TRANSAMERICA ADVISORS LIFE INSURANCE Co - FORM 10-Q

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EX-31.1 - EX-31.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co	d912754dex311.htm
EX-32.2 - EX-32.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co	d912754dex322.htm
EX-32.1 - EX-32.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co	d912754dex321.htm
EX-31.2 - EX-31.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co	d912754dex312.htm
EXCEL - IDEA: XBRL DOCUMENT - TRANSAMERICA ADVISORS LIFE INSURANCE Co	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015

COMMISSION FILE NUMBERS 33-26322

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)*	March 31, 2015		December 31, 2014
	*(unaudited)*
ASSETS
Investments
Fixed maturity available-for-sale securities, at estimated fair value (amortized cost: 2015 - $1,702,954; 2014 - $1,705,721)	$	1,891,151	$	1,867,913
Equity available-for-sale securities, at estimated fair value (cost: 2015 - $33,928; 2014 - $33,928)		36,747		35,958
Limited partnerships		65,395		64,518
Mortgage loans on real estate		65,778		66,667
Policy loans		671,667		681,071
Derivative assets		2,652		1,055

Total investments		2,733,390		2,717,182

Cash and cash equivalents		284,844		235,034
Accrued investment income		33,728		37,648
Deferred policy acquisition costs		42,510		41,127
Deferred sales inducements		9,660		9,351
Value of business acquired		260,057		268,079
Goodwill		2,800		2,800
Reinsurance receivables - net		429		-
Receivable for investments sold - net		573		807
Other assets		34,891		25,044
Separate Accounts assets		6,694,558		6,771,369

Total Assets	$	10,097,440	$	10,108,441

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)*	March 31, 2015			December 31, 2014
	*(unaudited)*
LIABILITIES AND STOCKHOLDER’S EQUITY
Liabilities
Policyholder liabilities and accruals
Policyholder account balances	$	1,190,436		$	1,207,763
Future policy benefits		419,191			425,259
Claims and claims settlement expenses		39,407			28,939

Total policyholder liabilities and accruals		1,649,034			1,661,961

Payables for collateral under securities loaned, reverse repurchase agreements and derivatives		301,807			265,880
Checks not yet presented for payment		7,919			13,576
Derivative liabilities		20,402			18,744
Income taxes - net		5,118			5,109
Affiliated payables - net		7,521			5,491
Reinsurance payables - net		-			49
Other liabilities		3,897			4,260
Separate Accounts liabilities		6,694,558			6,771,369

Total Liabilities		8,690,256			8,746,439


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		1,556,273			1,545,665
Accumulated other comprehensive income, net of taxes		133,163			109,242
Retained deficit		(284,752	)		(295,405	)

Total Stockholder’s Equity		1,407,184			1,362,002

Total Liabilities and Stockholder’s Equity	$	10,097,440		$	10,108,441

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF INCOME


	Three Months Ended March 31,
*(dollars in thousands)*	2015			2014
				As Restated
	*(unaudited)*
Revenues
Policy charge revenue	$	43,861		$	46,455
Net investment income		29,527			28,845
Net realized investment gains
Portion of other-than-temporary impairments previously recognized in other comprehensive income		-			(100	)

Net other-than-temporary impairment losses on securities recognized in income		-			(100	)
Net realized investment gains, excluding other-than-temporary impairment losses on securities		143			558

Net realized investment gains		143			458

Net derivative losses		(20,922	)		(14,069	)

Total Revenues		52,609			61,689


Benefits and Expenses
Interest credited to policyholder liabilities		12,746			13,674
Policy benefits (net of reinsurance recoveries: 2015 - $576; 2014 - $3,213)		13,305			20,471
Reinsurance premium ceded		1,145			1,602
Accretion of deferred policy acquisition costs		(1,351	)		(350	)
Amortization (accretion) of value of business acquired		4,854			(147	)
Insurance expenses and taxes		11,257			11,028

Total Benefits and Expenses		41,956			46,278

Income Before Taxes		10,653			15,411


Income Tax Expense (Benefit)		-			-

Net Income	$	10,653		$	15,411

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 March 31,
*(dollars in thousands)*	2015			2014
				As Restated
	*(unaudited)*

Net Income	$	10,653		$	15,411


Other Comprehensive Income
Net unrealized gains on available-for-sale securities
Net unrealized holding gains arising during the period		25,571			35,940
Reclassification adjustment for (gains) losses included in net income		1,162			(351	)

		26,733			35,589

Net unrealized gains (losses) on cash flow hedges
Net unrealized gain (losses) on cash flow hedges arising during the period		1,088			(1,525	)
Reclassification adjustment for losses included in net income		(800	)		(2	)

		288			(1,527	)

Net unrealized other-than-temporary impairments on securities
Change in previously recognized unrealized other-than-temporary impairments		62			705
Reclassification adjustment for other-than-temporary impairments included in net income		-			100

		62			805


Adjustments
Value of business acquired		(3,162	)		(5,902	)

		(3,162	)		(5,902	)

Total other comprehensive income, net of taxes		23,921			28,965

Comprehensive Income	$	34,574		$	44,376

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)*	Three Months Ended March 31, 2015			Twelve Months Ended December 31, 2014
	*(unaudited)*

Common Stock	$	2,500		$	2,500

Balance at beginning of period
Balance at beginning of period	$	1,545,665		$	1,366,636
Capital contribution from AEGON USA, LLC		10,608			179,029

Balance at end of period	$	1,556,273		$	1,545,665


Accumulated Other Comprehensive Income
Balance at beginning of period	$	109,242		$	39,703
Total other comprehensive income, net of taxes		23,921			69,539

Balance at end of period	$	133,163		$	109,242


Retained Deficit
Balance at beginning of period	$	(295,405	)	$	(228,938	)
Net income		10,653			33,533
Cash dividend paid to AEGON USA, LLC		-			(100,000	)

Balance at end of period	$	(284,752	)	$	(295,405	)


Total Stockholder’s Equity	$	1,407,184		$	1,362,002

See Notes to Financial Statement

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF CASH FLOWS


	Three Months Ended March 31,
*(dollars in thousands)*	2015			2014
				As Restated
	*(unaudited)*

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	10,653		$	15,411
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Change in deferred policy acquisition costs		(1,383	)		(413	)
Change in deferred sales inducements		(309	)		(48	)
Change in value of business acquired		4,854			(147	)
Change in benefit reserves		(559	)		1,264
Change in income tax accruals		9			505
Change in claims and claims settlement expenses		10,468			14,953
Change in other operating assets and liabilities, net		(4,508	)		(8,246	)
Change in checks not yet presented for payment		(5,657	)		(262	)
Amortization of investments		1,628			380
Interest credited to policyholder liabilities		12,746			13,674
Net derivative losses		20,922			14,069
Net realized investment gains		(143	)		(458	)

Net cash and cash equivalents provided by operating activities		48,721			50,682


CASH FLOWS FROM INVESTING ACTIVITIES
Sales of available-for-sale securities and mortgage loans		65,651			30,848
Maturities of available-for-sale securities and mortgage loans		109,307			73,351
Purchases of available-for-sale securities		(172,780	)		(55,745	)
Sales of limited partnerships		252			-
Cash received in connection with derivatives		5,691			2,666
Cash paid in connection with derivatives		(24,946	)		(48,125	)
Policy loans on insurance contracts, net		9,405			7,909
Net settlement on futures contracts		(1,316	)		(1,363	)
Other		(1,128	)		23

Net cash and cash equivalents provided by (used in) investing activities	$	(9,864	)	$	9,564

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF CASH FLOWS - Continued


	Three Months Ended March 31,
*(dollars in thousands)*	2015			2014
				As Restated
	*(unaudited)*

CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder deposits	$	3,954		$	6,545
Policyholder withdrawals		(39,536	)		(39,013	)
Capital contributions from AEGON USA, LLC		10,608			5,525
Change in payables for collateral under securities loaned, reverse repurchase agreements and derivatives		35,927			8,103

Net cash and cash equivalents provided by (used in) financing activities		10,953			(18,840	)


Net increase in cash and cash equivalents ⁽¹⁾		49,810			41,406
Cash and cash equivalents, beginning of year		235,034			301,737

Cash and cash equivalents, end of period	$	284,844		$	343,143

(1) Included in net increase in cash and cash equivalents is interest received (2015 - $0; 2014 - $0); interest paid (2015 - $5; 2014 - $5;); income taxes paid (2015 - $0; 2014 - $0); and income taxes received (2015 - $9; 2014 - $505).

See Notes to Financial Statement

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 2014 Financial Statements and accounting policies, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The interim Financial Statements for the three month periods are unaudited; 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 2014 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.

Restatement of Previously Issued Financial Statements

During the preparation of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, an error in the tax valuation allowance was identified for the year ended December 31, 2013. The error principally relates to the scheduling of certain deferred tax liabilities in the Company’s analysis of the future ability to utilize net operating loss carryforwards in the tax expense calculations and the resulting amount of valuation allowance recognized. Following the identification of the tax related error, management initiated a comprehensive internal review of the Company’s historical financial information and determined the error materially impacted the audited financial statements for the year ended December 31, 2013 and the unaudited interim financial statements for March 31, 2014, June 30, 2014 and September 30, 2014. Consequently, the Company restated its financial statements for the year ended December 31, 2013 and the unaudited interim financial statements for March 31, 2014, June 30, 2014 and September 30, 2014. For additional detail and a complete presentation of the restated unaudited interim financial statements for March 31, 2014, June 30, 2014 and September 30, 2014, refer to the Company’s Annual Report on Form 10-K.

In addition to the error in the tax valuation allowance, the Company identified out-of-period errors that were individually and in the aggregate immaterial and that were corrected in the period to which they relate. These corrections primarily relate to actuarial modelling reserving errors and state tax calculations. The impact to the individual financial statement line items for these corrections is reflected in the below section “Comparison of previously issued unaudited interim financial statements to restated unaudited interim financial statements for the period ended March 31, 2014.”

Certain corrections have been made to prior period financial statements. In the Statements of Other Comprehensive Income, unrealized losses of $1,610 were reclassified from “Change in previously recognized unrealized other-than-temporary impairments” to “Net unrealized holding gains arising during the period”. There was no effect on net income, total other comprehensive income or stockholder’s equity of the prior period. Management has evaluated the corrections and concluded that they were not material to any previously reported quarterly or annual financial statements.

Comparison of previously issued unaudited interim financial statements to restated unaudited interim financial statements for the period ended March 31, 2014

The following tables compare the previously reported Statements of Income, Comprehensive Income (Loss), and Cash Flows for the period ended March 31, 2014 to the corresponding restated financial statements.

Transamerica Advisors Life Insurance Company

Statement of Income (unaudited)


	Three Months Ended March 31, 2014
*(dollars in thousands)*	As Reported			Tax Valuation Allowance Restatement			Other Adjustments⁽¹⁾			As Restated

Revenues
Policy charge revenue	$	46,455		$	-		$	-		$	46,455
Net investment income		28,845			-			-			28,845
Net realized investment gains (losses)
Portion of other-than-temporary impairments previously recognized in other comprehensive income		(100	)		-			-			(100	)

Net other-than-temporary impairment losses on securities recognized in income		(100	)		-			-			(100	)
Net realized investment gains, excluding other-than-temporary impairment losses on securities		558			-			-			558

Net realized investment gains		458			-			-			458

Net derivative losses		(14,069	)		-			-			(14,069	)

Total Revenues		61,689			-			-			61,689


Benefits and Expenses
Interest credited to policyholder liabilities		13,674			-			-			13,674
Policy benefits (net of reinsurance recoveries: $3,213		20,571			-			(100	)		20,471
Reinsurance premium ceded		1,602			-			-			1,602
Accretion of deferred policy acquisition costs		(180	)		-			(170	)		(350	)
Accretion of value of business acquired		(47	)		-			(100	)		(147	)
Insurance expenses and taxes		11,028			-			-			11,028

Total Benefits and Expenses		46,648			-			(370	)		46,278

Income Before Taxes		15,041			-			370			15,411


Income Tax Expense		13,759			(13,759	)		-			-

Net Income	$	1,282		$	13,759		$	370		$	15,411

(1) Consists of out-of-period errors.

Transamerica Advisors Life Insurance Company

Statement of Comprehensive Income (unaudited)


	Three Months Ended March 31, 2014
*(dollars in thousands)*	As Reported			Tax Valuation Allowance Restatement		Other Adjustments⁽¹⁾			As Restated

Net Income	$	1,282		$	13,759	$	370		$	15,411


Other Comprehensive Income
Net unrealized gains on available-for-sale securities
Net unrealized holding gains arising during the period		37,550			-		(1,610	)⁽²⁾		35,940
Reclassification adjustment for gains included in net income		(351	)		-		-			(351	)

		37,199			-		(1,610	)		35,589

Net unrealized losses on cash flow hedges
Net unrealized losses on cash flow hedges arising during the period		(1,525	)		-		-			(1,525	)
Reclassification adjustment for gains included in net income		(2	)		-		-			(2	)

		(1,527	)		-		-			(1,527	)

Net unrealized other-than-temporary impairments on securities
Change in previously recognized unrealized other-than-temporary impairments		(905	)		-		1,610	⁽²⁾		705
Reclassification adjustment for other-than-temporary impairments included in net income		100			-		-			100

		(805	)		-		1,610			805

Adjustments
Value of business acquired		(5,902	)		-		-			(5,902	)
Deferred income taxes		(10,284	)		10,284		-			-

		(16,186	)		10,284		-			(5,902	)


Total other comprehensive income, net of taxes		18,681			10,284		-			28,965

Comprehensive Income	$	19,963		$	24,043	$	370		$	44,376

(1) Consists of out-of-period errors and reclassifications.

(2) Consists of reclassification of unrealized losses from “Change in previously recognized other-than-temporary impairments” to “Net unrealized holding gains arising during the period”.

Transamerica Advisors Life Insurance Company

Statement of Cash Flows (unaudited)


	Three Months Ended March 31, 2014
*(dollars in thousands)*	As Reported			Tax Valuation Allowance Restatement			Other Adjustments⁽¹⁾			As Restated

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,282		$	13,759		$	370		$	15,411
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Change in deferred policy acquisition costs		(243	)		-			(170	)		(413	)
Change in deferred sales inducements		(48	)		-			-			(48	)
Change in value of business acquired		(47	)		-			(100	)		(147	)
Change in benefit reserves		1,364			-			(100	)		1,264
Change in income tax accruals		14,264			(13,759	)		-			505
Change in claims and claims settlement expenses		14,953			-			-			14,953
Change in other operating assets and liabilities, net		(8,246	)		-			-			(8,246	)
Change in checks not yet presented for payment		(262	)		-			-			(262	)
Amortization of investments		380			-			-			380
Interest credited to policyholder liabilities		13,674			-			-			13,674
Net derivative losses		14,069			-			-			14,069
Net realized investment gains		(458	)		-			-			(458	)

Net cash and cash equivalents provided by operating activities		50,682			-			-			50,682


CASH FLOWS FROM INVESTING ACTIVITIES
Sales of available-for-sale securities		30,848			-			-			30,848
Maturities of available-for-sale securities and mortgage loans		73,351			-			-			73,351
Purchases of available-for-sale securities		(55,745	)		-			-			(55,745	)
Cash received in connection with derivatives		2,666			-			-			2,666
Cash paid in connection with derivatives		(48,125	)		-			-			(48,125	)
Policy loans on insurance contracts, net		7,909			-			-			7,909
Net settlement on futures contracts		(1,363	)		-			-			(1,363	)
Other		23			-			-			23

Net cash and cash equivalents provided by investing activities	$	9,564		$	-		$	-		$	9,564


CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder deposits	$	6,545		$	-		$	-		$	6,545
Policyholder withdrawals		(39,013	)		-			-			(39,013	)
Capital contribution from AEGON USA, LLC		5,525			-			-			5,525
Change in payables for collateral under securities loaned and reverse repurchase agreements		8,103			-			-			8,103

Net cash and cash equivalents used in financing activities		(18,840	)		-			-			(18,840	)


Net increase in cash and cash equivalents (2)		41,406			-			-			41,406
Cash and cash equivalents, beginning of year		301,737			-			-			301,737

Cash and cash equivalents, end of period	$	343,143		$	-		$	-		$	343,143

(1) Consists of out-of-period errors.

(2) Included in net increase in cash and cash equivalents is interest received - $0; interest paid - $5; income taxes paid - $ 0; and income taxes received - $ 505.

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.

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. No subsequent events have been identified.

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

ASC 860, Transfers and Servicing

In June 2014, the FASB issued 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 was 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. The new accounting requirements will not impact the Company’s results of operations or financial position. The adoption of the guidance will have an impact on the Company’s disclosures.

ASC 205, Presentation of Financial Statements

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (ASC Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This guidance requires an entity’s management to evaluate whether there are conditions or events that, considered in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. It also requires

disclosures under certain circumstances. The guidance is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. Implementation of the ASC will not affect the Company’s financial position or results of operations. The Company is in the process of reviewing its policies and processes to ensure compliance with the new guidance.

ASC 606, Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance unless the contracts are within the scope of other standards (for example, financial instruments, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance establishes a five-step process to achieve this core principle. ASU 2014-09 will be effective for the Company on January 1, 2017, using either of two methods: retrospective to each prior reporting period presented with certain practical expedients, or retrospective with the cumulative effect of initial application recognized at the date of initial application subject to certain additional disclosures. The Company has not yet selected a transition method and is evaluating the impact that adoption of this update is expected to have on the Company’s financial statements.

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:


	March 31, 2015
	Level 1		Level 2		Level 3		Total
Assets
Fixed maturity available-for-sale (“AFS”) securities (a)
Corporate securities	$	-	$	1,131,987	$	1,612	$	1,133,599
Asset-backed securities		-		124,645		8,575		133,220
Commercial mortgage-backed securities		-		97,220		-		97,220
Residential mortgage-backed securities		-		104,155		-		104,155
Municipals		-		803		-		803
Government and government agencies
United States		411,927		-		-		411,927
Foreign		3,559		6,668		-		10,227

Total fixed maturity AFS securities (a)		415,486		1,465,478		10,187		1,891,151
Equity securities (a)
Banking securities		-		30,538		-		30,538
Industrial securities		-		6,209		-		6,209

Total equity securities (a)		-		36,747		-		36,747
Cash equivalents (b)		-		283,467		-		283,467
Derivative assets (f)		-		2,652		-		2,652
Limited partnerships (c)		-		62,452		2,943		65,395
Separate Accounts assets (d)		6,694,558		-		-		6,694,558

Total assets	$	7,110,044	$	1,850,796	$	13,130	$	8,973,970


Liabilities
Future policy benefits (embedded derivatives only) (e)	$	-	$	-	$	3,657	$	3,657
Derivative liabilities (f)		-		20,402		-		20,402

Total liabilities	$	-	$	20,402	$	3,657	$	24,059


	December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets
Fixed maturity AFS securities (a)
Corporate securities	$	-	$	1,177,409	$	-	$	1,177,409
Asset-backed securities		-		124,686		8,474		133,160
Commercial mortgage-backed securities		-		100,801		-		100,801
Residential mortgage-backed securities		-		45,447		-		45,447
Municipals		-		800		-		800
Government and government agencies
United States		400,251		-		-		400,251
Foreign		3,564		6,481		-		10,045

Total fixed maturity AFS securities (a)		403,815		1,455,624		8,474		1,867,913
Equity securities (a)
Banking securities		-		29,702		-		29,702
Industrial securities		-		6,256		-		6,256

Total equity securities (a)		-		35,958		-		35,958
Cash equivalents (b)		-		232,509		-		232,509
Derivative assets (f)		-		1,055		-		1,055
Limited partnerships (c)		-		60,432		4,086		64,518
Separate Accounts assets (d)		6,771,369		-		-		6,771,369

Total assets	$	7,175,184	$	1,785,578	$	12,560	$	8,973,322


Liabilities
Future policy benefits (embedded derivatives only) (e)	$	-	$	-	$	633	$	633
Derivative liabilities (f)		-		18,744		-		18,744


Total liabilities	$	-	$	18,744	$	633	$	19,377

(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 March 31, 2015 and 2014, 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 the 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 credit default swaps 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 and 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. Credit default swaps are valued using a discounted cash flow model where future premium payments and protection payments are corrected for the probability of default which is modeled using an arbitrage free credit spread model.

For the three months ended March 31, 2015 and twelve months ended December 31, 2014, there were no transfers between Level 1 and 2, respectively.

The following table provides a summary of the change in fair value of the Company’s Level 3 assets at March 31, 2015 and December 31, 2014:


	Three Months Ended						Twelve Months Ended
	March 31, 2015						December 31, 2014
				Fixed						Fixed
	Limited			Maturity AFS			Limited			Maturity AFS
	Partnership			Securities			Partnership			Securities
Balance at beginning of period (a)	$	4,086		$	8,474		$	5,044		$	6,428

Change in unrealized losses (b)		-			(321	)		-			(72	)
Purchases		-			-			-			-
Sales		(252	)		(15	)		(962	)		(30	)
Transfers into Level 3		-			2,049			-			3,744
Transfers out of Level 3		-			-			-			(1,596	)
Changes in valuation (c)		(891	)		-			4			-


Balance at end of period (a)	$	2,943		$	10,187		$	4,086		$	8,474

(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 increase in Level 3 fixed maturity AFS securities at March 31, 2015 was due to a security transferring from Level 2 to Level 3 due to the unavailability of market observable data. The increase in Level 3 fixed maturity AFS securities at December 31, 2014 was due to a security transferring from Level 2 to Level 3 due to the unavailability of market observable data. The increase was partially offset by a security transferring from Level 3 to Level 2 due to the availability of market observable data.

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, an increase (decrease) 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 March 31, 2015 and December 31, 2014, 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 24.4% and 24.3% at March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014:


	Three Months Ended								Twelve Months Ended
	March 31, 2015								December 31, 2014
	GMWB			GMIB Reinsurance			SALB		GMWB		GMIB Reinsurance			SALB
Balance at beginning of period (b)	$	60,702		$	(60,573	)	$	504	$	21,776	$	(39,345	)	$	41

Changes in interest rates (a)		7,261			(4,328	)		-		30,760		(26,759	)		-
Changes in equity markets (a)		(2,637	)		2,702			-		762		2,330			463
Other (a)		7			19			-		7,404		3,201			-

Balance at end of period (b)	$	65,333		$	(62,180	)	$	504	$	60,702	$	(60,573	)	$	504

(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 three months ended March 31, 2015, the change in GMWB and GMIB reinsurance reserves was primarily driven by continuing declines in interest rates. During 2014, the change in GMWB and GMIB reinsurance reserves was primarily driven by declining interest rates and updated policyholder behavior assumptions.

The following table provides a summary of the quantitative inputs and assumptions of the Company’s Level 3 assets and liabilities at March 31, 2015 and December 31, 2014:


	March 31,
	2015
Description	Estimated Fair Value			Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
Assets
Fixed maturity securities
Corporate securities	$	1,612		Blockrock Anser Model	Spread over US Treasury Spot Rate	+/- 50 bps (525 bps)
Asset-backed securities		8,575		Broker	Not applicable	Not applicable

Total fixed maturity securities		10,187
Limited partnership		2,943		Not applicable ₍₁₎	Not applicable ₍₁₎	Not applicable ₍₁₎

Total assets	$	13,130


Liabilities
Future policy benefits (embedded derivatives) - GMWB	$	65,333		Discounted cash flows	Own credit risk	30 bps
					Long-term volatility	25%
Future policy benefits (embedded derivatives) - GMIB Reinsurance		(62,180	)	Discounted cash flows	Own credit risk	30 bps
					Long-term volatility	25%
Future policy benefits - SALB		504		See comment below ₍₂₎	See comment below ₍₂₎	See comment below ₍₂₎

Total liabilities	$	3,657


	December 31,
	2014
Description	Estimated Fair Value			Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
Assets
Fixed maturity securities
Asset-backed securities	$	8,474

Total fixed maturity securities		8,474		Broker	Not applicable	Not applicable
Limited partnership		4,086		Not applicable ₍₁₎	Not applicable ₍₁₎	Not applicable ₍₁₎

Total assets	$	12,560


Liabilities
Future policy benefits (embedded derivatives) - GMWB	$	60,702		Discounted cash flows	Own credit risk	30 bps
					Long-term volatility	25%
Future policy benefits (embedded derivatives) - GMIB Reinsurance		(60,573	)	Discounted cash flows	Own credit risk	30 bps
					Long-term volatility	25%
Future policy benefits - SALB		504		See comment below ₍₂₎	See comment below ₍₂₎	See comment below ₍₂₎

Total liabilities	$	633

(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 150 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 March 31, 2015 and December 31, 2014:


	March 31, 2015
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans on real estate (a)	$	-	$	-	$	71,038	$	71,038
Policy loans (b)		-		671,667		-		671,667

Total assets	$	-	$	671,667	$	71,038	$	742,705


	December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans on real estate (a)	$	-	$	-	$	71,433	$	71,433
Policy loans (b)		-		681,071		-		681,071

Total assets	$	-	$	681,071	$	71,433	$	752,504

(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. The fair value of policy loans approximates their book value.

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 March 31, 2015 and December 31, 2014 were:


	March 31, 2015
			Gross Unrealized					Estimated
	Amortized Cost/Cost		Gains		Losses			Fair Value		OTTI in AOCI₍₁₎
Fixed maturity AFS securities
Corporate securities	$	1,038,963	$	99,748	$	(5,112	)	$	1,133,599	$	-
Asset-backed securities		127,791		5,631		(202	)		133,220		(24	)
Commercial mortgage-backed securities		92,377		4,852		(9	)		97,220		-
Residential mortgage-backed securities		100,563		3,723		(131	)		104,155		-
Municipals		915		-		(112	)		803		-
Government and government agencies
United States		333,710		78,217		-			411,927		-
Foreign		8,635		1,592		-			10,227		-

Total fixed maturity AFS securities	$	1,702,954	$	193,763	$	(5,566	)	$	1,891,151	$	(24	)


Equity securities
Banking securities	$	28,137	$	2,708	$	(308	)	$	30,537	$	-
Industrial securities		5,791		419		-			6,210		-

Total equity securities	$	33,928	$	3,127	$	(308	)	$	36,747	$	-


	December 31, 2014
			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	$	1,095,082	$	89,852	$	(7,525	)	$	1,177,409	$	-
Asset-backed securities		127,803		5,743		(386	)		133,160		(97	)
Commercial mortgage-backed securities		96,594		4,341		(134	)		100,801		-
Residential mortgage-backed securities		42,205		3,244		(2	)		45,447		-
Municipals		916		-		(116	)		800		-
Government and government agencies
United States		334,448		65,805		(2	)		400,251		-
Foreign		8,673		1,372		-			10,045		-

Total fixed maturity AFS securities	$	1,705,721	$	170,357	$	(8,165	)	$	1,867,913	$	(97	)


Equity securities
Banking securities	$	28,137	$	2,135	$	(570	)	$	29,702	$	-
Industrial securities		5,791		465		-			6,256		-

Total equity securities	$	33,928	$	2,600	$	(570	)	$	35,958	$	-

(1) Represents other-than-temporary impairments (“OTTI”) in Accumulated Other Comprehensive Income (“AOCI”), which were not included in earnings. Amount excludes $3,192 and $3,202 of unrealized gains at March 31, 2015 and December 31, 2014, respectively.

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 March 31, 2015 and December 31, 2014 were:


	March 31, 2015				December 31, 2014
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Investment grade	$	1,579,916	$	1,763,589	$	1,615,944	$	1,776,153
Below investment grade		123,038		127,562		89,777		91,760

Total fixed maturity AFS securities	$	1,702,954	$	1,891,151	$	1,705,721	$	1,867,913

At March 31, 2015 and December 31, 2014, the estimated fair value of fixed maturity securities rated BBB- was $83,350 and $107,865, 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 March 31, 2015 and December 31, 2014 by contractual maturities were:


	March 31, 2015				December 31, 2014
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Fixed maturity AFS securities
Due in one year or less	$	49,260	$	50,174	$	61,405	$	62,356
Due after one year through five years		560,814		608,744		480,098		514,063
Due after five years through ten years		338,860		363,253		453,522		481,957
Due after ten years		433,289		534,385		444,094		530,129

		1,382,223		1,556,556		1,439,119		1,588,505
Mortgage-backed securities and other asset-backed securities		320,731		334,595		266,602		279,408

Total fixed maturity AFS securities	$	1,702,954	$	1,891,151	$	1,705,721	$	1,867,913

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 March 31, 2015 and December 31, 2014 were as follows:


	March 31, 2015
	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	$	58,942	$	60,624	$	(1,682	)
Asset-backed securities		60,141		60,178		(37	)
Commercial mortgage-backed securities		1,022		1,031		(9	)
Residential mortgage-backed securities		14,545		14,675		(130	)
Equity securities - banking securities		8,275		8,500		(225	)

Total fixed maturity and equity securities		142,925		145,008		(2,083	)


Greater than six months but less than or equal to one year
Fixed maturity AFS securities
Corporate securities		4,191		5,711		(1,520	)
Residential mortgage-backed securities		7		7		-

Total fixed maturity and equity securities		4,198		5,718		(1,520	)


Greater than one year
Fixed maturity AFS securities
Corporate securities		4,697		6,607		(1,910	)
Asset-backed securities		4,833		4,998		(165	)
Residential mortgage-backed securities		54		55		(1	)
Municipals		803		915		(112	)
Equity securities - banking securities		1,713		1,796		(83	)

Total fixed maturity and equity securities		12,100		14,371		(2,271	)

Total fixed maturity and equity securities	$	159,223	$	165,097	$	(5,874	)


	December 31, 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	$	60,583	$	64,799	$	(4,216	)
Asset-backed securities		70,078		70,188		(110	)
Commercial mortgage-backed securities		528		529		(1	)
Government and government agencies - United States		9,310		9,312		(2	)
Equity securities - banking securities		8,050		8,500		(450	)

Total fixed maturity and equity securities		148,549		153,328		(4,779	)


Greater than six months but less than or equal to one year
Fixed maturity AFS securities
Corporate securities		3,363		3,783		(420	)
Residential mortgage-backed securities		9		9		-

Total fixed maturity and equity securities		3,372		3,792		(420	)


Greater than one year
Fixed maturity AFS securities
Corporate securities		44,656		47,545		(2,889	)
Asset-backed securities		6,721		6,997		(276	)
Commercial mortgage-backed securities		8,504		8,637		(133	)
Residential mortgage-backed securities		59		61		(2	)
Municipals		800		916		(116	)
Equity securities - banking securities		1,676		1,796		(120	)

Total fixed maturity and equity securities		62,416		65,952		(3,536	)

Total fixed maturity and equity securities	$	214,337	$	223,072	$	(8,735	)

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

The total number of securities in an unrealized loss position was 82 and 95 at March 31, 2015 and December 31, 2014, respectively.

There were two securities in a continuous unrealized loss position where fair value had declined below amortized cost by greater than 20% at March 31, 2015. The securities had an estimated fair value of $2,827 with an unrealized loss of $3,056. There were two securities in a continuous unrealized loss position where fair value had declined below amortized cost by greater than 20% at December 31, 2014. The securities had an estimated fair value of $3,221 with an unrealized loss of $2,665.

Unrealized gains (losses) during the first three months of 2015 and 2014 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 March 31, 2015 and December 31, 2014 were as follows:


	March 31, 2015			December 31, 2014
Assets
Fixed maturity securities	$	188,197		$	162,192
Equity securities		2,820			2,030
Cash flow hedges		2,584			2,296
Value of business acquired		(39,105	)		(35,943	)

		154,496			130,575


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

		(21,333	)		(21,333	)

Stockholder’s equity
Accumulated other comprehensive income, net of taxes	$	133,163		$	109,242

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.

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 months ended March 31, 2015 and 2014.

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 March 31, 2015 and December 31, 2014 was $33 and $36, respectively. The change in the reserve is reflected in net realized investment gains (losses), excluding OTTI on securities in the Statements of Income. There were no impaired mortgage loans at March 31, 2015 and December 31, 2014.

The change in the credit loss allowances on mortgage loans by type of property at March 31, 2015 and December 31, 2014 was as follows:


Commercial	March 31, 2015			December 31, 2014
Balance at beginning of period	$	36		$	27
Provision		(3	)		9

Balance at end of period	$	33		$	36

The commercial mortgages are geographically diversified throughout the United States with the largest concentrations in Pennsylvania, New Hampshire, California, Washington, Minnesota, Virginia, and Oregon which account for approximately 78% of mortgage loans at March 31, 2015.

The credit quality of mortgage loans by type of property at March 31, 2015 and December 31, 2014 was as follows:


Commercial	March 31, 2015			December 31, 2014
AAA - AA	$	15,850		$	21,378
A		49,961			45,325

Total mortgage loans on real estate		65,811			66,703
Less: reserves		(33	)		(36	)

Total mortgage loans on real estate, net	$	65,778		$	66,667

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

The following table provides a summary of the securities under securities lending agreements for the periods ended:


	March 31, 2015		December 31, 2014
Payable for collateral under securities loaned	$	269,996	$	265,236
Amortized cost of securities out on loan		214,094		215,195
Estimated fair value of securities out on loan		264,385		260,060

Reverse Repurchase Agreements

The following table provides a summary of the securities under reverse repurchase agreements for the periods ended:


	March 31, 2015		December 31, 2014
Payable for reverse repurchase agreements	$	30,477	$	644
Amortized cost of securities pledged		30,432		634
Estimated fair value of securities pledged		30,700		646

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.

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.

During the fourth quarter of 2014, the Company began writing credit default swaps enabling the Company to change the risk profile of the assets in the portfolio by enhancing the overall yield. As a writer of credit default swaps, the Company actively monitors the underlying asset, being careful to note any events (default or similar credit event) that would require the Company to perform on the credit default swap. If such events would take place, the Company has recourse provisions from the proceeds of the bankruptcy settlement of the underlying entity or by the sale of the underlying bond. In the event the representative issuer defaults on its debt obligation referenced in the contract, a payment equal to the notional amount of the contract will be made by the Company and recognized in net derivative gains (losses) on the Statement of Income.

The following table presents the notional and fair value for hedging instruments at March 31, 2015 and December 31, 2014:


	Notional				Fair Value
	March 31,		December 31,		March 31,			December 31,
Derivative Type	2015		2014		2015			2014
Non-qualifying hedges
Short futures	$	42,349	$	49,873	$	-		$	-
Variance swaps		527		1,059		(1,418	)		(3,243	)
Total return swaps		927,485		852,910		(21,358	)		(17,941	)
Credit default swaps		210,000		170,000		2,458			2,017

Total non-qualifying hedges		1,180,361		1,073,842		(20,318	)		(19,167	)

Cash flow hedges
Interest rate swaps		49,884		49,884		2,568			1,478

Total cash flow hedges		49,884		49,884		2,568			1,478

Derivative Total	$	1,230,245	$	1,123,726	$	(17,750)		$	(17,689)

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 March 31,
Derivative Type	2015			2014
Short futures	$	(1,316	)	$	(1,363	)
Variance swaps		(1,242	)		(1,222	)
Total return swaps		(19,253	)		(11,402	)
Interest rate swaps		1			(82	)
Credit default swaps		888			-

Total	$	(20,922	)	$	(14,069	)

The following table presents the maximum potential amount of future payments, credit rating, and maturity dates for the credit default swaps at March 31, 2015 and December 31, 2014:


	Maximum Potential Amount of Future Payments		Credit Rating	Maturity Date Range
Derivative Type	March 31, 2015
Credit default swaps
Corporate debt	$	120,000	A	June 2017 - December 2020
Sovereign debt		90,000	AA-A	June 2017 - March 2020

Credit default swaps total	$	210,000


	Maximum Potential Amount of Future Payments		Credit Rating	Maturity Date Range
Derivative Type	December 31, 2014
Credit default swaps
Corporate debt	$	100,000	A	June 2017 - December 2020
Sovereign debt		70,000	A	June 2017 - December 2020

Credit default swaps total	$	170,000

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)					Net Realized Gains (Losses) Recognized in Income on Derivative (Ineffective Portion)
	March 31,					March 31,
	2015		2014			2015		2014
Interest rate swaps	$	288	$	(1,527	)	$	1	$	(82	)

Total	$	288	$	(1,527	)	$	1	$	(82	)


						Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
						March 31,
	Location					2015		2014
Interest rate swaps		Net investment income				$	800	$	2

Total						$	800	$	2

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

At March 31, 2015, the before-tax deferred net gains on derivatives recorded in AOCI that are expected to be reclassified to the Statements of Income during the next twelve months are $3,204. 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 March 31, 2015 and December 31, 2014, the Company has pledged securities in the amount of $21,733 and $27,862, respectively, to counterparties. At March 31, 2015, the Company received cash collateral from counterparties in the amount of $1,057. At December 31, 2014, 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 $3,464 and $3,235 at March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014:


	March 31, 2015
							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	$	8,033	$	5,381	$	2,652	$	-	$	689	$	1,963

Total	$	8,033	$	5,381	$	2,652	$	-	$	689	$	1,963


	December 31, 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	$	5,467	$	4,412	$	1,055	$	-	$	-	$	1,055

Total	$	5,467	$	4,412	$	1,055	$	-	$	-	$	1,055


The following tables present the offsetting of derivative liabilities for the periods ended March 31, 2015 and December 31, 2014:

	March 31, 2015
							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	$	25,783	$	5,381	$	20,402	$	-	$	17,034	$	3,368

Total	$	25,783	$	5,381	$	20,402	$	-	$	17,034	$	3,368


	December 31, 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	$	23,156	$	4,412	$	18,744	$	-	$	17,637	$	1,107

Total	$	23,156	$	4,412	$	18,744	$	-	$	17,637	$	1,107

There were no other financial assets or financial liabilities at March 31, 2015 and December 31, 2014 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 months ended March 31 were as follows:


	Three Months Ended
	March 31,
	2015			2014
Proceeds	$	65,521		$	30,848
Gross realized investment gains		1,894			1,611
Gross realized investment losses		(1,748	)		(375	)

Proceeds on the sale of AFS securities sold at a realized loss		16,702			13,377

Net realized investment gains for the three months ended March 31 were as follows:


	Three Months Ended
	March 31,
	2015			2014
Fixed maturity AFS securities	$	147		$	1,106
Equity securities		-			30
Mortgage loans on real estate		3			(1,177	)
Adjustment related to value of business acquired		(7	)		499

Net realized investment gains	$	143		$	458

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 at the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts at March 31, 2015 and December 31, 2014:


	March 31, 2015			December 31, 2014
Balance at beginning of period	$	(185	)	$	714
Additional credit loss impairments recognized in the current period on securities previously impaired through other comprehensive income		-			104
Accretion of credit loss impairments previously recognized		(260	)		(1,003	)

Balance at end of period	$	(445	)	$	(185	)

The components of OTTI reflected in the Statements of Income for the three months ended March 31 were as follows:


	Three Months Ended March 31, 2015
	OTTI Losses on Securities		Net OTTI Losses Recognized in OCI		Net OTTI Losses Recognized in Income
Gross OTTI losses	$	-	$	-	$	-

Net OTTI losses	$	-	$	-	$	-


	Three Months Ended March 31, 2014
	OTTI Losses on Securities		Net OTTI Losses Recognized in OCI		Net OTTI Losses Recognized in Income
Gross OTTI losses	$	100	$	-	$	100

Net OTTI losses	$	100	$	-	$	100

The Company had no impairment losses for the three months ended March 31, 2015. For the three months ended March 31, 2014, the Company’s impairment losses recognized in the Statements of Income was $100 with no associated value of business acquired amortization. For the three months ended March 31, 2014, the Company impaired its holding of a previously OCI impaired 2006 vintage MBS due to adverse changes in cash flows.

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

VOBA

VOBA reflects the estimated fair value of in force contracts acquired and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts in force at the acquisition date. VOBA is based on actuarially determined projections, for each block of business, of future policy and contract charges, premiums, mortality, Separate Accounts performance, surrenders, operating expenses, investment returns and other factors. Actual experience on the purchased business may vary from these projections. If estimated gross profits or premiums differ from expectations, the amortization of VOBA is adjusted to reflect actual experience. The long-term equity growth rate assumption for the amortization of VOBA, DAC and DSI was 8% at March 31, 2015 and 2014, respectively.

The change in the carrying amount of VOBA for the three months ended March 31 was as follows:


	Three Months Ended March 31,
	2015			2014
Accretion (amortization) expense	$	(4,779	)	$	146
Unlocking		(75	)		1
Adjustment related to realized (gains) losses on investments		(7	)		499
Adjustment related to unrealized gains and OTTI on investments		(3,161	)		(5,902	)

Change in VOBA carrying amount	$	(8,022	)	$	(5,256	)

For the three months ended March 31, 2015, the decrease in VOBA was primarily driven by an increase in amortization due to higher gross profits and adjustments related to unrealized gains during the period.

DAC and DSI

The change in the carrying amount of DAC and DSI for the three months ended March 31 was as follows:


	Three Months Ended March 31,
DAC	2015			2014
Capitalization	$	32		$	63
Accretion		1,378			319
Unlocking		(27	)		31

Change in DAC carrying amount	$	1,383		$	413


	Three Months Ended March 31,
DSI	2015			2014
Capitalization	$	1		$	2
Accretion		314			78
Unlocking		(6	)		(32	)

Change in DSI carrying amount	$	309		$	48

The change in the carrying amount of DAC and DSI for the three months ended March 31, 2015 was primarily driven by lower gross profits which resulted in increased accretion when compared to 2014.

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 months ended March 31 were as follows:


	Three Months Ended March 31,
GMDB	2015			2014
Guaranteed benefits incurred	$	6,482		$	6,825
Guaranteed benefits paid		(4,798	)		(7,111	)
Unlocking		(4,510	)		(379	)

Total	$	(2,826	)	$	(665	)


	Three Months Ended March 31,
GMIB	2015			2014
Guaranteed benefits incurred	$	2,880		$	3,110
Guaranteed benefits paid		(46	)		(16	)
Unlocking		(3,591	)		385

Total	$	(757	)	$	3,479

During the three months ended March 31, 2015, the decrease in reserves was driven by increased Separate Account returns which resulted in favorable unlocking when compared to 2014.

The variable annuity GMDB liability at March 31, 2015 and December 31, 2014 was $109,269 and $112,095, respectively. The variable annuity GMIB liability at March 31, 2015 and December 31, 2014 was $69,018 and $69,775, 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 months ended March 31, 2015 and 2014, 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 three months ended March 31, 2015 and 2014. 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 income tax expense (benefit) for the three months ended March 31, 2015 and 2014, was $0 for both periods.

The provision for income tax receivable (payable) consists of the following for the periods ending March 31, 2015 and December 31, 2014:


	March 31, 2015			December 31, 2014
Current federal income tax payable	$	(179	)	$	(179	)
Current state income tax payable		(105	)		(96	)
Deferred federal income tax payable		(5,895	)		(5,895	)
Deferred state income tax receivable		1,061			1,061

Net income tax payable	$	(5,118	)	$	(5,109	)

At March 31, 2015 and December 31, 2014, the Company has a tax valuation allowance for deferred tax assets of $103,134 and $113,406, 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 error that was identified during the preparation of the Company’s 2014 financial statements as of the year ended December 31, 2013 and the three quarters of 2014 relate to the complexity of the tax valuation allowance calculation.

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 $3,041 (gross $8,689) that should not be recognized at March 31, 2015 and December 31, 2014, which primarily relate to uncertainty regarding the sustainability of certain deductions taken on the 2013, 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:


	March 31, 2015		December 31, 2014
Balance at beginning of period	$	3,041	$	2,931
Additions for tax positions of prior years		-		110

Balance at end of period	$	3,041	$	3,041

At December 31, 2014, the Company had an operating loss carryforward for federal income tax purposes of $505,102 (net of the ASC 740 reduction of $8,689), with a carryforward period of fifteen years that expire at various dates up to 2029. As of March 31, 2015, a taxable loss is projected for 2015 that will increase the loss carryforward by approximately $30,087. At March 31, 2015 and December 31, 2014, the Company had a capital loss carryforward of $2,468 for federal income tax purposes with a carryforward period of five years that will expire in 2018. At March 31, 2015 and December 31, 2014, the Company had a foreign tax credit carryforward of $8,734 and $8,574, respectively, with a carryforward period of ten years that will expire at various dates up to 2024. Also, the Company has an Alternative Minimum Tax credit carryforward for federal income tax purposes of $4,216 at March 31, 2015 and December 31, 2014, with an indefinite carryforward period.

The Company classifies interest and penalties related to income taxes as interest expense and penalty expense, respectively. The Company did not recognize any penalties in its financial statements at March 31, 2015 and December 31, 2014. The Company recognized interest expense of $1 and less than $1 at March 31, 2015 and December 31, 2014, respectively.

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. As of March 31, 2015 and December 31, 2014, the Company recognized capital contributions from Transamerica Corporation in connection with the tax allocation agreement in the amount of $10,608 and $179,029, respectively. 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. An examination by the Internal Revenue Service is in progress for the years 2011 and 2012. The Company believes that there are adequate defenses against or sufficient provisions established related to any open or contested tax positions. A consolidated tax return was filed for 2013. A consolidated tax return has not yet been filed for 2014.

Note 7. Accumulated Other Comprehensive Income

The following table presents the change in accumulated other comprehensive income by component for the period ended March 31, 2015 and 2014:


	Three Months Ended March 31, 2015
	Unrealized Holding Gains (Losses) on AFS Securities _(a)			Unrealized Holding Gains (Losses) on Cash Flow Hedges _(a)			Total
Beginning balance	$	107,760		$	1,482		$	109,242

OCI before reclassifications		22,986			702			23,688
Amounts reclassified from AOCI		749			(516	)		233

Net current period OCI		23,735			186			23,921


Ending balance	$	131,495		$	1,668		$	133,163


	Three Months Ended March 31, 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		30,112			(984	)		29,128
Amounts reclassified from AOCI		(162	)		(1	)		(163	)

Net current period OCI		29,950			(985	)		28,965


Ending balance	$	68,483		$	185		$	68,668

(a)	All amounts are net of tax.

The following table presents the reclassifications out of accumulated other comprehensive income for the period ended March 31, 2015 and 2014:


	Three Months Ended March 31,
	2015			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	$	(1,162	)	$	351		Net realized investment gains (losses)
							Portion of OTTI previously recognized
		-			(100	)	in OCI

		(1,162	)		251		Total before tax
		(413	)		89		Tax expense (benefit)

	$	(749	)	$	162		Net of tax

Unrealized holding losses on cash flow hedges
Interest rate swaps	$	800		$	2		Net investment income

		800			2		Total before tax
		284			1		Tax expense

	$	516		$	1		Net of tax

Total amounts reclassified from AOCI	$	(233	)	$	163

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 three months ended March 31, 2015 and 2014 was $36,805 and $36,784, respectively. Statutory capital and surplus at March 31, 2015 and December 31, 2014 was $938,509 and $912,090, respectively.

For the three months ended March 31, 2015 and 2014, the Company did not pay any dividends to AUSA. During the first three months of 2015 and 2014, the Company received capital contributions from AUSA of $10,608 and $5,525, respectively.

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 March 31, 2015 and December 31, 2014, net reinsurance receivables (payable) were $429 and ($49), respectively. The Company did not have a reinsurance reserve at March 31, 2014 and December 31, 2014.

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 March 31, 2015, 35% and 5% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured. At December 31, 2014, 36% and 5% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured.

Note 10. Related Party Transactions

At March 31, 2015, 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 months ended March 31, 2015 and 2014, the Company incurred $3,325 and $2,710, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts capitalized.

The Company is party to intercompany short-term note receivable arrangements with its parent and affiliates at various times. During the three months ended March 31, 2015 and 2014, the Company did not have an intercompany short-term note receivable and did not accrue and/or receive any 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 months ended March 31, 2015 and 2014, the Company incurred $33 and $21, 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 months ended March 31, 2015 and 2014, respectively.

AEGON USA Investment Management, LLC acts as a discretionary investment manager under an investment management agreement with the Company. During the three months ended March 31, 2015 and 2014, the Company incurred $439 and $427, 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 months ended March 31, 2015 and 2014, the Company incurred $7,350 and $7,569, 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 months ended March 31, 2015 and 2014, the Company incurred $92 and $101, 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 months ended March 31, 2015 and 2014, the Company received $618 and $501, 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 using the fair value on the date of the acquisition or disposition. The purchasing and selling of investments between affiliated companies for the years ended March 31, was as follows:


	Three Months Ended March 31,
	2015		2014
Investments purchased from related parties:
Fixed maturities	$	30,356	$	752
Investments sold to related parties:
Fixed maturities	$	21,403	$	18,156

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 months ended:


	Annuity			Life Insurance		Total
Three months ended March 31, 2015
Net revenues (a)	$	20,331		$	19,532	$	39,863
Amortization of VOBA		1,226			3,628		4,854
Policy benefits (net of reinsurance recoveries)		4,562			8,743		13,305
Income tax expense (benefit)		(1,257	)		1,257		-
Net income		5,953			4,700		10,653

Three months ended March 31, 2014
Net revenues (a)	$	28,865		$	19,150	$	48,015
Amortization (accretion) of VOBA		(161	)		14		(147	)
Policy benefits (net of reinsurance recoveries)		9,536			10,935		20,471
Income tax expense (benefit)		(1,493	)		1,493		-
Net income		8,910			6,501		15,411

(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 2014 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.

Overview

As discussed further in Note 1, Summary of Significant Accounting Policies – Restatement of Previously Issued Financial Statements, the Company restated previously issued financial statements for the year ended December 31, 2013 and the unaudited interim financial statements for March 31, 2014, June 30, 2014, and September 30, 2014.

The restatement is a result of an error in the tax valuation allowance which was identified for the year ended December 31, 2013. In addition, the Company identified, individually and in the aggregate, immaterial out-of-period errors which were corrected in the periods to which they relate. For additional detail and a complete presentation of the restated unaudited interim financial statements for March 31, 2014, June 30, 2014, and September 30, 2014, refer to the Company’s Annual Report on Form 10-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 $5.3 million and $7.0 million for the three months ended March 31, 2015 and 2014, respectively. Internal exchanges were $1.4 million and $0.5 million for the three months ended March 31, 2015 and 2014, respectively. Deposits are currently limited to additions to existing policies which will result in fluctuations period over period.

Financial Condition

At March 31, 2015, the Company’s assets were $10.1 billion or $11.0 million lower than the $10.1 billion in assets at December 31, 2014. Assets excluding Separate Accounts assets increased $65.8 million during the first quarter of 2015. Separate Accounts assets, which represent 66% of total assets, decreased $76.8 million to $6.7 billion. Changes in Separate Accounts assets were as follows:


	Three Months Ended March 31,
(dollars in millions)	2015			2014

Investment performance	$	144.5		$	88.0
Deposits		5.1			6.7
Policy fees and charges		(38.4	)		(40.4	)
Surrenders, benefits and withdrawals		(188.0	)		(204.8	)


Net change	$	(76.8	)	$	(150.5	)

During the three months ended March 31, 2015 and 2014, fixed contract owner deposits were less than $0.1 million. During the three months ended March 31, 2015 and 2014, fixed contract owner withdrawals were $22.3 million and $7.3 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 March 31, 2015, the Dow decreased less than 1%, while the NASDAQ increased 3% and S&P increased less than 1% from December 31, 2014.

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 74% of Separate Accounts assets were invested in equity-based mutual funds at March 31, 2015. 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 three months ended March 31, 2015, average variable account balances decreased $0.5 billion (or 7%) to $6.7 billion as compared to the same period in 2014.

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 March 31,
	2015			2014
Average medium term interest rate yield (a)		0.73%			0.76%
Increase (decrease) in medium term interest rates (in basis points)		(13	)		1
Credit spreads (in basis points) (b)		109			88
Contracting of credit spreads (in basis points)		(6	)		(14	)

Increase on market valuations (in millions)
Available-for-sale (“AFS”) investment securities	$	26.8		$	36.4

Net change on market valuations	$	26.8		$	36.4

(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 2 of the 2014 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 March 31, 2015 and December 31, 2014, approximately $104.9 million (or 6%) and $106.4 million (or 6%), 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 March 31, 2015, the Company did not record OTTI in income. For the three months ended March 31, 2014, the Company recorded an OTTI in income of $0.1 million 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 March 31, 2015 and December 31, 2014, there was $65.8 million and $66.7 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 March 31, 2015 and December 31, 2014 was $71.0 million and $71.4 million, respectively. There were no impaired mortgage loans at March 31, 2015 and December 31, 2014. The generic reserve at March 31, 2015 and December 31, 2014 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. At March 31, 2015 and December 31, 2014, 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 Standard and Poor’s 500 Composite Stock Price Index (“S&P”). 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.

During the fourth quarter of 2014, the Company began writing credit default swaps enabling the Company to change the risk profile of the assets in the portfolio by enhancing the overall yield.

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

Securities Lending

Financial assets that are lent to a third party or that are transferred subject to a repurchase agreement at a fixed price are not derecognized as the Company retains substantially all the risks and rewards of asset ownership. The 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.

The following table provides a summary of the securities under securities lending agreements for the periods ended:


(dollars in millions)	March 31, 2015		December 31, 2014
Payable for collateral under securities loaned	$	269.9	$	265.2
Amortized cost of securities out on loan		214.1		215.2
Estimated fair value of securities out on loan		264.4		260.1

Reverse Repurchase Agreements

The Company enters into dollar roll repurchase agreement transactions whereby the Company takes delivery of mortgage-backed securities (“MBS”) pools and sells them to a counter party along with an agreement to repurchase substantially the same pools at some point in the future, typically one month forward. These transactions are accounted for as collateralized borrowings, and the repurchase agreement liability is included in the balance sheet payables for collateral under securities loaned and reverse repurchase agreements.

The following table provides a summary of the securities under reverse repurchase agreements for the periods ended:


	March 31,		December 31,
(dollars in millions)	2015		2014
Payable for reverse repurchase agreements	$	30.5	$	0.6
Amortized cost of securities pledged		30.4		0.6
Estimated fair value of securities pledged		30.7		0.6

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 March 31, 2015 and December 31, 2014, the Company’s VOBA asset was $260.1 million and $268.1 million, respectively. For the three months ended March 31, 2015 and 2014, the favorable (unfavorable) impact to pre-tax income related to VOBA unlocking was ($0.1) million and less than $0.1 million, respectively. See Note 4 to the Financial Statements for a further discussion.

For acquired annuity and variable life insurance contracts, VOBA is amortized in proportion to gross profits arising principally from investment margins, mortality and expense margins, rider margins, and surrender charges, based on historical and anticipated future experience, which is updated periodically. Revisions in estimates result in changes to the amounts amortized 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. See Note 4 to the Financial Statements for 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 March 31, 2015 and December 31, 2014, variable annuities accounted for the Company’s entire DAC asset of $42.5 million and $41.1 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. For the three months ended March 31, 2015 and 2014, there was an unfavorable impact to pre-tax income related to DAC 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.

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 March 31, 2015 and December 31, 2014, variable annuities accounted for the Company’s entire DSI asset of $9.7 million and $9.4 million, respectively. For the three months ended March 31, 2015 and 2014, 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% at March 31, 2015 and 2014, 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 March 31, 2015 and December 31, 2014 were $1.2 billion.

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 March 31, 2015 and December 31, 2014, future policy benefits were $419.3 million and $425.2 million, respectively.

Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issues. At March 31, 2015 and December 31, 2014, GMDB and GMIB liabilities included within future policy benefits were as follows:


	March 31,		December 31,
(dollars in millions)	2015		2014
GMDB liability	$	109.3	$	112.1
GMIB liability		69.0		69.8

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 months ended March 31, 2015 and 2014, the favorable (unfavorable) impact to pre-tax income related to GMDB and GMIB unlocking was $8.1 million and less than ($0.1) 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 are 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 March 31, 2015 and December 31, 2014, the GMWB liability and GMIB reinsurance asset included within future policy benefits were as follows:


	March 31,			December 31,
(dollars in millions)	2015			2014
GMWB liability	$	65.3		$	60.7
GMIB reinsurance asset		(62.2	)		(60.6	)

At March 31, 2015 and December 31, 2014, the future policy benefits for the SALB liability was $0.5 million.

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 March 31, 2015 and December 31, 2014 was $103.1 million and $113.4 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 error that was identified during the preparation of the Company’s 2014 financial statements, which required a restatement of the Company’s financial statements as of the year ended December 31, 2013 and the three quarters of 2014 relate to the complexity of the tax valuation allowance calculation.

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 is 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. The new accounting requirements will not impact the Company’s results of operations or financial position. The adoption of the guidance will have an impact on the Company’s disclosures.

•

ASC 205, Presentation of Financial Statements - ASU 2014-15, Presentation of Financial Statements-Going Concern - requires an entity’s management to evaluate whether there are conditions or events that, considered in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. It also requires disclosures under certain circumstances. The guidance is effective for annual periods ending after December 15, 2016. Early application is permitted. Implementation of the ASC will not affect the Company’s financial position or results of operations. The Company is in the process of reviewing its policies and processes to ensure compliance with the new guidance.

•

ASC 606, Revenue from Contracts with Customers - ASU 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09) - requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance establishes a five-step process to achieve this core principle. ASU 2014-09 will be effective for the Company on January 1, 2017, using either of two methods: retrospective to each prior reporting period presented with certain practical expedients, or retrospective with the cumulative effect of initial application recognized at the date of initial application subject to certain additional disclosures. The Company has not yet selected a transition method and are evaluating the impact that adoption of this update is expected to have on the Company’s financial statements.

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 March 31, 2015 and December 31, 2014 were:


	March 31, 2015
			Gross Unrealized						% of Estimated Fair Value
(dollars in millions)	Amortized Cost/Cost		Gains		Losses/ OTTI ₍₁₎		Estimated Fair Value		% of Estimated Fair Value
Fixed maturity AFS securities
Corporate securities
Financial services	$	293.4	$	30.1	$	(0.2)	$	323.3		17%
Industrial		682.9		62.5		(4.9)		740.5		38
Utility		62.7		7.1		-		69.8		4
Asset-backed securities
Housing related		34.0		5.4		-		39.4		2
Credit cards		37.2		-		-		37.2		2
Autos		39.0		-		-		39.0		2
Timeshare		2.0		-		-		2.0		0
Other		15.6		0.2		(0.2)		15.6		1
Commercial mortgage-backed securities - non agency backed		92.4		4.9		(0.1)		97.2		5
Residential mortgage-backed securities
Agency backed		63.0		2.7		-		65.7		3
Non agency backed		37.6		1.0		(0.1)		38.5		2
Municipals		0.9		-		(0.1)		0.8		0
Government and government agencies
United States		333.7		78.2		-		411.9		21
Foreign		8.6		1.6		-		10.2		1

Total fixed maturity AFS securities		1,703.0		193.7		(5.6)		1,891.1		98
Equity securities
Banking securities		28.1		2.7		(0.3)		30.5		2
Industrial securities		5.8		0.4		-		6.2		0

Total equity securities		33.9		3.1		(0.3)		36.7		2

Total fixed maturity and equity securities	$	1,736.9	$	196.8	$	(5.9)	$	1,927.8		100%


	December 31, 2014
	Amortized Cost/Cost		Gross Unrealized						% of Estimated Fair Value
(dollars in millions)	Amortized Cost/Cost		Gains		Losses/ OTTI ₍₁₎		Estimated Fair Value		% of Estimated Fair Value
Fixed maturity AFS securities
Corporate securities
Financial services	$	321.3	$	27.3	$	(2.3)	$	346.3		18%
Industrial		711.0		56.2		(5.2)		762.0		40
Utility		62.8		6.3		-		69.1		4
Asset-backed securities										0
Housing related		21.3		4.8		(0.1)		26.0		1
Credit cards		53.1		0.1		-		53.2		3
Structured settlements		13.3		0.9		-		14.2		1
Autos		21.2		-		-		21.2		1
Equipment lease		0.6		-		-		0.6		0
Timeshare		2.4		-		-		2.4		0
Other		15.9		-		(0.3)		15.6		1
Commercial mortgage-backed securities - non agency backed		96.6		4.3		(0.1)		100.8		5
Residential mortgage-backed securities										0
Agency backed		34.0		2.4		(0.1)		36.3		2
Non agency backed		8.2		0.9		-		9.1		0
Municipals		0.9		-		(0.1)		0.8		0
Government and government agencies										0
United States		334.4		65.8		-		400.2		21
Foreign		8.7		1.4		-		10.1		1

Total fixed maturity AFS securities		1,705.7		170.4		(8.2)		1,867.9		98
Equity securities
Banking securities		28.1		2.1		(0.5)		29.7		2
Industrial securities		5.8		0.5		-		6.3		0

Total equity securities		33.9		2.6		(0.5)		36.0		2

Total fixed maturity and equity securities	$	1,739.6	$	173.0	$	(8.7)	$	1,903.9		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 March 31, 2015.

Five issuers represent more than 5% of the total unrealized loss position, comprised of below investment grade corporate bonds with $4.1 million of unrealized loss at March 31, 2015.

Unrealized gains (losses) incurred during the first three months of 2015 and 2014 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.

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


	March 31, 2015
(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	$	14.7	$	14.8	$	(0.1	)
Industrial		27.9		29.3		(1.4	)
Asset-backed securities
Credit cards		34.4		34.4		-
Autos		20.7		20.7		-
Timeshare		2.1		2.1		-
Commercial mortgage-backed securities - non agency backed		1.0		1.0		-
Equity securities - banking securities		8.3		8.5		(0.2	)

Total fixed maturity and equity securities		109.1		110.8		(1.7	)

Greater than one year
Corporate securities
Industrial		4.6		4.7		(0.1	)
Asset-backed securities - other		4.8		5.0		(0.2	)
Residential mortgage-backed securities - agency backed		0.1		0.1		-

Total fixed maturity and equity securities	$	9.5	$	9.8	$	(0.3	)

Total of all investment grade AFS securities
Corporate securities
Financial services	$	14.7	$	14.8	$	(0.1	)
Industrial		32.5		34.0		(1.5	)
Credit cards		34.4		34.4		-
Autos		20.7		20.7		-
Other		4.8		5.0		(0.2	)
Timeshare		2.1		2.1		-
Commercial mortgage-backed securities - non agency backed		1.0		1.0		-
Residential mortgage-backed securities - agency backed		0.1		0.1		-
Equity securities - banking securities		8.3		8.5		(0.2	)

Total fixed maturity and equity securities	$	118.6	$	120.6	$	(2.0	)


Total number of securities in a continuous unrealized loss position						63


	December 31, 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	$	11.7	$	11.8	$	(0.1	)
Industrial		24.5		25.4		(0.9	)
Asset-backed securities
Credit cards		48.1		48.1		-
Autos		17.5		17.5		-
Other		0.3		0.3		-
Equipment lease		0.6		0.6		-
Timeshare		0.7		0.7		-
Commercial mortgage-backed securities - non agency backed		0.5		0.5		-
Government and government agencies - United States		9.3		9.3		-
Equity securities - banking securities		8.1		8.5		(0.4	)

Total fixed maturity and equity securities		121.3		122.7		(1.4	)

Greater than one year
Corporate securities
Financial services	$	9.6	$	9.9	$	(0.3	)
Industrial		34.6		35.6		(1.0	)
Asset-backed securities
Autos		2.0		2.0		-
Other		4.7		5.0		(0.3	)
Commercial mortgage-backed securities		8.5		8.6		(0.1	)
Residential mortgage-backed securities - agency backed		0.1		0.2		(0.1	)

Total fixed maturity and equity securities	$	59.5	$	61.3	$	(1.8	)

Total of all investment grade AFS securities
Corporate securities
Financial services	$	21.3	$	21.7	$	(0.4	)
Industrial		59.1		61.0		(1.9	)
Asset-backed securities
Credit cards		48.1		48.1		-
Autos		19.5		19.5		-
Other		5.0		5.3		(0.3	)
Equipment lease		0.6		0.6		-
Timeshare		0.7		0.7		-
Commercial mortgage-backed securities - non agency backed		9.0		9.1		(0.1	)
Residential mortgage-backed securities - agency backed		0.1		0.2		(0.1	)
Government and government agencies - United States		9.3		9.3		-
Equity securities - banking securities		8.1		8.5		(0.4	)

Total fixed maturity and equity securities	$	180.8	$	184.0	$	(3.2	)


Total number of securities in a continuous unrealized loss position						82

(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:


	March 31, 2015
(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	$	5.7	$	5.8	$	(0.1	)
Industrial		10.7		10.8		(0.1	)
Asset-backed securities - housing related		2.9		2.9		-
Residential mortgage-backed securities - non agency backed		14.5		14.7		(0.2	)

Total fixed maturity and equity securities		33.8		34.2		(0.4	)


Greater than six months but less than or equal to one year
Corporate securities - industrial		4.2		5.7		(1.5	)

Total fixed maturity and equity securities		4.2		5.7		(1.5	)


Greater than one year
Corporate securities - industrial		0.1		1.9		(1.8	)
Municipals		0.8		0.9		(0.1	)
Equity securities - banking securities		1.7		1.8		(0.1	)

Total fixed maturity and equity securities	$	2.6	$	4.6	$	(2.0	)


Total of all below investment grade AFS securities
Corporate securities
Financial services	$	5.7	$	5.8	$	(0.1	)
Industrial		15.0		18.4		(3.4	)
Asset-backed securities - housing related		2.9		2.9		-
Residential mortgage-backed securities - non agency backed		14.5		14.7		(0.2	)
Municipals		0.8		0.9		(0.1	)
Equity securities - banking securities		1.7		1.8		(0.1	)

Total fixed maturity and equity securities	$	40.6	$	44.5	$	(3.9	)


Total number of securities in a continuous unrealized loss position						19


	December 31, 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	$	16.4	$	18.3	$	(1.9	)
Industrial		8.0		9.3		(1.3	)
Asset-backed securities - housing related		2.9		3.0		(0.1	)

Total fixed maturity and equity securities		27.3		30.6		(3.3	)


Greater than six months but less than or equal to one year
Corporate securities - industrial		3.4		3.8		(0.4	)

Total fixed maturity and equity securities		3.4		3.8		(0.4	)


Greater than one year
Corporate securities - industrial		0.4		2.0		(1.6	)
Municipals		0.8		0.9		(0.1	)
Equity securities - banking securities		1.7		1.8		(0.1	)

Total fixed maturity and equity securities	$	2.9	$	4.7	$	(1.8	)


Total of all below investment grade AFS securities
Corporate securities
Financial services	$	16.4	$	18.3	$	(1.9	)
Industrial		11.8		15.1		(3.3	)
Asset-backed securities - housing related		2.9		3.0		(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	$	33.6	$	39.1	$	(5.5	)


Total number of securities in a continuous unrealized loss position						13

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

Gross unrealized losses and OTTI on below investment grade AFS securities represented 66% and 63% of total gross unrealized losses and OTTI on all AFS securities at March 31, 2015 and December 31, 2014, 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 March 31, 2015.

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


		March 31, 2015
(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%	$	33.8	$	34.2	$	(0.4	)

			33.8		34.2		(0.4	)

Greater than six months but less than or equal to one year	70% to 100%		1.5		1.7		(0.2	)
	40% to 70%		2.7		4.0		(1.3	)

			4.2		5.7		(1.5	)

Greater than one year	70% to 100%		2.5		2.7		(0.2	)
	Below 40%		0.1		1.9		(1.8	)

			2.6		4.6		(2.0	)

Total		$	40.6	$	44.5	$	(3.9	)


		December 31, 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%	$	27.3	$	30.6	$	(3.3	)

			27.3		30.6		(3.3	)

Greater than six months but less than or equal to one year	70% to 100%		3.4		3.8		(0.4	)

			3.4		3.8		(0.4	)

Greater than one year	70% to 100%		2.5		2.8		(0.3	)
	Below 40%		0.4		1.9		(1.5	)

			2.9		4.7		(1.8	)

Total		$	33.6	$	39.1	$	(5.5	)

(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 March 31, 2015 and December 31, 2014 by rating agency equivalent were:


	March 31, 2015				December 31, 2014
(dollars in millions)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
AAA	$	570.3	$	657.4	$	557.5	$	631.5
AA		120.1		127.8		108.4		115.1
A		516.9		568.9		558.4		605.2
BBB		372.7		409.4		391.6		424.3
Below investment grade		123.0		127.6		89.8		91.8

Total fixed maturity AFS securities	$	1,703.0	$	1,891.1	$	1,705.7	$	1,867.9


Investment grade		93%		93%		95%		95%
Below investment grade		7%		7%		5%		5%

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 March 31, 2015 and December 31, 2014, approximately $83.4 million (or 4%) and $107.9 million (or 6%), 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 March 31, 2015 and December 31, 2014:


	March 31, 2015
(dollars in millions)	Amortized Cost		Estimated Fair Value		Gross Unrealized Gain (Loss) and OTTI
First lien - fixed
A	$	0.6	$	0.6	$	-
Below BBB		16.9		19.3		2.4
Second lien (a)
Below BBB		-		1.8		1.8

Total	$	17.5	$	21.7	$	4.2


	December 31, 2014
(dollars in millions)	Amortized Cost		Estimated Fair Value		Gross Unrealized Gain (Loss) and OTTI
First lien - fixed
A	$	0.7	$	0.7	$	-
Below BBB		17.2		19.6		2.4
Second lien (a)
Below BBB		-		2.1		2.1

Total	$	17.9	$	22.4	$	4.5


	March 31, 2015
	Estimated Fair Value by Vintage
(dollars in millions)	2004&Prior		2005		2006		2007		Total
First lien - fixed
A	$	0.6	$	-	$	-	$	-	$	0.6
Below BBB		2.4		-		3.7		13.2		19.3
Second lien (a)
Below BBB		-		-		1.8		-		1.8

Total	$	3.0	$	-	$	5.5	$	13.2	$	21.7


	December 31, 2014
	Estimated Fair Value by Vintage
(dollars in millions)	2004&Prior		2005		2006		2007		Total
First lien - fixed
A	$	0.7	$	-	$	-	$	-	$	0.7
Below BBB		2.5		-		3.8		13.3		19.6
Second lien (a)
Below BBB		-		-		2.1		-		2.1

Total	$	3.2	$	-	$	5.9	$	13.3	$	22.4

(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 March 31, 2015 and December 31, 2014, the Company’s assets included $2.2 billion 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.

Capital Resources

For the three months ended March 31, 2015 and 2014, the Company did not pay any dividends to AUSA. For the three months ended March 31, 2015 and 2014, the Company received a capital contribution from AUSA of $10.6 million and $5.5 million.

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 May 15, 2015:


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

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

Commitments and Contingencies

The following table summarizes the Company’s policyholders’ obligations at March 31, 2015:


(dollars in millions)	Less Than One Year		One To Three Years		Four To Five Years		More Than Five Years		Total
General accounts (a)	$	166.4	$	301.4	$	264.8	$	1,718.7	$	2,451.3
Separate Accounts (a)		756.3		1,332.8		1,138.4		5,517.4		8,744.9

	$	922.7	$	1,634.2	$	1,403.2	$	7,236.1	$	11,196.2

(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 March 31, 2015 and December 31, 2014, the Company’s estimated liability for future guaranty fund assessments was $0.1 million. In addition, the Company has a receivable for future premium tax deductions of $4.5 million at March 31, 2015 and December 31, 2014. 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 March 31, 2015 and 2014, the Company recorded net income of $10.7 million and $15.4 million, respectively. The decrease in net income during the three months ended March 31, 2015 as compared to the same period in 2014 was primarily due to increased derivative losses and lower policy charge revenue. The decrease in revenue was partially offset by lower policy benefits expense during the first quarter of 2014 when compared to the same period in 2014.

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


	Three Months Ended March 31,
(dollars in millions)	2015		2014		Change
Asset-based policy charge revenue	$	25.6	$	27.7	$	(2.1	)
Guaranteed benefit based policy charge revenue		5.8		6.1		(0.3	)
Non-asset based policy charge revenue		12.5		12.7		(0.2	)

Total policy charge revenue	$	43.9	$	46.5	$	(2.6	)

Net derivative losses increased $6.8 million during the three months ended March 31, 2015 as compared to the same period in 2014. The following table provides the changes in net derivative gains (losses) by type:


	Three Months Ended March 31,
(dollars in millions)	2015			2014			Change
Total return swaps	$	(19.3	)	$	(11.4	)	$	(7.9	) (a)
Variance swaps		(1.2	)		(1.2	)		-
Short futures		(1.3	)		(1.4	)		0.1
Interest rate swaps		-			(0.1	)		0.1
Credit default swaps		0.9			-			0.9

Total net derivative losses	$	(20.9	)	$	(14.1	)	$	(6.8	)

(a)	The Company had a large notional of short positions in total return swaps for the first quarter of 2015 and 2014, and the 3% increase in the S&P in the first three months of 2015 drove an increase in losses compared to the 1% increase in the S&P in the first three months of 2014.

Policy benefits decreased $7.2 million during the three months ended March 31, 2015 as compared to the same period in 2014. The following table provides the changes in policy benefits by type:


	Three Months Ended March 31,
(dollars in millions)	2015			2014			Change
Annuity benefit unlocking	$	(8.0	)	$	(0.1	)	$	(7.9	)	(a	)
Annuity benefit expense		12.9			9.7			3.2		(b	)
Amortization of deferred sales inducements		(0.3	)		-			(0.3	)
Life insurance mortality expense		8.7			10.9			(2.2	)	(c	)

Total policy benefits	$	13.3		$	20.5		$	(7.2	)

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

(b)	During the three months ended March 31, 2015 the increase in annuity benefit expense was driven by an increase in reserves due to interest rates continuing to decline when compared to the same period in 2014.

(c)	During the three months ended March 31, 2015 the decrease in mortality expense was related to a reduction in claims when compared to the same period in 2014.

Accretion of DAC was ($1.4) million and ($0.4) million for the three months ended March 31, 2015 and 2014, respectively. During the three months ended March 31, 2015 and 2014, there was a favorable (unfavorable) impact to pre-tax income related to DAC unlocking of less than ($0.1) million and less than $0.1 million, respectively. During the three months ended March 31, 2015 lower gross profits resulted in increased DAC accretion compared to the same period in 2014.

Amortization (accretion) of VOBA was $4.9 million and ($0.1) for the three months ended March 31, 2015 and 2014, which included favorable (unfavorable) unlocking ($0.1) of million and less than $0.1 million, respectively. During the three months ended March 31, 2015, higher gross profits resulted in increased VOBA amortization compared to the same period in 2014.

Insurance expenses and taxes increased $0.3 million during the three months ended March 31, 2015 as compared to the same period in 2014. The following table provides the changes in insurance expenses and taxes for each respective period:


	Three Months Ended March 31,
(dollars in millions)	2015		2014		Change
Commissions	$	7.8	$	8.1	$	(0.3	)
General insurance expenses		3.4		2.8		0.6
Taxes, licenses, and fees		0.1		0.1		-

Total insurance expenses and taxes	$	11.3	$	11.0	$	0.3

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

Evaluation of Disclosure Controls and Procedures

As described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2014, the Company identified a material weakness in internal control over financial reporting as of December 31, 2013. The Company did not have effective controls surrounding the evaluation and review related to non-routine technical tax accounting matters, specifically with regards to the valuation allowance on deferred tax assets. The material weakness resulted in adjustments during the preparation of the Company’s 2014 financial statements and restatement of the Company’s financial statements as of and for the year ended 2013 and the interim periods in 2014 which affected the tax-related financial statement line items and disclosures and until remediation is complete could result in misstatements in future interim or annual reporting periods.

TALIC’s management, with the participation of the President and Chief Financial Officer, have evaluated the effectiveness of TALIC’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, and because of the material weakness described above and under “Management’s Annual Report on Internal Controls Over Financial Reporting” in the Annual Report on Form 10-K, TALIC’s President and Chief Financial Officer have concluded that such disclosure controls and procedures were not effective as of the end of the period covered by this report.

Based on additional analysis and other post-closing procedures designed to ensure that the Company’s Financial Statements will be presented in accordance with generally accepted accounting principles, management believes, notwithstanding the material weakness, that the Financial Statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

Changes in Internal Control over Financial Reporting

Management has been actively engaged in developing remediation plans to address the above material weakness. The remediation efforts expected to be implemented include the following:

Re-designing processes, procedures, and controls to identify, research, evaluate and review the appropriate accounting related to non-routine technical tax accounting matters, specifically with regards to the valuation allowance on deferred tax assets to ensure greater oversight and evaluation of income tax conclusions prior to the issuance of the financial statements.

The Company believes that the controls that will be implemented will improve the effectiveness of our internal control over financial reporting. As the Company continues to evaluate and work to improve the internal control over financial reporting, the Company may take additional measures to address the material weakness or determine to supplement or modify certain of the remediation measures described above.

There have been no other changes in our internal control over financial reporting that occurred during our first fiscal quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our 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 reasonably likely to have a material adverse impact on our financial statements or 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 financial statements or 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, 2014. 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 three months of 2015. 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.



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: May 15, 2015		/s/ David Hopewell
		David Hopewell
		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.

Attached files

TRANSAMERICA ADVISORS LIFE INSURANCE Co Reports

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