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TRANSAMERICA ADVISORS LIFE INSURANCE CO OF NEW YORK - 10-Q - Management's Narrative Analysis of Results of Operations

Edgar Online, Inc.

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

Forward Looking Statements


Certain statements in this report may be considered forward-looking, including
those about management expectations, strategic objectives, growth opportunities,
business prospects, anticipated financial results and other similar matters.
These forward-looking statements represent only management's beliefs regarding
future performance, which is inherently uncertain. There are a variety of
factors, many of which are beyond the Company's control, which affect its
operations, performance, business strategy and results and could cause its
actual results and experience to differ materially from the expectations and
objectives expressed in any forward-looking statements. These factors include,
but are not limited to, actions and initiatives taken by current and potential
competitors, general economic conditions, the effects of current, pending and
future legislation, regulation and regulatory actions, and the other risks and
uncertainties detailed in this report. See Risk Factors in the 2012 Annual
Report on Form 10-K. Accordingly, readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the dates on
which they are made. The Company does not undertake to update forward-looking
statements to reflect the impact of circumstances or events that arise after the
dates they are made. The reader should, however, consult further disclosures the
Company may make in future filings of its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K.





Business



Overview

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

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

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

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

• the charges imposed on variable annuity and variable life insurance

         contracts, and



• the net earnings from investment of fixed rate life insurance and annuity

Executive Positions Available for Seasoned Marketers

contract owner deposits less interest credited to contract owners,

commonly known as interest spread.



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





Deposits





Total direct deposits (including internal exchanges) were $0.1 million and $0.1
million for the three months ended March 31, 2013 and 2012, respectively. There
were no internal exchanges during the three months ended March 31, 2013.
Internal exchanges during the three months ended March 31, 2012 were less than
$0.1 million.



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Financial Condition



At March 31, 2013, the Company's assets were $794.1 million or $9.3 million
higher than the $784.8 million in assets at December 31, 2012. Assets excluding
Separate Accounts assets decreased $1.2 million during the first quarter of
2013. Separate Accounts assets, which represent 68% of total assets, increased
$10.5 million to $536.9 million.

Changes in Separate Accounts assets were as follows:



                                                Three
                                             Months Ended
                                              March 31,
(dollars in millions)                    2013           2012
Investment performance                  $   22.0$   47.3
Deposits                                     8.4            0.1
Policy fees and charges                     (2.7 )         (2.9 )

Surrenders, benefits and withdrawals (17.2 ) (20.2 )


Net change                              $   10.5$   24.3



During the first three months of 2013 and 2012, the Company did not have any
fixed contract owner deposits and fixed contract owner withdrawals were $2.2
million and $0.6 million, respectively.





Business Environment



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

Equity Market Performance


The investment performance of the underlying U.S. equity-based mutual funds
supporting the Company's variable products do not replicate the returns of any
specific U.S. equity market index. However, investment performance will
generally increase or decrease with corresponding increases or decreases of the
overall U.S. equity market. There are several standard indices published on a
daily basis that measure performance of selected components of the U.S. equity
market. Examples include the Dow Jones Industrial Average ("Dow"), the NASDAQ
Composite Index ("NASDAQ") and the Standard & Poor's 500 Composite Stock Price
Index ("S&P"). The Dow, NASDAQ and S&P ended March 31, 2013 with increases of
11%, 8% and 10%, respectively, from December 31, 2012.

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 69% of Separate Accounts assets were invested in equity-based
mutual funds at March 31, 2013. Since asset-based fees collected on in force
variable contracts represent a significant source of revenue, the Company's
financial condition will be impacted by fluctuations in investment performance
of equity-based Separate Accounts assets. During the three months ended
March 31, 2013, average variable account balances decreased $24.0 million (or
4.3%) to $536.5 million as compared to the same period in 2012.

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

Medium Term Interest Rates, Corporate Credit and Credit Spreads

Executive Positions Available for Seasoned Marketers


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

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

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



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



                                                                        Three Months Ended
                                                                             March 31,
                                                                        2013           2012
Average medium term interest rate yield (a)                               0.39%         0.52%
Increase (decrease) in medium term interest rates (in basis points)          (2 )          12
Credit spreads (in basis points) (b)                                        115           199
Contracting of credit spreads (in basis points)                             

(9 ) (86 )

Increase (decrease) on market valuations (in millions) Available-for-sale ("AFS") investment securities

$   (1.3 )$   1.3
Interest-sensitive policyholder liabilities                                

(0.2 ) (0.1 )


Net change on market valuations                                        $   (1.5 )$   1.2

(a) The Company defines medium term interest rates as the average interest rate

on U.S. Treasury securities with terms of one to five years.

(b) The Company defines credit spreads according to the Merrill Lynch U.S.

    Corporate Bond Index for BBB-A Rated bonds with three to five year
    maturities.





Critical Accounting Policies and Estimates




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

The Company's critical accounting policies and estimates are discussed below.
For a full description of these and other accounting policies see Note 1 of the
2012 Annual Report on Form 10-K.

Valuation of Fixed Maturity and Equity Securities

Executive Positions Available for Seasoned Marketers


The Company's investments consist principally of fixed maturity and equity
securities that are classified as available-for-sale ("AFS") which are reported
at estimated fair value. In addition, the Company held fixed maturity securities
which contain a conversion to equity feature, which is considered an embedded
derivative. These fixed maturity securities have been classified as trading and
are reported at estimated fair value. During 2012, the last of these securities
converted so the Company no longer holds any of these securities as of
December 31, 2012. The fair values of fixed maturity and equity securities are
determined by management after taking into consideration several sources of
data. When available, the Company uses quoted market prices in active markets to
determine the fair value of its investments. The Company's valuation policy
utilizes a pricing hierarchy which dictates that publicly available prices are
initially sought from indices and third-party pricing services. In the event
that pricing is not available from these sources, those securities are submitted
to brokers to obtain quotes. If broker quotes are not available, then securities
are priced using internal cash flow modeling techniques. These valuation
methodologies commonly use reported trades, bids, offers, issuer spreads,
benchmark yields, estimated prepayment speeds, and/or estimated cash flows.

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

Each month, the Company performs an analysis of the information obtained from
third-party services and brokers to ensure that the information is reasonable
and produces a reasonable estimate of fair value. The Company considers both
qualitative and quantitative factors as part of this analysis, including but not
limited to, recent transactional activity for similar fixed maturities, review
of pricing statistics and trends, and consideration of recent relevant market
events. Other controls and procedures over pricing received from indices,
third-party pricing services, or brokers include validation checks such as
exception reports which highlight significant price changes, stale prices or
un-priced securities. In addition, the Company performs back testing on a



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sample basis. Back testing involves selecting a sample of securities trades and
comparing the prices in those transactions to prices used for financial
reporting. Significant variances between the price used for financial reporting
and the transaction price are investigated to explain the cause of the
difference.

The Company's portfolio of private placement securities is valued using a matrix
pricing methodology. The pricing methodology is obtained from a third party
service and indicates current spreads for securities based on weighted average
life, credit rating and industry sector. Monthly the Company reviews the matrix
to ensure the spreads are reasonable by comparing them to observed spreads for
similar securities traded in the market. In order to account for the illiquid
nature of these securities, illiquidity premiums are included in the valuation
and are determined based upon the pricing of recent transactions in the private
placement market as well as comparing the value of the privately offered
security to a similar public security. The impact of the illiquidity premium to
the overall valuation is less than 1% of the value. At March 31, 2013 and
December 31, 2012, approximately $2.2 million (or 2%) and $2.0 million (or 2%),
respectively, of the Company's fixed maturity and equity securities portfolio
consisted of private placement securities.

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

Other-Than-Temporary Impairment ("OTTI") Losses on Investments


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

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

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

For the three months ended March 31, 2013 and 2012, the Company did not record an OTTI in income.


Derivative Instruments

Derivatives are financial instruments in which the value changes in response to
an underlying variable, that require little or no net initial investment and are
settled at a future date. The Company has entered into exchange traded
derivatives, such as futures contracts, to hedge the costs of the volatility of
the S&P. All derivatives recognized on the Balance Sheets are carried at fair
value. All changes in fair value are recognized in the Statements of Income. The
fair value for exchange traded derivatives, such as



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futures, are calculated net of the interest accrued to date and is based on
quoted market prices. Net settlements on the futures occur daily. At March 31,
2013, the Company had 90 outstanding short futures contracts with a notional
amount of $32.6 million. At December 31, 2012, the Company had 10 outstanding
short futures contracts with a notional amount of $3.6 million. Realized losses
on settlement of these futures were $0.4 million and $0.8 million for the three
months ended March 31, 2013 and 2012, respectively. These losses have been
recorded in net derivative losses in the Statements of Income.

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 $0.3 million and $0.3
million as of March 31, 2013 and December 31, 2012, respectively.

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

VOBA


VOBA represents the portion of the purchase price that is allocated to the value
of the right to receive future cash flows from the insurance and annuity
contracts in force at the acquisition date. VOBA is based on actuarially
determined projections, for each block of business, of future policy and
contract charges, premiums, mortality, policyholder behavior, Separate Account
performance, operating expenses, investment returns, and other factors. Actual
experience on the purchased business may vary from these projections. Revisions
in estimates result in changes to the amounts expensed in the reporting period
in which the revisions are made and could result in the impairment of the asset
and a charge to income if estimated future gross profits are less than the
unamortized balance. At March 31, 2013 and December 31, 2012, the Company's VOBA
asset was $24.8 million and $25.2 million, respectively. For the three months
ended March 31, 2013 and 2012, the favorable (unfavorable) impact to pre-tax net
income related to VOBA unlocking was less than $0.1 million and less than ($0.1)
million, respectively. See Note 4 to the Financial Statements for a further
discussion.

DAC


The costs of acquiring business, principally commissions, certain expenses
related to policy issuance, and certain variable sales expenses that relate to
and vary with the production of new and renewal business are deferred and
amortized based on the estimated future gross profits for a group of contracts.
DAC are subject to recoverability testing at the time of policy issuance and
loss recognition testing at the end of each reporting period. At March 31, 2013
and December 31, 2012, variable annuities accounted for the Company's entire DAC
asset of $0.4 million and $0.3 million, respectively.

DAC for variable annuities is amortized with interest over the anticipated lives
of the insurance contracts in relation to the present values of estimated future
gross profits from asset-based fees, guaranteed benefit rider fees, contract
fees, and surrender charges, less a provision for guaranteed death and living
benefit expenses, policy maintenance expenses, and non-capitalized commissions.
Future gross profit estimates are subject to periodic evaluation with necessary
revisions applied against amortization to date. The impact of revisions and
assumptions to estimates on cumulative amortization is recorded as a charge or
benefit to current operations, commonly referred to as "unlocking". Changes in
assumptions can have a significant impact on the amount of DAC reported and the
related amortization patterns. In general, increases in the estimated Separate
Accounts return and decreases in surrender or mortality assumptions increase the
expected future profitability of the underlying business and may lower the rate
of DAC amortization. Conversely, decreases in the estimated Separate Accounts
returns and increases in surrender or mortality assumptions reduce the expected
future profitability of the underlying business and may increase the rate of DAC
amortization. At March 31, 2013 and 2012, there was relatively no impact to
pre-tax income related to DAC unlocking. See Note 4 to the Financial Statements
for a further discussion.

DSI

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

The expense and the subsequent capitalization and amortization are recorded as a
component of policy benefits in the Statements of Income. At March 31, 2013 and
December 31, 2012, variable annuities accounted for the Company's entire DSI
asset of $0.1 million and $0.1 million, respectively. See Note 4 to the
Financial Statements for a further discussion.



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The long-term growth rate assumption for the amortization of VOBA, DAC and DSI was 9% at both March 31, 2013 and 2012, respectively.

Policyholder Account Balances


The Company's liability for policyholder account balances represents the
contract value that has accrued to the benefit of policyholders as of the
Balance Sheet date. The liability is generally equal to the accumulated account
deposits plus interest credited less policyholders' withdrawals and other
charges assessed against the account balance. Policyholder account balances at
March 31, 2013 and December 31, 2012 were $100.6 million and $104.1 million,
respectively.

Future Policy Benefits

Future policy benefits are actuarially determined liabilities, which are
calculated to meet future obligations and are generally payable over an extended
period of time. Principal assumptions used in the establishment of liabilities
for future policy benefits are mortality, surrender rates, policy expenses,
equity returns, interest rates, and inflation. These estimates and assumptions
are influenced by historical experience, current developments and anticipated
market trends. At March 31, 2013 and December 31, 2012, future policy benefits
were $17.0 million and $16.5 million, respectively.

Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issued. At March 31, 2013 and December 31, 2012, GMDB and GMIB liabilities included within future policy benefits were as follows:



                         March 31,        December 31,
(dollars in millions)      2013              2012
GMDB liability           $      1.2      $          1.5
GMIB liability                  3.2                 3.7


The Company regularly evaluates the assumptions used to establish these
liabilities, as well as actual experience and adjusts GMDB and GMIB liabilities
with a related charge or credit to earnings ("unlocking"), if actual experience
or evidence suggests that the assumptions should be revised. For the three
months ended March 31, 2013 and 2012, the favorable impact to pre-tax income
related to GMDB and GMIB unlocking was $1.4 million and $2.7 million,
respectively.

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

At March 31, 2013 and December 31, 2012, GMWB liability and GMIB reinsurance asset included within future policy benefits were as follows:



                           March 31,         December 31,
(dollars in millions)        2013               2012
GMWB liability            $       0.7       $          1.1
GMIB reinsurance asset           (7.9 )               (8.9 )


Income Taxes

The Company uses the asset and liability method in providing income taxes on all
transactions that have been recognized in the financial statements. The asset
and liability method requires that deferred taxes be adjusted to reflect the tax
rates at which future taxable amounts will be settled or realized. The Company
provides for income taxes based on amounts it believes it will ultimately owe.
Inherent in the provision for income taxes are estimates regarding the
realization of certain tax deductions and credits.

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

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




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Recent Accounting Guidance

The following outlines the adoption of recent accounting guidance in 2013. See Note 1 to the Financial Statements for a further discussion.

• Accounting Standards Codification ("ASC") 210, Balance Sheet - Accounting

Standards Update ("ASU") 2011-11, Disclosures about Offsetting Assets and

Liabilities - enhances disclosures about financial instruments and

derivative instruments that are either offset on the statement of

financial position or subject to an enforceable master netting arrangement

         - adopted January 1, 2013.



• ASC 220, Comprehensive Income - ASU 2013-02, Reporting of Amounts

Reclassified Out of Accumulated Other Comprehensive Income, requires an

entity to provide information about significant items reclassified out of

accumulated other comprehensive income ("AOCI") by component - adopted

January 1, 2013.

The following outlines the adoption of recent accounting guidance in 2012. See Note 1 to the Financial Statements for a further discussion.

• ASC 944, Financial Services-Insurance - ASU 2010-26, Accounting for Costs

Associated with Acquiring or Renewing Insurance Contracts - modifies the

definition of the types of costs incurred by insurance entities that can

be capitalized in the acquisition of new and renewal contracts - adopted

January 1, 2012.



• ASC 820, Fair Value Measurements and Disclosures - ASU 2011-04, Amendments

to Achieve Common Fair Value Measurement and Disclosure Requirements in

U.S. GAAP and IFRS - amends current guidance to achieve common fair value

measurement and disclosure requirements in U.S. GAAP and International

         Financial Reporting Standards ("IFRS") - adopted January 1, 2012.




  •   ASC 220, Comprehensive Income




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




           •    ASU 2011-12, Deferral of the Effective Date for

Amendments to the

                Presentation of Reclassifications of Items Out of

Accumulated Other

                Comprehensive Income in Accounting Standards Update No. 

2011-05 -

                defers the amendments in ASU 2011-05 that relate to 

presentation of

                reclassifications out of accumulated other comprehensive income -
                adopted January 1, 2012.




    •    ASC 350, Intangibles-Goodwill and Other - ASU 2011-08, Testing Goodwill

for Impairment - gives entities the option of performing a qualitative

assessment to determine whether it is necessary to perform the two-step

         goodwill impairment test - adopted January 1, 2012.






Investments



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



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Fixed Maturity and Equity Securities


The amortized cost/cost and estimated fair value of investments in fixed
maturity and equity AFS securities at March 31, 2013 and December 31, 2012 were:



                                                                                March 31, 2013
                                                                                                                     % of
                                                                       Gross Unrealized            Estimated       Estimated
                                                  Amortized                          Losses/          Fair           Fair
(dollars in millions)                             Cost/Cost          Gains          OTTI (1)         Value           Value
Fixed maturity AFS securities
Corporate securities
Financial services                                 $    25.4$        2.5      $      -        $    27.9             18%
Industrial                                              72.8               8.1             -             80.9            51
Utility                                                  3.4               0.5             -              3.9             2
Asset-backed securities
Housing related                                          4.1               -               -              4.1             3
Other                                                    0.7               -               -              0.7             -
Commercial mortgage-backed securities - non
agency backed                                           20.8               2.4             -             23.2            15
Residential mortgage-backed securities
Agency backed                                            4.4               0.4             -              4.8             3
Non agency backed                                        0.7               -               -              0.7             -
Government and government agencies
United States                                            5.8               0.4             -              6.2             4
Foreign                                                  3.6               0.7             -              4.3             3

Total fixed maturity AFS securities                    141.7              15.0             -            156.7            99

Equity securities - banking securities                   1.4               0.2             -              1.6             1

Total equity securities                                  1.4               0.2             -              1.6             1

Total fixed maturity and equity securities         $   143.1$       15.2      $      -        $   158.3            100%


                                                                               December 31, 2012
                                                                                                                     % of
                                                                       Gross Unrealized            Estimated       Estimated
                                                  Amortized                          Losses/          Fair           Fair
(dollars in millions)                             Cost/Cost          Gains          OTTI (1)         Value           Value
Fixed maturity AFS securities
Corporate securities
Financial services                                 $    26.0$        2.4      $      -        $    28.4             19%
Industrial                                              66.7               8.9             -             75.6            51
Utility                                                  3.4               0.5             -              3.9             3
Asset-backed securities
Housing related                                          4.2               -               -              4.2             3
Commercial mortgage-backed securities - non
agency backed                                           19.1               2.8             -             21.9            15
Residential mortgage-backed securities
Agency backed                                            4.4               0.4             -              4.8             3
Non agency backed                                        0.7               -               -              0.7             -
Government and government agencies
United States                                            3.0               0.4             -              3.4             2
Foreign                                                  3.2               0.8             -              4.0             3

Total fixed maturity AFS securities                    130.7              16.2             -            146.9            99

Equity securities - banking securities                   1.3               0.2             -              1.5             1

Total equity securities                                  1.3               0.2             -              1.5             1

Total fixed maturity and equity securities $ 132.0$ 16.4 $ - $ 148.4

            100%





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

    OCI-OTTI.




                                       32
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The Company regularly monitors industry sectors and individual debt securities
for evidence of impairment. This evidence may include one or more of the
following: 1) deteriorating market to book ratio, 2) increasing industry risk
factors, 3) deteriorating financial condition of the issuer, 4) covenant
violations, 5) high probability of bankruptcy of the issuer, 6) nationally
recognized credit rating agency downgrades, and/or 7) intent and ability to hold
to recovery. Additionally, for structured securities (asset-backed securities
("ABS"), residential mortgage-backed securities ("RMBS"), commercial
mortgage-backed securities ("CMBS")), cash flow trends and underlying levels of
collateral are monitored. A security is impaired if there is objective evidence
that a loss event has occurred after the initial recognition of the asset that
has a negative impact on the estimated future cash flows. A specific security is
considered to be impaired when it is determined that it is probable that not all
amounts due (both principal and interest) will be collected as scheduled. For
debt securities, an OTTI must be recognized in earnings when an entity either a)
has the intent to sell the debt security or b) more likely than not will be
required to sell the debt security before its anticipated recovery. If the
Company meets either of these criteria, the OTTI is recognized in earnings in an
amount equal to the entire difference between the security's amortized cost
basis and its fair value at the balance sheet date. For debt securities in
unrealized loss positions that do not meet these criteria, the Company must
analyze its ability to recover the amortized cost by comparing the net present
value of projected future cash flows with the amortized cost of the security.
The Company has evaluated the near-term prospects of the issuers in relation to
the severity and duration of the unrealized loss, and unless otherwise noted,
does not consider these investments to be impaired at March 31, 2013.

Seven issuers represent more than 5% of the total unrealized loss position,
comprised of two corporate non-convertible bonds, one subprime asset-backed
securities ("ABS") housing holding, and four emerging markets holdings. The
Company owns two investment grade corporate non-convertible securities with
unrealized losses totaling less than $0.1 million. The Company's ABS unrealized
loss is less than $0.1 million and relates to an investment grade 2004 fixed
rate first lien subprime mortgage. The company owns four investment grade
emerging markets holdings with unrealized losses totaling less than $0.1
million.

At March 31, 2013 and December 31, 2012, approximately $4.8 million (or 16%) and
$4.8 million (or 18%), respectively, of RMBS and CMBS holdings were fully
collateralized by the Government National Mortgage Association, the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation.
RMBS and CMBS securities are structured to allow the investor to determine,
within certain limits, the amount of interest rate risk, prepayment risk and
default risk that the investor is willing to accept. It is this level of risk
that determines the degree to which the yields on RMBS and CMBS will exceed the
yields that can be obtained from corporate securities with similar credit
ratings.

Unrealized gains (losses) incurred during the first three months of 2013 and
2012, 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.

There were no sectors with unrealized losses greater than $41 thousand and $36 thousand at March 31, 2013 and December 31, 2012.

The amortized cost and estimated fair value of fixed maturity AFS securities at March 31, 2013 and December 31, 2012 by rating agency equivalent were:




                                          March 31, 2013                             December 31, 2012
                                  Amortized             Estimated             Amortized              Estimated
(dollars in millions)               Cost               Fair Value                Cost               Fair Value
AAA                              $       22.5$       24.9$        21.0$       23.6
AA                                       22.2                  24.7                   19.4                  22.0
A                                        59.3                  66.6                   58.4                  66.5
BBB                                      27.9                  30.2                   26.0                  28.4
Below investment grade                    9.8                  10.3                    5.9                   6.4

Total fixed maturity AFS
securities                       $      141.7$      156.7$       130.7$      146.9


Investment grade                          93%                   93%                    95%                   96%
Below investment grade                     7%                    7%                     5%                    4%


The Company defines investment grade securities as unsecured debt obligations
that have a rating equivalent to S&P's BBB- or higher (or similar rating
agency). At March 31, 2013 and December 31, 2012 approximately $3.5 million (or
2%) and $2.4 million



                                       33
--------------------------------------------------------------------------------
(or 2%), respectively, of fixed maturity securities were rated BBB-, which is
the lowest investment grade rating given by S&P. Below investment grade
securities are speculative and are subject to significantly greater risks
related to the creditworthiness of the issuers and the liquidity of the market
for such securities. The Company closely monitors such investments.

The Company did not hold any trading securities during the three months ended
March 31, 2013. For the three months ended March 31, 2012, there was investment
income of less than $0.1 million on fixed maturity trading securities and less
than $0.1 million recognized from the change in the fair value on fixed maturity
trading securities recorded in net investment income in the Statements of
Income.

Subprime Mortgage Investments


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

The following tables provide the ABS subprime mortgage exposure by rating and estimated fair value by vintage at March 31, 2013 and December 31, 2012:



                                              March 31, 2013
                                                                       Gross
                          Amortized         Estimated Fair           Unrealized
(dollars in millions)       Cost                Value               Loss and OTTI
First lien - fixed
AAA                      $        1.7      $             1.7      $             -
Below BBB                         2.4                    2.4                    -

Total                    $        4.1      $             4.1      $             -


                                             December 31, 2012
                                                                       Gross
                          Amortized         Estimated Fair           Unrealized
(dollars in millions)       Cost                Value               Loss and OTTI
First lien - fixed
AAA                      $        1.7      $             1.7      $             -
Below BBB                         2.5                    2.5                    -

Total                    $        4.2      $             4.2      $             -


                                              March 31, 2013
                                      Estimated Fair Value by Vintage
(dollars in millions)    2004&Prior              2005                  Total
First lien - fixed
AAA                      $        1.7      $             -        $             1.7
Below BBB                         0.9                    1.5                    2.4

Total                    $        2.6      $             1.5      $             4.1





                                       34
--------------------------------------------------------------------------------
                                                   December 31, 2012
                                           Estimated Fair Value by Vintage
(dollars in millions)      2004&Prior                  2005                       Total
First lien - fixed
AAA                      $           1.7          $             -            $              1.7
Below BBB                            0.9                        1.6                         2.5

Total                    $           2.6          $             1.6          $              4.2



OTTI

For the three months ended March 31, 2013 and 2012, the Company did not incur any impairment losses.

Liquidity and Capital Resources

Liquidity


The Company's liquidity requirements include the payment of sales commissions
and other underwriting expenses and the funding of its contractual obligations
for the life insurance and annuity contracts it has in force. The Company has
developed and utilizes a cash flow projection system and regularly performs
asset/liability duration matching in the management of its asset and liability
portfolios. The Company anticipates funding its cash requirements utilizing cash
from operations, normal investment maturities and anticipated calls and
repayments, consistent with prior years. At March 31, 2013 and December 31,
2012, the Company's assets included $186.6 million and $185.1 million,
respectively, of cash, short-term investments and investment grade publicly
traded AFS securities that could be liquidated if funds were required.

Capital Resources

During the first three months of 2013 and 2012, the Company did not receive a capital contribution from AUSA nor did the Company pay a dividend to AUSA.

Ratings


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

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



  •    S&P - AAA to R




  •    A.M. Best - A++ to S




  •    Fitch - AAA to C

The following table summarizes the Company's ratings at May 13, 2013:



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


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



                                       35

--------------------------------------------------------------------------------

Commitments and Contingencies

The following table summarizes the Company's policyholders' obligations at March 31, 2013:




                         Less Than One        One To Three        Four To Five         More Than Five
(dollars in millions)         Year                Years               Years                Years                  Total

General accounts (a) $ 13.8 $ 25.4 $ 22.0 $

            96.1      $            157.3
Separate Accounts (a)               76.7               131.5               113.1                  415.7                   737.0

                         $          90.5      $        156.9$        135.1      $           511.8      $            894.3




(a) The policyholder liabilities include benefit and claim liabilities of which a

significant portion represents policies and contracts that do not have a

stated contractual maturity. The projected cash benefit payments in the table

above are based on management's best estimates of the expected gross benefits

and expenses, partially offset by the expected gross premiums, fees and

charges relating to the existing business in force. Estimated cash benefit

payments are based on mortality and lapse assumptions comparable with the

Company's historical experience, modified for recently observed trends.

Actual payment obligations may differ if experience varies from these

assumptions. The cash benefit payments are presented on an undiscounted basis

and are before deduction of tax and before reinsurance. The liability amounts

in the Company's Financial Statements reflect the discounting for interest as

well as adjustments for the timing of other factors as described above. As a

result, the sum of the cash benefit payments shown for all years in the table

above exceeds the corresponding policyholder liability amounts.



The Company has utilized public information to estimate the future assessments
it will incur as a result of life insurance company insolvencies. At March 31,
2013 and December 31, 2012, the Company's estimated liability for future
guaranty fund assessments was $0.3 million and $0.3 million, respectively. In
addition, the Company has a receivable for future premium tax deductions of less
than $0.1 million and less than $0.1 million at March 31, 2013 and December 31,
2012, respectively. The Company regularly monitors public information regarding
insurer insolvencies and adjusts its estimated liability as appropriate.

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





Results of Operations



For the three months ended March 31, 2013 and 2012, the Company recorded net
income of $1.8 million and $2.8 million, respectively. The decrease in income
during the three months ended 2013 as compared to 2012 was primarily due to
decreased policy charge revenue driven by lower Separate Account balances and a
smaller release of reserves in 2013.

Policy charge revenue decreased $0.5 million during the three months ended
March 31, 2013 as compared to the same period in 2012. The following table
provides the changes in policy charge revenue by type for each respective
period:



                                                       Three Months Ended
                                                           March  31,
(dollars in millions)                                 2013             2012           Change
Asset-based policy charge revenue                  $       1.9$     2.2$     (0.3 )       (a )
Guaranteed benefit based policy charge revenue             0.2             0.3             (0.1 )
Non-asset based policy charge revenue                      0.9             1.0             (0.1 )

Total policy charge revenue                        $       3.0$     3.5$     (0.5 )

(a) The decrease in asset-based policy charge revenue for 2013 was principally

due to a decrease in average variable account balances.



During the three months ended March 31, 2013, the decrease of $0.4 million in
net derivative losses relates to the decrease in net losses on futures contracts
during 2013 as compared to 2012. Short futures contracts fluctuate relative to
the volatility in the S&P.



                                       36
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Policy benefits increased $1.8 million during the three months ended March 31,
2013 as compared to the same period in 2012. The following table provides the
changes in policy benefits by type:



                                        Three Months Ended
                                            March 31,
(dollars in millions)                 2013             2012            Change
Annuity benefit unlocking           $     (1.4 )$     (2.7 )$      1.3       (a )
Annuity benefit expense                    1.1              0.9              0.2
Life insurance mortality expense           0.4              0.1              0.3

Total policy benefits               $      0.1$     (1.7 )$      1.8

(a) See the Critical Accounting Policies and Estimates section above for further

discussion of annuity benefit unlocking.



Amortization of VOBA was $0.6 million for the three months ended March 31, 2013,
which included favorable unlocking of less than $0.1 million. Amortization of
VOBA was $0.5 million for the three months ended March 31, 2012, which included
unfavorable unlocking of less than $0.1 million.

Insurance expenses and taxes remained the same during the three months ended
March 31, 2013 as compared to the same period in 2012. The following table
provides the changes in insurance expenses and taxes for each respective period:



                                         Three Months Ended
                                              March 31,
(dollars in millions)                   2013            2012           Change
Commissions                           $      0.5$      0.6$     (0.1 )
General insurance expenses                   0.4             0.3             0.1

Total insurance expenses and taxes $ 0.9$ 0.9$ (0.0 )

Segment Information



The products that comprise the Annuity and Life Insurance segments generally
possess similar economic characteristics. As such, the financial condition and
results of operations of each business segment are generally consistent with the
Company's consolidated financial condition and results of operations presented
herein.
Wordcount: 7566



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