884			(2,681	)		1,756

Derivative Total	$	968,053		$	793,440		$	(41,492	)	$	(50,072	)


The following table presents the net derivative gains (losses) recognized in the Statements of Income:

	Net Derivative Gains (Losses) Recognized In Income
	Three Months Ended June 30,						Six Months Ended June 30,
Derivative Type	2014			2013			2014			2013
Short futures	$	(3,421	)	$	(4,137	)	$	(4,783	)	$	(17,820	)
Long futures		-			(1,577	)		-			(2,103	)
Variance swaps		(3,210	)		160			(4,433	)		(2,051	)
Total return swaps		(31,295	)		7,912			(42,697	)		12,924
Interest rate swaps		2			-			(80	)		-
Equity collar		-			(32,306	)		-			(120,472	)

Total	$	(37,924	)	$	(29,948	)	$	(51,993	)	$	(129,522	)


The following tables present the components of the gain or loss on derivatives that qualify as cash flow hedges:

	Gain (Loss) Recognized in OCI on Derivative (Effective Portion)						Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Interest rate swaps	$	(2,233)		$	-		$	(3,760)		$	-

Total	$	(2,233)		$	-		$	(3,760)		$	-


	Net Realized Gains (Losses) Recognized in Income on Derivative (Ineffective Portion)						Net Realized Gains (Losses) Recognized in Income on Derivative (Ineffective Portion)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Interest rate swaps	$	2		$	-		$	(80)		$	-

Total	$	2		$	-		$	(80)		$	-

Gain (Loss) Reclassified
from AOCI into Income
(Effective Portion)

Three Months Ended

Six Months Ended

June 30,

Location

2014

2013

2014

2013

Interest rate swaps

Net investment income

(679

)

(677

)

Total

(679

)

(677

)

All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.

At June 30, 2014, the before-tax deferred net losses on derivatives recorded in AOCI that are expected to be reclassified to the Statements of Income during the next twelve months are ($1,354). This expectation is based on the anticipated interest payments on the hedged investments in TIPS that will occur over the next twelve months, at which time the Company will recognize the deferred gains (losses) as an adjustment to interest income over the term of the investment cash flows.

The Company receives or pledges collateral related to these derivative transactions. 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 June 30, 2014 and December 31, 2013, the Company has pledged securities in the amount of $39,034 and $31,213, respectively, to counterparties. At June 30, 2014 and December 31, 2013 the Company did not receive cash collateral from counterparties.

In addition, in order to trade futures, the Company is required to post collateral to an exchange (sometimes referred to as margin). The fair value of collateral posted in relation to the futures margin was $4,661 and $8,452 at June 30, 2014 and December 31, 2013, respectively.

Offsetting of Financial Instruments

The Company has derivative instruments that are subject to master netting agreements. These agreements include provisions to setoff positions with the same counterparties in the event of default by one of the parties.

The following tables present the offsetting of derivative assets for the periods ended June 30, 2014 and December 31, 2013:


	June 30, 2014
							Gross Amounts Not Offset in the Balance Sheet
Description	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets Presented in the Balance Sheet		Financial Instruments		Collateral Received		Net Amount
Derivatives	$	1,281	$	1,281	$	-	$	-	$	-	$	-

Total	$	1,281	$	1,281	$	-	$	-	$	-	$	-


	December 31, 2013
							Gross Amounts Not Offset in the Balance Sheet
Description	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets Presented in the Balance Sheet		Financial Instruments		Collateral Received		Net Amount
Derivatives	$	1,756	$	898	$	858	$	451	$	-	$	407

Total	$	1,756	$	898	$	858	$	451	$	-	$	407

The following tables present the offsetting of derivative liabilities for the periods ended June 30, 2014 and December 31, 2013:


	June 30, 2014
							Gross Amounts Not Offset in the Balance Sheet
Description	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet		Net Amounts of Liabilities Presented in the Balance Sheet		Financial Instruments		Collateral Pledged		Net Amount
Derivatives	$	42,773	$	1,281	$	41,492	$	-	$	38,520	$	2,972

Total	$	42,773	$	1,281	$	41,492	$	-	$	38,520	$	2,972


	December 31, 2013
							Gross Amounts Not Offset in the Balance Sheet
Description	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet		Net Amounts of Liabilities Presented in the Balance Sheet		Financial Instruments		Collateral Pledged		Net Amount
Derivatives	$	51,828	$	898	$	50,930	$	-	$	29,235	$	21,695

Total	$	51,828	$	898	$	50,930	$	-	$	29,235	$	21,695

There were no other financial assets or financial liabilities as of June 30, 2014 and December 31, 2013 that were subject to offsetting.

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 six months ended June 30 were as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Proceeds	$	16,764		$	15,407		$	47,612		$	22,302
Gross realized investment gains		644			307			2,255			380
Gross realized investment losses		(175	)		(8	)		(550	)		(70	)

Proceeds on AFS securities sold at a realized loss		4,289			11,604			17,666			15,233

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Fixed maturity AFS securities	$	469		$	299		$	1,575		$	259
Equity securities		-			-			30			-
Mortgages		(3	)		(5	)		(1,180	)		(1	)
Adjustment related to VOBA		79			(5	)		578			(5	)

Net realized investment gains	$	545		$	289		$	1,003		$	253

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 June 30, 2014 and December 31, 2013:


	June 30, 2014			December 31, 2013
Balance at beginning of period	$	714		$	1,420
Additional credit loss impairments recognized in the current period on securities previously impaired through other comprehensive income		100			436
Accretion of credit loss impairments previously recognized		(510	)		(1,142	)

Balance at end of period	$	304		$	714

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


	Three Months Ended June 30, 2014						Six Months Ended June 30, 2014
	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	$	-	$	-	$	-	$	100	$	-	$	100

Net OTTI losses	$	-	$	-	$	-	$	100	$	-	$	100


	Three Months Ended June 30, 2013						Six Months Ended June 30, 2013
	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	$	-	$	-	$	-	$	51	$	-	$	51

Net OTTI losses	$	-	$	-	$	-	$	51	$	-	$	51

For the three months ended June 30, 2014 and 2013 the Company had no impairment losses recognized in the Statements of Income. For the six months ended June 30, 2014 and 2013, the Company’s impairment losses recognized in the Statements of Income were $100 and $51, respectively, with no associated value of business acquired amortization. For the six months ended June 30, 2014 and 2013, the Company impaired its holding of a previously OCI impaired 2006 vintage residential mortgage backed security (“RMBS”) and a previously OCI impaired 2007 vintage RMBS due to adverse changes in cash flows.

Note 4. Value of Business Acquired (“VOBA”), Deferred Policy 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 equity growth rate assumption for the amortization of VOBA, DAC and DSI was 8% and 9% at June 30, 2014 and 2013, respectively.

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Amortization expense	$	(1,199	)	$	(8,746	)	$	(1,053	)	$	(8,493	)
Unlocking		-			1			(99	)		262
Adjustment related to realized (gains) losses on investments		78			(5	)		577			(5	)
Adjustment related to unrealized (gains) losses and OTTI on investments		(5,020	)		(847	)		(10,922)			3,736

Change in VOBA carrying amount	$	(6,141	)	$	(9,597	)	$	(11,497	)	$	(4,500	)

For the three and six months ended June 30, 2014 the decrease in VOBA was primarily driven by an increase in adjustments related to unrealized (gains) losses and OTTI on investments resulting from increased unrealized gains during the period.

DAC and DSI

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


	Three Months Ended June 30,					Six Months Ended June 30,
DAC	2014		2013			2014			2013
Capitalization	$	24	$	17		$	88		$	178
Accretion (amortization) expense		346		(2,709	)		665			(5,413	)
Unlocking		-		-			(139	)		(659	)

Change in DAC carrying amount	$	370	$	(2,692	)	$	614		$	(5,894	)


	Three Months Ended June 30,					Six Months Ended June 30,
DSI	2014		2013			2014			2013
Capitalization	$	38	$	14		$	40		$	46
Accretion (amortization) expense		67		(621	)		145			(1,237	)
Unlocking		-		-			(32	)		48

Change in DSI carrying amount	$	105	$	(607	)	$	153		$	(1,143	)

The change in the carrying amount of DAC and DSI for the three and six months ended June 30, 2014 was primarily driven by a reserve increase as well as increased hedge costs resulting in regular accretion when compared to the same period in 2013.

Note 5. Variable Contracts Containing Guaranteed Benefits

The Company records liabilities for contracts containing a guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“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 six months ended June 30 were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
GMDB	2014			2013			2014			2013
Guaranteed benefits incurred	$	8,478		$	7,937		$	15,303		$	15,897
Guaranteed benefits paid		(7,625	)		(9,682	)		(14,736	)		(17,736	)
Unlocking		(9,100	)		3,478			(9,479	)		(14,522	)

Total	$	(8,247	)	$	1,733		$	(8,912	)	$	(16,361	)


	Three Months Ended June 30,						Six Months Ended June 30,
GMIB	2014			2013			2014			2013
Guaranteed benefits incurred	$	3,234		$	2,816		$	6,344		$	6,015
Guaranteed benefits paid		(1,065	)		(298	)		(1,081	)		(307	)
Unlocking		(2,640	)		821			(2,255	)		(9,646	)

Total	$	(471	)	$	3,339		$	3,008		$	(3,938	)

During the three and six months ended June 30, 2014, the change in reserves was driven by strong Separate Account performance and a drop in interest rates resulting in a decrease in death benefit reserves when compared to 2013.

The variable annuity GMDB liability at June 30, 2014 and December 31, 2013 was $113,678 and $122,590, respectively. The variable annuity GMIB liability at June 30, 2014 and December 31, 2013 was $67,912 and $64,904, 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 six months ended June 30, 2014 and 2013, an insignificant amount of variable life guaranteed benefits were recorded as policy benefits in the Statements of Income as incurred or paid.

Note 6. Income Taxes

The effective tax rate was not meaningful for the six months ended June 30, 2014 and 2013. 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 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.

The provision for income tax expense (benefit) consists of the following for the three and six months ended June 30:


	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014		2013
Current federal income tax benefit	$	-	$	(9,684	)	$	-	$	(9,883	)
Deferred federal income tax expense		4,311		18,918			17,453		9,500
Deferred state income tax expense		203		-			820		-

Total income tax expense (benefit)	$	4,514	$	9,234		$	18,273	$	(383	)

The provision for income tax receivable (payable) consists of the following for the periods ending June 30, 2014 and December 31, 2013:


	June 30, 2014			December 31, 2013
Current federal income tax receivable	$	2		$	508
Current state income tax receivable		119			118
Deferred federal income tax payable		(77,790	)		(41,707	)
Deferred state income tax payable		(1,777	)		(957	)

Net income tax payable	$	(79,446	)	$	(42,038	)

At June 30, 2014 and December 31, 2013, the Company has a tax valuation allowance for deferred tax assets of $187,196 and $179,654, respectively (this includes losses that are anticipated to be used in the consolidated group to reflect the income statement impact of the losses that wouldn’t be used if filing separately). At December 31, 2013, management determined that deferred tax assets on the net operating loss carryforward and other assets 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 $2,931 (gross $8,374) that should not be recognized at June 30, 2014 and December 31, 2013, which primarily relate to uncertainty regarding the sustainability of certain deductions taken on the 2012, 2011, 2010, 2009 and 2008 U.S. Federal income tax returns. To the extent these unrecognized tax benefits are ultimately recognized, they will not 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:


	June 30, 2014		December 31, 2013
Balance at beginning of period	$	2,931	$	2,648
Additions for tax positions of prior years		-		283

Balance at end of period	$	2,931	$	2,931

At December 31, 2013, the Company had an operating loss carryforward for federal income tax purposes of $459,738 (net of the ASC 740 reduction of $8,374) with a carryforward period of fifteen years that expire at various dates up to 2028. As of June 30, 2014 a taxable loss is projected for 2014 that will increase the loss carryforward by approximately $44,261. At June 30, 2014 and December 31, 2013, the Company had a capital loss carryforward of $4,127 for federal income tax purposes. At December 31, 2013, the Company had a foreign tax credit carryforward of $8,092 with a carryforward period of ten years that will expire at various dates up to 2023. Also, the Company has an Alternative Minimum Tax credit carryforward for federal income tax purposes of $4,216 at December 31, 2013, with an indefinite carryforward period. As of June 30, 2014, the Company does not expect to utilize either of these credit carryforwards in 2014.

The Company classifies interest and penalties related to income taxes as interest expense and penalty expense, respectively. These amounts are included in insurance expenses and taxes on the Statements of Income. The Company did not recognize any penalties in its financial statements at June 30, 2014 or December 31, 2013. The Company recognized interest (income) of less than ($1) at June 30, 2014 and December 31, 2013.

The Company records taxes on a separate company basis. Effective January 1, 2013 for federal income tax purposes, the Company joined the Transamerica Corporation consolidated income tax group. The method of allocation between the companies is subject to a written tax allocation agreement. Under the terms of the agreement, taxes are payable to or receivable from Transamerica Corporation in amounts that would result had the company filed a separate tax return with taxing authorities. Any tax differences between the Company’s separately calculated provision and cash flows attributable to benefits from consolidation have been recognized as capital contributions from Transamerica Corporation. At June 30, 2014, the Company recognized capital contributions from Transamerica Corporation in connection with the tax allocation agreement in the amount of $99,319. There were no capital contributions or returns of capital in 2013. Intercompany income tax balances are settled within thirty days of payment to or filing with the Internal Revenue Service.

The Company filed a separate federal income tax return for the years 2008 through 2012 but no examination by the Internal Revenue Service has commenced. A tax return has not yet been filed for 2013 or 2014.

Note 7. Accumulated Other Comprehensive Income

The following table presents the change in accumulated other comprehensive income by component for the three and six months ended June 30, 2014 and 2013:


	Three Months Ended June 30, 2014
	Unrealized Holding Gains (Losses) on AFS Securities _(a)		Unrealized Holding Gains (Losses) on Cash Flow Hedges _(a)			Total
Beginning balance	$	58,199	$	185		$	58,384

OCI before reclassifications		16,319		(1,878	)		14,441
Amounts reclassified from AOCI		289		438			727

Net current period OCI		16,608		(1,440	)		15,168


Ending balance	$	74,807	$	(1,255	)	$	73,552


	Six Months Ended June 30, 2014
	Unrealized Holding Gains (Losses) on AFS Securities _(a)		Unrealized Holding Gains (Losses) on Cash Flow Hedges _(a)			Total
Beginning balance	$	38,533	$	1,170		$	39,703

OCI before reclassifications		36,147		(2,862	)		33,285
Amounts reclassified from AOCI		127		437			564

Net current period OCI		36,274		(2,425	)		33,849


Ending balance	$	74,807	$	(1,255	)	$	73,552


			Three Months Ended June 30, 2013			Six Months Ended June 30, 2013
			Unrealized Holding Gains (Losses) on AFS Securities _(a)			Unrealized Holding Gains (Losses) on AFS Securities _(a)
Beginning balance			$	86,767		$	96,710

OCI before reclassifications				(41,189	)		(51,117	)
Amounts reclassified from AOCI				(637	)		(652	)

Net current period OCI				(41,826	)		(51,769	)


Ending balance			$	44,941		$	44,941

(a)	All amounts are net of tax.

The following table presents the reclassifications out of accumulated other comprehensive income for the three and six months ended June 30, 2014 and 2013.


	Three Months Ended June 30, 2014			Six Months Ended June 30, 2014
AOCI Components	Amount Reclassified from AOCI			Amount Reclassified from AOCI			Affected Line Item in the Statement Where Net Income is Presented
Unrealized holding gains (losses) on AFS securities
Available-for-sale securities	$	(448	)	$	(97	)	Net realized investment gains (losses)
							Portion of OTTI previously recognized
		-			(100	)	in OCI

		(448	)		(197	)	Total before tax
		(159	)		(70	)	Tax benefit

	$	(289	)	$	(127	)	Net of tax

Unrealized holding gains (losses) on cash flow hedges
Interest rate swaps	$	(679	)	$	(677	)	Net investment income

		(679	)		(677	)	Total before tax
		(241	)		(240	)	Tax benefit

	$	(438	)	$	(437	)	Net of tax

Total amounts reclassified from AOCI	$	(727	)	$	(564	)


	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013
AOCI Components	Amount Reclassified from AOCI			Amount Reclassified from AOCI			Affected Line Item in the Statement Where Net Income is Presented
Unrealized holding gains (losses) on AFS securities
Available-for-sale securities	$	987		$	1,062		Net realized investment gains (losses)
							Portion of OTTI previously recognized
		-			(51	)	in OCI

		987			1,011		Total before tax
		350			359		Tax expense

Total amounts reclassified from AOCI	$	637		$	652		Net of tax

Note 8. 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 for the six months ended June 30, 2014 and 2013 was $92,453 and $240,392, respectively. Statutory capital and surplus at June 30, 2014 and December 31, 2013 was $821,449 and $733,415, respectively.

For the six months ended June 30, 2014 and 2013, the Company did not pay any dividends to AUSA. During the six months ended June 30, 2014, the Company received capital contributions from AUSA of $99,319. The Company did not receive any capital contributions from AUSA in the six months ended June 30, 2013.

Note 9. 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 June 30, 2014 and December 31, 2013, net reinsurance receivables (payable) were $3,293 and ($249), respectively. The Company did not have a reinsurance reserve at June 30, 2014 and December 31, 2013.

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 June 30, 2014, 36% and 5% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured. At December 31, 2013, 36% and 6% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured.

Note 10. Related Party Transactions

At June 30, 2014, 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 six months ended June 30, 2014, the Company incurred $2,237 and $4,947, respectively, in expenses under this agreement. During the three and six months ended June 30, 2013, the Company incurred $2,626 and $5,470, 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 AUSA and affiliates at various times. On June 27, 2014, the Company entered into an intercompany short-term note receivable with AUSA for $50,000 with an interest rate of 0.11% that is due June 27, 2015. During the three months ended June 30, 2014, the Company accrued and/or received less than $1 of interest income. On May 21, 2013, the Company entered into an intercompany short-term note receivable with AUSA for $50,000 with an interest rate of 0.10% that was paid off in December 2013. During the three months ended June 30, 2013 the Company accrued and/or received $6 of interest income. 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 six months ended June 30, 2014, the Company incurred $20 and $41, respectively, under this agreement. During the three and six months ended June 30, 2013, the Company incurred $23 and $46, respectively, under this agreement. Mortgage loan origination fees are amortized into net investment income over the life of the mortgage loans. There were no mortgage loan origination fees during the three and six months ended June 30, 2014 and 2013.

AEGON USA Investment Management, LLC acts as a discretionary investment manager under an investment management agreement with the Company. During the three and six months ended June 30, 2014, the Company incurred $453 and $880, respectively, in expenses under this agreement. During the three and six months ended June 30, 2013, the Company incurred $450 and $924, 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 six months ended June 30, 2014, the Company incurred $7,918 and $15,487, respectively, in expenses under this agreement. During the three and six month ended June 30, 2013, the Company incurred $8,200 and $16,336, 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 six months ended June 30, 2014, the Company incurred $103 and $204, respectively, in expenses under this agreement. During the three and six months ended June 30, 2013, the Company incurred $102 and $203, respectively, in expenses under this agreement.

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 six months ended June 30, 2014, the Company received $683 and $1,184, respectively, in revenue under this agreement. During the three and six months ended June 30, 2013, the Company received $436 and $867, respectively, in revenue under this agreement. Revenue attributable to this agreement is included in policy charge revenue.

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 and six months ended June 30, 2014, the Company purchased $97,701 and $98,453, respectively, of fixed maturity AFS securities from affiliated companies. During the three months ended June 30, 2014, the Company purchased $25,000 of a limited partnership from affiliated companies. During the three and six months ended June 30, 2014, the Company sold $6,688 and $24,844, respectively of fixed maturity AFS securities to affiliated companies. During the three and six months ended June 30, 2013, the Company did not sell or purchase any fixed maturity AFS securities, mortgage loans on real estate, or limited partnerships to/from affiliated parties.

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 11. 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, CDAs 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 three and six months ended:


	Annuity			Life Insurance		Total
Three months ended June 30, 2014
Net revenues (a)	$	5,030		$	19,366	$	24,396
Amortization (accretion) of VOBA		(961	)		2,160		1,199
Policy benefits (net of reinsurance recoveries)		(3,636	)		10,378		6,742
Income tax expense		3,091			1,423		4,514
Net income (loss)		(4,931	)		3,549		(1,382	)

Three months ended June 30, 2013
Net revenues (a)	$	12,220		$	19,716	$	31,936
Amortization of VOBA		7,538			1,207		8,745
Policy benefits (net of reinsurance recoveries)		15,141			12,021		27,162
Income tax expense		7,276			1,958		9,234
Net income (loss)		(34,550	)		1,609		(32,941	)


	Annuity			Life Insurance		Total
Six months ended June 30, 2014
Net revenues (a)	$	33,895		$	38,516	$	72,411
Amortization (accretion) of VOBA		(1,022	)		2,174		1,152
Policy benefits (net of reinsurance recoveries)		6,000			21,313		27,313
Income tax expense		14,532			3,741		18,273
Net income (loss)		(7,832	)		7,732		(100	)

Six months ended June 30, 2013
Net revenues (a)	$	(46,021	)	$	39,666	$	(6,355	)
Amortization of VOBA		8,031			199		8,230
Policy benefits (net of reinsurance recoveries)		(5,534	)		20,369		14,835
Income tax expense (benefit)		(5,631	)		5,248		(383	)
Net income (loss)		(74,918	)		7,944		(66,974	)

(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 2013 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”). In addition, the Company sells a fixed contingent annuity (also sometimes referred to as a contingent deferred annuity (“CDA”)), which includes a stand-alone living benefit (“SALB”).

The Company makes available, free of charge, annual reports on Form 10-K, quarterly reports on 10-Q, and current reports on Form 8-K. This information is available through the About Us – Financial Strength section of the Transamerica website at www.Transamerica.com. These reports are available through the website as soon as reasonably practicable after the Registrant electronically files such material with, or furnishes it to, the Securities and Exchange Commission.

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

•

the charges imposed on variable annuity, CDA 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 $6.1 million and $13.1 million, respectively, for the three and six months ended June 30, 2014. Total direct deposits (including internal exchanges) were $4.1 million and $16.1 million, respectively, for the three and six months ended June 30, 2013. Internal exchanges were $2.7 million and $3.2 million for the three and six months ended June 30, 2014. Internal exchanges were $1.3 million and $2.1 million for the three and six months ended June 30, 2013. Deposits are currently limited to additions to existing policies which will result in fluctuations period over period.

Financial Condition

At June 30, 2014, the Company’s assets were $10.5 billion or less than $0.1 billion lower than the $10.6 billion in assets at December 31, 2013. Assets excluding Separate Accounts assets increased $127.1 million during the first half of 2014. Separate Accounts assets, which represent 68% of total assets, decreased $175.9 million to $7.2 billion. Changes in Separate Accounts assets were as follows:


	Six Months Ended June 30,
(dollars in millions)	2014			2013

Investment performance	$	307.8		$	433.7
Deposits		12.8			15.7
Policy fees and charges		(81.2	)		(80.6	)
Surrenders, benefits and withdrawals		(415.3	)		(377.8	)


Net change	$	(175.9	)	$	(9.0	)

During the six months ended June 30, 2014 and 2013, fixed contract owner deposits were $0.1 million. During the six months ended June 30, 2014 and 2013, fixed contract owner withdrawals were $39.5 million and $50.7 million, respectively.

Business 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”). For the period ended June 30, 2014, the Dow increased 2%, while the NASDAQ and S&P had increases of 5% from March 31, 2014. The Dow ended June 30, 2014 with an increase of 2% while NASDAQ and S&P had increases of 6% from December 31, 2013.

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 73% of Separate Accounts assets were invested in equity-based mutual funds at June 30, 2014. Since asset-based fees collected on in force 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 six months ended June 30, 2014, average variable account balances increased less than $0.1 billion (or 1%) from $7.1 billion to $7.2 billion as compared to the same period in 2013.

Fluctuations in the U.S. equity market also directly impact the Company’s exposure to guaranteed benefit provisions contained in the 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 June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Average medium term interest rate yield (a)		0.73%			0.64%			0.73%			0.64%
Increase (decrease) in medium term interest rates (in basis points)		(3	)		25			(2	)		27
Credit spreads (in basis points) (b)		78			140			78			140
Expanding (contracting) of credit spreads (in basis points)		(10	)		25			(24	)		16

Increase (decrease) on market valuations (in millions)
Available-for-sale (“AFS”) investment securities	$	30.8		$	(80.2	)	$	67.2		$	(96.9	)
Interest-sensitive policyholder liabilities		-			16.2			-			12.9

Net change on market valuations	$	30.8		$	(64.0	)	$	67.2		$	(84.0	)

(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 accounting principles generally accepted in the United States (“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 2013 Annual Report on Form 10-K.

Valuation of Fixed Maturity and Equity Securities

The Company’s investments consist principally of fixed maturity and equity securities that are classified as available-for-sale (“AFS”) which 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. When available, the Company uses quoted market prices in active markets to determine the fair value of its investments. The Company’s valuation policy utilizes a pricing hierarchy which dictates that publicly available prices are initially sought from indices and third-party pricing services. In the event that pricing is not available from these sources, those securities are submitted to brokers to obtain quotes. If broker quotes are not available, then 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.

To understand the valuation methodologies used by third-party pricing services, the Company reviews and monitors their applicable methodology documents. Any changes to their methodologies are noted and reviewed for reasonableness. In addition, the Company performs in-depth reviews of prices received from third-party pricing services on a sample basis. The objective for such reviews is to demonstrate that the Company can corroborate detailed information such as assumptions, inputs and methodologies used in pricing individual securities against documented pricing methodologies. Only third-party pricing services and brokers with a substantial presence in the market and with appropriate experience and expertise are used.

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. Other controls and procedures over pricing received from indices, third-party pricing services, or brokers include validation checks such as exception reports which highlight significant price changes, stale prices or un-priced securities. In addition, the Company performs back testing on a sample basis. Back testing involves selecting a sample of securities trades and comparing the prices in those transactions to prices used for financial reporting. Significant variances between the price used for financial reporting and the transaction price are investigated to explain the cause of the difference.

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 June 30, 2014 and December 31, 2013, approximately $98.0 million (or 5%) and $72.5 million (or 4%), respectively, of the Company’s fixed maturity and equity securities portfolio consisted of private placement securities.

Changes in the fair value of fixed maturity and equity securities classified as 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 classified as 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 fair value. 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 months ended in June 30, 2014 and 2013 the Company had no impairment losses recognized in the Statements of Income. For the six months ended June 30, 2014 and 2013, the Company’s impairment losses recognized in the Statements of Income were $0.1 million and less than $0.1 million, respectively, with no 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 generic 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 the 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 generic reserve which is calculated by applying a percentage, based on risk rating and maturity, to the outstanding loan balance.

At June 30, 2014 and December 31, 2013, there was $43.9 million and $46.4 million, respectively, in mortgage loans on real estate recorded on the Balance Sheets. The estimated fair value of the mortgage loans on real estate at June 30, 2014 and December 31, 2013 was $49.2 million and $51.5 million, respectively. At June 30, 2014, there was one mortgage loan for which a valuation allowance (and corresponding impairment loss) was established for $1.1 million. The generic reserve at June 30, 2014 and December 31, 2013 was less than $0.1 million. The change in the valuation allowance and the generic reserve is reflected in net realized investment gains (losses), excluding OTTI losses on securities in the Statements of Income. The mortgage loan was impaired due to the borrower defaulting on the loan from missing a monthly payment. At June 30, 2014 there was one commercial mortgage loan that was two or more payments delinquent. At December 31, 2013, there were no mortgage loans that were two or more payments delinquent. See Note 3 to the Financial Statements for further discussion.

Derivatives and Hedge Accounting

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 derivatives, such as futures, options, total return swaps and variance swaps to hedge minimum guarantees on variable annuity contracts. These derivatives are recognized on the Balance Sheet and are carried at fair value with changes in fair value recognized as a component of net derivative gains (losses) in the Statements of Income.

Futures contracts are used to hedge the liability risk associated with products providing the policyholder a return based on various global equity market indices. Net settlements on the futures occur daily.

The Company has entered into variance swaps to hedge the costs of the volatility of the S&P index market. These variance swaps are similar to volatility options where the underlying index provides for the market value movements. Variance swaps do not accrue interest, and typically, no cash is exchanged at initiation.

In addition, the Company executed total return swaps with exposure to the S&P. These total return swaps are also being used to hedge equity risk.

Put and call options have been utilized by the Company to create equity collars designed to have a zero cost at issue, which serve to hedge the risk of equity market declines by selling a portion of market upside above the Company’s long-term expected return. The equity collars were disposed of in the fourth quarter of 2013.

During 2013, the Company entered into cash flow hedging transactions on Treasury Inflation Protected Securities (“TIPS”) utilizing interest rate swaps to lengthen portfolio duration and to hedge the variability of cash flows due to changes in inflation.

For further discussion of the Company’s use of derivatives, see the Results of Operations and Note 3 to the Financial Statements.

Securities Lending

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 June 30, 2014 and December 31, 2013, the Company’s VOBA asset was $275.2 million and $286.7 million, respectively. There was no VOBA unlocking for the three months ended June 30, 2014. For the six months ended June 30, 2014, the unfavorable impact to pre-tax income related to VOBA unlocking was ($0.1) million. For the three and six months ended June 30, 2013, the favorable impact to pre-tax income related to VOBA unlocking was less than $0.1 million and $0.3 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 June 30, 2014 and December 31, 2013, variable annuities accounted for the Company’s entire DAC asset of $33.8 million and $33.1 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. There was no DAC unlocking for the three months ended June 30, 2014 and 2013. For the six months ended June 30, 2014 and 2013, there was an unfavorable impact to pre-tax income related to DAC unlocking of ($0.1) million and ($0.7) 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 June 30, 2014 and December 31, 2013, variable annuities accounted for the Company’s entire DSI asset of $7.7 million and $7.5 million, respectively. There was no DSI unlocking for the three months ended June 30, 2014 and 2013. For the six months ended June 30, 2014 and 2013, there was a favorable (unfavorable) impact to pre-tax income related to DSI unlocking of less than ($0.1) million and less than $0.1 million, respectively. See Note 4 to the Financial Statements for a further discussion.

The long-term equity growth rate assumption for the amortization of VOBA, DAC and DSI was 8% and 9% at June 30, 2014 and 2013, respectively.

Policyholder Account Balances

The Company’s liability for policyholder account balances represents the contract value that has accrued to the benefit of policyholders as of 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 June 30, 2014 and December 31, 2013 were $1.2 billion and $1.3 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 June 30, 2014 and December 31, 2013, future policy benefits were $385.9 million and $384.8 million, respectively.

Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issues. At June 30, 2014 and December 31, 2013, GMDB and GMIB liabilities included within future policy benefits were as follows:


(dollars in millions)	June 30, 2014		December 31, 2013
GMDB liability	$	113.7	$	122.6
GMIB liability		67.9		64.9

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 six months ended June 30, 2014, the favorable impact to pre-tax income related to GMDB and GMIB unlocking was $11.7 million. For the three and six months ended June 30, 2013, the favorable (unfavorable) impact to pre-tax income related to GMDB and GMIB unlocking was ($4.3) million and $24.2 million respectively.

Future policy benefits also include liabilities, which can be either positive or negative, for contracts containing GMWB and SALB provisions and for the reinsurance of GMIB provisions (“GMIB reinsurance”) for contracts 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 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 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. Currently, the Company does not hedge the risks associated with the SALB.

At June 30, 2014 and December 31, 2013, the GMWB liability and GMIB reinsurance asset included within future policy benefits were as follows:


(dollars in millions)	June 30, 2014			December 31, 2013
GMWB liability	$	26.6		$	18.2
GMIB reinsurance asset		(51.7	)		(40.7	)

At June 30, 2014 and December 31, 2013, the future policy benefits for the SALB liability was $0.3 million and less than $0.1 million, respectively.

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 income taxes based on amounts it believes it will ultimately owe. Inherent in the provision for 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 June 30, 2014 and December 31, 2013 was $187.2 and $179.6 million, respectively (this includes losses that are anticipated to be used in the consolidated group to reflect the income statement impact of the losses that would not be used if filing separately). The valuation allowance is related to loss carryforwards 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 filed a separate federal income tax return for the years 2008 through 2012, but no examination by the Internal Revenue Service has commenced. Effective January 1, 2013 for federal income tax purposes, the Company joined in a consolidated income tax return filing with its direct parent, AUSA, and its indirect parent, Transamerica Corporation, and other affiliated companies. A tax return has not yet been filed for 2013 and 2014.

Future Accounting Guidance

•

ASC 860, Transfers and Servicing - ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosure - requires repurchase-to-maturity transactions to be accounted for as secured borrowings and amends accounting for repurchase financings. It also requires disclosure for (1) repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings and (2) certain transactions accounted for as a sale. The guidance will be effective for the Company on January 1, 2015, except for disclosure requirements for certain transactions accounted for as secured borrowings which will be effective on April 1, 2015.

Investments

The Company maintains a 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 AFS securities at June 30, 2014 and December 31, 2013 were:


	June 30, 2014
	Amortized Cost/Cost		Gross Unrealized						% of Estimated Fair Value
			Gains		Losses/ OTTI ₍₁₎		Estimated Fair Value
(dollars in millions)			Gains		Losses/ OTTI ₍₁₎		Estimated Fair Value
Fixed maturity AFS securities
Corporate securities
Financial services	$	320.1	$	31.5	$	(1.3)	$	350.3		18%
Industrial		706.7		67.9		(1.7)		772.9		40
Utility		48.9		6.8		-		55.7		3
Asset-backed securities
Housing related		26.2		3.6		(0.1)		29.7		2
Credit cards		31.7		0.2		-		31.9		2
Structured settlements		9.6		0.5		-		10.1		1
Autos		42.7		-		-		42.7		2
Equipment lease		2.1		-		-		2.1		0
Timeshare		2.9		-		-		2.9		0
Other		14.4		0.1		(0.2)		14.3		1
Commercial mortgage-backed securities - non agency backed		99.0		5.4		(0.6)		103.8		6
Residential mortgage-backed securities
Agency backed		35.9		2.8		-		38.7		2
Non agency backed		8.9		1.1		-		10.0		1
Municipals		0.9		-		(0.1)		0.8		0
Government and government agencies
United States		334.2		35.6		-		369.8		19
Foreign		8.7		1.3		-		10.0		1

Total fixed maturity AFS securities		1,692.9		156.8		(4.0)		1,845.7		98
Equity securities
Banking securities		28.1		2.6		(0.1)		30.6		2
Industrial securities		5.8		0.5		-		6.3		0

Total equity securities		33.9		3.1		(0.1)		36.9		2

Total fixed maturity and equity securities	$	1,726.8	$	159.9	$	(4.1)	$	1,882.6		100%


	December 31, 2013
			Gross Unrealized						% of
	Amortized Cost/Cost		Gains		Losses/ OTTI ₍₁₎		Estimated Fair Value		Estimated Fair Value
(dollars in millions)	Amortized Cost/Cost		Gains		Losses/ OTTI ₍₁₎		Estimated Fair Value		Estimated Fair Value
Fixed maturity AFS securities
Corporate securities
Financial services	$	308.9	$	24.5	$	(2.7)	$	330.7		18%
Industrial		684.2		49.5		(5.9)		727.8		41
Utility		90.3		8.6		(0.2)		98.7		6
Asset-backed securities
Housing related		28.3		3.5		(0.8)		31.0		2
Credit cards		13.8		0.4		-		14.2		1
Structured settlements		9.8		-		-		9.8		1
Autos		37.0		-		-		37.0		2
Timeshare		3.7		-		-		3.7		0
Other		19.4		-		(0.2)		19.2		1
Commercial mortgage-backed securities - non agency backed		106.0		6.1		(2.0)		110.1		6
Residential mortgage-backed securities
Agency backed		38.2		2.9		-		41.1		2
Non agency backed		9.7		0.9		-		10.6		1
Municipals		0.9		-		(0.1)		0.8		0
Government and government agencies
United States		271.3		10.6		(8.1)		273.8		16
Foreign		8.7		1.1		-		9.8		1

Total fixed maturity AFS securities		1,630.2		108.1		(20.0)		1,718.3		98
Equity securities
Banking securities		28.1		1.1		(0.8)		28.4		2
Industrial securities		5.9		0.3		-		6.2		0

Total equity securities		34.0		1.4		(0.8)		34.6		2

Total fixed maturity and equity securities	$	1,664.2	$	109.5	$	(20.8)	$	1,752.9		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 of the issuer, 5) high probability of bankruptcy of the issuer, 6) nationally recognized credit rating agency downgrades, and/or 7) intent or requirement to sell before a debt security’s anticipated 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 June 30, 2014.

Five issuers represent more than 5% of the total unrealized loss position, with all five securities being investment grade corporate bonds with $1.9 million of unrealized loss.

At June 30, 2014 and December 31, 2013, approximately $38.7 million (or 25%) and $41.1 million (or 25%), 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 AFS investment grade securities were as follows:


	June 30, 2014
(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	$	20.7	$	21.0	$	(0.3)
Asset-backed securities
Credit cards		6.2		6.2		-
Autos		12.0		12.0		-
Equipment lease		2.1		2.1		-
Government and government agencies - United States		27.2		27.2		-

Total fixed maturity and equity securities		68.2		68.5		(0.3	)

Greater than six months but less than or equal to one year
Corporate securities
Financial services		8.1		9.0		(0.9	)
Industrial		7.6		7.7		(0.1	)
Asset-backed securities - other		4.8		5.0		(0.2	)

Total fixed maturity and equity securities	$	20.5	$	21.7	$	(1.2	)


	June 30, 2014
(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	$	3.2	$	3.3	$	(0.1	)
Industrial		36.0		37.2		(1.2	)
Asset-backed securities - autos		2.0		2.0		-
Commercial mortgage-backed securities - non agency backed		21.2		21.8		(0.6	)
Residential mortgage-backed securities - agency backed		0.1		0.1		-

Total fixed maturity and equity securities	$	62.5	$	64.4	$	(1.9	)

Total of all investment grade AFS securities
Corporate securities
Financial services	$	32.0	$	33.3	$	(1.3	)
Industrial		43.6		44.9		(1.3	)
Asset-backed securities
Credit cards		6.2		6.2		-
Autos		14.0		14.0		-
Other		4.8		5.0		(0.2	)
Equipment lease		2.1		2.1		-
Commercial mortgage-backed securities - non agency backed		21.2		21.8		(0.6	)
Residential mortgage-backed securities - agency backed		0.1		0.1		-
Government and government agencies - United States		27.2		27.2		-

Total fixed maturity and equity securities	$	151.2	$	154.6	$	(3.4	)


Total number of securities in a continuous unrealized loss position						70


	December 31, 2013
(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	$	36.3	$	38.6	$	(2.3	)
Industrial		43.3		44.5		(1.2	)
Utility		3.5		3.5		-
Asset-backed securities
Structured settlements		9.7		9.7		-
Credit cards		0.8		0.8		-
Autos		23.6		23.6		-
Other		19.2		19.3		(0.1	)
Commercial mortgage-backed securities - non agency backed		1.5		1.5		-
Municipals		0.8		0.9		(0.1	)
Government and government agencies - United States		168.3		176.4		(8.1	)
Equity securities - banking securities		7.8		8.5		(0.7	)

Total fixed maturity and equity securities		314.8		327.3		(12.5	)


Greater than six months but less than or equal to one year
Corporate securities
Financial services		4.1		4.4		(0.3	)
Industrial		39.2		42.7		(3.5	)
Utility		3.0		3.2		(0.2	)
Asset-backed securities
Autos		2.0		2.0		-
Timeshare		1.2		1.2		-
Commercial mortgage-backed securities - non agency backed		21.2		23.2		(2.0	)

Total fixed maturity and equity securities	$	70.7	$	76.7	$	(6.0	)


	December 31, 2013
(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	$	7.2	$	7.3	$	(0.1	)
Industrial		8.3		9.2		(0.9	)
Asset-backed securities - housing related		2.0		2.0		-
Residential mortgage-backed securities - agency backed		0.1		0.1		-

Total fixed maturity and equity securities	$	17.6	$	18.6	$	(1.0	)

Total of all investment grade AFS securities
Corporate securities
Financial services	$	47.6	$	50.3	$	(2.7	)
Industrial		90.8		96.4		(5.6	)
Utility		6.5		6.7		(0.2	)
Asset-backed securities
Housing related		2.0		2.0		-
Structured settlements		9.7		9.7		-
Credit cards		0.8		0.8		-
Autos		25.6		25.6		-
Other		19.2		19.3		(0.1	)
Timeshare		1.2		1.2		-
Commercial mortgage-backed securities - non agency backed		22.7		24.7		(2.0	)
Residential mortgage-backed securities - agency backed		0.1		0.1		-
Municipals		0.8		0.9		(0.1	)
Government and government agencies - United States		168.3		176.4		(8.1	)
Equity securities - banking securities		7.8		8.5		(0.7	)

Total fixed maturity and equity securities	$	403.1	$	422.6	$	(19.5	)


Total number of securities in a continuous unrealized loss position						103

(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:


	June 30, 2014
(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
Financial services	$	3.3	$	3.3	$	-
Industrial		7.5		7.6		(0.1	)
Asset-backed securities - housing related		6.4		6.5		(0.1	)

Total fixed maturity and equity securities		17.2		17.4		(0.2	)

Greater than six months but less than or equal to one year
Corporate securities - industrial		1.6		1.9		(0.3	)
Municipals		0.8		0.9		(0.1	)
Equity securities - banking securities		1.7		1.8		(0.1	)

Total fixed maturity and equity securities		4.1		4.6		(0.5	)

Greater than one year
Corporate securities - industrial		2.3		2.3		-

Total fixed maturity and equity securities	$	2.3	$	2.3	$	-

Total of all below investment grade AFS securities
Corporate securities
Financial services	$	3.3	$	3.3	$	-
Industrial		11.4		11.8		(0.4	)
Asset-backed securities - housing related		6.4		6.5		(0.1	)
Municipals		0.8		0.9		(0.1	)
Equity securities - banking securities		1.7		1.8		(0.1	)

Total fixed maturity and equity securities	$	23.6	$	24.3	$	(0.7	)


Total number of securities in a continuous unrealized loss position						9


	December 31, 2013
(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
Financial services	$	3.0	$	3.1	$	(0.1	)
Industrial		1.6		1.8		(0.2	)
Asset-backed securities - housing related		10.4		10.8		(0.4	)
Equity securities - banking securities		1.7		1.8		(0.1	)

Total fixed maturity and equity securities		16.7		17.5		(0.8	)

Greater than six months but less than or equal to one year
Corporate securities - industrial		0.3		0.3		-

Total fixed maturity and equity securities		0.3		0.3		-

Greater than one year
Corporate securities - industrial		2.2		2.2		-
Asset-backed securities - housing related		5.0		5.5		(0.5	)

Total fixed maturity and equity securities	$	7.2	$	7.7	$	(0.5	)

Total of all below investment grade AFS securities
Corporate securities
Financial services	$	3.0	$	3.1	$	(0.1	)
Industrial		4.1		4.3		(0.2	)
Asset-backed securities - housing related		15.4		16.3		(0.9	)
Equity securities - banking securities		1.7		1.8		(0.1	)

Total fixed maturity and equity securities	$	24.2	$	25.5	$	(1.3	)


Total number of securities in a continuous unrealized loss position						10

(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 17% and 6% of total gross unrealized losses and OTTI on all AFS securities at June 30, 2014 and December 31, 2013, 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 June 30, 2014.

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


		June 30, 2014
(dollars in millions)	Ratio of Estimated Fair Value to Amortized Cost	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI ₍₁₎
Less than or equal to six months	70% to 100%	$	17.2	$	17.4	$	(0.2	)
Greater than six months but less than or equal to one year	70% to 100%		4.1		4.6		(0.5	)
Greater than one year	70% to 100%		2.3		2.3		-

Total		$	23.6	$	24.3	$	(0.7	)


		December 31, 2013
(dollars in millions)	Ratio of Estimated Fair Value to Amortized Cost	Estimated Fair Value		Amortized Cost/Cost		Gross Unrealized Losses and OTTI ₍₁₎
Less than or equal to six months	70% to 100%	$	16.7	$	17.5	$	(0.8	)
Greater than six months but less than or equal to one year	70% to 100%		0.3		0.3		-
Greater than one year	70% to 100%		7.2		7.7		(0.5	)

Total		$	24.2	$	25.5	$	(1.3	)

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

The amortized cost and estimated fair value of fixed maturity AFS securities at June 30, 2014 and December 31, 2013 by rating agency equivalent were:


	June 30, 2014				December 31, 2013
(dollars in millions)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
AAA	$	179.0	$	185.1	$	160.7	$	165.4
AA		524.9		574.4		471.1		486.3
A		523.2		572.6		538.2		577.2
BBB		377.6		418.4		401.1		425.1
Below investment grade		88.2		95.2		59.1		64.3

Total fixed maturity AFS securities	$	1,692.9	$	1,845.7	$	1,630.2	$	1,718.3


Investment grade		95%		95%		96%		96%
Below investment grade		5%		5%		4%		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 June 30, 2014 and December 31, 2013, approximately $112.6 million (or 6%) and $117.5 million (or 7%), 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.

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 June 30, 2014 and December 31, 2013:


	June 30, 2014
(dollars in millions)	Amortized Cost		Estimated Fair Value		Gross Unrealized Gain (Loss) and OTTI
First lien - fixed
AAA	$	1.3	$	1.3	$	-
AA		1.7		1.8		0.1
Below BBB		19.5		20.2		0.7
Second lien (a)
Below BBB		-		2.6		2.6

Total	$	22.5	$	25.9	$	3.4


	December 31, 2013
(dollars in millions)	Amortized Cost		Estimated Fair Value		Gross Unrealized Gain (Loss) and OTTI
First lien - fixed
AAA	$	2.0	$	2.0	$	-
AA		1.7		1.8		0.1
Below BBB		20.5		19.9		(0.6	)
Second lien (a)
Below BBB		0.6		3.5		2.9

Total	$	24.8	$	27.2	$	2.4


	June 30, 2014
	Estimated Fair Value by Vintage
(dollars in millions)	2004&Prior		2005		2006		2007		Total
First lien - fixed
AAA	$	1.3	$	-	$	-	$	-	$	1.3
AA		1.8		-		-		-		1.8
Below BBB		2.8		1.6		4.0		11.8		20.2
Second lien (a)
Below BBB		-		-		2.6		-		2.6

Total	$	5.9	$	1.6	$	6.6	$	11.8	$	25.9


	December 31, 2013
	Estimated Fair Value by Vintage
(dollars in millions)	2004&Prior		2005		2006		2007		Total
First lien - fixed
AAA	$	2.0	$	-	$	-	$	-	$	2.0
AA		1.8		-		-		-		1.8
Below BBB		2.7		1.8		4.0		11.4		19.9
Second lien (a)
Below BBB		-		-		3.5		-		3.5

Total	$	6.5	$	1.8	$	7.5	$	11.4	$	27.2

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

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 June 30, 2014 and December 31, 2013, the Company’s assets included $2.2 billion and $2.1 billion, respectively, of cash, short-term investments and investment grade publicly traded AFS securities that could be liquidated if funds were required.

We believe that the existing cash available to the Company, the cash flows to be generated from operations and other transactions will be sufficient to allow us to meet policyholder obligations, pay expenses and satisfy other financial obligations. However, the cash flow is affected by a variety of factors, many of which are outside our control, including insurance regulatory issues, competition, financial markets and other general business conditions. We cannot provide assurance that we will possess sufficient income and liquidity to meet all our policyholder obligations and other company obligations.

Capital Resources

For the six months ended June 30, 2014 and 2013, the Company did not pay any dividends to AUSA. During the first six months of 2014, the Company received capital contributions from AUSA of $99.3 million in conjunction with a tax allocation agreement. See Note 6 to the financial statement for further discussion. The Company did not receive any capital contributions from AUSA in the six months ended June 30, 2013.

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 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

The following table summarizes the Company’s ratings at August 13, 2014:

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 June 30, 2014:


(dollars in millions)	Less Than One Year		One To Three Years		Four To Five Years		More Than Five Years		Total
General accounts (a)	$	170.4	$	309.5	$	270.9	$	1,742.7	$	2,493.5
Separate Accounts (a)		854.7		1,519.8		1,285.5		5,655.3		9,315.3

	$	1,025.1	$	1,829.3	$	1,556.4	$	7,398.0	$	11,808.8

(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 June 30, 2014 and December 31, 2013, the Company’s estimated liability for future guaranty fund assessments was $0.2 million. In addition, the Company has a receivable for future premium tax deductions of $4.5 million and $4.6 million, respectively, at June 30, 2014 and December 31, 2013. 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 June 30, 2014 and 2013, the Company recorded a net loss of ($1.4) million and ($32.9) million, respectively. For the six months ended June 30, 2014 and 2013, the Company recorded a net loss of ($0.1) million and ($67.0) million, respectively. The lower loss during the three months ended June 30, 2014 as compared to the same period in 2013 was primarily due to a decrease in VOBA amortization and policy benefit expense. The lower loss during the six months ended June 30, 2014 as compared to the same period in 2013 was primarily due to the negative impact of the equity collar hedge during 2013.

The following table provides the changes in policy charge revenue by type for each respective period:


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in millions)	2014		2013		2014		2013
Asset-based policy charge revenue	$	27.5	$	27.9	$	55.3	$	55.0
Guaranteed benefit based policy charge revenue		6.2		6.0		12.3		12.0
Non-asset based policy charge revenue		12.3		12.3		24.9		25.1

Total policy charge revenue	$	46.0	$	46.2	$	92.5	$	92.1

Net derivative losses increased ($7.9) million and decreased $77.6 million, respectively, during the three and six months ended June 30, 2014 as compared to the same period in 2013. The following table provides the changes in net derivative losses by type:


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in millions)	2014			2013			2014			2013
Equity collar (puts and calls)	$	-		$	(32.3	)	$	-		$	(120.5	)	(a	)
Total return swaps		(31.3	)		7.9			(42.7	)		12.9		(b	)
Variance swaps		(3.2	)		0.1			(4.4	)		(2.1	)
Futures		(3.4	)		(5.7	)		(4.8	)		(19.9	)	(c	)
Interest rate swaps		-			-			(0.1	)		-

Total net derivative losses	$	(37.9	)	$	(30.0	)	$	(52.0	)	$	(129.6	)

(a)

The equity collar was disposed of in the fourth quarter of 2013 which is driving the decrease in losses. The 2013 losses were driven by the increase in the S&P index. This was a zero cost at inception macro equity hedge to protect against a portion of the unhedged equity tail risk by selling a portion of the market upside above the Company’s long term expected return and buying protection against extreme market declines. As a result, when equity markets increase, the equity collars decline in value. When markets decrease, they increase in value.

(b)	The Company had a large notional amount of short positions in total return swaps for the first half of 2014, and the increase in the S&P gave rise to losses. The total return swap gains in 2013 were the result of long exposure to the S&P.

(c)	Short futures result in losses when equity markets increase and long futures result in gains as equity markets increase. The Company no longer holds long futures. Short futures performance was driven by the 6% and 10% increases in the S&P for the six months ended June 30, 2014 and 2013.

Policy benefits decreased ($20.5) million and increased $12.5 million during the three and six months ended June 30, 2014 as compared to the same period in 2013. The following table provides the changes in policy benefits by type:


	Three Months Ended June 30,					Six Months Ended June 30,
(dollars in millions)	2014			2013		2014			2013
Annuity benefit unlocking	$	(11.7	)	$	4.3	$	(11.7	)	$	(24.2	)	(a	)
Annuity benefit expense		8.1			10.2		17.8			17.4
Amortization (accretion) of deferred sales inducements		(0.1	)		0.6		(0.1	)		1.2
Life insurance mortality expense		10.4			12.1		21.3			20.4

Total policy benefits	$	6.7		$	27.2	$	27.3		$	14.8

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

Accretion of DAC was ($0.3) million and ($0.5) million for the three and six months ended June 30, 2014, respectively. Amortization of DAC was $2.7 million and $6.1 million for the three and six months ended June 30, 2013, respectively. There was no DAC unlocking for the three months ended June 30, 2014 and 2013. During the six months ended June 30, 2014 and 2013, there was an unfavorable impact to pre-tax income related to DAC unlocking of ($0.1) million and ($0.7) million, respectively. During the three and six months ended June 30, 2014, a reserve increase as well as an increase in hedge costs drove DAC accretion compared to the same period in 2013.

Amortization of VOBA was $1.2 million for both the three and six months ended June 30, 2014. There was no VOBA unlocking for the three months ended June 30, 2014. During the six months ended June 30, 2014 there was an unfavorable impact to pre-tax income related to VOBA unlocking of ($0.1) million. Amortization of VOBA was $8.7 million and $8.2 for the three and six months ended June 30, 2013, respectively, which included favorable unlocking of less than $0.1 million and $0.3 million, respectively. During the three and six months ended June 30, 2014, an increase in gross profits from strong equity market performance drove the change in VOBA amortization.

Insurance expenses and taxes decreased ($2.4) million and ($3.3) during the three and six months ended June 30, 2014 as compared to the same period in 2013. The following table provides the changes in insurance expenses and taxes for each respective period:


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in millions)	2014		2013		2014		2013
Commissions	$	8.4	$	8.6	$	16.5	$	17.4
General insurance expenses		3.5		5.5		6.3		8.6	(a	)
Taxes, licenses, and fees		0.2		0.4		0.4		0.5

Total insurance expenses and taxes	$	12.1	$	14.5	$	23.2	$	26.5

(a)	The decrease in general insurance expenses was due to a decrease in the guaranty fund assessment expense.

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 second fiscal quarter of 2014 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.

The Company, like other life insurance companies, is subject to regulatory and legal proceedings, including class action lawsuits, in the ordinary course of our business. Such legal and regulatory matters include proceedings specific to us and other proceedings generally applicable to business practices in the industry in which the Company operates. In some lawsuits and regulatory proceedings involving insurers, substantial damages have been sought and/or material settlement payments have been made. Although the outcome of any litigation or regulatory proceeding cannot be predicted with certainty, at the present time, the Company believes that there are no pending or threatened proceedings or lawsuits that are likely to have a material adverse impact on our ability to meet our obligations.

The Company reached an agreement to end a multi-state exam with several state insurance regulators and state controllers’ offices regarding compliance with laws and regulations concerning the identification, reporting and escheatment of unclaimed benefits or abandoned funds. The Company is also the subject of other inquiries and market conduct examinations with a similar focus on the handling of unreported claims and abandoned property. The audits and related examination activity may result in additional payments to beneficiaries, escheatment of funds deemed abandoned, administrative penalties and changes in our procedures for the identification of unreported claims and handling of escheatable property. The Company does not believe that any regulatory actions or agreements that result from these examinations will have a material adverse impact on our ability to meet our obligations.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2013. 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.

In 2012, the Company began selling a fixed contingent annuity (also sometimes referred to as a contingent deferred annuity or “CDA”) that includes a stand-alone living benefit (“SALB”). A SALB is essentially a guaranteed lifetime withdrawal benefit which exists independently and is applied to mutual funds and exchange traded funds. There is a risk that state regulators could determine that existing actuarial or financial standards are inadequate when applied to CDAs and therefore require more stringent regulations, which could impact the Company’s ability to issue such products, potentially making growth of future revenues limited and uncertain. The sales volume of the CDAs is deemed by the Company to be immaterial through the first six months of 2014. Therefore, the Company has not actively hedged the CDAs.

Item 2. Unregistered Sales of Equity Securities and use of Proceeds.

Not applicable.

Item 3. Defaults upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

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.)

4.25		Form of Group Fixed Contingent Annuity Contract. (Incorporated by reference to Exhibit 4(i) to the Registrant’s Registration Statement on Form S-3, File No. 333-177282, filed October 13, 2011.)

4.26		Form of Group Fixed Contingent Annuity Certificate. (Incorporated by reference to Exhibit 4(ii) to the Registrant’s Registration Statement on Form S-3, File No. 333-177282, filed October 13, 2011.)

4.27		Form of Group or Individual Contingent Deferred Annuity Contract. (Incorporated by reference to Exhibit 4(i) to Pre-Effective Amendment No. 1 to Registrant’s Registration Statement on Form S-3, File No. 333-185576, filed April 15, 2013.)

4.28		Form of Group Contingent Deferred Annuity Certificate. (Incorporated by reference to Exhibit 4(ii) to Pre-Effective Amendment No. 1 to Registrant’s Registration Statement on Form S-3, File No. 333-185576, filed April 15, 2013.)

4.29		Form of Enrollment Form. (Incorporated by reference to Exhibit 4(iii) to Pre-Effective Amendment No. 1 to Registrant’s Registration Statement on Form S-3, File No. 333-185576, filed April 15, 2013.)

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.)

10.19		Principal Underwriting Agreement by and between Transamerica Capital, Inc. and Transamerica Advisors Life Insurance Company. (Incorporated by reference to Exhibit 1 to Pre-Effective Amendment No. 1 to Registrant’s Registration Statement on Form S-3, File No. 333-177282, filed December 15, 2011.)

10.20		Administrative Services Agreement between ARIA Retirement Solutions, LLC and Transamerica Advisors Life Insurance Company. (Incorporated by reference to Exhibit 10 to Registrant’s Registration Statement on Form S-3, File No. 333-177282, filed October 13, 2011.)

10.21		Amended and Restated Principal Underwriting Agreement between Transamerica Capital, Inc. and Transamerica Advisors Life Insurance Company. (Incorporated by reference to Exhibit 1 to Pre-Effective Amendment No. 3 to Registrant’s Registration Statement on Form S-3, File No. 333-185576, filed May 15, 2013.)

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

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

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, is filed herewith.

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, is filed herewith.

101.INS		XBRL Instance Document, is filed herewith.

101.SCH		XBRL Taxonomy Extension Schema, is filed herewith.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase, is filed herewith.

101.DEF		XBRL Taxonomy Definition Linkbase, is filed herewith.

101.LAB		XBRL Taxonomy Extension Label Linkbase, is filed herewith.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase, is filed herewith.

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
		(Registrant)

Date: August 13, 2014		/s/ Eric J. Martin
		Eric J. Martin
		Chief Financial Officer, Vice President, Treasurer and Corporate Controller

EXHIBIT INDEX


31.1		Certification by the President pursuant to Rule 15d-14(a), is filed herewith.

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

32.1		Certification by the President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is filed herewith.

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, is filed herewith.

101.INS		XBRL Instance Document, is filed herewith.

101.SCH		XBRL Taxonomy Extension Schema, is filed herewith.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase, is filed herewith.

101.DEF		XBRL Taxonomy Definition Linkbase, is filed herewith.

101.LAB		XBRL Taxonomy Extension Label Linkbase, is filed herewith.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase, is filed herewith.

(4th out of 21)

(2nd out of 16)

(4th out of 19)