TRANSAMERICA ADVISORS LIFE INSURANCE CO – 10-K – 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

  The statements contained in this Report that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. The following are words that identify such forward-looking statements: aim, believe, estimate, target, intend, may, expect, anticipate, predict, project, counting on, plan, continue, want, forecast, should, would, is confident, will, and similar expressions as they relate to our Company. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Such risks and uncertainties include but are not limited to the following:      •   Changes in general economic conditions;  

• Changes in the performance of financial markets, including emerging

markets, such as with regard to:

• The frequency and severity of defaults by issuers in our fixed income

              investment portfolios; and   

• The effects of corporate bankruptcies and/or accounting restatements

             on the financial markets and the resulting decline in the value of              equity and debt securities we hold;     •   The frequency and severity of insured loss events;   

• Changes affecting mortality, morbidity, persistence and other factors that

may impact the profitability of our insurance products;

• Changes affecting interest rate levels and continuing low or rapidly

         changing interest rate levels;     •   Increasing levels of competition;  

• Changes in laws and regulations, particularly those affecting our

operations, the products we sell, and the attractiveness of certain

products to our customers;

• Regulatory changes relating to the insurance industry in the jurisdictions

in which we operate;

• Lowering of one or more of the financial strength ratings and the adverse

impact such action may have on the premium writings, policy retention,

         profitability and liquidity;     •   Acts of God, acts of terrorism, acts of war and pandemics;     •   Changes in the policies of central banks and/or governments;  

• Litigation or regulatory actions that could require us to pay significant

damages or change the way we do business;

• Customer responsiveness to both new products and distribution channels;

• Competitive, legal, regulatory or tax changes that affect the distribution

cost of or demand for our products;

• The impact of product withdrawals, restructurings and other unusual items;

and

• Our failure to achieve anticipated levels of earnings or operational

efficiencies as well as other cost saving initiatives.

   We undertake no obligation to publicly update or revise any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which merely reflect Company expectations at the time of the writing. Actual results may differ materially from expectations conveyed in forward-looking statements due to changes caused by various risks and uncertainties. The reader should, however, consult any further disclosures TALIC 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.                                           8  --------------------------------------------------------------------------------

  Business Overview    TALIC conducts its business primarily in the annuity markets and to a lesser extent in the life insurance markets of the financial services industry. Currently, the Company is not issuing new life insurance, variable annuity and market value adjusted annuity products. The Company offered the following guaranteed benefits within its variable annuity product suite: guaranteed minimum death benefits ("GMDB"), guaranteed minimum income benefits ("GMIB") and guaranteed minimum withdrawal benefits ("GMWB"). In 2012, the Company began selling a fixed contingent annuity (also sometimes referred to as a contingent deferred annuity ("CDA")) that includes a stand-alone living benefit ("SALB"). A SALB is essentially a guaranteed lifetime withdrawal benefit which exists independently and is applied to mutual funds and exchange traded funds.     

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. See Note 1 to the Financial Statements for additional information regarding accounting policies.

Valuation of Fixed Maturity and Equity Securities

  The Company's investments consist principally of fixed maturity and equity securities that are classified as available-for-sale ("AFS") which are reported at estimated fair value. In addition, the Company holds fixed maturity securities which contain a conversion to equity feature, which is considered an embedded derivative. These fixed maturity securities have been classified as trading and are reported at estimated fair value. The fair values of fixed maturity and equity securities are determined by management after taking into consideration several sources of data. 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. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows.  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. Additionally, during 2011, the Company began performing back testing on a sample basis. Back testing involves selecting a sample of securities trades and comparing the prices in those transactions to prices used for financial reporting. Significant variances between the price used for financial reporting and the transaction price are investigated to explain the cause of the difference.  The Company's portfolio of private placement securities is valued using a matrix pricing methodology. The pricing methodology is obtained from a third party service and indicates current spreads for securities based on weighted average life, credit rating and industry sector. Monthly the Company reviews the matrix to ensure the spreads are reasonable by comparing them to observed spreads for similar securities traded in the market. In order to account for the illiquid nature of these securities, illiquidity premiums are included in the valuation and are determined based upon the pricing of recent transactions in the private placement market as well as comparing the value of the privately offered security to a similar public security. The impact of the illiquidity premium to the overall valuation is less than 1% of the value. At December 31, 2011 and 2010, approximately $56.7 million (or 3%) and $51.7 million (or 3%), 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.                                           9 

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

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 year ended December 31, 2011, the Company recorded an OTTI in income of $1.2 million, with no associated value of business acquired amortization. For the years ended December 31, 2010 and 2009, the Company recorded an OTTI in income of $0.6 million and $9.9 million, respectively, net of value of business acquired amortization.  

Mortgage Loans on Real Estate

  Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of premiums and accretion of discounts and are net of valuation allowances and generic reserves. The fair value for mortgage loans on real estate is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and/or similar remaining maturities. Interest income is accrued on the principal balance of the loan based on the loan's contractual interest rate. Premiums and discounts are amortized using the effective yield method over the life of the loan. Interest income and amortization of premiums and discounts are reported in net investment income along with mortgage loan fees, which are recorded as they are incurred.  Loans are considered impaired when it is probable that based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. When the Company determines that a loan is impaired, a valuation allowance is established for the excess carrying value of the loan over its estimated collateral value. Changing economic conditions impact the valuation of mortgage loans. Changing vacancies and rents are incorporated into the discounted cash flow analysis that the Company performs for monitored loans and may contribute to the establishment of (or an increase or decrease in) an allowance for losses. In addition, the Company continues to monitor the entire commercial mortgage loan portfolio to identify risk. Areas of emphasis are properties that have deteriorating credits or have experienced debt coverage reduction. Where warranted, the Company has established or increased loss reserves based upon this analysis. The Company does not accrue interest on loans ninety days past due. The Company also establishes a generic reserve which is calculated by applying a percentage, based on risk rating and maturity, to the outstanding loan balance.  At December 31, 2011 and 2010, there was $55.7 million and $62.9 million, respectively, in mortgage loans on real estate recorded on the Balance Sheets. The estimated fair value of the mortgage loans on real estate at December 31, 2011 and December 31, 2010 was $61.8 million and $66.7 million, respectively. There were no impaired mortgage loans at December 31, 2011. A valuation allowance of $0.6 million was established for an impaired mortgage loan during 2010 which was then sold during the first quarter 2011 resulting in a recovery of $0.2 million. In addition, during the fourth quarter 2010, a mortgage loan                                           10 

-------------------------------------------------------------------------------- was impaired for $0.6 million and then sold. The general reserve at December 31, 2011 and 2010 was less than $0.1 million. The change in the valuation allowance and the general reserve is reflected in net realized investment gains (losses), excluding OTTI losses on securities in the Statements of Income. At December 31, 2011 and 2010, there were no mortgage loans that were two or more payments delinquent. See Note 3 to the Financial Statements for further discussion.  

Derivative Instruments

  Derivatives are financial instruments in which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date. The Company has entered into short futures contracts to hedge minimum guarantees on variable annuity contracts. The Company has also entered into variance swaps to hedge the costs of the volatility of the Standard & Poor's 500 Composite Stock Price Index ("S&P") market. These variance swaps are similar to volatility options where the underlying index provides for the market value movements. All derivatives recognized on the Balance Sheets are carried at fair value with changes in fair value recognized in the Statements of Income. The fair value for exchange traded derivatives, such as futures, are calculated net of the interest accrued to date and is based on quoted market prices. Net settlements on the futures occur daily. The fair value of variance swaps is calculated as the difference between the estimated volatility of the underlying S&P index at maturity to the actual volatility of the underlying S&P index at initiation (i.e.; strike) multiplied by the notional value of the swap. At termination the final fair value is recorded as a realized investment gain (loss) in the Statements of Income. Variance swaps do not accrue interest, and typically, no cash is exchanged at initiation.  At December 31, 2011 and 2010, the Company had 630 and 360 outstanding short futures contracts with a notional amount of $197.3 million and $112.8 million, respectively. At December 31, 2011 and 2010, the Company had variance swaps with a notional value of $5.0 thousand and $7.0 thousand, respectively, and a net fair value of ($1.3) million and ($0.4) million, respectively, which is presented as a liability on the Balance Sheets. The Company recognized $1.0 million and $0.4 million of losses from the change in fair value of the variance swaps in net investment income in the Statements of Income during the years ended December 31, 2011 and 2010, respectively.  The Company can also receive collateral related to derivative transactions that it enters into. The credit support agreement contains a fair value threshold of $1.0 million over which collateral needs to be pledged by the Company or its counterparty. At December 31, 2011 and 2010, the Company did not pledge or receive collateral on derivative transactions.  

Securities Lending

  Financial assets that are lent to a third party or that are transferred subject to a repurchase agreement at a fixed price are not derecognized as the Company retains substantially all the risks and rewards of asset ownership. The lent securities are included in fixed maturity AFS securities in the Balance Sheets. A liability is recognized for cash collateral received, required initially at 102%, on which interest is accrued. If the fair value of the collateral is at any time less than 102% of the fair value of the loaned securities, the counterparty is mandated to deliver additional collateral, the fair value of which, together with the collateral already held in connection with the lending transaction, is at least equal to 102% of the fair value of the loaned securities. At December 31, 2011 and 2010, the payable for collateral under securities loaned was $244.0 million and $160.4 million, 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 December 31, 2011 and 2010, the Company's VOBA asset was $309.6 million and $335.1 million, respectively. For the years ended December 31, 2011, 2010 and 2009, the favorable (unfavorable) impact to pre-tax income related to VOBA unlocking was ($11.6) million, $24.6 million and ($79.4) million, respectively. In addition, for the year ended December 31, 2009, there was an impairment charge on variable annuities of $63.9 million. There were no impairment charges in 2011 and 2010. 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 December 31, 2011 and 2010, variable annuities accounted for the Company's entire DAC asset of $45.0 million and $31.4 million, respectively.                                           11  -------------------------------------------------------------------------------- DAC for variable annuities is amortized with interest over the anticipated lives of the insurance contracts in relation to the present values of estimated future gross profits from asset-based fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for guaranteed death and living benefit expenses, policy maintenance expenses, and non-capitalized commissions. Future gross profit estimates are subject to periodic evaluation with necessary revisions applied against amortization to date. The impact of revisions and assumptions to estimates on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as "unlocking". Changes in assumptions can have a significant impact on the amount of DAC reported and the related amortization patterns. In general, increases in the estimated Separate Accounts return and decreases in surrender or mortality assumptions increase the expected future profitability of the underlying business and may lower the rate of DAC amortization. Conversely, decreases in the estimated Separate Accounts returns and increases in surrender or mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization. For the years ended December 31, 2011, 2010 and 2009, there was a favorable (unfavorable) impact to pre-tax income related to DAC unlocking of ($3.0) million, $1.1 million and ($2.6) million, respectively. See Note 4 to the Financial Statements for a further discussion.  

DSI

  The Company offers a sales inducement whereby the contract owner receives a bonus which increases the initial account balance by an amount equal to a specified percentage of the contract owner's deposit. This amount may be subject to recapture under certain circumstances. Consistent with DAC, sales inducements for variable annuity contracts are deferred and amortized based on the estimated future gross profits for each group of contracts. These future gross profit estimates are subject to periodic evaluation by the Company, with necessary revisions applied against amortization to date. The impact of these revisions on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as "unlocking". It is reasonably possible that estimates of future gross profits could be reduced in the future, resulting in a material reduction in the carrying amount of the deferred sales inducement asset.  The expense and the subsequent capitalization and amortization (accretion) are recorded as a component of policy benefits in the Statements of Income. At December 31, 2011 and 2010, variable annuities accounted for the Company's entire DSI asset of $10.4 million and $7.3 million, respectively. For the years ended December 31, 2011, 2010 and 2009, there was a favorable (unfavorable) impact to pre-tax income related to unlocking of ($0.6) million, $0.3 million and less than $0.1 million, respectively. See Note 4 to the Financial Statements for a further discussion.  The long-term growth rate assumption for the amortization of VOBA, DAC and DSI was 9% at December 31, 2011, 2010 and 2009. The short-term growth rate assumption for the amortization of VOBA, DAC and DSI was 9% at December 31, 2011 and 2010 and 7.25% at December 31, 2009.  

Goodwill

  Goodwill is the excess of the purchase price over the estimated fair value of net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized, but are subject to impairment tests conducted at least annually. Impairment testing is to be performed using the fair value approach, which requires the use of estimates and judgment, at the "reporting unit" level. A reporting unit represents the operating segment which is the level at which the financial information is prepared and regularly reviewed by management. The entire asset amount has been allocated to annuities. Goodwill is reviewed for indications of value impairment, with consideration given to financial performance and other relevant factors. In addition, certain events including a significant adverse change in legal factors or the business climate, an adverse action or assessment by a regulator, or unanticipated competition would cause the Company to review the carrying amounts of goodwill for impairment. When considered impaired, the carrying amounts are written down to fair value based primarily on discounted cash flows. The Company performed the annual test of goodwill at December 31, 2011, 2010 and 2009 and determined there was no impairment of the goodwill.  

Policyholder Account Balances

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

Future Policy Benefits

  Future policy benefits are actuarially determined liabilities, which are calculated to meet future obligations and are generally payable over an extended period of time. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, surrender rates, policy expenses, equity returns, interest rates, and inflation. These estimates and assumptions are influenced by historical experience, current developments and anticipated market trends. At December 31, 2011 and 2010, future policy benefits were $475.9 million and $362.6 million, respectively.                                           12

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

Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issues.

At December 31, 2011 and 2010, GMDB and GMIB liabilities included within future policy benefits were as follows:

                              $000,000       $000,000                               December 31, (dollars in millions)      2011           2010 GMDB liability          $    144.4     $    114.5 GMIB liability                78.7           32.0   The Company regularly evaluates the assumptions used to establish these liabilities, as well as actual experience and adjusts GMDB and GMIB liabilities with a related charge or credit to earnings ("unlocking"), if actual experience or evidence suggests that the assumptions should be revised. For the years ended December 31, 2011, 2010 and 2009, the favorable (unfavorable) impact to pre-tax income related to GMDB and GMIB unlocking was ($70.0) million, $41.0 million and ($10.4) million, respectively.  Future policy benefits also include liabilities, which can be either positive or negative, for contracts containing GMWB provisions and for the reinsurance of GMIB provisions ("GMIB reinsurance") for variable annuities based on the fair value of the underlying benefit. GMWB and GMIB reinsurance are treated as embedded derivatives and are required to be reported separately from the host variable annuity contract. The fair value of these guarantees are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees, which are unlike instruments available in financial markets, their fair values are determined using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions.  

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

                              $000,000        $000,000                                 December 31, (dollars in millions)       2011            2010 GMWB liability           $    108.6      $     31.0 GMIB reinsurance asset        (94.5 )         (56.4 )   Federal Income Taxes  The Company uses the asset and liability method in providing income taxes on all transactions that have been recognized in the financial statements. The asset and liability method requires that deferred taxes be adjusted to reflect the tax rates at which future taxable amounts will be settled or realized. The Company provides for federal income taxes based on amounts it believes it will ultimately owe. Inherent in the provision for federal income taxes are estimates regarding the realization of certain tax deductions and credits.  Specific estimates include the realization of dividend-received deductions ("DRD") and foreign tax credits ("FTC"). A portion of the Company's investment income related to Separate Accounts business qualifies for the DRD and FTC. Information necessary to calculate these tax adjustments is typically not available until the following year. However, within the current year's provision, management makes estimates regarding the future tax deductibility of these items. These estimates are primarily based on recent historic experience. See Note 6 to the Financial Statements for a further discussion.  The valuation allowance for deferred tax assets at December 31, 2011 and 2010 was $90.4 million and $93.0 million, respectively. The valuation allowance is related to a net operating loss carryforward and other deferred tax assets that, in the judgment of management, is not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of 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.                                           13 

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

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

Recent Accounting Guidance

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

• Accounting Standards Codification ("ASC") 820, Fair Value Measurements and

Disclosure - Accounting Standards Update ("ASU") 2010-06, Improving

Disclosures about Fair Value Measurement - requires separate presentation

of information about purchases, sales, issuances, and settlements in the

Level 3 reconciliation for fair value measurements using significant

         unobservable inputs - adopted January 1, 2011.    

• ASC 944, Financial Services-Insurance - ASU 2010-15, How Investments Held

Through Separate Accounts Affect an Insurer's Consolidation Analysis

of Those Investments - clarifies that an insurance entity should not

consider any separate account interest held for the benefit of

policyholders in an investment to be the insurer's interest and should not

combine those interests with its general account interest in the same

investment when assessing the investment for consolidation - adopted

January 1, 2011.         •    ASC 350, Intangibles-Goodwill and Other - ASU 2010-28, When to Perform

Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or

Negative Carrying Amounts - requires entities with a zero or negative

carrying value to perform step 2 of the goodwill impairment test if it is

         more likely than not that a goodwill impairment exists - adopted          January 1, 2011.    

• ASC 310, Receivables - ASU 2011-02, A Creditor's Determination of Whether

a Restructuring Is a Troubled Debt Restructuring- clarifies when a loan

modification or restructuring is considered a troubled debt restructuring

- adopted April 1, 2011, applied retrospectively to January 1, 2011.

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

• ASC 820, Fair Value Measurements and Disclosure - ASU 2010-06, Improving

Disclosures about Fair Value Measurements - guidance on new disclosures

and clarifications of existing disclosures about fair value measurements -

          adopted January 1, 2010.         •    ASC 310, Receivables - ASU 2010-20, Disclosures about the Credit Quality

of Financing Receivables and the Allowance for Credit Losses - guidance

requires new and expanded disclosures about the allowance for credit

losses, credit quality, impaired loans, modifications, and nonaccrual and

past due financing receivables - adopted December 31, 2010.

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

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

Associated with Acquiring or Renewing Insurance Contracts - modifies the

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

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

         adopted January 1, 2012.    

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

to Achieve Common Fair Value Measurement and Disclosure Requirements in

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

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

         Financial Reporting Standards - will be adopted January 1, 2012.       •   ASC 220, Comprehensive Income    

• ASU 2011-05, Presentation of Comprehensive Income - requires an entity

             to report components of comprehensive income in either a single              continuous statement of comprehensive income or two separate but              consecutive statements - will be adopted January 1, 2012.    

• 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 - will

             be adopted January 1, 2012.                                            14 

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

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

for Impairment - gives entities the option of performing a qualitative

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

         goodwill impairment test - will be adopted January 1, 2012.    

• ASC 210, Balance Sheet - 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

         - will be adopted January 1, 2013.       Deposits    Total direct deposits (including internal exchanges) were $33.5 million, $46.0 million and $295.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. Deposits are currently limited to additions to existing policies which will result in fluctuations period over period. The decrease in deposits was primarily due to the Company ceasing to issue new variable annuity and market value adjusted annuity products in the latter part of 2009. Internal exchanges during 2011, 2010 and 2009 were $5.9 million, $5.2 million and $10.4 million, respectively.      Financial Condition    At December 31, 2011, the Company's assets were $10.5 billion or $976.1 million lower than the $11.5 billion in assets at December 31, 2010. Assets excluding Separate Accounts assets increased $179.5 million. Separate Accounts assets, which represent 67% of total assets, decreased $1.2 billion to $7.0 billion. Changes in Separate Accounts assets were as follows:                                             xxxxxxxxxx        xxxxxxxxxx (dollars in millions)                      2011              2010 Investment performance                 $     (106.2 )    $      846.0 Deposits                                       32.3              45.1 Policy fees and charges                      (174.1 )          (183.4 )

Surrenders, benefits and withdrawals (907.6 ) (858.5 )

  Net change                             $   (1,155.6 )    $     (150.8 )    During 2011, 2010 and 2009, fixed contract owner deposits were $0.2 million, $0.2 million and $1.9 million, respectively. During 2011, 2010 and 2009, fixed contract owner withdrawals were $114.2 million, $114.8 million and $162.0 million, respectively.      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.

                                       15

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

 The following schedule identifies the Company's general account invested assets by type at December 31:                                                             December 31,                                                       2011         2010 Fixed maturity AFS securities Investment grade fixed maturity securities              58%          54% Below investment grade fixed maturity securities        2            3  Total fixed maturity AFS securities                    60           57  Fixed maturity trading securities                       1            1 Mortgage loans on real estate                           2            2 Policy loans                                           26           29 Cash and cash equivalents                              11           11                                                         100%         100%   

Fixed Maturity and Equity Securities

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

                                                                                  December 31, 2011                                                                                                                    % 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                                 $     284.4      $   14.4      $   (1.9 )     $    296.9             16% Industrial                                               693.7          72.4          (1.8 )          764.3            40 Utility                                                   90.8          12.2           -              103.0             6 Asset-backed securities Housing related                                           43.2           2.0          (7.2 )           38.0             2 Credit cards                                              47.8           3.6           -               51.4             3 Structured settlements                                     4.1           0.3           -                4.4             - Autos                                                     11.9           0.1           -               12.0             1 Timeshare                                                  0.4           -             -                0.4             - Commercial mortgage-backed securities - non agency backed                                            109.3           9.9          (0.2 )          119.0             6 Residential mortgage-backed securities Agency backed                                             65.6           4.1           -               69.7             4 Non agency backed                                         18.0           -            (3.5 )           14.5             1 Municipals - tax exempt                                    1.1           0.1           -                1.2             - Government and government agencies United States                                            309.1          47.9           -              357.0            19 Foreign                                                    8.9           1.4           -               10.3             1  Total fixed maturity AFS securities                    1,688.3         168.4         (14.6 )        1,842.1            99  Equity securities Banking securities                                        30.2           -            (5.2 )           25.0             1 Other financial services securities                        0.2           0.2           -                0.4             - Industrial securities                                      5.8           -            (0.1 )            5.7             -  Total equity securities                                   36.2           0.2          (5.3 )           31.1             1 

Total fixed maturity and equity securities $ 1,724.5$ 168.6 $ (19.9 ) $ 1,873.2

            100%                                             16 

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

                                                                         December 31, 2010                                                                                                             % 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                              $   266.9      $  12.7      $   (0.4 )     $   279.2             17% Industrial                                          698.7         35.1          (2.7 )         731.1            45 Utility                                             103.4          7.7          (0.5 )         110.6             7 Asset-backed securities Housing related                                      49.8          1.7          (7.6 )          43.9             3 Credit cards                                         40.0          4.8           -              44.8             3 Structured settlements                                4.6          0.3           -               4.9             - Autos                                                 5.0          0.3           -               5.3             - Student loan                                          3.0          -             -               3.0             - Timeshare                                             0.6          -             -               0.6             - Commercial mortgage-backed securities - non agency backed                                   131.3          8.5           -             139.8             9 Residential mortgage-backed securities Agency backed                                        82.9          3.1          (0.2 )          85.8             5 Non agency backed                                    21.6          -            (3.3 )          18.3             1 Municipals - tax exempt                               1.5          -             -               1.5             - Government and government agencies United States                                       146.6          4.8          (1.7 )         149.7             9 Foreign                                               9.1          0.8           -               9.9             1  Total fixed maturity AFS securities               1,565.0         79.8         (16.4 )       1,628.4           100  Equity securities Banking securities                                    9.2          -            (2.2 )           7.0             - Other financial services securities                   0.2          0.4           -               0.6             - Industrial securities                                 5.8          -            (0.4 )           5.4             -  Total equity securities                              15.2          0.4          (2.6 )          13.0             -  Total fixed maturity and equity securities                                      $ 1,580.2      $  80.2      $  (19.0 )     $ 1,641.4            100%     

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

OCI-OTTI.

   The Company regularly monitors industry sectors and individual debt securities for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4) covenant violations of the issuer, 5) high probability of bankruptcy of the issuer, 6) nationally recognized credit rating agency downgrades, and/or 7) intent or requirement to sell before a debt security's anticipated recovery. Additionally, for structured securities (asset-backed securities ("ABS"), residential mortgage-backed securities ("RMBS"), commercial mortgage-backed securities ("CMBS")), cash flow trends and underlying levels of collateral are monitored. A security is impaired if there is objective evidence that a loss event has occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows. A specific security is considered to be impaired when it is determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled. For debt securities, an OTTI must be recognized in earnings when an entity either a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. For debt securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The Company has evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss, and unless otherwise noted, does not consider these investments to be impaired at December 31, 2011.                                           17

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

Financial Services Sector

  The Company's $1.9 million of gross unrealized losses within the financial services sector has a fair value of $37.2 million. The majority of the unrealized loss in the financial services sector relates to the banking sub-sector which has $1.7 million of gross unrealized losses on securities with a fair value of $33.2 million. Companies within the Company's financial services sector are high in credit quality and, as a whole, represent a large portion of the corporate debt market.  Banking  The overall exposure to the banking sub-sector in the Company's portfolio is of high quality. The unrealized losses in the banking sub-sector primarily reflect the size of our holdings, low floating rate coupons on some securities, and credit spread widening in the sector due to the European debt crisis as well as residual impact from the U.S. financial crisis. As a whole, the sub-sector remained volatile in 2011 as financial bail-outs in Greece, Ireland, and Portugal led to fears that Italy and Spain may require similar International bail-outs. European banks hold a significant amount of Government debt on their balance sheets. Subordinated securities, specifically, have become a target for liability management exercises by some European banks as they attempt to raise core Tier 1 ratios to 9% by June 2012 as required by the European Banking Authority. Deeply subordinated securities became more volatile following successful attempts by the European Commission to impose "burden sharing" on the subordinated securities of those banks receiving significant state-aid as a result of the 2008 financial crisis. Furthermore, proposed legislation in the US and Europe could give governments wide discretion to impose "burden sharing" on both senior and subordinated bondholders in order to quickly stabilize or wind-up troubled banks. While these measures have made existing subordinated securities more volatile in the near-term, new, more stringent global legislation on bank capital and liquidity requirements is intended to reduce overall risk in the sector going forward. Furthermore, central banks appear committed to providing liquidity to the market and, as a result, asset write-downs and credit losses have diminished substantially in all but the most troubled countries.  Hybrid securities are included in the Company's banking exposure, which typically have an original maturity of more than 30 years, may be perpetual and were designed to receive enhanced equity credit from rating agencies. In addition, they have other features that may not be consistent across issues such as a cumulative or non-cumulative coupon, capital replacement language and an alternative payment mechanism. The Company's exposure to hybrid securities in an unrealized loss is all rated investment grade and there is little risk of payment interruption.  The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss and does not consider those investments to be impaired at December 31, 2011. There are no individual issuers rated below investment grade in this sub-sector which have an unrealized loss position greater than $2.5 million.  

Industrial Sector

  The Company's $1.8 million of gross unrealized losses within the industrial sector has a fair value of $19.6 million. The unrealized loss in the industrial sector primarily relates to two sub-sectors, communications and consumer cyclical. The communications sub-sector has $1.0 million of gross unrealized losses with a fair value of $11.4 million. The consumer cyclical sub-sector has $0.5 million of gross unrealized losses with a fair value of $4.9 million.  

Communications

  The communications sub-sector includes the wirelines industry where the economic uncertainty in Europe weighed on investment grade telecom providers. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss and does not consider those investments to be impaired at December 31, 2011.  

There are no individual issuers rated below investment grade in the communications sub-sector which have unrealized loss positions greater than $2.5 million.

  Consumer Cyclical  All the unrealized losses within the consumer cyclical sub-sector relate to the gaming industry. Fundamentals in the gaming industry remain weak due to high debt balances and related interest costs due to leveraged buyout activity and a material reduction in discretionary consumer spending. A weak homebuilding environment and a material drop-off in consumer confidence, coupled with concerns over unemployment resulted in weak demand. While the gaming industry has seen some positive momentum in occupancy rates and convention traffic, the rate and extent of a future recovery are uncertain at this time. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss and does not consider those investments to be impaired at December 31, 2011.                                           18

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

There are no individual issuers rated below investment grade in the consumer cyclical sub-sector which have unrealized loss positions greater than $2.5 million.

Asset-Backed Securities- housing related

  ABS - housing related securities are secured by pools of residential mortgage loans which are primarily categorized as subprime. The unrealized loss is primarily due to decreased liquidity and increased credit spreads in the market combined with significant increases in expected losses on loans within the underlying pools. Expected losses within the underlying pools are generally higher than original expectations, primarily in certain later-vintage adjustable rate mortgage loan pools, which has led to some rating downgrades in these securities. The Company's $7.2 million of gross unrealized losses within the ABS - housing related sector has a fair value of $25.8 million.  The Company does not currently invest in or originate whole loan residential mortgages. The Company categorizes mortgage backed securities 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 mortgage backed securities 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.  All ABS - housing related securities are monitored and reviewed on a monthly basis. Detailed cash flow models using the current collateral pool and capital structure on the portfolio are updated and reviewed quarterly. Model output is generated under base and several stress-case scenarios. Our internal ABS - housing related asset specialists utilize widely recognized industry modeling software to perform a loan-by-loan, bottom-up approach to modeling. Key assumptions used in the models are projected defaults, loss severities, and prepayments. Each of these key assumptions varies greatly based on the significantly diverse characteristics of the current collateral pool for each security. Loan-to-value, loan size, and borrower credit history are some of the key characteristics used to determine the level of assumption that is utilized. Defaults were estimated by identifying the loans that are in various delinquency buckets and defaulting a certain percentage of them over the near-term and long-term. Assumed defaults on delinquent loans are dependent on the specific security's collateral attributes and historical performance. Loss severity assumptions were determined by observing historical rates from broader market data while being adjusted for specific pool performance, collateral type, mortgage insurance and estimated loan modifications. Prepayments were estimated by examining historical averages of prepayment activity on the underlying collateral. Once the entire pool is modeled, the results are closely analyzed by our internal asset specialists to determine whether or not our particular tranche or holding is at risk for not collecting all contractual cash flows taking into account the seniority and other terms of the tranches held. The unrealized loss is primarily due to decreased liquidity, increased credit spreads in the market, slower prepayments, and increased expected losses on loans within the underlying pools. Expected losses within the underlying pools are generally higher than original expectations, which have led to some rating downgrades in these securities.  

There are no individual issuers rated below investment grade in the ABS - housing related sector which have unrealized loss positions greater than $2.5 million.

  Securities are impaired to the net present value of projected future cash flows where holdings are not projected to pay principal and interest in full. As the remaining unrealized losses in the ABS - housing related 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 at December 31, 2011.  

Residential Mortgage-Backed Securities

  RMBS are securitizations of underlying pools of non-commercial mortgages on real estate. The underlying residential mortgages have varying credit ratings and are pooled together and sold in tranches. The Company's RMBS includes government sponsored enterprise ("GSE") guaranteed passthroughs, whole loan passthroughs and collateralized mortgage obligations ("CMO"), as well as negative amortization mortgage-backed securities.  RMBS of the Company are monitored and reviewed on a monthly basis. Detailed cash flow models using the current collateral pool and capital structure on the portfolio are updated and reviewed quarterly. Model output is generated under base and stress-case scenarios. Our RMBS asset specialists utilize widely recognized industry modeling software to perform a loan-by-loan, bottom-up approach to modeling. Key assumptions used in the models are projected defaults, loss severities, and prepayments. Each of these key assumptions varies greatly based on the significantly diverse characteristics of the current collateral pool for each security. Loan-to-value, loan size, and borrower credit history are some of the key characteristics used to determine the level of assumption that is utilized. Defaults were estimated by identifying the loans that are in various delinquency buckets and defaulting a certain percentage of them over the near-term and long-term. Assumed defaults on delinquent loans are dependent on the specific security's collateral attributes and historical performance.                                           19  -------------------------------------------------------------------------------- Loss severity assumptions were determined by obtaining historical rates from broader market data and by adjusting those rates for vintage, specific pool performance, collateral type, mortgage insurance and estimated loan modifications. Prepayments were estimated by examining historical averages of prepayment activity on the underlying collateral. Once the entire pool is modeled, the results are closely analyzed by our asset specialists to determine whether or not our particular tranche or holding is at risk for not collecting all contractual cash flows taking into account the seniority and other terms of the tranches held. The Company impaired its particular tranche to the net present value of projected future cash flows when we expect that we will not receive all contractual cash flows on our tranches.  The Company's $3.5 million of gross unrealized losses within the RMBS sector has a fair value of $14.6 million. The unrealized loss in the sector is primarily a result of the housing downturn the United States has experienced since 2007. Even with the stabilization over the past two years, fundamentals in RMBS continue to be weak, which impacts the magnitude of the unrealized loss. Delinquencies and severities in property liquidations remain at an elevated level, while prepayments remain at historically low levels. Due to the weak fundamental situation, reduced liquidity, and the requirement for higher yields due to market uncertainty, credit spreads remain elevated across the asset class.  

There is one individual issuer rated below investment grade in the RMBS sector which has an unrealized loss position greater than $2.5 million.

                                                     Fair            Gross                              Aging of (dollars in millions)             Type            Value      Unrealized

Loss Rating* Unrealized Loss GSR MTGE LN TR 2005-AR5 Whole Loan CMO $ 12.6 $ (2.8 )

           CC            >24 months     

* Ratings based on a hierarchy of S&P, Moody's, Fitch, Internal, NAIC

   For this holding in the RMBS portfolio, the underlying collateral pool has experienced higher than expected delinquencies and losses, which is further exacerbated by the impact of declining home values on borrowers using affordability products. This has led to the underlying collateral pool having reduced cash flows in comparison to expectations at origination. Increased losses have eroded the subordination in this security, which in turn has led to a decline in the level of protection to our tranche within the collateral pool. Due to an adverse change in cash flows, the Company's holding above was last impaired to the net present value of projected future cash flows in 2010.  

There are no other individual issuers rated below investment grade in the RMBS sector which have unrealized loss positions greater than $2.5 million.

  Securities are impaired to the net present value of projected future cash flows where holdings are not projected to pay principal and interest in full. As the remaining unrealized losses in the RMBS 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 at December 31, 2011.  

Equity Securities

  The Company's $5.3 million of gross unrealized losses classified as equity have a fair value of $31.0 million. The majority of the unrealized loss relates to preferred non-convertible holdings in the banking sub-sector which have $5.2 million of gross unrealized losses with a fair value of $25.0 million. Objective evidence of impairment of an investment in an equity instrument classified as available-for-sale includes information about significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the issuer operates, and indicates that the cost of the investment in the equity instrument may not be recovered. As part of an ongoing process, the equity analysts actively monitor earnings releases, company fundamentals, new developments and industry trends for any signs of possible impairment. If an available-for-sale equity security is impaired based upon the Company's qualitative or quantitative impairment criteria, any further declines in the fair value at subsequent reporting dates are recognized as impairments. Therefore, at each reporting period, for an equity security that is determined to be impaired based upon the Company's impairment criteria, an impairment is recognized for the difference between the fair value and the original cost basis, less any previously recognized impairments.  These factors typically require significant management judgment. The impairment review process has resulted in no other than temporary impairment charges for the year ended December 31, 2011 for the Company.                                           20

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

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

                                                   December 31, 2011                     December 31, 2010                                                             Estimated                             Estimated                                          Amortized             Fair            Amortized             Fair (dollars in millions)                       Cost              Value               Cost              Value AAA                                     $       460.0      $       519.7      $       400.5      $       415.5 AA                                              218.5              237.6              190.0              199.2 A                                               618.4              673.1              619.6              646.0 BBB                                             325.4              353.4              274.4              294.8 Below investment grade                           66.0               58.3               80.5               72.9 

Total fixed maturity AFS securities $ 1,688.3$ 1,842.1

  $     1,565.0      $     1,628.4   Investment grade                                  96%                97%                95%                96% Below investment grade                             4%                 3%                 5%                 4%   The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to S&P's BBB- or higher (or similar rating agency). At December 31, 2011 and 2010, approximately $61.8 million (or 3%) and $55.8 million (or 3%), respectively, of fixed maturity securities were rated BBB-, which is the lowest investment grade rating given by S&P. Below investment grade securities are speculative and are subject to significantly greater risks related to the creditworthiness of the issuers and the liquidity of the market for such securities. The Company closely monitors such investments.  Unrealized gains (losses) incurred during 2011 and 2010 were primarily due to price fluctuations resulting from changes in interest rates and credit spreads. If the Company has the intent to sell or it is more likely than not that the Company will be required to sell these securities prior to the anticipated recovery of the amortized cost, securities are written down to fair value. If cash flow models indicate a credit event will impact future cash flows, the security is impaired to discounted cash flows. As the remaining unrealized losses in the portfolio relate to holdings where the Company expects to receive full principal and interest, the Company does not consider the underlying investments to be impaired.  

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

                                                                       December 31, 2011                                                                                           Gross                                                         Estimated                       Unrealized                                                           Fair          Amortized       Losses and (dollars in millions)                                     Value         Cost/Cost        OTTI (1) Investment grade AFS securities Less than or equal to six months Corporate securities Financial services                                      $     33.2      $     35.1      $      (1.9 ) Industrial                                                    11.7            12.6             (0.9 ) Asset-backed securities Housing related                                               14.5            14.8             (0.3 ) Credit cards                                                  14.0            14.0              - Autos                                                          4.6             4.6              -

Commercial mortgage-backed securities - non agency backed

                                                         8.3             8.5             (0.2 ) Residential mortgage-backed securities - non agency backed                                                         0.1             0.1              - Equity securities Banking securities                                            13.6            15.1             (1.5 ) Industrial securities                                          5.7             5.8             (0.1 )  Total fixed maturity and equity securities                   105.7           110.6             (4.9 )   Greater than six months but less than or equal to one year Equity securities - banking securities                         7.0             8.5             (1.5 )  Total fixed maturity and equity securities              $      7.0      $      8.5      $      (1.5 )                                             21 

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

                                                                       December 31, 2011                                                                                               Gross                                                                                             Unrealized                                                            Estimated        Amortized       Losses and (dollars in millions)                                     Fair Value        Cost/Cost        OTTI (1) Investment grade AFS securities (continued) Greater than one year Corporate securities Financial services                                        $        4.0      $      4.0      $       - Industrial                                                         0.1             0.1              - Utility                                                            2.6             2.6              -  Total fixed maturity and equity securities                         6.7             6.7              -   Total of all investment grade AFS securities Corporate securities Financial services                                                37.2            39.1             (1.9 ) Industrial                                                        11.8            12.7             (0.9 ) Utility                                                            2.6             2.6              - Asset-backed securities Housing related                                                   14.5            14.8             (0.3 ) Credit cards                                                      14.0            14.0              - Autos                                                              4.6             4.6              -

Commercial mortgage-backed securities - non agency backed

                                                             8.3             8.5             (0.2 ) Residential mortgage-backed securities - non agency backed                                                             0.1             0.1              - Equity securities Banking securities                                                20.6            23.6             (3.0 ) Industrial securities                                              5.7             5.8             (0.1 )  Total fixed maturity and equity securities                $      119.4      

$ 125.8 $ (6.4 )

   Total number of securities in a continuous unrealized loss position                                                                                        53                                                                         December 31, 2010                                                                                               Gross                                                            Estimated                        Unrealized                                                              Fair           Amortized       Losses and (dollars in millions)                                        Value          Cost/Cost        OTTI (1) Investment grade AFS securities Less than or equal to six months Corporate securities Financial services                                        $        4.4      $      4.5      $      (0.1 ) Industrial                                                        53.9            56.1             (2.2 ) Utility                                                            6.7             7.0             (0.3 ) Asset-backed securities Housing related                                                    2.8             2.8              - Credit cards                                                       7.5             7.5              -

Commercial mortgage-backed securities - non agency backed

                                                             1.0             1.0              - Residential mortgage-backed securities - agency backed             6.5             6.7             (0.2 ) Government and government agencies - United States                 0.7             0.7              - Equity securities - banking securities                             2.5             2.6             (0.1 )  Total fixed maturity and equity securities                        86.0            88.9             (2.9 )   

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

                                     0.2             0.2              -  Total fixed maturity and equity securities                $        0.2      $      0.2      $       -                                             22 

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

                                                                          December 31, 2010                                                                                                  Gross                                                                                                Unrealized                                                               Estimated        Amortized       Losses and (dollars in millions)                                        Fair Value        Cost/Cost        OTTI (1) Investment grade AFS securities (continued) Greater than one year Corporate securities Financial services                                           $        8.4      $      8.7      $      (0.3 ) Utility                                                               2.9             2.9              - Asset-backed securities - housing related                             2.5             2.5              - Government and government agencies - United States                   30.8            32.5             (1.7 ) Equity securities - industrial securities                             5.4             5.8             (0.4 )  Total fixed maturity and equity securities                           50.0            52.4             (2.4 )   Total of all investment grade AFS securities Corporate securities Financial services                                                   12.8            13.2             (0.4 ) Industrial                                                           53.9            56.1             (2.2 ) Utility                                                               9.8            10.1             (0.3 ) Asset-backed securities Housing related                                                       5.3             5.3              - Credit cards                                                          7.5             7.5              - Commercial mortgage-backed securities - non agency backed             1.0             1.0              - Residential mortgage-backed securities - agency backed                6.5             6.7             (0.2 ) Government and government agencies - United States                   31.5            33.2             (1.7 ) Equity securities Banking securities                                                    2.5             2.6             (0.1 ) Industrial securities                                                 5.4             5.8             (0.4 )  Total fixed maturity and equity securities                   $      136.2   

$ 141.5 $ (5.3 )

Total number of securities in a continuous unrealized loss position

                            58    

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

    OCI-OTTI.                                            23 

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

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

                                                                       December 31, 2011                                                                                          Gross                                                         Estimated                      Unrealized                                                            Fair        Amortized       Losses and (dollars in millions)                                     Value        Cost/Cost        OTTI (1) Below investment grade AFS securities Less than or equal to six months Corporate securities - industrial                        $     2.9      $   

3.3 $ (0.4 )

  Total fixed maturity and equity securities                     2.9            3.3             (0.4 )  Greater than one year Corporate securities - industrial                              4.9            5.4             (0.5 ) Asset-backed securities - housing related                     11.3           18.2             (6.9 ) 

Residential mortgage-backed securities - non agency backed

                                                        14.5           18.0             (3.5 ) Equity securities - banking securities                         4.4            6.6             (2.2 )  Total fixed maturity and equity securities                    35.1           48.2            (13.1 )   

Total of all below investment grade AFS securities Corporate securities - industrial

                              7.8            8.7             (0.9 ) Asset-backed securities - housing related                     11.3           18.2             (6.9 ) 

Residential mortgage-backed securities - non agency backed

                                                        14.5           18.0             (3.5 ) Equity securities - banking securities                         4.4            6.6             (2.2 )  Total fixed maturity and equity securities               $    38.0      $   

51.5 $ (13.5 )

   Total number of securities in a continuous unrealized loss position                                                                                   15                                                                              December 31, 2010                                                                                               Gross                                                              Estimated                      Unrealized                                                                 Fair        Amortized       Losses and (dollars in millions)                                          Value        Cost/Cost        OTTI (1) Below investment grade AFS securities Less than or equal to six months Corporate securities - industrial                             $     4.7      $     5.1      $      (0.4 ) Residential mortgage-backed securities - non agency backed          2.8            3.3             (0.5 )  Total fixed maturity and equity securities                          7.5            8.4             (0.9 )   

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

                                   5.0            5.2             (0.2 )  Total fixed maturity and equity securities                          5.0            5.2             (0.2 )   Greater than one year Corporate securities - utility                                      0.3            0.5             (0.2 ) Asset-backed securities - housing related                          12.5           20.0             (7.5 ) 

Residential mortgage-backed securities - non agency backed 15.5

       18.3             (2.8 ) Equity securities - banking securities                              4.5            6.6             (2.1 )  Total fixed maturity and equity securities                    $    32.8      $    45.4      $     (12.6 )                                             24 

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

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

Residential mortgage-backed securities - non agency backed 18.3

         21.6             (3.3 ) Equity securities - banking securities                               4.5             6.6             (2.1 )  Total fixed maturity and equity securities                    $     45.3    

$ 59.0 $ (13.7 )

   Total number of securities in a continuous unrealized loss position                                                                                               16    

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

OCI-OTTI.

   Gross unrealized losses and OTTI on below investment grade AFS securities represented 68% and 71% of total gross unrealized losses and OTTI on all AFS securities at December 31, 2011 and 2010, respectively. Generally, below investment grade securities are more likely than investment grade securities to develop credit concerns. The ratios of estimated fair value to amortized cost reflected in the table below were not necessarily indicative of the market value to amortized cost relationships for the securities throughout the entire time that the securities have been in an unrealized loss position nor are they necessarily indicative of these ratios subsequent to December 31, 2011.  

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

                                                                             December 31, 2011                                          Ratio of                                      Amortized Cost to                                            Gross                                          Estimated          Estimated                           Unrealized                                            Fair               Fair            Amortized         Losses and (dollars in millions)                      Value              Value           Cost/Cost          OTTI (1) Less than or equal to six months        70% to 100%         $      2.9        $      3.3        $      (0.4 )                                                                     2.9               3.3               (0.4 )   Greater than one year                                         70% to 100%               20.8              25.2               (4.4 )                                         40% to 70%                14.3              23.0               (8.7 )                                                                    35.1              48.2              (13.1 )  Total                                                       $     38.0        $     51.5        $     (13.5 )                                             25 

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

                                                                          December 31, 2010                                          Ratio of                                      Amortized Cost to                                            Gross                                          Estimated                                              Unrealized                                            Fair             Estimated         Amortized         Losses and (dollars in millions)                      Value           Fair Value         Cost/Cost          OTTI (1) Less than or equal to six months        70% to 100%         $      7.5        $      8.4        $      (0.9 )                                                                     7.5               8.4               (0.9 )   Greater than six months but less than or equal to one year               70% to 100%                5.0               5.2               (0.2 )                                                                     5.0               5.2               (0.2 )  Greater than one year                                         70% to 100%               17.3              20.5               (3.2 )                                         40% to 70%                15.5              24.9               (9.4 )                                                                    32.8              45.4              (12.6 )  Total                                                       $     45.3        $     59.0        $     (13.7 )     

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

OCI-OTTI.

   The assets depressed over 20% as well as over 40% and greater than one year at December 31, 2011 are related to RMBS, ABS backed by subprime mortgages and preferred stock (ABN AMRO) with exposure to the banking sector. With respect to RMBS, this holding is below investment grade and has been impaired to discounted cash flows with the remaining unrealized loss being reflected in OCI-OTTI. In regards to the ABS backed by subprime mortgages, as there has been no impact to expected future cash flows, the Company does not consider the underlying investments to be impaired at December 31, 2011. The drop in price for the ABN AMRO preferred stock was primarily due to high illiquidity in the markets in general due to the European debt crisis.  During 2011, 2010 and 2009, there was $0.6 million, $1.7 million and $1.7 million, respectively, of investment income on fixed maturity trading securities recorded in net investment income in the Statements of Income. During 2011 and 2010, there was $0.4 million and ($1.5) million, respectively, of income (loss) recognized from the change in the fair value on fixed maturity trading securities recorded in net investment income in the Statements of Income. The Company recognized losses of $0.1 million during 2011 on the conversion of fixed maturity trading securities to preferred stock. There were no conversions of fixed maturity trading securities to preferred stock in 2010 or 2009.  

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.                                           26 

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

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

                                          December 31, 2011                                                               Net                                          Estimated         Unrealized                          Amortized         Fair          Gains (Losses) (dollars in millions)      Cost            Value            and OTTI First lien - fixed AAA                      $     17.8      $     17.9      $           0.1 Below BBB                      18.2            11.3                 (6.9 ) Second lien (a) Below BBB                       3.3             5.0                  1.7  Total                    $     39.3      $     34.2      $          (5.1 )                                          December 31, 2010                                                               Net                                          Estimated         Unrealized                          Amortized         Fair          Gains (Losses) (dollars in millions)      Cost            Value            and OTTI First lien - fixed AAA                      $     20.6      $     20.9      $           0.3 Below BBB                      20.0            12.5                 (7.5 ) Second lien (a) Below BBB                       5.1             6.4                  1.3  Total                    $     45.7      $     39.8      $          (5.9 )                                                         December 31, 2011                                             Estimated Fair Value by Vintage (dollars in millions)   2004&Prior         2005           2006           2007           Total First lien - fixed AAA                      $     12.5      $     5.4      $     -        $     -        $     17.9 Below BBB                       -              -              2.9            8.4            11.3 Second lien (a) Below BBB                       -              -              5.0            -               5.0  Total                    $     12.5      $     5.4      $     7.9      $     8.4      $     34.2                                                      December 31, 2010                                             Estimated Fair Value by Vintage (dollars in millions)   2004&Prior         2005           2006           2007           Total First lien - fixed AAA                      $     15.4      $     5.5      $     -        $     -        $     20.9 Below BBB                       -              -              3.4            9.1            12.5 Second lien (a) Below BBB                       -              -              6.4            -               6.4  Total                    $     15.4      $     5.5      $     9.8      $     9.1      $     39.8     

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

    borrowers.   OTTI  For the year ended December 31, 2011, the Company's impairment losses were $1.2 million, with no associated VOBA amortization. During 2011, the Company impaired its holdings of 2007 vintage subprime mortgage ABS for $0.7 million due to an adverse change in cash flows, a 2006 vintage subprime mortgage ABS for $0.1 million, a corporate bond for $0.3 million due to adverse changes in cash flows and a corporate non-convertible security for $0.1 million due to a pre-packaged bankruptcy.                                           27 

-------------------------------------------------------------------------------- For the year ended December 31, 2010, the Company's impairment losses were $0.6 million, net of associated VOBA amortization. The gross impairment losses recognized in the Statements of Income were primarily driven by the impairment of a 2005 vintage RMBS for  and a 2007 vintage ABS subprime mortgage for $0.3 million due to adverse changes in cash flows. A corporate bond was also impaired for $0.4 million due to the intent to sell or being more likely than not required to sell. In addition, the Company impaired its holding of a 2007 vintage subprime mortgage ABS for $0.4 million.  The Company adopted revised guidance for the recognition and presentation of OTTI effective at June 30, 2009. As permitted by the guidance, the Company recorded an increase of $3.5 million to the opening balance of retained earnings with a corresponding decrease to accumulated OCI on the Statement of Stockholder's Equity to reclassify the non credit portion of previously other-than-temporarily impaired AFS securities held at April 1, 2009.  The following summarizes the components for this cumulative effect adjustment:                                                                               Net                 Total                                                    Unrealized           Unrealized           Cumulative                                                       OTTI               Loss on               Effect                                                      on AFS                AFS               Adjustment (dollars in millions)                              Securities           Securities             in OCI 

Increase in amortized cost of AFS securities $ 0.3 $

   12.3          $      12.6 Change in VOBA                                             -                   (7.2 )               (7.2 ) Income tax                                                (0.1 )               (1.8 )               (1.9 )  Net cumulative effect adjustment                   $       0.2          $   

3.3 $ 3.5

    The cumulative effect adjustment was calculated for all AFS securities held at April 1, 2009, for which an OTTI was previously recognized, but at April 1, 2009, the Company did not intend to sell the security and it was not more likely than not that the Company would be required to sell the security before recovery of its amortized cost, by comparing the present value of cash flows expected to be received at April 1, 2009, to the amortized cost basis of the AFS securities. The discount rate used to calculate the present value of the cash flows expected to be collected was the rate for each respective AFS security in effect before recognizing any OTTI. In addition, because the carrying amount of VOBA is adjusted for the effects of realized and unrealized gains and losses on AFS securities, the Company recognized a true-up to the VOBA balances for this cumulative effect adjustment.  

Mortgage Loans on Real Estate

The following summarizes key information on mortgage loans on real estate:

                                                              December 31,                                                    2011                    2010 (dollars in millions)                       Amount         %        Amount         % Property Type Office                                       $ 36.0         64%      $ 37.6         60% Retail                                          8.7        16          10.8        17 Industrial                                      7.9        14          10.9        17 Apartment                                       3.1         6           3.6         6 

Total mortgage loans by property type 55.7 100 62.9

      100   Geographic Region Middle Atlantic                                16.0        28          16.1        26 South Atlantic                                 11.6        21          12.4        20 New England                                    11.3        20          12.2        19 Pacific                                         8.4        15          10.1        16 East North Central                              5.3        10           5.9         9 West North Central                              3.1         6           3.6         6 Mountain                                        -           -           2.6         4 

Total mortgage loans by geographic region $ 55.7 100% $ 62.9

       100%                                             28 

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

                                                             December 31,                                                       2011                   2010       (dollars in millions)                    Amount        %        Amount        %       State Exposure       Pennsylvania                             $  13.1        23%     $  13.1        21%       New Hampshire                               11.3       20          12.2       19       Virginia                                     7.9       14           8.6       14       Ohio                                         5.3       10           5.9        9       California                                   5.0        9           5.2        8       Delaware                                     3.7        7           3.8        6       Washington                                   3.4        6           4.9        8       South Dakota                                 3.1        6           3.6        6       New Jersey                                   2.9        5           3.0        5       Arizona                                      -          -           2.6        4        Total mortgage loans by state exposure   $  55.7       100%     $  62.9       100%    The fair value for mortgage loans on real estate is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and/or similar remaining maturities. The estimated fair value of the mortgage loans on commercial real estate at December 31, 2011 and 2010 was $61.8 million and $66.7 million, respectively.  All mortgage loans that are impaired have an established allowance for loss. Changing economic conditions impact our valuation of mortgage loans. Changing vacancies and rents are incorporated into the discounted cash flow analysis that the Company performs for monitored loans and may contribute to the establishment of (or an increase or decrease in) an allowance for losses. In addition, the Company continues to monitor the entire commercial mortgage loan portfolio to identify risk. Areas of emphasis are properties that have deteriorating credits or have experienced debt coverage reduction. Where warranted, the Company has established or increased loss reserves based upon this analysis. There were no impaired mortgage loans at December 31, 2011. There was one impaired mortgage loan at 2010 for $0.6 million. At December 31, 2011 and 2010, there were no commercial mortgage loans that were two or more payments delinquent. See Note 3 to the Financial Statements for further discussion.      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 S&P. The Dow, NASDAQ and S&P ended 2011 with increases (decreases) of 6%, (2%) and less than (0.1%), respectively, from 2010. The Dow, NASDAQ and S&P ended 2010 with increases of 11%, 17% and 13%, respectively, from 2009.  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 December 31, 2011. Since asset-based fees collected on in force variable contracts represent a significant source of revenue, the Company's financial condition will be impacted by fluctuations in investment performance of equity-based Separate Accounts assets. During 2011, average variable account balances decreased $0.4 billion (or 4%) to $7.7 billion as compared to the same period in 2010.  Fluctuations in the U.S. equity market also directly impact the Company's exposure to guaranteed benefit provisions contained in the variable contracts it manufactures. Minimal or negative investment performance generally results in greater exposure to guarantee provisions. Prolonged periods of minimal or negative investment performance will result in greater guaranteed benefit costs as compared to assumptions. If the Company determines that it needs to increase its estimated long term cost of guaranteed benefits, it will result in establishing greater guaranteed benefit liabilities as compared to current practice.                                           29 

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

Medium Term Interest Rates, Corporate Credit and Credit Spreads

  Changes in interest rates affect the value of investments, primarily fixed maturity securities and preferred equity securities, as well as interest-sensitive liabilities. Changes in interest rates have an inverse relationship to the value of investments and interest-sensitive liabilities. Also, since the Company has certain fixed products that contain guaranteed minimum crediting rates, decreases in interest rates can decrease the amount of interest spread earned.  Changes in the corporate credit environment directly impact the value of the Company's investments, primarily fixed maturity securities. The Company primarily invests in investment-grade corporate debt to support its fixed rate product liabilities.  Credit spreads represent the credit risk premiums required by market participants for a given credit quality, i.e., the additional yield that a debt instrument issued by a AA-rated entity must produce over a risk-free alternative (e.g., U.S. Treasury instruments). Changes in credit spreads have an inverse relationship to the value of interest sensitive investments.  

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

                                                            2011            2010            2009 Average medium term interest rate yield (a)              0.40%           0.97%           1.43% Increase (decrease) in medium term interest rates (in basis points)                                          (57 )           (46 )            54 Credit spreads (in basis points) (b)                       285             175             200 Expanding (contracting) of credit spreads (in basis points)                                              110             

(25 ) (535 )

  Increase (decrease) on market valuations: (in millions) Available-for-sale investment securities               $  87.5         $  78.6           132.7 Interest-sensitive policyholder liabilities               (3.2 )          (1.7 )           3.7  Net change on market valuations                        $  84.3         $  76.9         $ 136.4     

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

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

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

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

maturities.

   At December 31, 2011 and 2010, the Company had 12,939 and 14,140 life insurance and annuity contracts inforce with interest rate guarantees, respectively. The estimated average rate of interest credited on behalf of contract owners was 3.74% and 3.76% during 2011 and 2010, respectively. Total invested assets supporting these liabilities with interest rate guarantees had an estimated average effective yield of 5.2% and 4.5% during 2011 and 2010, respectively.     

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 December 31, 2011 and 2010, the Company's assets included $2.3 billion and $1.9 billion, respectively, of cash, short-term investments and investment grade publicly traded AFS securities that could be liquidated if funds were required.  

Capital Resources

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

                                       30

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

Statutory Principles and Risk-Based Capital</org> ("RBC")

  In order to continue to issue annuity products, the Company must meet or exceed the statutory capital and surplus requirements of the insurance departments of the states in which it conducts business. Statutory accounting principles differ from GAAP in two major respects. First, under statutory accounting principles, the acquisition costs of new business are charged to expense, while under GAAP they are amortized over a period of time. Second, under statutory accounting principles, the required additions to statutory reserves are calculated under different rules than under GAAP.  The National Association of Insurance Commissioners utilizes the RBC adequacy monitoring system. The RBC calculates the amount of adjusted capital that a life insurance company should have based upon that company's risk profile. At December 31, 2011 and 2010, based on the RBC formula, the Company's total adjusted capital levels were well in excess of the minimum amount of capital required to avoid regulatory action.  

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  

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

The following table summarizes the Company's ratings at March 29, 2012:

   S&P         AA-   (4th out of 21) A.M. Best   A +   (2nd out of 16) Fitch       AA-   (4th out of 19)   A downgrade of our financial strength rating could affect our competitive position in the insurance industry as customers may select companies with higher financial strength ratings. These ratings are not a recommendation to buy or hold any of the Company's securities and they may be revised or revoked at any time at the sole discretion of the rating organization.      

Commitments and Contingencies

    The following table summarizes the Company's policyholders' obligations at December 31, 2011:                            Less Than One       One To Three       Four To Five      More Than Five (dollars in millions)        Year              Years              Years               Years               Total

General accounts (a) $ 213.8 $ 388.5 $ 350.1 $ 2,121.0 $ 3,073.4 Separate Accounts (a)

            846.6            1,529.9            1,406.8             5,565.9             9,349.2                           $     1,060.4      $     1,918.4      $     1,756.9      $      7,686.9      $     12,422.6     

(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.                                            31 

-------------------------------------------------------------------------------- The Company has utilized public information to estimate the future assessments it will incur as a result of life insurance company insolvencies. At December 31, 2011 and 2010, the Company's estimated liability for future guaranty fund assessments was $0.6 million and $5.1 million, respectively. In addition, the Company has a receivable for future premium tax deductions of $3.8 million and $4.0 million at December 31, 2011 and 2010, 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   

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

• the charges imposed on variable annuity and variable life insurance

     contracts, and    

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

contract owner deposits less interest credited to contract owners, commonly

known as interest spread

   The costs associated with acquiring contract owner deposits (DAC) are amortized based on the estimated gross profits for a group of contracts, as noted in the Critical Accounting Policies section above. 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.  

2011 compared to 2010

  For the years ended December 31, 2011 and 2010, the Company recorded net income of $18.7 million and $137.9 million, respectively. The decrease in income during 2011 as compared to 2010 was primarily due to higher policy benefits and a lower income tax benefit, partially offset by a decrease in VOBA and DAC amortization, a decrease in insurance expenses and taxes and lower net realized investment losses.  Policy charge revenue decreased $2.4 million to $202.2 million during 2011, as compared to $204.6 million in 2010. The following table provides the changes in policy charge revenue by type for each respective period:                                                                                         $00,000               $00,000               $00,000 (dollars in millions)                                                               2011                  2010                 Change Asset-based policy charge revenue                                                $     114.4           $     122.7           $      (8.3 )  (a) Guaranteed benefit based policy charge revenue                                          26.5                  26.3                   0.2 Non-asset based policy charge revenue                                                   61.3                  55.6                   5.7    (b)  Total policy charge revenue                                                      $     202.2           $     204.6           $      (2.4 )   

(a) Asset-based policy charge revenue for 2011 was negatively impacted by the decrease in average variable account balances. (b) The increase in non-asset based policy charge revenue is primarily due to the recapture of an indemnity reinsurance agreement in 2011.

  Net realized investment losses decreased $12.5 million to $11.9 million during 2011 as compared to $24.4 million in 2010. The following table provides the changes in net realized investment gains (losses) by type:  (dollars in millions)                                                               2011                  2010                 Change Credit related losses                                                            $      (1.2 )         $      (1.4 )         $       0.2    (a) Interest related gains                                                                   9.0                   6.8                   2.2 Equity related losses                                                                  (18.6 )               (29.1 )                10.5    (b) Associated amortization of VOBA                                                         (1.1 )                (0.7 )                (0.4 )  Total net realized investment losses                                        

$ (11.9 ) $ (24.4 ) $ 12.5

Write-downs for OTTI included in net realized gains (losses) on investments

     $      (1.2 )         $      (6.9 )         $       5.7    (a)    

(a) The change in credit related losses as compared to 2010 is primarily due to a

decrease in OTTI impairments.

(b) The change in equity related gains (losses) principally relates to the

decrease in net losses on futures contracts during 2011 as compared to 2010.

Short futures contracts fluctuate relative to the volatility in the S&P.

                                           32 

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

Policy benefits increased $150.7 million during 2011 as compared to 2010. The following table provides the changes in policy benefits by type:

    (dollars in millions)                              2011              2010   

Change

 Annuity benefit unlocking                        $    70.0         $   (41.0 )       $   111.0    (a) Annuity benefit expense                               81.7              41.2              40.5    (b) Accretion of deferred sales inducements               (3.0 )            (0.9 )            (2.1 ) Life insurance mortality expense                      32.6              31.3               1.3  Total policy benefits                            $   181.3         $    30.6         $   150.7     

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

discussion of annuity benefit unlocking.

(b) The increase in annuity benefit expense was primarily due to the reduction in

risk neutral rates and lower equity market performance which resulted in an

increase in guaranteed benefits in 2011 as compared to 2010.

   Accretion of DAC was $13.1 million and $3.7 million for 2011 and 2010, respectively, which included favorable (unfavorable) unlocking of ($3.0) million and $1.1 million, respectively. The increase in DAC in 2011 as compared to 2010 was principally driven by unfavorable equity markets and the long-term interest rate assumption change resulting in an increase in accretion and unfavorable unlocking.  Amortization of VOBA was $12.2 million and $20.4 million for the years ended December 31, 2011 and 2010, respectively, which included favorable (unfavorable) unlocking of ($11.6) million and $24.6 million. 2011 was impacted by unfavorable equity markets and long term interest rate assumption changes during the third quarter resulting in lower amortization and unfavorable unlocking as compared to 2010.  

Insurance expenses and taxes decreased $4.8 million (or 9%) in 2011 as compared to 2010. The following table provides the changes in insurance expenses and taxes for each respective period:

   (dollars in millions)                  2011          2010        Change Commissions                           $   41.1      $   36.5     $   4.6 General insurance expense                  6.8          17.0       (10.2 )   (a) Taxes, licenses, and fees                  1.2           0.4         0.8 

Total insurance expenses and taxes $ 49.1$ 53.9 $ (4.8 )

(a) The decline in general insurance expenses is primarily due to a reduction in

the future guaranty fund assessment liability and lower transition and system

conversion related expenses in 2011 as compared to 2010.

2010 compared to 2009

  For the years ended December 31, 2010 and 2009, the Company recorded net income (loss) of $137.9 million and ($203.1) million, respectively. The increase in income during 2010 as compared to 2009 was primarily due to the 2009 VOBA impairment, the change in the valuation allowance on deferred tax assets, unfavorable 2009 VOBA unlocking, a decrease in net realized investment losses and a decrease in insurance expenses and taxes.                                           33  -------------------------------------------------------------------------------- Policy charge revenue increased $0.7 million to $204.6 million during 2010, as compared to $203.9 million in 2009. The following table provides the changes in policy charge revenue by type for each respective period:    (dollars in millions)                                 2010             2009 

Change

 Asset-based policy charge revenue                   $   122.7        $   116.2        $  6.5    (a) Guaranteed benefit based policy charge revenue           26.3             28.2          (1.9 ) Non-asset based policy charge revenue                    55.6             59.5          (3.9 )  (b)  Total policy charge revenue                         $   204.6        $   203.9        $  0.7     

(a) Asset-based policy charge revenue for 2010 was positively impacted by the

increase in average variable account balances.

(b) The decrease in non-asset based policy charge revenue is primarily due to the

    run-off of the life business as well as less paid up additions.    

Net realized investment losses decreased $33.9 million to $24.4 million during 2010 as compared to $58.3 million in 2009. The following table provides the changes in net realized investment gains (losses) by type:

  (dollars in millions)                                  2010                  2009                  Change Credit related losses                                $     (1.4 )          $     (9.4 )          $       8.0    (a) Interest related gains (losses)                             6.8                  (1.7 )                  8.5    (a) Equity related losses                                     (29.1 )               (50.3 )                 21.2    (b) Associated amortization of VOBA                            (0.7 )                 3.1                   (3.8 )  Total net realized investment losses                 $    (24.4 )          

$ (58.3 ) $ 33.9

   Write-downs for OTTI included in net realized investment gains (losses)                            $     (6.9 )          $    (14.2 )          $       7.3    (a)    

(a) The change in credit related losses as compared to 2009 is primarily due to a

decrease in OTTI impairments along with the change in accounting principle

for OTTI impairments in 2009. See Note 3 to the Financial Statements for

further discussion.

(b) The change in equity related gains (losses) principally relates to the

decrease in the net losses on futures contracts during 2010. Short futures

    contracts fluctuate relative to the volatility in the S&P 500.    

Policy benefits decreased $20.5 million during 2010 as compared to 2009. The following table provides the changes in policy benefits by type:

  (dollars in millions)                                   2010                       2009                Change Annuity benefit unlocking                          $         (41.0 )         $            10.4         $ (51.4 )  (a) Annuity benefit expense                                       41.2                         9.1            32.1    (b) Amortization (accretion) of deferred sales inducements                                                   (0.9 )                       2.5            (3.4 ) Life insurance mortality expense                              31.3                        29.1             2.2  Total policy benefits                              $          30.6            $           51.1         $ (20.5 )     

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

discussion of annuity benefit unlocking.

(b) The increase in annuity benefit expense was primarily driven by the relative

change in the minimum guarantee reserves year over year and by risk neutral

rate fluctuations in 2010 as compared to 2009.

   Reinsurance premiums ceded increased $7.1 million during 2010 as compared to 2009 principally due to refined calculations related to a system conversion. At December 31, 2010, the Company has recaptured the majority of its life reinsurance which had started in second quarter of 2008.  Amortization (accretion) of DAC was ($3.7) million and $10.6 million for 2010 and 2009, respectively. For 2010 and 2009, there was a favorable (unfavorable) impact to pre-tax income related to DAC unlocking of $1.1 million and ($2.6) million, respectively. The decrease in amortization during 2010 as compared to 2009 was primarily due to the decline in the guaranteed benefit reserves.  Amortization of VOBA was $20.4 million for the year ended December 31, 2010, which included favorable unlocking of $24.6 million. Amortization and impairment of VOBA was $155.5 million for the year ended December 31, 2009, which included                                           34 

-------------------------------------------------------------------------------- unfavorable unlocking of $79.4 million. Favorable unlocking during 2010 was primarily driven by the favorable equity market in the latter half of the year, while in 2009 poor equity market performance during the first quarter resulted in unfavorable unlocking. In addition, during 2009, an impairment charge of $63.9 million was recorded as estimated future gross profits were less than the unamortized balance at March 31, 2009.  

Insurance expenses and taxes decreased $21.7 million (or 29%) in 2010 as compared to 2009. The following table provides the changes in insurance expenses and taxes for each respective period:

        (dollars in millions)                  2010          2009         Change      Commissions                           $   36.5      $   38.2      $  (1.7 )      General insurance expense                 17.0          36.7        

(19.7 ) (a)

      Taxes, licenses, and fees                  0.4           0.7         

(0.3 )

Total insurance expenses and taxes $ 53.9$ 75.6 $ (21.7 )

(a) The decrease in general insurance expenses is primarily due to lower

transition and system conversion related expenses in 2010 as compared to

    2009.       Segment Information    The Company's operating results are categorized into two business 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 described in the summary of significant accounting policies. All revenue and expense transactions are recorded at the contract level and accumulated at the business segment level for review by management.  Select financial information by segment for the years ended December 31 is as follows:                                                                             Life (dollars in millions)                                Annuity          Insurance           Total 2011 Net revenues (a)                                     $   167.8         $    76.5         $   244.3 Amortization (accretion) of VOBA                          (5.0 )            17.2              12.2 Policy benefits (net of reinsurance recoveries)          148.6              32.7             181.3 Federal income tax expense (benefit)                     (16.1 )             1.1             (15.0 ) Net income                                                 5.3              13.4              18.7  2010 Net revenues (a)                                     $   152.6         $    76.2         $   228.8 Amortization of VOBA                                      17.4               3.0              20.4 Policy benefits (net of reinsurance recoveries)           (0.6 )            31.3              30.6 Federal income tax expense (benefit)                     (25.0 )             0.3             (24.7 ) Net income                                               111.6              26.3             137.9  2009 Net revenues (a)                                     $   101.4         $    87.6         $   189.0 Amortization and impairment of VOBA                      137.2              18.3             155.5 Policy benefits (net of reinsurance recoveries)           22.0              29.1              51.1 Federal income tax expense                                34.5              57.5              91.9 Net loss                                                (175.0 )           (28.1 )          (203.1 )    

(a) Management considers interest credited to policyholder liabilities in

evaluating net revenues.

The Company is not dependent upon any single customer, and no single customer accounted for more than 10% of its revenues during 2011, 2010, or 2009.

                                       35

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

Wordcount:

15692