Transamerica Advisors Life Insurance 10-Q 2017 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

Commission File No. 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)	(I.R.S. Employer Identification No.)

4333 Edgewood Road, NE

Cedar Rapids, Iowa 52499-0001

(Address of Principal Executive Offices)

(800) 346-3677

(Registrant’s telephone no. including area code)

Securities registered pursuant to Section 12(b) or 12(g) of the Act: None

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    ☐  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    ☐  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.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ☐  Yes    ☒  No

Indicate the number of shares outstanding of each of the registrant’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.

TABLE OF CONTENTS

PART I. Financial Information	2
Item 1. Financial Statements	2
BALANCE SHEETS	2
STATEMENTS OF INCOME (LOSS)	4
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	5
STATEMENTS OF STOCKHOLDER’S EQUITY	6
STATEMENTS OF CASH FLOWS	7
NOTES TO FINANCIAL STATEMENTS (unaudited)	9
Note 1.  Summary of Significant Accounting Policies	9
Note 2.  Fair Value of Financial Instruments	10
Note 3.  Investments	18
Note 4.  VOBA and DAC	29
Note 5.  Variable Contracts Containing Guaranteed Benefits	30
Note 6.  Income Taxes	31
Note 7.  Accumulated Other Comprehensive Income	33
Note 8.  Stockholder’s Equity and Statutory Accounting Principles	35
Note 9.  Reinsurance	35
Note 10.  Related Party Transactions	35
Note 11.  Commitments and Contingencies	37
Note 12.  Segment Information	38
Item 2. Management's Narrative Analysis of Results of Operations	40
Item 3. Quantitative and Qualitative Disclosures About Market Risk	58
Item 4. Controls and Procedures	58
PART II Other Information	58
Item 1. Legal Proceedings	58
Item 1A. Risk Factors	58
Item 2. Unregistered Sales of Equity Securities and use of Proceeds	58
Item 3. Defaults upon Senior Securities	58
Item 4. Mine Safety Disclosures	58
Item 5. Other Information	58
Item 6. Exhibits	58
SIGNATURES	59
EXHIBIT INDEX	60

1

FINAL

PART I. Financial Information

Item 1. Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

BALANCE SHEETS

	June 30,		December 31,
(dollars in thousands, except share data)	2017		2016
	(unaudited)
ASSETS
Investments
Fixed maturity available-for-sale securities, at estimated fair value
(amortized cost: 2017 - $1,347,918; 2016 - $1,383,787)	$	1,474,826	$	1,487,037
Equity available-for-sale securities, at estimated fair value
(cost: 2017 - $31,264; 2016 - $31,264)		33,929		32,551
Limited partnerships		71,716		70,910
Mortgage loans on real estate		123,820		116,208
Policy loans		618,134		632,834
Derivative assets		6,444		16,526
Total investments		2,328,869		2,356,066
Cash and cash equivalents		290,633		267,844
Accrued investment income		36,735		34,318
Deferred policy acquisition costs		32,181		33,901
Deferred sales inducements		7,316		7,708
Value of business acquired		212,889		222,299
Goodwill		2,800		2,800
Income tax asset		1		576
Reinsurance receivables		80		166
Receivable for investments sold - net		-		997
Other assets		36,539		35,484
Recoverable of ceded guaranteed minimum income benefits embedded derivatives, at fair value		36,890		48,166
Separate Accounts assets		5,713,098		5,659,950
Total Assets	$	8,698,031	$	8,670,275

See Notes to Financial Statements

2

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

BALANCE SHEETS - Continued

	June 30,			December 31,
(dollars in thousands, except share data)	2017			2016
	(unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholder liabilities and accruals
Policyholder account balances	$	1,069,873		$	1,096,695
Future policy benefits		450,919			486,826
Claims and claims settlement expenses		31,041			37,556
Total policyholder liabilities and accruals		1,551,833			1,621,077
Payables for collateral under securities loaned,
reverse repurchase agreements and derivatives		228,626			245,702
Checks not yet presented for payment		8,297			4,261
Derivative liabilities		3,703			15,165
Affiliated payables - net		2,431			5,064
Affiliated short-term note payable		38,000			-
Reinsurance payables		194			203
Payable for investments purchased - net		7,606			-
Other liabilities		9,351			12,461
Separate Accounts liabilities		5,713,098			5,659,950
Total Liabilities		7,563,139			7,563,883
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		1,380,976			1,425,816
Accumulated other comprehensive income, net of taxes		79,739			55,350
Retained Earnings (Deficit)		(328,323	)		(377,274	)
Total Stockholder's Equity		1,134,892			1,106,392
Total Liabilities and Stockholder's Equity	$	8,698,031		$	8,670,275

See Notes to Financial Statements

3

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF INCOME (LOSS)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in thousands)	2017			2016			2017			2016
	(unaudited)						(unaudited)
Revenues
Policy charge revenue	$	37,369		$	37,860		$	74,845		$	74,899
Net investment income (loss)		26,417			27,614			54,361			54,066
Net realized investment gains (losses)
Other-than-temporary impairment gains (losses) on securities		-			(1,015	)		-			(4,563	)
Portion of other-than-temporary impairments previously
recognized in other comprehensive income (loss)		-			-			-			(121	)
Net other-than-temporary impairment losses on
securities recognized in income		-			(1,015	)		-			(4,684	)
Net realized investment gains (losses), excluding other-than-temporary impairment losses on securities		2,184			1,072			2,215			4,607
Net realized investment gains (losses)		2,184			57			2,215			(77	)
Net derivative gains (losses)		(6,540	)		(6,665	)		(30,768	)		(3,294	)
Total Revenues		59,430			58,866			100,653			125,594
Benefits and Expenses
Interest credited to policyholder liabilities		13,370			13,953			26,353			27,983
Policy benefits (net of reinsurance recoveries:
2017 - $758; $1,173; 2016 - $420; $1,207)		11,889			21,859			2,399			64,913
Amortization (accretion) of deferred policy acquisition costs		605			(500	)		1,737			442
Amortization (accretion) of value of business acquired		2,854			7,611			5,218			12,991
Insurance, General and Administrative Expenses		6,577			10,242			15,420			20,168
Total Benefits and Expenses		35,295			53,165			51,127			126,497
Income (Loss) Before Taxes		24,135			5,701			49,526			(903	)
Income Tax Expense (Benefit)		-			-			575			-
Net Income (Loss)	$	24,135		$	5,701		$	48,951		$	(903	)

See Notes to Financial Statements

4

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in thousands)	2017			2016			2017			2016
	(unaudited)						(unaudited)
Net Income (Loss)	$	24,135		$	5,701		$	48,951		$	(903	)
Other Comprehensive Income (Loss)
Net unrealized gains (losses) on available-for-sale securities
Net unrealized holding gains (losses) arising during the period		18,451			40,686			24,447			89,409
Reclassification adjustment for (gains) losses included in net income (loss)		(611	)		68			(79	)		(1,732	)
		17,840			40,754			24,368			87,677
Net unrealized gains (losses) on cash flow hedges
Net unrealized gains (losses) on cash flow hedges arising during the period		2,530			1,290			2,691			140
Reclassification adjustment for (gains) losses included in net income (loss)		373			513			620			316
		2,903			1,803			3,311			456
Net unrealized other-than-temporary impairments on securities
Change in previously recognized unrealized other-than-temporary impairments		746			100			669			(755	)
Reclassification adjustment for other-than-temporary impairments included in net income (loss)		-			-			-			121
		746			100			669			(634	)
Adjustments
Value of business acquired		(3,088	)		(7,318	)		(3,959	)		(12,416	)
		(3,088	)		(7,318	)		(3,959	)		(12,416	)
Total other comprehensive income (loss), net of taxes		18,401			35,339			24,389			75,083
Comprehensive Income (Loss)	$	42,536		$	41,040		$	73,340		$	74,180

See Notes to Financial Statements

5

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF STOCKHOLDER’S EQUITY

	Six Months Ended			Twelve Months Ended
	June 30,			December 31,
(dollars in thousands)	2017			2016
	(unaudited)
Common Stock	$	2,500		$	2,500
Additional Paid-in Capital
Balance at beginning of period	$	1,425,816		$	1,514,157
Return of capital to Transamerica Corporation		(44,840	)		(88,341	)
Balance at end of period	$	1,380,976		$	1,425,816
Accumulated Other Comprehensive Income
Balance at beginning of period	$	55,350		$	56,591
Total other comprehensive income (loss), net of taxes		24,389			(1,241	)
Balance at end of period	$	79,739		$	55,350
Retained Earnings (Deficit)
Balance at beginning of period	$	(377,274	)	$	(281,747	)
Net income (loss)		48,951			(20,527	)
Cash dividend paid to Transamerica Corporation		-			(75,000	)
Balance at end of period	$	(328,323	)	$	(377,274	)
Total Stockholder's Equity	$	1,134,892		$	1,106,392

See Notes to Financial Statements

6

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF CASH FLOWS

	Six Months Ended
	June 30,
(dollars in thousands)	2017			2016
	(unaudited)
CASH FLOWS FROM  OPERATING ACTIVITIES
Net income (loss)	$	48,951		$		(903	)
Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by operating activities:
Change in deferred policy acquisition costs		1,720				422
Change in deferred sales inducements		392				97
Change in value of business acquired		5,218				12,991
Change in benefit reserves, net of change in ceded reinsurance recoverable		(25,447	)			26,308
Change in income tax accruals		575				-
Change in claims and claims settlement expenses		(6,515	)			777
Change in other operating assets and liabilities - net		1,799				(10,033	)
Change in checks not yet presented for payment		4,036				(429	)
Amortization (accretion) of investments		(633	)			(452	)
Interest credited to policyholder liabilities		26,353				27,983
Net derivative (gains) losses		30,768				3,294
Net realized investment (gains) losses		(2,215	)			77
Change in unrealized (gains) losses related to limited partnerships		(1,911	)		-
Limited partnership asset distributions		-				1
Net cash and cash equivalents provided by/(used in) operating activities		83,091				60,133
CASH FLOWS FROM  INVESTING ACTIVITIES
Sales of available-for-sale securities and mortgage loans		75,155				199,431
Maturities of available-for-sale securities and mortgage loans		82,417				138,364
Purchases of available-for-sale securities and mortgage loans		(126,246	)			(297,825	)
Sales of limited partnerships		67,130				2,516
Purchases of limited partnerships		(66,025	)			(11,145	)
Change in affiliated short-term note receivable		-				25,000
Cash received in connection with derivatives		48,623				21,338
Cash paid in connection with derivatives		(79,808	)			(34,410	)
Policy loans on insurance contracts - net		14,700				22,116
Net settlement on futures contracts		1,025				4,532
Other		-				2,628
Net cash and cash equivalents provided by/(used in) investing activities	$	16,971		$		72,545

See Notes to Financial Statements

7

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF CASH FLOWS - Continued

	Six Months Ended
	June 30,
(dollars in thousands)	2017			2016
	(unaudited)
CASH FLOWS  FROM  FINANCING ACTIVITIES
Policyholder deposits	$	5,022		$	5,510
Policyholder withdrawals		(57,381	)		(75,048	)
Cash dividend paid to Transamerica Corporation		-			(75,000	)
Return of capital to Transamerica Corporation (a)		(44,840	)		(12	)
Change in payables for collateral under securities loaned, reverse repurchase    agreements and derivatives		(18,074	)		107,465
Change in affiliated short-term note payable		38,000			-
Net cash and cash equivalents provided by/(used in) financing activities		(77,273	)		(37,085	)
Net increase (decrease) in cash and cash equivalents		22,789			95,593
Cash and cash equivalents, beginning of year		267,844			236,482
Cash and cash equivalents, end of period	$	290,633		$	332,075

(a) Not included in return of capital to Transamerica Corporation for the six months ended June 30, 2016 is the amount payable to Transamerica Corporation in connection with the tax allocation agreement of $13,489. The amount payable is presented on the Balance Sheets within the affiliated payables – net line item.

See Notes to Financial Statements

8

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

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 Transamerica Corporation (“TA Corp”, “the Parent”), which is an indirect wholly owned subsidiary of AEGON N.V., a limited liability share company organized under Dutch law. AEGON N.V. and its subsidiaries and joint ventures have life insurance and pension operations in over twenty countries in Europe, the Americas, and Asia and are also active in savings and investment operations, accident and health insurance, and general insurance and have limited banking operations in a number of these countries.

The Company is a life insurance company that 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 is domiciled in the State of Arkansas and is currently licensed to sell insurance and annuities in forty-nine states, the District of Columbia, the U.S. Virgin Islands and Guam. The Company is currently subject to primary regulation by the Arkansas Insurance Department.

Basis of Reporting

The accompanying Financial Statements have been prepared in conformity with United States generally accepted accounting principles (“GAAP”). The Company also submits financial statements to insurance industry regulatory authorities, which are prepared on the basis of statutory accounting principles (“SAP”). The interim Financial Statements 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2016. For a complete discussion of the Company’s 2016 Financial Statements and accounting policies, refer to the Company’s 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.

Accounting Estimates and Assumptions

The preparation of financial statements in conformity to GAAP 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 investments (including derivatives), 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.

Subsequent Events

The Financial Statements are adjusted to reflect events that occurred between the Balance Sheet date and the date when the Financial Statements are issued, provided they give evidence of conditions that existed at the Balance Sheet date. Events that are indicative of conditions that arose after the Balance Sheet date are disclosed, but do not result in an adjustment of the Financial Statements themselves. No subsequent events have been identified through August 14, 2017 that require adjustments to or disclosure in the Financial Statements.

Future Accounting Guidance

There were no new accounting pronouncements applicable for the interim reporting period ended June 30, 2017.

9

Note 2.  Fair Value of Financial Instruments

Fair Value Measurements

Accounting Standards Codification (“ASC”) ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level 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 the three-level hierarchy 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:

a) Quoted prices for similar assets or liabilities in active markets

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

c) Inputs other than quoted market prices that are observable

d) 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. Both observable and unobservable inputs may be used to determine the fair value of positions classified in Level 3. The circumstances for using unobservable measurements include those in which there is little, if any, market activity for the assets or liabilities. Therefore, the Company must make assumptions about inputs a hypothetical market participant would use to value the assets and liabilities.

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

10

The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016:

	June 30, 2017
	Level 1		Level 2		Level 3		Total
Assets
Fixed maturity available-for-sale ("AFS") securities (a)
Corporate securities	$	-	$	883,959	$	-	$	883,959
Asset-backed securities		-		58,572		9,347		67,919
Commercial mortgage-backed securities		-		74,607		-		74,607
Residential mortgage-backed securities		-		67,712		-		67,712
Municipals		-		874		-		874
Government and government agencies
United States		353,867		-		-		353,867
Foreign		1,468		24,420		-		25,888
Total fixed maturity AFS securities	$	355,335	$	1,110,144	$	9,347	$	1,474,826
Equity AFS securities (a)
Banking securities	$	-	$	28,143	$	-	$	28,143
Industrial securities		-		5,786		-		5,786
Total equity AFS securities	$	-	$	33,929	$	-	$	33,929
Cash equivalents (b)	$	-	$	288,019	$	-	$	288,019
Derivative assets (c)		-		6,444		-		6,444
Fair value recoverable of ceded guaranteed minimum income benefits ("GMIB") embedded derivatives (d)		-		-		36,890		36,890
Investments measured at net asset value ("NAV") (e)		-		-		-		5,784,814
Total assets	$	355,335	$	1,438,536	$	46,237	$	7,624,922
Liabilities
Future policy benefits (embedded derivatives only) (f)	$	-	$	-	$	49,489	$	49,489
Derivative liabilities (c)		-		3,703		-		3,703
Total liabilities	$	-	$	3,703	$	49,489	$	53,192

11

	December 31, 2016
	Level 1		Level 2		Level 3		Total
Assets
Fixed maturity AFS securities (a)
Corporate securities	$	-	$	911,851	$	-	$	911,851
Asset-backed securities		-		43,372		9,215		52,587
Commercial mortgage-backed securities		-		76,513		-		76,513
Residential mortgage-backed securities		-		96,177		-		96,177
Municipals		-		856		-		856
Government and government agencies
United States		341,379		-		-		341,379
Foreign		1,480		6,194		-		7,674
Total fixed maturity AFS securities	$	342,859	$	1,134,963	$	9,215	$	1,487,037
Equity AFS securities (a)
Banking securities	$	-	$	26,726	$	-	$	26,726
Industrial securities		-		5,825		-		5,825
Total equity AFS securities	$	-	$	32,551	$	-	$	32,551
Cash equivalents (b)		-		265,538		-		265,538
Derivative assets (c)		-		16,526		-		16,526
Fair value recoverable of ceded GMIB embedded    derivatives (d)		-		-		48,166		48,166
Investments measured at NAV (e)		-		-		-		5,730,860
Total assets	$	342,859	$	1,449,578	$	57,381	$	7,580,678
Liabilities
Future policy benefits (embedded derivatives only) (f)	$	-	$	-	$	55,143	$	55,143
Derivative liabilities (c)		-		15,165		-		15,165
Total liabilities	$	-	$	15,165	$	55,143	$	70,308

(a) The fair values of debt 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 debt securities. The Company’s valuation policy utilizes a pricing hierarchy that 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, securities are submitted to brokers to obtain quotes. The majority of brokers’ quotes are non-binding. As part of the pricing process, the Company assesses the appropriateness of each quote (i.e., as to whether the quote is based on observable market transactions or not) to determine the most appropriate estimate of fair value. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use the following inputs: reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows.

Third-party pricing services and brokers will often determine prices using recently reported trades for identical or similar securities. The third-party pricing services and brokers make adjustments for the elapsed time from the trade date to the Balance Sheet date to take into account available market information. Lacking recently reported trades, third-party pricing services and brokers will use modeling techniques to determine a security price where expected future cash flows are developed based on the performance of the underlying collateral and discounted using an estimated market rate.

Periodically, the Company performs an analysis of the inputs obtained from third-party pricing services and brokers to ensure that the inputs are reasonable and produce a reasonable estimate of fair value. The Company’s asset specialists and investment valuation specialists consider both qualitative and quantitative factors as part of this analysis. Several examples of analytical procedures performed include, but are not limited to, recent transactional activity for similar debt securities, 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 that highlight significant price changes, stale prices or un-priced securities.

12

Following is additional discussion of the valuation methodologies for certain types of debt securities:

Corporate debt securities - Valuations of corporate debt securities are monitored and reviewed on a monthly basis. The pricing hierarchy is dependent on the possibility of corroboration of market prices when available. If no market prices are available, valuations are determined by a discounted cash flow methodology using an internally calculated yield. The yield is comprised of a credit spread over a given benchmark, taking into effect liquidity risk for thinly traded securities.

Residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset backed securities (“ABS”) - Valuations of RMBS, CMBS and ABS are monitored and reviewed on a monthly basis. Valuations are based on a pricing hierarchy and, depending on the asset type, the pricing hierarchy consists of a waterfall that starts with making use of market prices from indices and follows with making use of third-party pricing services or brokers. The pricing hierarchy is dependent on the possibility of corroborating the market prices. If no market prices are available, the Company uses either internal models or another available pricing source to determine fair value. Significant inputs included in the internal models are generally determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles. Market standard models may be used to model the specific collateral composition and cash flow structure of each transaction. The most significant unobservable input is the illiquidity premium, which is embedded in the discount rate.

Government and government agencies - When available, the Company uses quoted market prices in active markets to determine the fair value of its government and government agencies’ investments. When the Company cannot make use of quoted market prices, market prices from indices or quotes from third-party pricing services or brokers are used.

Equity securities – Valuations of equity securities are monitored and reviewed on a monthly basis. When available, the Company uses quoted market prices in active markets to determine the fair value of its equity investments. When the Company cannot make use of quoted market prices, quotes from a third-party vendor, broker, or custodian are used. 

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

(c) Level 2 derivatives include interest rate swaps, inflation swaps, variance swaps, total return swaps, credit default swaps, and options for which the Company utilized readily accessible quoted index levels and broker quotes. The fair value of interest rate swaps is calculated based on the change in the underlying floating rate curve measured using the London Inter-Bank Offered Rate (“LIBOR”) at the reporting date, as compared to the fixed leg of the swap. 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 and the last reset date, multiplied by the notional value of the swap. The fair value for variance swaps is calculated as the difference between the estimated volatility of the underlying Standard & Poor’s 500 Composite Price Index (“S&P”) at maturity and the actual volatility of the underlying S&P 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. The fair value for equity options is calculated using the Black-Scholes model and market observable inputs for the underlying market price and volatility surface. 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.

(d) The Company reinsures a portion of its variable annuity business that offer GMIB reinsurance. GMIB reinsurance contracts are treated as embedded derivatives since they contain payment provisions for net settlement and are therefore reported separately from the host contract.

13

(e) Amounts are comprised of certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient and have not been classified in the fair value hierarchy in accordance with ASC 820-10. These investments do not have lockup periods.

		June 30, 2017								December 31, 2016
Investment:		Fair			Unfunded		Redemption	Redemption		Fair			Unfunded
Limited Partnerships		Value			Commitments		Frequency	Notice Period		Value			Commitments
Limited Partnership - Private Equity	$		1,194	$		-	None	None	$		1,759	$		-
Limited Partnership - Hedge Funds			70,522			543	Quarterly	60-65 days			69,151			-
	$		71,716	$		543			$		70,910	$		-
Separate Accounts			5,713,098			-	None	None			5,659,950			-
Investments measured at NAV	$		5,784,814	$		543			$		5,730,860	$		-

(f) The Company recognizes liabilities for contracts containing guaranteed minimum withdrawal benefits ("GMWB") and stand-alone living benefits ("SALB"), which are reported at fair value. The liabilities for the contracts containing GMWB are treated as embedded derivatives, which are required to be reported separately from the host contract. The fair value of these guarantees is calculated as the present value of future expected payments to policyholders less the present value of assessed fees attributable to the guarantees. Given the complexity and long-term nature of the guarantees, their fair values are determined using stochastic techniques under a variety of market return, discount rate and actuarial assumptions. Since two 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.

For the six months ended June 30, 2017 and twelve months ended December 31, 2016, 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 fixed maturity AFS securities at June 30, 2017 and December 31, 2016:

	Six Months Ended June 30, 2017			Twelve Months Ended December 31, 2016
	Fixed Maturity AFS			Fixed Maturity AFS
	Securities			Securities
Balance at beginning of period (a)	$	9,215		$	6,666
Change in unrealized gains (losses) (b)		202			(243	)
Purchases		4,000			2,792
Sales		(77	)		(326	)
Transfers into Level 3		-			2,113
Transfers out of Level 3		(3,993	)		(1,954	)
Net realized investment gains (c)		-			167
Balance at end of period (a)	$	9,347		$	9,215

(a) Recorded as a component of fixed maturity AFS securities on the Balance Sheets.

(b) Recorded as a component of other comprehensive income (loss) (“OCI”) in net unrealized holding gains (losses) on AFS securities arising during the period.

(c) Recorded as a component of net realized investment gains (losses) for fixed maturity in the Statements of Income (Loss).

In certain circumstances, the Company will obtain non-binding broker quotes from brokers to assist in the determination of fair value. If those quotes can be corroborated by other market observable data, the investments will be classified as Level 2 investments. If not, the investments are classified as Level 3 due to the unobservable nature of the brokers’ valuation processes. The primary driver for the decrease in Level 3 fixed maturity AFS securities at June 30, 2017 is due to an asset-backed non-housing security transferring from Level 3 to a Level 2 due to the availability of market observable data (Level 2).

The Company's Level 3 assets consist of GMIB reinsurance and Level 3 liabilities consist of provisions for GMWB and SALB. 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 liability measurement and an increase (decrease) in volatility in isolation would result in a higher (lower) fair value liability measurement. Changes in the Company’s credit spread and volatility assumptions have an inverse effect on the GMIB reinsurance assets.

14

The expected market rates of return are based on risk-free rates, such as the current LIBOR forward curve. The credit spread, which is a 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 was35 basis points (“bps”) and 50 bps at June 30, 2017 and December 31, 2016, 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%-30% thereafter. The volume of observable option trading from which volatilities are derived generally declines as the contracts’ term increases; therefore, the volatility curve grades from implied volatilities for five years to the ultimate rate. The resulting volatility assumption in year 20 for the S&P (expressed as a spot rate) was 23.3% and 24.0% at June 30, 2017 and December 31, 2016, respectively. Correlations of market returns across underlying indices are based on historical market returns and their inter-relationships over a number of years preceding the valuation date. Assumptions regarding policyholder behavior, such as lapses, included in the models are derived in the same way as the assumptions used to measure insurance liabilities. These assumptions are reviewed at each valuation date and updated based on historical experience and observable market data as required.

The following table provides a summary of the changes in fair value of the Company’s Level 3 liabilities (assets) at June 30, 2017 and December 31, 2016:

	Six Months Ended								Twelve Months Ended
	June 30, 2017								December 31, 2016
				GMIB								GMIB
	GMWB			Reinsurance			SALB		GMWB			Reinsurance			SALB
Balance at beginning of period (a)	$	54,414		$	(48,166	)	$	729	$	60,618		$	(61,426	)	$	511
Changes in interest rates (b)		5,642			(2,904	)		-		(4,179	)		2,262			-
Changes in equity markets (b)		(11,279	)		13,710			-		(5,988	)		12,560			218
Other (b)		(17	)		470			-		3,963			(1,562	)		-
Balance at end of period (a)	$	48,760		$	(36,890	)	$	729	$	54,414		$	(48,166	)	$	729

(a) GMWB and SALB are recorded as a component of future policy benefits on the Balance Sheets and GMIB reinsurance is recorded as recoverable of ceded GMIB embedded derivatives, at fair value on the Balance Sheets.

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

For the six months ended June 30, 2017, the change in the fair value of the GMWB and GMIB reinsurance guarantees was primarily driven by changes in interest rates and equity market performance. The fair value of the GMWB decreased due to favorable equity market returns and was partially offset by the decrease in the 10-year Treasury interest rate and own credit spread. The increase to the GMIB reinsurance guarantees was driven primarily by the favorable equity market returns, partially offset by the decrease in interest rates.

The following tables provides a summary of the quantitative inputs and assumptions of the Company's Level 3 assets and liabilities at June 30, 2017 and December 31, 2016:

	June 30, 2017
	Estimated				Range
Description	Fair Value		ValuationTechniques	UnobservableInputs	(WeightedAverage)
Assets
Fixed maturity securities
Asset-backed securities	$	9,347	Broker	See comment below (a)	See comment below (a)
Total fixed maturity securities	$	9,347
Future policy benefits (embedded derivatives) -    GMIB Reinsurance		36,890	Discounted cash flows	Own credit risk	35
				Long-term volatility	25% - 30%
Total assets	$	46,237
Liabilities
Future policy benefits (embedded derivatives) - GMWB	$	48,760	Discounted cash flows	Own credit risk	35
				Long-term volatility	25% - 30%
Future policy benefits - SALB		729	See comment below (b)	See comment below (b)	See comment below (b)
Total liabilities	$	49,489

15

	December 31, 2016
	Estimated				Range
Description	Fair Value		Valuation Techniques	Unobservable Inputs	(Weighted Average)
Assets
Fixed maturity securities
Asset-backed securities	$	9,215	Broker	See comment below (a)	See comment below (a)
Future policy benefits (embedded derivatives) -    GMIB Reinsurance		48,166	Discounted cash flows	Own credit risk	50
				Long-term volatility	25% - 30%
Total assets	$	57,381
Liabilities
Future policy benefits (embedded derivatives) -    GMWB	$	54,414	Discounted cash flows	Own credit risk	50
				Long-term volatility	25% - 30%
Future policy benefits - SALB		729	See comment below (b)	See comment below (b)	See comment below (b)
Total liabilities	$	55,143

(a) The Company has obtained non-binding broker quotes, which cannot be corroborated by market observable data, to assist in determining the fair values of the Level 3 asset-backed securities. The Company does not receive the unobservable inputs used by the broker but performs annual reviews to approve the use of brokers and obtains an asset specialist’s review of the broker’s price.

(b) The SALB is a product with fewer than 150 policies. Due to the small size of this block, the liability was established based on the fees.

16

The following tables provides the estimated fair value of the Company's assets not carried at fair value on the Balance Sheets at June 30, 2017 and December 31, 2016:

	June 30, 2017
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans on real estate (a)	$	-	$	-	$	126,881	$	126,881
Policy loans (b)		-		618,134		-		618,134
Total assets	$	-	$	618,134	$	126,881	$	745,015

	December 31, 2016
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans on real estate (a)	$	-	$	-	$	115,020	$	115,020
Policy loans (b)		-		632,834		-		632,834
Total assets	$	-	$	632,834	$	115,020	$	747,854

(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 book value of policy loans approximates their fair value.

17

Note 3.  Investments

Fixed Maturity and Equity Securities

The amortized cost/cost, gross unrealized gains and losses, estimated fair values and other-than-temporary impairments (“OTTI”) reflected in accumulated other comprehensive income (“AOCI”) of investments in fixed maturity and equity AFS securities at June 30, 2017 and December 31, 2016 were: 

		June 30, 2017
					Gross Unrealized							Estimated
		Amortized										Fair			OTTI
		Cost/Cost			Gains			Losses				Value			in AOCI (a)
Fixed maturity AFS securities
Corporate securities	$		822,600	$		62,851	$		(1,492	)	$		883,959	$		-
Asset-backed securities			67,950			224			(255	)			67,919			-
Commercial mortgage-backed securities			72,989			1,865			(247	)			74,607			-
Residential mortgage-backed securities			61,834			5,922			(44	)			67,712			-
Municipals			907			-			(33	)			874			-
Government and government agencies
United States			297,444			56,453			(30	)			353,867			-
Foreign			24,194			1,716			(22	)			25,888			-
Total fixed maturity AFS securities	$		1,347,918	$		129,031	$		(2,123	)	$		1,474,826	$		-
Equity AFS securities
Banking securities	$		25,473	$		2,670	$		-		$		28,143	$		-
Industrial securities			5,791			-			(5	)			5,786			-
Total equity AFS securities	$		31,264	$		2,670	$		(5	)	$		33,929	$		-

	December 31, 2016
					Gross Unrealized							Estimated
		Amortized										Fair			OTTI
		Cost/Cost			Gains			Losses				Value			in AOCI (a)
Fixed maturity AFS securities
Corporate securities	$		859,028	$		56,387	$		(3,564	)	$		911,851	$		-
Asset-backed securities			53,421			15			(849	)			52,587			-
Commercial mortgage-backed securities			75,396			1,706			(589	)			76,513			-
Residential mortgage-backed securities			92,943			4,004			(770	)			96,177			(5	)
Municipals			909			-			(53	)			856			-
Government and government agencies
United States			295,581			45,798			-				341,379			-
Foreign			6,509			1,165			-				7,674			-
Total fixed maturity AFS securities	$		1,383,787	$		109,075	$		(5,825	)	$		1,487,037	$		(5	)
Equity AFS securities
Banking securities	$		25,473	$		1,721	$		(468	)	$		26,726	$		-
Industrial securities			5,791			34			-				5,825			-
Total equity AFS securities	$		31,264	$		1,755	$		(468	)	$		32,551	$		-

(a) Represents OTTI in AOCI, which were not included in earnings. Amount excludes $3,110 and $2,446 of unrealized gains at June 30, 2017 and December 31, 2016, 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.

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The amortized cost and estimated fair value of fixed maturity AFS securities by investment grade at June 30, 2017 and December 31, 2016 were: 

	June 30, 2017				December 31, 2016
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Investment grade	$	1,268,702	$	1,386,926	$	1,294,978	$	1,393,503
Below investment grade		79,216		87,900		88,809		93,534
Total fixed maturity AFS securities	$	1,347,918	$	1,474,826	$	1,383,787	$	1,487,037

At June 30, 2017 and December 31, 2016, the estimated fair value of fixed maturity securities rated BBB-, which is the lowest investment grade rating given by rating agencies, was $58,930 and $65,730, respectively. 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 to assess whether they are other-than-temporarily impaired.

The amortized cost and estimated fair value of fixed maturity AFS securities at June 30, 2017 and December 31, 2016 by contractual maturities were: 

		June 30, 2017						December 31, 2016
					Estimated						Estimated
		Amortized			Fair			Amortized			Fair
		Cost			Value			Cost			Value
Fixed maturity AFS securities
Due in one year or less	$		78,733	$		80,116	$		56,748	$		57,489
Due after one year through five years			450,657			477,698			523,815			555,221
Due after five years through ten years			118,259			124,484			95,744			99,697
Due after ten years			497,496			582,290			485,720			549,354
	$		1,145,145	$		1,264,588	$		1,162,027	$		1,261,761
Mortgage-backed securities and other    asset-backed securities	$		202,773	$		210,238	$		221,760	$		225,276
Total fixed maturity AFS securities	$		1,347,918	$		1,474,826	$		1,383,787	$		1,487,037

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.

19

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 AOCI, net of taxes.

The estimated fair value and gross unrealized losses and OTTI related to fixed maturity and equity AFS securities aggregated by length of time that individual securities have been in a continuous unrealized loss position at June 30, 2017 and December 31, 2016 were as follows: 

	June 30, 2017
					Gross
	Estimated				Unrealized
	Fair		Amortized		Losses and
	Value		Cost/Cost		OTTI (a)
Less than or equal to six months
Fixed maturity AFS securities
Corporate securities	$	3,212	$	3,288	$	(76	)
Asset-backed securities		21,820		21,842		(22	)
Commercial mortgage-backed securities		10,578		10,678		(100	)
Residential mortgage-backed securities		2,880		2,924		(44	)
Government and government agencies
United States		6,593		6,623		(30	)
Foreign		3,789		3,811		(22	)
Equity securities		5,786		5,791		(5	)
Total fixed maturity and equity AFS securities	$	54,658	$	54,957	$	(299	)
Greater than six months but less than or equal to one year
Fixed maturity AFS securities
Corporate securities	$	19,522	$	19,832	$	(310	)
Asset-backed securities		6,948		7,051		(103	)
Commercial mortgage-backed securities		13,169		13,316		(147	)
Total fixed maturity and equity AFS securities	$	39,639	$	40,199	$	(560	)
Greater than one year
Fixed maturity AFS securities
Corporate securities	$	9,383	$	10,489	$	(1,106	)
Asset-backed securities		8,997		9,127		(130	)
Residential mortgage-backed securities		9		9		-
Municipals		874		907		(33	)
Total fixed maturity and equity AFS securities	$	19,263	$	20,532	$	(1,269	)
Total fixed maturity and equity AFS securities	$	113,560	$	115,688	$	(2,128	)

20

	December 31, 2016
					Gross
	Estimated				Unrealized
	Fair		Amortized		Losses and
	Value		Cost/Cost		OTTI (a)
Less than or equal to six months
Fixed maturity AFS securities
Corporate securities	$	64,992	$	66,625	$	(1,633	)
Asset-backed securities		30,729		31,253		(524	)
Commercial mortgage-backed securities		30,698		31,285		(587	)
Residential mortgage-backed securities		54,987		55,690		(703	)
Equity securities - banking securities		8,213		8,500		(287	)
Total fixed maturity and equity AFS securities	$	189,619	$	193,353	$	(3,734	)
Greater than six months but less than or equal to one year
Fixed maturity AFS securities
Corporate securities	$	4,522	$	4,863	$	(341	)
Asset-backed securities		879		1,000		(121	)
Commercial mortgage-backed securities		1,010		1,012		(2	)
Residential mortgage-backed securities		212		229		(17	)
Total fixed maturity and equity AFS securities	$	6,623	$	7,104	$	(481	)
Greater than one year
Fixed maturity AFS securities
Corporate securities	$	19,541	$	21,131	$	(1,590	)
Asset-backed securities		7,978		8,182		(204	)
Residential mortgage-backed securities		2,122		2,172		(50	)
Municipals		856		909		(53	)
Equity AFS securities - banking securities		1,615		1,796		(181	)
Total fixed maturity and equity AFS securities	$	32,112	$	34,190	$	(2,078	)
Total fixed maturity and equity AFS securities	$	228,354	$	234,647	$	(6,293	)

(a) Subsequent unrealized gains (losses) on OTTI securities are included in Net unrealized OTTI on securities in the Statements of Comprehensive Income (Loss).

The total number of securities in an unrealized loss position was 49 and 81 at June 30, 2017 and December 31, 2016, respectively. The Company held 354 and 360 total securities at June 30, 2017 and December 31, 2016, respectively.

The fair value, gross unrealized losses/the portion of OTTI recognized in OCI and the number of securities with fair value declining below amortized cost by greater than 20% and 40% by length of time that securities have been in a continuous unrealized loss position were as follows at June 30, 2017 and December 31, 2016: 

	June 30, 2017							December 31, 2016
	Estimated		Gross Unrealized			Number of		Estimated			Gross Unrealized			Number of
	Fair Value		Losses/OTTI (a)			Securities		Fair Value			Losses/OTTI (a)			Securities
Decline 20% - 40%
Held greater than one year	$	1,195	$	(794	)		1	$	1,375	$		(614	)		1
Total	$	1,195	$	(794	)		1	$	1,375	$		(614	)		1

(a)    Subsequent unrealized gains (losses) on OTTI securities are included in Net unrealized OTTI on securities in the Statements of    Comprehensive Income (Loss).

Unrealized gains (losses) incurred during the first six months of 2017 and twelve months of 2016 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. For fixed maturity AFS securities, the Company does not intend to sell them, nor is it more likely than not that the Company will be required to sell them before the recovery of its amortized cost basis, and the Company expects to recover the entire cost basis of the debt securities. In making the other-than-temporary impairment assessment, the Company also considered all available information relevant to the collectability of the security, including information about past events, current conditions, and reasonable and supportable forecasts, when developing the estimate of cash flows expected to be collected. Therefore, the Company determined that these fixed maturity AFS securities were not other-than-temporarily impaired.

21

The components of net unrealized gains (losses) and OTTI included in AOCI, net of taxes, at June 30, 2017 and December 31, 2016 were as follows: 

	June 30,			December 31,
	2017			2016
Assets
Fixed maturity AFS securities	$	126,908		$	103,250
Equity AFS securities		2,665			1,287
Cash flow hedges		2,088			(1,224	)
Value of business acquired		(30,589	)		(26,630	)
	$	101,072		$	76,683
Liabilities
Income taxes - deferred	$	(21,333	)	$	(21,333	)
Stockholder's Equity
Accumulated other comprehensive income, net of taxes	$	79,739		$	55,350

Mortgage Loans on Real Estate

Mortgage loans on real estate consist entirely of mortgages on commercial real estate. Prepayment premiums are collected when borrowers elect to prepay their debt prior to the stated maturity. There were $1,121 and $1,183 in prepayment premiums collected during the three and six months ended June 30, 2017. There were no prepayment premiums collected for the twelve months ended December 31, 2016. Prepayment premiums are included in net realized investment gains (losses), excluding OTTI losses on securities, in the Statements of Income (Loss). The Company does not accrue interest on loans ninety days past due. At June 30, 2017 and December 31, 2016, there were no commercial mortgage loans that had two or more payments delinquent.

The fair values of mortgage loans on real estate are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and/or similar remaining maturities. The estimated fair value of the mortgages on commercial real estate at June 30, 2017 and December 31, 2016 was $126,881 and $115,020, respectively.

Loans are considered impaired when it is probable that, based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. A valuation allowance is established when a loan is determined to be impaired for the excess carrying value of the loan over its estimated collateral value. There were no impaired mortgage loans at June 30, 2017 and December 31, 2016. For the portion of the mortgage loan portfolio without specific reserves, an allowance for credit losses is established. The change in the allowance for credit losses is reflected in net realized investment gains (losses), excluding OTTI losses on securities, in the Statements of Income (Loss).

The commercial mortgages are geographically diversified throughout the United States with the largest concentrations in Texas, Pennsylvania, Wisconsin, Florida, California, Missouri, Washington, Georgia, Virginia, Utah, Minnesota and Tennessee,which account for approximately 86% of mortgage loans at June 30, 2017.

The credit quality of commercial mortgage loans at June 30, 2017 and December 31, 2016, was as follows:

	June 30,			December 31,
Commercial	2017			2016
AAA - AA	$	43,289		$	43,047
A		58,022			55,269
BBB		22,599			17,970
Total mortgage loans on real estate	$	123,910		$	116,286
Less: allowance for credit losses		(90	)		(78	)
Total mortgage loans on real estate, net	$	123,820		$	116,208

The credit quality of the commercial mortgage loans was determined based on an internal credit rating model that 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 a 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 that is intended to align with S&P Global Rating Services (“S&P GRS”) 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, an adequate allowance for credit losses has been established to cover those risks.

22

Securities Lending

The following table provides a summary of the securities lending program at June 30, 2017 and December 31, 2016: 

	June 30,		December 31,
	2017		2016
Payables for collateral under securities loaned	$	208,377	$	199,412
Amortized cost of securities out on loan		171,800		166,942
Estimated fair value of securities out on loan		201,685		194,996

Reverse Repurchase Agreements

The following table provides a summary of the dollar roll reverse repurchase agreements at June 30, 2017 and December 31, 2016:

	June 30,		December 31,
	2017		2016
Payables for reverse repurchase agreements	$	20,238	$	46,637
Amortized cost of securities pledged		20,009		47,021
Estimated fair value of securities pledged		20,043		46,401

Collateral Maturities of Reverse Repurchase Agreements and Securities Lending Transactions

The following tables provide a summary of maturities of collateral underlying reverse repurchase agreements and securities lending transactions at June 30, 2017 and December 31, 2016: 

	June 30, 2017
	Overnight and Continuous		Up to 30 days		Total
Reverse repurchase agreements
Residential mortgage-backed securities	$	-	$	20,043	$	20,043
Total	$	-	$	20,043	$	20,043
Securities lending transactions
U.S. Treasury and agency securities	$	147,480	$	-	$	147,480
Corporate securities		47,588		-		47,588
Equity securities-banking		6,617		-		6,617
Total	$	201,685	$	-	$	201,685
Total Borrowings	$	201,685	$	20,043	$	221,728
Gross amount of recognized liabilities for reverse repurchase agreements and securities    lending included on the Balance Sheets					$	228,615

	December 31, 2016
	Overnight and Continuous		Up to 30 days		Total
Reverse repurchase agreements
Residential mortgage-backed securities		-	$	46,401	$	46,401
Total	$	-	$	46,401	$	46,401
Securities lending transactions
U.S. Treasury and agency securities	$	144,705	$	-	$	144,705
Corporate securities		40,774		-		40,774
Equity securities-banking		9,517		-		9,517
Total	$	194,996	$	-	$	194,996
Total Borrowings	$	194,996	$	46,401	$	241,397
Gross amount of recognized liabilities for reverse repurchase agreements and securities    lending included on the Balance Sheets					$	246,049

23

Derivatives and Hedge Accounting

The following table presents the notional and fair value amounts of non-qualifying hedging instruments and cash flow hedges at June 30, 2017 and December 31, 2016:

	Notional						Fair Value
		June 30,			December 31,			June 30,				December 31,
Derivative Type	2017			2016			2017				2016
Non-qualifying hedges
Short futures	$		10,972	$		25,157	$		-		$		-
Long futures			51,422			55,071			-				-
Interest rate swaps			251,000			251,000			(1,591	)			(2,799	)
Variance swaps			575			540			(3,087	)			(1,835	)
Total return swaps			247,183			1,405,253			(3,596	)			(16,487	)
Options			962,636			2,002,850			6,476				24,525
Credit default swaps			185,000			210,000			6,525				1,311
Total non-qualifying hedges	$		1,708,788	$		3,949,871	$		4,727		$		4,715
Cash flow hedges
Interest rate swaps	$		49,884	$		49,883	$		(311	)	$		(3,002	)
Total cash flow hedges	$		49,884	$		49,883	$		(311	)	$		(3,002	)
Derivative Total	$		1,758,672	$		3,999,754	$		4,416		$		1,713

The following table presents the net derivative gains (losses) recognized in the Statements of Income (Loss) for the three and six months ended June 30, 2017 and 2016:

	Net Derivative Gains (Losses) Recognized In Income
	Three Months Ended								Six Months Ended
	June 30,								June 30,
Derivative Type	2017				2016				2017				2016
Short futures	$	(3	)	$		(1,154	)	$		(727	)	$		(2,459	)
Long futures		1,497				3,138				1,752				6,991
Variance swaps		(711	)			(1,033	)			(2,340	)			(1,670	)
Total return swaps		(3,487	)			(10,996	)			(8,389	)			(17,039	)
Options		(6,879	)			(1,784	)			(23,788	)			(3,235	)
Interest rate swaps		1,840				5,079				1,211				13,771
Credit default swaps		1,203				85				1,513				347
Total	$	(6,540	)	$		(6,665	)	$		(30,768	)	$		(3,294	)

The following tables present the maximum potential amount of future payments, credit rating, and maturity dates for the credit default swaps at June 30, 2017 and December 31, 2016:

	Maximum Potential Amount
	of Future Payments		Credit Rating		Maturity Date Range
Derivative Type	June 30, 2017
Credit default swaps
Corporate debt	$	95,000		AA-A		March 2020-December 2021
Sovereign debt		90,000		AA-A		March 2018-June 2022
Credit default swaps total	$	185,000
	Maximum Potential Amount
	of Future Payments		Credit Rating		Maturity Date Range
Derivative Type	December 31, 2016
Credit default swaps
Corporate debt	$	120,000		A	June 2017-December 2020
Sovereign debt		90,000		AA-A	June 2017-December 2021
Credit default swaps total	$	210,000

24

The following tables present the components of the gains (losses) on derivatives that qualify as cash flow hedges for the three and six months ended June 30, 2017 and 2016:

	Gains (Losses) Recognized in				Gains (Losses) Recognized in
	OCI on Derivatives (Effective Portion)				OCI on Derivatives (Effective Portion)
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Interest rate swaps	$	2,903	$	1,803	$	3,311	$	456
Total	$	2,903	$	1,803	$	3,311	$	456

	Net Realized Gains (Losses)				Net Realized Gains (Losses)
	Recognized in Income on Derivatives (Ineffective Portion)				Recognized in Income on Derivatives (Ineffective Portion)
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Interest rate swaps	$	1	$	1	$	3	$	3
Total	$	1	$	1	$	3	$	3

	Gains (Losses) Reclassified from						Gains (Losses) Reclassified from
	AOCI into Net Investment Income (Effective Portion)						AOCI into Net Investment Income (Effective Portion)
	Three Months Ended						Six  Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Interest rate swaps	$	(373	)	$	(513	)	$	(620	)	$	(316	)
Total	$	(373	)	$	(513	)	$	(620	)	$	(316	)

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

At June 30, 2017, the before-tax deferred net gains (losses) on derivatives recorded in AOCI that are expected to be reclassified to the Statements of Income (Loss) during the next twelve months are ($1,241). This expectation is based on the anticipated interest payments on the hedged investments in Treasury Inflation Protection Securities 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.

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 $5,630 and $5,276 at June 30, 2017 and December 31, 2016, respectively.

25

Offsetting of Derivative 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 table presents the offsetting of derivative assets and liabilities at June 30, 2017 and December 31, 2016:

	June 30, 2017						December 31, 2016
Derivatives Subject to a Master Netting Arrangement or a Similar Right to Offset	Assets			Liabilities			Assets			Liabilities
Gross estimated fair value of derivatives:
OTC - Bilateral	$	14,046		$	8,040		$	37,344		$	32,832
OTC - Cleared		1,446			3,036			1,678			4,477
Total gross estimated fair value of derivatives	$	15,492		$	11,076		$	39,022		$	37,309
Amounts offset on the Balance Sheets
Gross estimated fair value of derivatives: (1)
OTC - Bilateral	$	(5,797	)	$	(5,797	)	$	(18,014	)	$	(18,014	)
OTC - Cleared		(1,446	)		(1,446	)		(1,678	)		(1,678	)
Cash collateral: (2), (3)
OTC - Bilateral		(1,805	)		-			(2,804	)		-
OTC - Cleared		-			(130	)		-			(2,452	)
Estimated fair value of derivatives presented on the Balance Sheets	$	6,444		$	3,703		$	16,526		$	15,165
Gross amounts not offset on the Balance Sheets:
Securities collateral: (4)
OTC - Bilateral	$	(5,913	)	$	(1,336	)	$	(15,222	)	$	(14,249	)
Net amount after application of master netting agreements and collateral	$	531		$	2,367		$	1,304		$	916

(1) Estimated fair value of derivatives is limited to the amount that is subject to set-off.

(2) The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements. Cash collateral received for over-the-counter ("OTC") OTC-Bilateral and OTC-Cleared derivatives is included in cash and cash equivalents, short-term investments, or fixed maturity securities, and the obligation to return it, beyond what is already being setoff, is included in payables for collateral under securities loaned, reverse repurchase agreements and derivatives. At June 30, 2017, the Company received $9 of excess cash collateral. The Company had no excess cash collateral received from counterparties at December 31, 2016

(3) The receivable for the return of cash collateral provided to the counterparty, beyond what is being setoff, is included in other assets. The amount reported in the table above does not include initial margin on exchange-traded and OTC-Cleared derivatives. At June 30, 2017 and December 31, 2016, the Company had no excess cash collateral provided to counterparties that was excluded from the table due to the foregoing limitation.

(4) Securities collateral received or pledged by the Company is held in separate custodial accounts and is not recorded on the Balance Sheets. The amount of securities collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements and cash collateral. At June 30, 2017 and December 31, 2016, the Company received excess securities collateral with an estimated fair value of $5,041 and $395, respectively, for its OTC-Bilateral derivatives, which are not included in the table above due to the foregoing limitation. At June 30, 2017 and December 31, 2016, the Company provided excess securities collateral with an estimated fair value of $1,956 and $1,878, respectively, for its OTC-Bilateral derivatives, which are not included in the table above due to the foregoing limitation. At June 30, 2017 and December 31, 2016, the Company also provided securities initial margin with an estimated fair value of $11,405 and $11,291, respectively, for its OTC-Cleared derivatives, which are not included in the table above.

There were no other derivative assets or liabilities at June 30, 2017 and December 31, 2016 that were subject to offsetting.

26

Net Investment Income (Loss)

Net investment income (loss) by source for the three and six months ended June 30, 2017 and 2016 was as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
Net investment income (loss)	2017			2016			2017			2016
Fixed maturity AFS securities	$	15,204		$	16,863		$	30,668		$	34,230
Equity AFS securities		422			538			840			1,003
Limited partnerships		279			(90	)		1,943			(2,631	)
Mortgage loans on real estate		1,400			1,264			2,863			2,467
Policy loans on insurance contracts		8,234			8,382			16,454			16,991
Derivatives		1,684			1,857			3,274			3,769
Cash and cash equivalents		633			564			907			1,015
Other		70			106			143			213
Gross investment income	$	27,926		$	29,484		$	57,092		$	57,057
Less investment expenses		(1,509	)		(1,870	)		(2,731	)		(2,991	)
Net investment income (loss)	$	26,417		$	27,614		$	54,361		$	54,066

Realized Investment Gains (Losses)

The Company considers fair value at the date of sale to be equal to the proceeds received. Proceeds and gross realized investment gains (losses) from the sale of AFS securities for the three and six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Proceeds	$	12,264		$	97,888		$	65,967		$	199,431
Gross realized investment gains		1,241			1,064			1,834			4,943
Gross realized investment losses		(41	)		(1	)		(557	)		(277	)
Proceeds on AFS securities sold at a realized loss		768			16,830			27,458			24,745

Net realized investment gains (losses) for the three and six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Fixed maturity AFS securities	$	1,200		$	(481	)	$	1,277		$	(754	)
Equity AFS securities		-			-			-			207
Mortgage loans on real estate		1,113			12			1,171			3
Adjustment related to value of business acquired		(129	)		526			(233	)		467
Net realized investment gains (losses)	$	2,184		$	57		$	2,215		$	(77	)

 .

27

OTTI

The following table sets forth the amount of credit loss impairments on fixed maturity securities held by the Company, for which the non-credit portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts at June 30, 2017 and December 31, 2016:

	June 30,			December 31,
	2017			2016
Balance at beginning of period	$	(2,040	)	$	(935	)
Additional credit loss impairments recognized in the    current period on securities previously impaired through OCI		-			121
Accretion of credit loss impairments previously recognized		(564	)		(1,226	)
Balance at end of period	$	(2,604	)	$	(2,040	)

The components of OTTI reflected in the Statements of Income (Loss) for the three and six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended June 30, 2017								Six Months Ended June 30, 2017
				Net		Net OTTI						Net		Net OTTI
	OTTI			OTTI Losses		Losses			OTTI			OTTI Losses		Losses
	Losses on			Recognized		Recognized			Losses on			Recognized		Recognized
	Securities			in OCI		in Income			Securities			in OCI		in Income
Gross OTTI losses	$	-		$	-	$	-		$	-		$	-	$	-
Value of business acquired amortization		-			-		-			-			-		-
Net OTTI losses	$	-		$	-	$	-		$	-		$	-	$	-
	Three Months Ended June 30, 2016								Six Months Ended June 30, 2016
				Net		Net OTTI						Net		Net OTTI
	OTTI			OTTI Losses		Losses			OTTI			OTTI Losses		Losses
	Losses on			Recognized		Recognized			Losses on			Recognized		Recognized
	Securities			in OCI		in Income			Securities			in OCI		in Income
Gross OTTI losses	$	1,544		$	-	$	1,544		$	5,213		$	-	$	5,213
Value of business acquired amortization		(529	)		-		(529	)		(529	)		-		(529	)
Net OTTI losses	$	1,015		$	-	$	1,015		$	4,684		$	-	$	4,684

28

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

VOBA

The change in the carrying amount of VOBA for the three and six months ended June 30, 2017 and 2016 was as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Accretion (Amortization) expense	$	(3,110	)	$	(7,602	)	$	(5,337	)	$	(12,973	)
Unlocking		256			(9	)		119			(18	)
Adjustment related to realized (gains) losses on investments		(129	)		526			(233	)		467
Adjustment related to unrealized (gains) losses and OTTI on investments		(3,088	)		(7,318	)		(3,959	)		(12,416	)
Change in VOBA carrying amount	$	(6,071	)	$	(14,403	)	$	(9,410	)	$	(24,940	)

DAC

The change in the carrying amount of DAC for the three and six months ended June 30, 2017 and 2016 was as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Capitalization	$	7		$	17		$	17		$	20
Accretion (amortization) expense		(863	)		516			(1,829	)		(416	)
Unlocking		258			(16	)		92			(26	)
Change in DAC carrying amount	$	(598	)	$	517		$	(1,720	)	$	(422	)

For a complete discussion of the Company’s accounting policies, refer to the 2016 Annual Report on Form 10-K.

29

Note 5.  Variable Contracts Containing Guaranteed Benefits

The Company has issued variable annuity contracts in which the Company may have contractually guaranteed to the contract owner a guaranteed minimum death benefit (“GMDB”) and/or an optional guaranteed living benefit provision. The living benefit provisions offered by the Company included a GMIB and a GMWB. Information regarding the general characteristics of each guaranteed benefit type is provided below:

• In general, contracts containing GMDB provisions provide a death benefit equal to the greater of the GMDB or the contract value. Depending on the type of contract, the GMDB may equal: (1) contract deposits accumulated at a specified interest rate, (2) the contract value on specified contract anniversaries, (3) return of contract deposits, or (4) some combination of these benefits. Each benefit type is reduced for contract withdrawals.

• In general, contracts containing GMIB provisions provide the option to receive a guaranteed future income stream upon annuitization. There is a waiting period of ten years from contract issue that must elapse before the GMIB provision can be exercised.

• Contracts containing GMWB provisions provide the contract owner the ability to withdraw minimum annual payments regardless of the impact of market performance on the contract owner’s account value. In general, withdrawal percentages are based on the contract owner’s age at the time of the first withdrawal.

The Company records liabilities for contracts containing a GMDB, GMIB and GMWB as a component of future policy benefits on the Balance Sheets and changes in the liabilities are included as a component of policy benefits in the Statements of Income (Loss).

The changes in the variable annuity GMDB, GMIB and GMWB liabilities for the three and six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
GMDB	2017			2016			2017			2016
Guaranteed benefits incurred	$	5,696		$	6,486		$	11,665		$	12,866
Guaranteed benefits paid		(6,791	)		(7,184	)		(11,425	)		(13,298	)
Unlocking		(2,803	)		(2,630	)		(16,460	)		4,841
Total	$	(3,898	)	$	(3,328	)	$	(16,220	)	$	4,409

	Three Months Ended						Six Months Ended
	June 30,						June 30,
GMIB	2017			2016			2017			2016
Guaranteed benefits incurred	$	2,742		$	3,529		$	5,803		$	6,765
Guaranteed benefits paid		(724	)		(1,308	)		(2,018	)		(1,406	)
Unlocking		(5,346	)		(1,911	)		(18,451	)		5,180
Total	$	(3,328	)	$	310		$	(14,666	)	$	10,539

	Three Months Ended				Six Months Ended
	June 30,				June 30,
GMWB	2017		2016		2017			2016
Change in fair value reserves		1,093		10,426		(5,655	)		23,872
Total	$	1,093	$	10,426	$	(5,655	)	$	23,872

30

Note 6.  Income Taxes

The effective tax rate was not meaningful for the six months ended June 30, 2017 and 2016. Differences between the effective rate and the U.S. statutory rate of 35% principally were the result of dividend received deductions (“DRD”) on the Separate Accounts, the valuation allowance on net operating loss (“NOL”) carryforwards and unrecognized tax benefits.

The Company provides for deferred income taxes resulting from temporary differences that arise from recording certain transactions in different years for income tax reporting purposes than for financial reporting purposes. 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 and six months ended June 30, 2017 was $0 and $575, respectively. There was no income tax expense (benefit) for the three and six months ended June 30, 2016.

The income tax asset (liability) consists of the following at June 30, 2017 and December 31, 2016:

	June 30,		December 31,
	2017		2016
Current state income tax asset (liability)	$	1	$	1
Deferred state income tax asset (liability)		-		575
Net income tax asset (liability)	$	1	$	576

At June 30, 2017 and December 31, 2016, the Company had a tax valuation allowance for deferred tax assets of $132,382 and $154,440, 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). In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.

The Company has analyzed all material tax positions under the guidance of ASC 740, Income Taxes, related to the accounting for uncertainty in income tax, and determined there were tax benefits of $4,391 (gross $12,547), that should not be recognized at June 30, 2017 and December 31, 2016, which primarily relate to uncertainty regarding the sustainability of certain deductions taken on the 2008-2015 U.S. Federal income tax returns. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate in a future period. It is not anticipated that the total amounts of unrecognized tax benefits will significantly increase within twelve months of the reporting date.

The components of the change in the unrecognized tax benefits were as follows at June 30, 2017 and December 31, 2016:

	June 30,		December 31,
	2017		2016
Balance at beginning of period	$	4,391	$	3,404
Additions for tax positions of prior years		-		987
Balance at end of period	$	4,391	$	4,391

At June 30, 2017 and December 31, 2016, the Company had a NOL carry forward for federal income tax purposes of $583,938 (net of the ASC 740 reduction of $12,547) and $627,860 (net of the ASC 740 reduction of $12,547), respectively, with a carry forward period of fifteen years that expires at various dates between 2023 and 2031. At both June 30, 2017 and December 31, 2016, the Company had a capital loss carry forward of $84 for federal income tax purposes with a carry forward period of five years that will expire in 2018. At June 30, 2017 and December 31, 2016, the Company had a foreign tax credit carry forward of $9,946 and $9,776, respectively, with a carry forward period of ten years that will expire at various dates up to 2027. Also, the Company has an Alternative Minimum Tax credit carry forward for federal income tax purposes of $4,216 at both June 30, 2017 and December 31, 2016, with an indefinite carry forward period.

31

The Company classifies interest and penalties related to income taxes as interest expense and penalty expense, respectively. There was no penalty expense for the three months ended June 30, 2017 and 2016. The Company recognized interest expense (income) of $21 and $58 for the three and six months ended June 30, 2017. The Company recognized interest expense (income) of $18 and $63 for the three and six months ended June 30, 2016. The Company recognized total interest payable balance at June 30, 2017 and December 31, 2016 was $219 and $161, respectively.

The Company records taxes on a separate company basis. For federal income tax purposes, the Company joins in a consolidated income tax return filing with its direct parent, TA Corp, and other affiliated companies. 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 TA Corp 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 TA Corp. At June 30, 2017 and December 31, 2016, the Company recognized capital contributions from (distributions to) TA Corp in connection with the tax allocation agreement in the amount of ($44,800) and ($13,381), 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. The Company was part of the consolidated tax return for 2013 through 2015. An examination by the Internal Revenue Service is in progress for the years 2011 through 2013. 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 has not been filed for 2016.

32

Note 7.  Accumulated Other Comprehensive Income

The changes in AOCI by component for the three and six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended June 30, 2017
	Unrealized Holding			Unrealized Holding			OCI Adjustments for			Total Accumulated
	Gains (Losses) on			Gains (Losses) on			Policyholder liabilities,			Other Comprehensive
	AFS Securities			Cash Flow Hedges			VOBA, and Deferred Tax			Income (Loss)
Beginning balance	$	110,989		$	(817	)	$	(48,834	)	$	61,338
OCI before reclassifications		19,197			2,530			(3,088	)		18,639
Amounts reclassified from    AOCI		(611	)		373			-			(238	)
Net current period OCI	$	18,586		$	2,903		$	(3,088	)	$	18,401
Tax expense (benefit)		-			-			-			-
Total other comprehensive    income (loss), net of taxes		18,586			2,903			(3,088	)		18,401
Ending balance, net of taxes	$	129,575		$	2,086		$	(51,922	)	$	79,739
	Six Months Ended June 30, 2017
	Unrealized Holding			Unrealized Holding			OCI Adjustments for			Total Accumulated
	Gains (Losses) on			Gains (Losses) on			Policyholder liabilities,			Other Comprehensive
	AFS Securities			Cash Flow Hedges			VOBA, and Deferred Tax			Income (Loss)
Beginning balance	$	104,538		$	(1,225	)	$	(47,963	)	$	55,350
OCI before reclassifications		25,116			2,691			(3,959	)		23,848
Amounts reclassified from    AOCI		(79	)		620			-			541
Net current period OCI	$	25,037		$	3,311		$	(3,959	)	$	24,389
Tax expense (benefit)		-			-			-			-
Total other comprehensive    income (loss), net of taxes		25,037			3,311			(3,959	)		24,389
Ending balance, net of taxes	$	129,575		$	2,086		$	(51,922	)	$	79,739

	Three Months Ended June 30, 2016
	Unrealized Holding			Unrealized Holding		OCI Adjustments for			Total Accumulated
	Gains (Losses) on			Gains (Losses) on		Policyholder liabilities,			Other Comprehensive
	AFS Securities			Cash Flow Hedges		VOBA, and Deferred Tax			Income (Loss)
Beginning balance	$	141,722		$	2,855	$	(48,242	)	$	96,335
OCI before reclassifications		40,786			1,290		(7,318	)		34,758
Amounts reclassified from    AOCI		68			513		-			581
Net current period OCI	$	40,854		$	1,803	$	(7,318	)	$	35,339
Tax expense (benefit)		-			-		-			-
Total other comprehensive    income (loss), net of taxes		40,854			1,803		(7,318	)		35,339
Ending balance, net of taxes	$	182,576		$	4,658	$	(55,560	)	$	131,674
	Six Months Ended June 30, 2016
	Unrealized Holding			Unrealized Holding		OCI Adjustments for			Total Accumulated
	Gains (Losses) on			Gains (Losses) on		Policyholder liabilities,			Other Comprehensive
	AFS Securities			Cash Flow Hedges		VOBA, and Deferred Tax			Income (Loss)
Beginning balance	$	95,533		$	4,202	$	(43,144	)	$	56,591
OCI before reclassifications		88,654			140		(12,416	)		76,378
Amounts reclassified from    AOCI		(1,611	)		316		-			(1,295	)
Net current period OCI	$	87,043		$	456	$	(12,416	)	$	75,083
Tax expense (benefit)		-			-		-			-
Total other comprehensive    income (loss), net of taxes		87,043			456		(12,416	)		75,083
Ending balance, net of taxes	$	182,576		$	4,658	$	(55,560	)	$	131,674

33

The reclassifications out of AOCI for the three and six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended June 30, 2017			Six Months Ended June 30, 2017
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	$	611		$	79		Net realized investment gains (losses)
							Portion of OTTI previously
		-			-		recognized in OCI
	$	611		$	79		Total
Unrealized holding gains    (losses) on cash flow hedges
Interest rate swaps	$	(373	)	$	(620	)	Net investment income
	$	(373	)	$	(620	)	Total
Total amounts reclassified    from AOCI	$	238		$	(541	)
	Three Months Ended June 30, 2016			Six Months Ended June 30, 2016
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	$	(68	)	$	1,732		Net realized investment gains (losses)
		-			(121	)	Portion of OTTI previously recognized in OCI
	$	(68	)	$	1,611		Total
Unrealized holding gains    (losses) on cash flow hedges
Interest rate swaps	$	(513	)	$	(316	)	Net investment income
	$	(513	)	$	(316	)	Total
Total amounts reclassified    from AOCI	$	(581	)	$	1,295

34

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’ statutory accounting principles as the basis of its statutory accounting principles.

The Company's statutory net income (loss) for the six months ended June 30, 2017 and 2016was $78,057and ($53,324), respectively. Statutory capital and surplus at June 30, 2017 and December 31, 2016was $774,251and $696,073, respectively.

For the six months ended June 30, 2017, the Company paid a $44,840 return of capital to TA Corp and paid no dividend. For the six months ended June 30, 2016, the Company paid a $75,000 cash dividend and $13,501 return of capital to TA Corp.

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. The company determined after this evaluation that no reserve was required. At June 30, 2017, the Company had a reinsurance receivable of $80 and reinsurance payable of $194. At December 31, 2016, the Company had a reinsurance receivable of $166 and reinsurance payable of $203.

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. The percentage of variable annuity contract account values containing GMIB provisions that were reinsured was 33% and 34% at June 30, 2017 and December 31, 2016. The account values for variable annuity contracts containing GMDB provisions that were reinsured was 4% at both June 30, 2017 and December 31, 2016.

Note 10.  Related Party Transactions

At June 30, 2017, the Company had the following related party agreements in effect:

The Company is party to a common cost allocation service agreement between TA Corp 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 related to the services rendered. During the three and six months ended June 30, 2017, the Company incurred $2,800 and $5,507, respectively, in expenses under this agreement. During the three and six months ended June 30, 2016, the Company incurred $2,374 and $4,788, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance, general and administrative expenses, net of amounts capitalized.

The Company is party to intercompany short-term note payable/receivable arrangements with its parent and affiliates at various times during the year. On May 22, 2017, the Company entered into a short-term note payable to the Parent for $35,000 with an interest rate of 0.83%. On June 20, 2017, the Company entered into a short-term note payable to the Parent for $3,000 with an interest rate of 0.9%.On June 18, 2016, the Company settled an intercompany short-term note receivable of $25,000 with an interest rate of 0.13% that was entered into on June 19, 2015 and the intercompany short-term note receivable of $25,000 with an interest rate of 0.36% that was entered into on February 25, 2016.During both the three and six months ended June 30, 2017, the Companyaccrued and/or paid $32 of interest. During the three and six months ended June 30, 2016 the Company accrued and/or received $10 and $27 interest income.  Interest related to these arrangements is included in net investment income.

AEGON USA Realty Advisors, LLC acts as the manager and administrator for the Company’s mortgage loans on real estate under an administrative and advisory agreement with the Company. Charges attributable to this agreement are included in net investment income. During the three and six months ended June 30, 2017, the Company incurred $50 and $101, respectively, under this agreement. During the three and six months ended June 30, 2016, the Company incurred charges of $44 and $86, respectively, under this agreement. Mortgage loan origination fees are included in investment expenses.

AEGON USA Investment Management, LLC acts as a discretionary investment manager under an investment management agreement with the Company. During the three and six months ended June 30, 2017, the Company incurred $439 and $930, respectively, in expenses under this agreement. During the three and six months ended June 30, 2016, the Company incurred $511 and $1,003, respectively, in expenses under this agreement. Charges attributable to this agreement are included in net investment income.

35

Transamerica Capital, Inc. provides underwriting and distribution services for the Company under an underwriting agreement. During the three and six months ended June 30, 2017, the Company incurred $6,129 and $11,687, respectively, in expenses under this agreement.  During three and six months ended June 30, 2016, the Company incurred $5,984 and $12,136, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance, general and administrative expenses, net of amounts capitalized.

Transamerica Asset Management, Inc. acts as the investment advisor for certain related party funds in the Company’s Separate Accounts under multiple service agreements. During the three and six months ended June 30, 2017, the Company incurred $0 and $79, respectively, in expenses under this agreement. During the three and six months ended June 30, 2016, the Company incurred $5 and $82, respectively, in expenses under this agreement. Charges attributable to these agreements are included in insurance, general and administrative expenses, net of amounts capitalized.

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 such related party funds. The Company has entered into a distribution and shareholder services agreement for certain of such funds. During the three and six months ended June 30, 2017, the Company received $598 and $1,198, respectively, in revenue under this agreement. During the three and six months ended June 30, 2016, the Company received $509 and $1,000, respectively, in revenue under this agreement. Revenue attributable to this agreement is included in policy charge revenue.

The Company purchases and sells investments from/to 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 three and six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended					Six Months Ended
		June 30,				June 30,
		2017		2016		2017		2016
Investments purchased from related parties:
Fixed maturities		$	4,490	$	-	$	4,490	$	-
Limited partnerships			-		-		-		10,000
Derivatives			150		-		150		-
Investments sold to related parties:
Fixed maturity AFS securities		$	-	$	-	$	-	$	62,859
Derivatives			4,440		-		4,440		-

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

36

Note 11.  Commitments and Contingencies

State insurance laws generally require that all life insurers who are licensed to transact business within a state become members of the state's life insurance guaranty association. These associations have been established for the protection of contract owners from loss (within specified limits) as a result of the insolvency of an insurer. At the time insolvency occurs, the guaranty association assesses the remaining members of the association an amount sufficient to satisfy the insolvent insurer's contract owner obligations (within specified limits). The Company has utilized public information to estimate the future assessments it will incur as a result of life insurance company insolvencies. At both June 30, 2017 and December 31, 2016, the Company’s estimated liability for future guaranty fund assessments was $140. If future insolvencies occur, the Company’s estimated liability may not be sufficient to fund these insolvencies and the estimated liability may need to be adjusted. The Company regularly monitors public information regarding insurer insolvencies and adjusts its estimated liability as appropriate. In addition, the Company has a receivable for future premium tax deductions of $3,751 and $4,012 at June 30, 2017 and December 31, 2016, respectively.

Legal and regulatory proceedings are subject to inherent uncertainties, and future events could change management's assessment of the probability or estimated amount of potential losses from pending or threatened proceedings. Based on available information, it is the opinion of management that the ultimate resolution of pending or threatened legal and regulatory proceedings, other than claims proceedings, both individually and in the aggregate, will not result in losses having a material adverse effect on the Company's financial position or liquidity at June 30, 2017. If management believes that, based on available information, it is at least reasonably possible that a material loss (or additional material loss in excess of any accrual) will be incurred in connection with any legal or regulatory proceedings, other than claims proceedings, the Company discloses an estimate of the possible loss or range of loss, either individually or in the aggregate, as appropriate, if such an estimate can be made, or discloses that an estimate cannot be made. Based on the Company's assessment at June 30, 2017, no such disclosures were considered necessary.

37

Note 12.  Segment Information

The following tables summarize each business segment’s contribution to select Statements of Income (Loss) information for the three and six months ended June 30, 2017 and 2016:

				Life
Three months ended June 30, 2017	Annuity			Insurance			Total
Policy charge revenue	$	23,939		$	13,430		$	37,369
Net Investment income (loss)		13,023			13,394			26,417
Net realized investment gains (losses)		1,887			297			2,184
Derivative gains (losses)		(6,540	)		-			(6,540	)
Total Revenue	$	32,309		$	27,121		$	59,430
Interest credited to policyholder liabilities	$	1,847		$	11,523		$	13,370
Policy benefits (net of reinsurance recoveries)		3,941			7,948			11,889
Amortization (accretion) of DAC		605			-			605
Amortization (accretion) of VOBA		612			2,242			2,854
Insurance, general and administrative expenses		5,773			804			6,577
Total Expenses	$	12,778		$	22,517		$	35,295
Income (Loss) before taxes	$	19,531		$	4,604		$	24,135
Income tax expense (benefit)		-			-			-
Net income (loss)	$	19,531		$	4,604		$	24,135
Three months ended June 30, 2016
Policy charge revenue	$	24,192		$	13,668		$	37,860
Net Investment income (loss)		13,486			14,128			27,614
Net realized investment gains (losses)		1,052			(995	)		57
Derivative gains (losses)		(6,670	)		5			(6,665	)
Total Revenue	$	32,060		$	26,806		$	58,866
Interest credited to policyholder liabilities	$	2,255		$	11,698		$	13,953
Policy benefits (net of reinsurance recoveries)		12,902			8,957			21,859
Amortization (accretion) of DAC		(500	)		-			(500	)
Amortization (accretion) of VOBA		1,356			6,255			7,611
Insurance, general and administrative expenses		9,250			992			10,242
Total Expenses	$	25,263		$	27,902		$	53,165
Income (Loss) before taxes	$	6,797		$	(1,096	)	$	5,701
Income tax expense (benefit)		1,324			(1,324	)		-
Net income (loss)	$	5,473		$	228		$	5,701

38

				Life
Six months ended June 30, 2017	Annuity			Insurance			Total
Policy charge revenue	$	47,950		$	26,895		$	74,845
Net Investment income (loss)		27,253			27,108			54,361
Net realized investment gains (losses)		1,689			526			2,215
Derivative gains (losses)		(30,768	)		-		$	(30,768	)
Total Revenue	$	46,124		$	54,529		$	100,653
Interest credited to policyholder liabilities	$	3,533		$	22,820		$	26,353
Policy benefits (net of reinsurance recoveries)		(12,180	)		14,579			2,399
Amortization (accretion) of DAC		1,737			-			1,737
Amortization (accretion) of VOBA		2,235			2,983			5,218
Insurance, general and administrative expenses		13,896			1,524			15,420
Total Expenses	$	9,221		$	41,906		$	51,127
Income (Loss) before taxes	$	36,903		$	12,623		$	49,526
Income tax expense (benefit)		393			182			575
Net income (loss)	$	36,510		$	12,441		$	48,951
Six months ended June 30, 2016
Policy charge revenue	$	47,913		$	26,986		$	74,899
Net Investment income (loss)		25,503			28,563			54,066
Net realized investment gains (losses)		831			(908	)		(77	)
Derivative gains (losses)		(3,315	)		21			(3,294	)
Total Revenue	$	70,932		$	54,662		$	125,594
Interest credited to policyholder liabilities	$	4,426		$	23,557		$	27,983
Policy benefits (net of reinsurance recoveries)		41,555			23,358			64,913
Amortization (accretion) of DAC		442			-			442
Amortization (accretion) of VOBA		3,089			9,902			12,991
Insurance, general and administrative expenses		18,407			1,761			20,168
Total Expenses	$	67,919		$	58,578		$	126,497
Income (Loss) before taxes	$	3,013		$	(3,916	)	$	(903	)
Income tax expense (benefit)		2,601			(2,601	)		-
Net income (loss)	$	412		$	(1,315	)	$	(903	)

39

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. For a complete discussion of the Company’s accounting policies and management estimates, refer to the 2016 Annual Report on Form 10-K

Forward Looking Statements

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. Certain statements in this report may be considered forward-looking, including those about management expectations, anticipated financial results and other similar matters. The words or phrases “expect,” “anticipate,” “should,” “believe,” “estimate,” “intend,” “may,” “predict,” “continue,” “forecast,” “will,” “would,” and similar statements of a future or forward-looking nature that reflect management’s current views with respect to future events or financial performance are meant to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by such sections. These forward-looking statements represent management’s beliefs regarding future performance, which is inherently uncertain. There are a variety of factors, many of which are beyond the control of the Company, which affect the Company’s 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 other risks and uncertainties detailed in “Part I – Item 1A, Risk Factors” and “Part II – Item 7 Management’s Narrative Analysis of Results of Operations – Forward Looking Statements” in the Company’s 2016 Annual Report on Form 10-K.

The Company does not undertake to update or revise forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made, except as otherwise may be required by the federal securities laws. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak to Company expectations only as of the dates on which they are made. Actual results may differ materially from expectations conveyed in forward-looking statements due to changes caused by various risks and uncertainties. The reader should consult further disclosures the Company may make in future filings of its Quarterly Reports and Current Reports on Form 8-K.

Business

TALIC (the “Registrant,” the “Company,” “we,” “our,” or “us”) is a wholly owned subsidiary of TA Corp, which is an indirect wholly owned subsidiary of AEGON N.V., a limited liability share company organized under Dutch law. The Company is a life insurance company that conducts its business primarily in the annuity markets and, to a lesser extent, in the life insurance markets of the financial services industry. While the Company is no longer issuing new life insurance, variable annuity or market value adjusted annuity products, it continues to service this closed block of business which is organized into two segments: Annuity and Life Insurance.

The Annuity segment administers variable and fixed annuity products. The variable annuity products include various guaranteed benefits. These include GMDB, GMIB and GMWB along with fixed contingent annuities sometimes referred to as a contingent deferred annuity (“CDA”) that includes a SALB. A SALB is essentially a guaranteed lifetime withdrawal benefit that exists independently and is applied to mutual funds and exchange—traded funds. Existing certificate owners of the CDAs may continue to make subsequent contributions, as permitted by the terms of their CDA contracts. Revenue earned on annuity products, including CDAs, is primarily fees driven from market movements and net asset flows.

The Life Insurance segment administers variable life and interest sensitive whole life insurance policies. These policies provide for life insurance death benefits and accumulation of cash value. Interest sensitive life policies provide a minimum guaranteed rate for accumulation of cash value and a guaranteed death benefit. Certain variable life insurance policies may contain a guaranteed minimum death benefit that may last until maturity of the contract. Funds contained in our variable life contracts are invested in Separate Accounts, which offer various bond and equity investment options. Revenue on interest sensitive whole life insurance policies is generated from monthly deductions for cost of insurance (“COI”) and expense charges as well as investment spreads. Revenue on variable life policies is generated from fees on the Separate Accounts as well as monthly deductions for expenses and COI.

The Registrant files annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with the Securities and Exchange Commission (the “SEC”). As soon as reasonably practicable after the Registrant electronically makes these filings and any amendments to these filings, with, or furnishes them to, the SEC, we make them available through the Transamerica website at www.transamerica.com. Click first on “About Us,” click next on “Who We Are – Financial Strength” and then click on “Transamerica Advisors Life Insurance Company” on the Financial Strength page. Any materials we file with the SEC are also publicly available through the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.  

40

Business Environment

The Company is a life insurance company that 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’s gross earnings are principally derived from two sources:

• the charges imposed by the outstanding variable annuity, CDA and variable life insurance contracts, and

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

Expenses generally include commissions, premium taxes, and general and administrative expenses for policy administration and related overhead charges.

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 which affects credit quality and causes fluctuations in credit spreads. The impact of each of these economic factors is discussed below.

Equity Market Performance

There are several standard indices published on a daily basis that measure performance of selected components of the U.S. equity market. Examples include the Dow Jones Industrial Average (“Dow”), the NASDAQ Composite Index (“NASDAQ”) and the Standard & Poor’s 500 Composite Stock Price Index (“S&P”). For the period ended June 30, 2017, the Dow, NASDAQ and S&P ended with increases of 8%, 13% and 8%, from December 31, 2016, respectively.

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 72% of Separate Accounts assets were invested in equity-based mutual funds at June 30, 2017. Since asset-based fees collected on in force contracts represent a significant source of revenue, the Company’s financial condition will be impacted by fluctuations in investment performance of equity-based Separate Accounts assets. During the six months ended June 30, 2017, the average variable Separate Account balances increased $0.07 billion (or 1%) to $5.7 billion as compared to the same period in 2016 due to improved equity market conditions, which resulted in an increase in related fees of $0.7 million.

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 an 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.

41

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

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2017				2016				2017				2016
Medium-term interest rate yield (a)			1.50	%			0.68	%			1.50	%			0.68	%
Increase (decrease) in medium-term interest rates (b)			9				(16	)			18				(48	)
Credit spreads (in basis points) (c)		87				134				87				134
Expanding (contracting) of credit spreads (b)			(9	)			(15	)			(21	)			(11	)
Increase (decrease) on market valuations (in millions) of    AFS investment securities (d)	$		18.6		$		40.9		$		25.0		$		87.1
Net change in market valuations (in millions)	$		18.6		$		40.9		$		25.0		$		87.1

(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) Represents the increase (decrease) between current year and prior quarter end (in basis points).

(c) 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.

(d) The decrease in the current year value compared to the previous year was driven primarily by the decline in the yield curve and tightening credit spreads.

42

Critical Accounting Policies and Estimates

The preparation of Financial Statements in conformity with GAAP 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. Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ and such differences could have a material impact on the Financial Statements. See Item 7, Critical Accounting Policies and Estimates, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for a complete discussion of the Company’s Critical Accounting Policies and Estimates.

Financial Condition

At both June 30, 2017 and December 31, 2016, the Company’s total assets were $8.7 billion. The increase from December 31, 2016 of $27.8 million was primarily due to an increase in Separate Accounts assets of $53.1 million, offset by a decrease in general fund investment assets supporting policyholder liabilities and reserves of $27.2 million.

Separate Accounts Assets

Separate Accounts assets, which represent 66% of total assets, increased $53.1 million to $5.7 billionat June 30, 2017. This was primarily due to growth in account asset values as a result of favorable investment performance of $419.0, offset by policyholder surrenders, benefits and withdrawals of $304.7million, driven by mortality and policyholder behavior as shown in the table below:

	Six Months Ended
	June 30,
(dollars in millions)	2017			2016
Investment performance	$	419.0		$	65.2
Deposits (including internal exchanges)		6.4			4.5
Policy fees and charges		(67.6	)		(69.2	)
Surrenders, benefits and withdrawals		(304.7	)		(272.8	)
Net change	$	53.1		$	(272.3	)

Cash and Cash Equivalents

The balance of cash and cash equivalents increased$22.8 million from December 31, 2016 to June 30, 2017. This change was primarily due to securities lending activity, which increased during the second quarter of 2017.

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 decreased by $26.8 million during 2017due to death benefits, withdrawals and surrenders of $49.1 million, offset by interest credited to policyholders of $22.8 million.

Future Policy Benefits

Future policy benefits includes reserves established to cover insurance risk associated with the Company’s benefit guarantee provisions for GMDB and GMIB products and liabilities related to the Company’s GMWB and SALB contract provisions recorded at fair value. During 2017, future policy benefits decreased $35.9 million primarily due to favorable equity market returns.

Affiliated Short-term Note

The Company's liability for the $38.0 million affiliated short-term notes payable at June 30, 2017 represents an amount due to the Parent (See Note 10 Related Party Transactions for a full discussion of the payable and terms). The Company entered into the related party borrowing arrangements in order to maintain compliance with its internal risk policy liquidity test requirements. As the Company's investments mature or are disposed, the funds will be applied to reducing the notes payable.

43

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. The Company’s fixed maturity securities portfolio consists primarily of publicly traded securities with only a minor portion comprised of private placement securities. At June 30, 2017 and December 31, 2016, approximately $105.2 million (or 7.0%) and $107.0 million (or 7.0%), respectively, of the fixed maturity and equity securities portfolio consisted of private placement securities. Additionally, during the second quarter, the Company sold its investment in one limited partnership.

Fixed Maturity and Equity Securities

The amortized cost/cost, gross unrealized gains and losses/OTTI, estimated fair value and percentage of estimated fair value of investments in fixed maturity and equity AFS securities at June 30, 2017 and December 31, 2016 were:

	June 30, 2017
			Gross Unrealized							% of
	Amortized				Losses/			Estimated		Estimated
(dollars in millions)	Cost/Cost		Gains		OTTI (a)			Fair Value		Fair Value
Fixed maturity AFS securities
Corporate securities
Financial services	$	231.5	$	18.8	$	(0.1	)	$	250.2		16	%
Industrial		518.5		38.5		(1.4	)		555.6		37
Utility		72.6		5.5		-			78.1		5
Asset-backed securities
Credit cards		11.5		-		-			11.5		1
Structured settlements		8.1		-		(0.2	)		7.9		1
Autos		19.2		0.1		-			19.3		1
Timeshare		2.8		-		-			2.8	0
Other		26.3		0.1		-			26.4		2
Commercial mortgage-backed securities - non agency backed		73.0		1.9		(0.3	)		74.6		5
Residential mortgage-backed securities
Agency backed		25.5		0.4		(0.1	)		25.8		2
Non agency backed		36.3		5.5		-			41.8		3
Municipals-tax exempt		0.9		-		-			0.9		0
Government and government agencies
United States		297.5		56.5		-			354.0		23
Foreign		24.2		1.7		-			25.9		2
Total fixed maturity AFS securities	$	1,347.9	$	129.0	$	(2.1	)	$	1,474.8		98	%
Equity AFS securities
Banking securities	$	25.5	$	2.7	$	-		$	28.2		2	%
Industrial securities		5.8		-		-			5.8		0
Total equity AFS securities	$	31.3	$	2.7	$	-		$	34.0		2	%
Total fixed maturity and equity AFS securities	$	1,379.2	$	131.7	$	(2.1	)	$	1,508.8		100	%

44

	December 31, 2016
			Gross Unrealized							% of
	Amortized				Losses/			Estimated		Estimated
(dollars in millions)	Cost/Cost		Gains		OTTI (a)			Fair Value		Fair Value
Fixed maturity AFS securities
Corporate securities
Financial services	$	239.8	$	16.7	$	(0.5	)	$	256.0		17	%
Industrial		546.1		34.8		(2.7	)		578.2		38
Utility		73.2		4.9		(0.4	)		77.7		5
Asset-backed securities
Structured settlements		8.2		-		(0.5	)		7.7		1
Autos		27.1		-		-			27.1		2
Timeshare		0.7		-		-			0.7		-
Other		17.4		-		(0.4	)		17.0		1
Commercial mortgage-backed securities - non agency backed		75.4		1.7		(0.6	)		76.5		5
Residential mortgage-backed securities
Agency backed		53.7		0.4		(0.6	)		53.5		4
Non agency backed		39.2		3.6		(0.1	)		42.7		3
Municipals-tax exempt		0.9		-		(0.1	)		0.8		-
Government and government agencies
United States		295.6		45.8		-			341.4		22
Foreign		6.5		1.2		-			7.7		1
Total fixed maturity AFS securities	$	1,383.8	$	109.1	$	(5.9	)	$	1,487.0		99	%
Equity AFS securities
Banking securities	$	25.5	$	1.7	$	(0.4	)	$	26.8		1	%
Industrial securities		5.8		-		-			5.8		-
Total equity AFS securities	$	31.3	$	1.7	$	(0.4	)	$	32.6		1	%
Total fixed maturity and equity AFS securities	$	1,415.1	$	110.8	$	(6.3	)	$	1,519.6		100	%

(a) Subsequent unrealized gains (losses) on OTTI securities are included in Net unrealized OTTI on securities in the Statements of Comprehensive Income (Loss).

The Company 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 (ABS, RMBS, and CMBS), cash flow trends and underlying levels of collateral are monitored. A security is impaired if there is objective evidence that a loss event has occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows. A specific security is considered to be impaired when it is determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled. For debt securities, an OTTI must be recognized in earnings when an entity either a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For debt securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The Company has evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss, and unless otherwise noted, does not consider these investments to be impaired at June 30, 2017. Only five issuers represent more than 5% of the total unrealized loss position. Of the five, two are Investment Grade Corporate Non-Convertible holdings with $0.3 million of unrealized loss, two are High Yield Corporate Non-Convertible holdings with $0.9 million of unrealized loss and one is an Investment Grade ABS Non-Housing Backed holding with $0.1 million of unrealized loss.

45

The Company’s fixed maturity AFS ratings are designated based on the Credit Name Limit Policy, which uses a composite rating from the main rating agencies (S&P GRS, Moody’s Investors Service, and Fitch Ratings (“Fitch”)). The rating used is the lower of the composite rating and the Company’s Internal Rating. The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to S&P GRS’s BBB- or higher (or similar rating agency). At June 30, 2017 and December 31, 2016, approximately $58.9 million (or 4.0%) and $65.7 million (or 4.4%), respectively, of the Company’s 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.

Unrealized gains (losses) incurred during 2017 and 2016 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.

46

Details underlying securities in a continuous gross unrealized loss and OTTI position for AFS investment grade securities were as follows at June 30, 2017 and December 31, 2016:

	June 30, 2017
	Estimated		Amortized		Gross Unrealized
(dollars in millions)	Fair Value		Cost/Cost		Losses and OTTI (a)
Investment grade AFS securities
Less than or equal to six months
Fixed Maturity Securities
Asset-backed securities
Credit Cards	$	11.5	$	11.5	$	-
Other		3.0		3.0		-
Autos		7.3		7.3		-
Commercial mortgage-backed securities - non agency backed		10.6		10.7		(0.1	)
Residential mortgage-backed securities - agency backed		2.1		2.2		(0.1	)
Government and government agencies
United States		6.6		6.6		-
Foreign		3.8		3.8		-
Equity Securities - other securities		5.8		5.8		-
Total fixed maturity and equity securities	$	50.7	$	50.9	$	(0.2	)
Greater than six months but less than or equal to one year
Fixed Maturity Securities
Corporate Securities
Financial Services	$	6.9	$	7.0	$	(0.1	)
Industrial		10.7		10.8		(0.1	)
Utility		1.1		1.1		-
Asset-backed securities
Structured Settlements		6.9		7.0		(0.1	)
Commercial mortgage-backed securities - non agency backed		13.2		13.4		(0.2	)
Total fixed maturity and equity securities	$	38.8	$	39.3	$	(0.5	)
Greater than one year
Fixed Maturity Securities
Corporate Securities
Industrial	$	8.2	$	8.5	$	(0.3	)
Asset-backed securities
Structured Settlements		0.9		1.0		(0.1	)
Other		7.9		7.9		-
Timeshare		0.2		0.2		-
Total fixed maturity and equity securities	$	17.2	$	17.6	$	(0.4	)
Total of all investment grade AFS securities
Fixed Maturity Securities
Corporate Securities
Financial Services	$	6.9	$	7.0	$	(0.1	)
Industrial		18.9		19.3		(0.4	)
Utility		1.1		1.1		-
Asset-backed securities
Structured Settlements		7.8		8.0		(0.2	)
Credit Cards		11.5		11.5		-
Other		10.9		10.9		-
Autos		7.3		7.3		-
Timeshare		0.2		0.2		-
Commercial mortgage-backed securities - non agency backed		23.8		24.1		(0.3	)
Residential mortgage-backed securities - agency backed		2.1		2.2		(0.1	)
Government and government agencies
United States		6.6		6.6		-
Foreign		3.8		3.8		-
Equity Securities - other securities		5.8		5.8		-
Total investment grade AFS securities	$	106.7	$	107.8	$	(1.1	)
Total number of securities in a continuous unrealized loss position						44

47

	December 31, 2016
	Estimated		Amortized		Gross Unrealized
(dollars in millions)	Fair Value		Cost/Cost		Losses and OTTI (a)
Investment grade AFS securities
Less than or equal to six months
Fixed Maturity Securities
Corporate Securities
Financial Services	$	13.2	$	13.6	$	(0.4	)
Industrial		37.3		38.4		(1.1	)
Utility		6.0		6.1		(0.1	)
Asset-backed securities
Structured Settlements		6.9		7.2		(0.3	)
Other		8.4		8.5		(0.1	)
Autos		15.1		15.1		-
Timeshare		0.4		0.4		-
Commercial mortgage-backed securities - non agency backed		30.7		31.3		(0.6	)
Residential mortgage-backed securities - agency backed		46.4		47.0		(0.6	)
Equity Securities - banking securities		8.2		8.5		(0.3	)
Total fixed maturity and equity securities	$	172.6	$	176.1	$	(3.5	)
Greater than six months but less than or equal to one year
Fixed Maturity Securities
Corporate Securities
Financial Services	$	1.4	$	1.5	$	(0.1	)
Utility		3.1		3.4		(0.3	)
Asset-backed securities
Structured Settlements		0.9		1.0		(0.1	)
Commercial mortgage-backed securities - non agency backed		1.0		1.0		-
Total fixed maturity and equity securities	$	6.4	$	6.9	$	(0.5	)
Greater than one year
Fixed Maturity Securities
Corporate Securities
Industrial	$	11.9	$	12.4	$	(0.5	)
Asset-backed securities
Other		7.7		7.9		(0.2	)
Timeshare		0.3		0.3		-
Total investment grade AFS securities	$	19.9	$	20.6	$	(0.7	)
Total of all investment grade AFS securities
Fixed Maturity Securities
Corporate Securities
Financial services	$	14.6	$	15.1	$	(0.5	)
Industrial		49.2		50.8		(1.6	)
Utility		9.1		9.5		(0.4	)
Asset-backed securities
Structured Settlements		7.8		8.2		(0.4	)
Other		16.1		16.4		(0.3	)
Auto		15.1		15.1		-
Timeshare		0.7		0.7		-
Commercial mortgage-backed securities - non agency backed		31.7		32.3		(0.6	)
Residential mortgage-backed securities - agency backed		46.4		47.0		(0.6	)
Equity securities-banking securities		8.2		8.5		(0.3	)
Total investment grade AFS securities	$	198.9	$	203.6	$	(4.7	)
Total number of securities in a continuous unrealized loss position						66

(a) Subsequent unrealized gains (losses) on OTTI securities are included in Net unrealized OTTI on securities in the Statements of Comprehensive Income (Loss).

48

Details underlying securities in a continuous gross unrealized loss and OTTI position for below investment grade AFS securities were as follows at June 30, 2017 and December 31, 2016:

	June 30, 2017
	Estimated		Amortized		Gross Unrealized
(dollars in millions)	Fair Value		Cost/Cost		Losses and OTTI (a)
Below investment grade AFS securities
Less than or equal to six months
Fixed Maturity Securities
Corporate Securities
Industrial	$	3.2	$	3.3	$	(0.1	)
Residential mortgage-backed securities  - non agency    backed		0.8		0.8		-
Total fixed maturity and equity securities	$	4.0	$	4.1	$	(0.1	)
Greater than six months but less than or equal to one year
Fixed Maturity Securities
Corporate Securities
Industrial	$	0.8	$	0.9	$	(0.1	)
Total fixed maturity and equity securities	$	0.8	$	0.9	$	(0.1	)
Greater than one year
Fixed Maturity Securities
Corporate Securities
Industrial	$	1.2	$	2.0	$	(0.8	)
Municipals-tax exempt		0.9		0.9		-
Total fixed maturity and equity securities	$	2.1	$	2.9	$	(0.8	)
Total of all below investment grade AFS securities
Corporate Securities
Industrial	$	5.2	$	6.2	$	(1.0	)
Residential mortgage-backed securities  - non agency backed		0.8		0.8		-
Municipals-tax exempt		0.9		0.9		-
Total below investment grade AFS securities	$	6.9	$	7.9	$	(1.0	)
Total number of securities in a continuous unrealized loss position						5

49

	December 31, 2016
	Estimated		Amortized		Gross Unrealized
(dollars in millions)	Fair Value		Cost/Cost		Losses and OTTI (a)
Below investment grade AFS securities
Less than or equal to six months
Corporate Securities
Industrial	$	8.5	$	8.6	$	(0.1	)
Residential mortgage-backed securities - non agency backed		8.6		8.7		(0.1	)
Total fixed maturity and equity securities	$	17.1	$	17.3	$	(0.2	)
Greater than six months but less than or equal to one year
Residential mortgage-backed securities - non agency backed		0.2		0.2		-
Total fixed maturity and equity securities	$	0.2	$	0.2	$	-
Greater than one year
Corporate Securities
Financial Services		0.9	$	1.0	$	(0.1	)
Industrial		6.7		7.7		(1.0	)
Residential mortgage-backed securities - non agency backed		2.1		2.2		(0.1	)
Municipals-tax exempt		0.9		0.9		-
Equity Securities-banking securities		1.6		1.8		(0.2	)
Total fixed maturity and equity securities	$	12.2	$	13.6	$	(1.4	)
Total of all below investment grade AFS securities
Corporate Securities
Financial Services	$	0.9	$	1.0	$	(0.1	)
Industrial		15.2		16.3		(1.1	)
Residential mortgage-backed securities - non agency backed		10.9		11.1		(0.2	)
Municipals-tax exempt		0.9		0.9		-
Equity Securities-banking securities		1.6		1.8		(0.2	)
Total below investment grade AFS securities	$	29.5	$	31.1	$	(1.6	)
Total number of securities in a continuous unrealized loss position						15

(a) Subsequent unrealized gains (losses) on OTTI securities are included in Net unrealized OTTI on securities in the Statements of Comprehensive Income (Loss).

Gross unrealized losses and OTTI on below investment grade AFS securities represented 48% and 32% of total gross unrealized losses and OTTI on all AFS securities at June 30, 2017 and December 31, 2016, 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 are not necessarily indicative of the market value to amortized cost relationships for the securities throughout the entire time that the securities have been in an unrealized loss position nor are they necessarily indicative of these ratios subsequent to June 30, 2017.

50

Details underlying AFS securities below investment grade and in an unrealized loss position were as follows at June 30, 2017 and December 31, 2016:

		June 30, 2017
	Ratio of					Gross
	EstimatedFair	Estimated				Unrealized
	Value to	Fair		Amortized		Losses and
(dollars in millions)	Amortized Cost	Value		Cost/Cost		OTTI (a)
Less than or equal to six months	70% to 100%	$	4.0	$	4.1	$	(0.1	)
		$	4.0	$	4.1	$	(0.1	)
Greater than six months but less than or equal to one year	70% to 100%	$	0.8	$	0.9	$	(0.1	)
		$	0.8	$	0.9	$	(0.1	)
Greater than one year	70% to 100%	$	0.9	$	0.9	$	-
	40% to 70%		1.2		2.0		(0.8	)
		$	2.1	$	2.9	$	(0.8	)
Total		$	6.9	$	7.9	$	(1.0	)

		December 31, 2016
	Ratio of					Gross
	Estimated Fair	Estimated				Unrealized
	Value to	Fair		Amortized		Losses and
(dollars in millions)	Amortized Cost	Value		Cost/Cost		OTTI (a)
Less than or equal to six months	70% to 100%	$	17.0	$	17.2	$	(0.2	)
		$	17.0	$	17.2	$	(0.2	)
Greater than six months but less than or equal to one year	70% to 100%	$	0.2	$	0.2	$	-
		$	0.2	$	0.2	$	-
Greater than one year	70% to 100%	$	10.8	$	11.6	$	(0.8	)
	40% to 70%		1.4		2.0		(0.6	)
		$	12.2	$	13.6	$	(1.4	)
Total		$	29.4	$	31.0	$	(1.6	)

(a) Subsequent unrealized gains (losses) on OTTI securities are included in Net unrealized OTTI on securities in the Statements of Comprehensive Income (Loss).

51

Payables for collateral under securities loaned, reverse repurchase agreements and derivatives

The $17.1 million decrease in the payables for collateral under securities loaned, reverse repurchase agreements and derivatives balance from December 31, 2016 to June 30, 2017 was primarily driven by a first quarter reduction in the dollar roll reverse repurchase agreements of $26.8 million, which are the only type of reverse repurchase agreements the Company enters into at this time. This was partially offset by the first quarter reduction in the securities lending program of $152.8 million, and further offset by an increase in securities lending activity of $161.8 million during the second quarter of 2017 as new securities lending agreements were put into place.

Liquidity and Capital Resources

Liquidity

The Company’s liquidity requirements include the payment of sales commissions and other underwriting expenses and the funding of its contractual obligations for the life insurance and annuity contracts it has in force. The Company has developed and utilizes a cash flow projection system and regularly performs asset/liability duration matching in the management of its asset and liability portfolios. The Company anticipates funding its cash requirements utilizing cash from operations, normal investment maturities and anticipated calls and repayments, consistent with prior years. At June 30, 2017 and December 31, 2016, the Company’s assets included $1.6 billion and $1.6 billion, respectively, of cash, short-term investments and investment grade publicly traded AFS securities that could be liquidated if funds were required.

Capital Resources

For the six months ended June 30, 2017 and 2016, the Company paid a $44.8 million and $13.5 million return of capital to TA Corp, respectively. For the six months ended June 30, 2017 and 2016, the Company paid no dividend and a $75.0 million cash dividend to TA Corp, respectively.

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 GRS, A.M. Best Company (“A.M. Best”), and Fitch are characterized as follows:

• S&P GRS – AAA to R

• A.M. Best – A++ to S

• Fitch – AAA to C

On March 24, 2017, Fitch affirmed the Company’s rating at A+.

The following table summarizes the Company’s ratings at August 14, 2017.

	2017
S&P	AA-	(4th out of 21)
A.M. Best	A+	(2nd out of 16)
Fitch	A+	(5th 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.

52

Commitments and Contingencies

The following table summarizes the Company’s projected cash benefit obligations to policyholders at June 30, 2017 related to the indicated accounts:

	Less		One To		Four To		More
	Than One		Three		Five		Than Five
(dollars in millions)	Year		Years		Years		Years		Total
General accounts (a)	$	168	$	298	$	258	$	1,453	$	2,177
Separate Accounts (a)		643		1,135		995		4,939		7,712
0	$	811	$	1,433	$	1,253	$	6,392	$	9,889

(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 a deduction of taxes 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 insolvencies of life insurance companies that are members of a life insurance guaranty association in which the Company is also a member. When a member becomes insolvent, the guaranty association assesses the remaining members of the association an amount sufficient to satisfy an insolvent insurer’s contract owner obligations, within specified limitations. At both June 30, 2017 and December 31, 2016, 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 $3.8 million and $4.0 million at June 30, 2017 and December 31, 2016, respectively. The Company regularly monitors public information regarding insurer insolvencies and adjusts its estimated liability as appropriate.

53

Results of Operations

For the three months ended June 30, 2017 and 2016, the Company recorded net income (loss) of $24.1 million and $5.7 million, respectively. For the six months ended June 30, 2017 and 2016, the Company recorded net income (loss) of $49.0 million and ($0.9) million, respectively. During the three and six months ended June 30, 2017 the increase in net earnings as compared to the same period in 2016 was primarily driven by lower policy benefits expense, partially offset by higher derivative losses in the first quarter of 2017.  

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in millions)	2017			2016			2017			2016
Asset-based policy charge revenue	$	22.1		$	21.8		$	44.1		$	43.3
Reinsurance premiums ceded		(1.0	)		(1.0	)		(2.0	)		(2.1	)
Guaranteed benefit based policy charge revenue		5.0			5.5			10.3			10.9
Non-asset based policy charge revenue		11.3			11.6			22.4			22.9
Total policy charge revenue	$	37.4		$	37.9		$	74.8		$	75.0

Net derivative gains (losses) recorded in income for the three months ended June 30, 2017 and 2016 were ($6.5) million and ($6.7) million. Net derivative gains (losses) recorded in income for the six months ended June 30, 2017 and 2016 were ($30.8) million and ($3.3) million. The following table provides the components in net derivative gains (losses) by type:

		Three Months Ended						Six Months Ended
		June 30,						June 30,
(dollars in millions)		2017			2016			2017				2016
Short futures		$	-		$	(1.2	)	$	(0.7	)	$		(2.5	)
Long futures	(a)		1.5			3.1			1.8				7.0
Variance swaps			(0.6	)		(1.0	)		(2.4	)			(1.7	)
Total return swaps	(b)		(3.5	)		(11.0	)		(8.4	)			(17.0	)
Options	(c)		(6.9	)		(1.8	)		(23.8	)			(3.2	)
Interest rate swaps	(d)		1.8			5.1			1.2				13.8
Credit default swaps			1.2			0.1			1.5				0.3
Total net derivative gains (losses)		$	(6.5	)	$	(6.7	)	$	(30.8	)	$		(3.3	)

(a) Long positions on bond futures contracts produced $1.5 million in realized gains during the quarter as a result of the flattening rate curve, which subsequently increased the value of the underlying bonds.

(b) Short positions on equity-linked total return swaps resulted in losses of $3.5 million during the second quarter as a reflection of lower equity leg resets relative to payment dates.

(c) Put options produced $6.9 million of losses during the second quarter, driven by normal amortization of $5.7 million on acquisitions in the second quarter of 2017 and fourth quarter of 2016, in addition to realized losses of $6.4 million and mark to market gains of $5.2 million on maturities and dispositions.

(d) Receive fixed vanilla interest rate swaps generated $1.8 million in mark to market gains, resulting from the flattening rate curve during the second quarter.

For the three and six months ended June 30, 2017, the Company did not record OTTI in income. For the three and six months ended June 30, 2016, the Company recorded OTTI in income of $1.0 and $4.7 million, respectively.

54

The following table provides the components in policy benefits by type for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in millions)	2017			2016			2017			2016
Annuity benefit unlocking	$	(12.1	)	$	(4.5	)	$	(38.9	)	$	10.0
Annuity benefit expense		15.9			17.5			26.3			31.4
Amortization (accretion) of deferred sales inducements		0.1			(0.1	)		0.4			0.1
Life insurance mortality expense		8.0			9.0			14.6			23.4
Total policy benefits	$	11.9		$	21.9		$	2.4		$	64.9

For the three and six months ended June 30, 2017, policy benefits expense decreased $10.0 million and $62.5 million, respectively, primarily driven by the favorable impact of reserve unlocking in 2017, resulting from higher than expected market returns, as compared to unfavorable unlocking in 2016, resulting from lower interest rates. In addition, both annuity benefit expense and life insurance mortality expense decreased in 2017 as compared to 2016, driven by favorable claims experience.

Amortization of VOBA decreased $4.8 million from $7.6 million at June 30, 2016 to $2.9 million at June 30, 2017. The decrease was primarily driven by higher fund performance and the impact of higher interest rates, offset by an increase in amortization due to favorable mortality expense for the three months ended June 30, 2017, compared to the same period in 2016. There were no VOBA impairment charges for the three months ended June 30, 2017 and 2016.

For a complete discussion of the Company’s accounting policies related to VOBA, refer to the 2016 Annual Report on Form 10-K.

Insurance, general and administrative expenses decreased $3.7 million and $4.7 million during the three and six months ended June 30, 2017, respectively, as compared to the same period in 2016 due to the $3.2 million release of a previously set accrual as a result of remediation of model changes completed during the second quarter of 2017. The following table provides the components in insurance expenses and taxes for each respective period:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
(dollars in millions)	2017			2016		2017		2016
Commissions	$	6.7		$	6.5	$	12.6	$	13.1
General insurance expenses		(0.5	)		3.4		2.2		6.5
Taxes, licenses, and fees		0.4			0.3		0.6		0.5
Total insurance, general and administrative expenses	$	6.6		$	10.2	$	15.4	$	20.1

55

Segment Information

The Company’s operating results are categorized into two operating segments: Annuity and Life Insurance. The Company’s Annuity segment consists of variable annuity and interest-sensitive annuity contracts. The Company’s Life Insurance segment consists of variable life insurance and interest-sensitive life insurance contracts. The accounting policies of the business segments are the same as those for the Company’s Financial Statements.

All revenue and expense transactions are recorded at the contract level and accumulated at the business segment level for review by management. The following tables summarize each business segment’s contributions to the Statement of Income (Loss) for the three and six months ended June 30, 2017 and 2016:

Annuity		Three months ended June 30, 2017				Three months ended June 30, 2016
Policy charge revenue	$		23.9		$		24.2
Net Investment income (loss)			13.0				13.5
Net realized investment gains (losses)			1.9				1.1
Derivative gains (losses)			(6.5	)			(6.7	)
Total Revenue	$		32.3		$		32.1
Interest credited to policyholder liabilities	$		1.9		$		2.3
Policy benefits (net of reinsurance recoveries)			3.9				12.9
Amortization (accretion) of DAC			0.6				(0.5	)
Amortization (accretion) of VOBA			0.6				1.4
Insurance, general and administrative expenses			5.8				9.2
Total Expenses	$		12.8		$		25.3
Income (Loss) before taxes	$		19.5		$		6.8
Income tax expense (benefit)			-				1.3
Net income (loss)	$		19.5		$		5.5
Life Insurance
Policy charge revenue	$		13.4		$		13.7
Net Investment income (loss)			13.4				14.1
Net realized investment gains (losses)			0.3				(1.0	)
Derivative gains (losses)			-				-
Total Revenue	$		27.1		$		26.8
Interest credited to policyholder liabilities	$		11.5		$		11.7
Policy benefits (net of reinsurance recoveries)			8.0				9.0
Amortization (accretion) of DAC			-				-
Amortization (accretion) of VOBA			2.2				6.2
Insurance, general and administrative expenses			0.8				1.0
Total Expenses	$		22.5		$		27.9
Income (Loss) before taxes	$		4.6		$		(1.1	)
Income tax expense (benefit)			-				(1.3	)
Net income (loss)	$		4.6		$		0.2

56

Annuity		Six months ended June 30, 2017				Six months ended June 30, 2016
Policy charge revenue	$		47.9		$		47.9
Net Investment income (loss)			27.3				25.5
Net realized investment gains (losses)			1.7				0.8
Derivative gains (losses)			(30.8	)			(3.3	)
Total Revenue	$		46.1		$		70.9
Interest credited to policyholder liabilities	$		3.6		$		4.4
Policy benefits (net of reinsurance recoveries)			(12.2	)			41.6
Amortization (accretion) of DAC			1.7				0.4
Amortization (accretion) of VOBA			2.2				3.1
Insurance, general and administrative expenses			13.9				18.4
Total Expenses	$		9.2		$		67.9
Income (Loss) before taxes	$		36.9		$		3.0
Income tax expense (benefit)			0.4				2.6
Net income (loss)	$		36.5		$		0.4
Life Insurance
Policy charge revenue	$		26.9		$		27.0
Net Investment income (loss)			27.1				28.6
Net realized investment gains (losses)			0.5				(0.9	)
Derivative gains (losses)			-				-
Total Revenue	$		54.5		$		54.7
Interest credited to policyholder liabilities	$		22.8		$		23.6
Policy benefits (net of reinsurance recoveries)			14.6				23.4
Amortization (accretion) of DAC			-				-
Amortization (accretion) of VOBA			3.0				9.9
Insurance, general and administrative expenses			1.5				1.7
Total Expenses	$		41.9		$		58.6
Income (Loss) before taxes	$		12.6		$		(3.9	)
Income tax expense (benefit)			0.2				(2.6	)
Net income (loss)	$		12.4		$		(1.3	)

For the three months ended June 30, 2017, the $14.0 million increase in net income for the annuity segment was primarily due to the release of policy benefit reserves $9.0 million and lower insurance, general and administrative expenses of $3.4 million. For the six months ended June 30, 2017, the $36.1 million increase in net income was due to the release of policy benefit reserves $53.8 million and lower insurance, general and administrative expenses of $4.5 million, in addition to a partial offset due to higher derivative losses of $27.5 million in the first quarter of 2017. The release in policy benefits reserves resulted from higher than expected equity market returns. The decrease in insurance, general and administrative expenses was driven by a $3.2 million release of a previously set accrual as a result of remediation of model changes completed during the second quarter of 2017.

For the three months ended June 30, 2017, the $4.4 million increase in net income for the life segment was primarily due $4.0 million lower amortization of VOBA, driven by higher fund performance. For the six months ended June 30, 2017, the $13.7 million increase in net income was driven by lower policy benefits expenses of $8.8 million, resulting from favorable claims experience, along with lower VOBA amortization of $6.9 million, driven by higher fund performance.

57

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As an insurance company, the Company is in the “risk” business and as a result is exposed to a variety of risks. Our largest exposures are to changes in the financial markets (e.g. interest rate, credit and equity market risks) that affect the value of our investments, liabilities from products that we sold, deferred expenses and the value of business acquired. There have been no material changes in our economic exposure to market risk from December 31, 2016. See “Item 7A, Quantitative and Qualitative Disclosures about Market Risk” of the Company’s 2016 Annual Report on Form 10-K for a full description of our risk management and control systems.

Item 4. Controls and Procedures

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

In addition, no change in the Company's internal control over financial reporting (as defined in Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the second fiscal quarter of 2017 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II Other Information

Item 1. Legal Proceedings

Not applicable

Item 1A. Risk Factors

In the course of conducting its business operations, the Company could be exposed to a variety of risks that are inherent to the insurance industry. The risks described in the 2016 Annual Report on Form 10-K and elsewhere in this Form 10-Q 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.

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) Not applicable

(b) Not applicable

Item 6. Exhibits

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed with this report, which Exhibit Index is incorporated here in by reference.

58

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Transamerica Advisors Life Insurance Company
	(Registrant)
Date: August 14, 2017	By:	/s/ C. Michiel van Katwijk
		C. Michiel van Katwijk
		Director, Executive Vice President, Chief Financial Officer and Treasurer

59

EXHIBIT INDEX

31.1	Certification by the Chief Executive Officer of the Registrant pursuant to Rule 15d-14(a).
31.2	Certification by the Chief Financial Officer of the Registrant pursuant to Rule 15d-14(a).
32.1	Certification by the Chief Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by the Chief Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
101.DEF	XBRL Taxonomy Definition Linkbase.
101.LAB	XBRL Taxonomy Extension Label Linkbase.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase.

60