UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

Commission File No. 33-26322

TRANSAMERICA ADVISORS LIFE

INSURANCE COMPANY

(Exact name of Registrant as specified in its charter)

Arkansas

91-1325756

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

4333 Edgewood Road, NE

Cedar Rapids, Iowa 52499-0001

(Address of Principal Executive Offices)

(800) 346-3677

(Registrant’s telephone no. including area code)

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

Former name, former address and former fiscal year, if changed since last report: Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common 250,000

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) and (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

TABLE OF CONTENTS

PART I. Financial Information	2
Item 1. Financial Statements	2
BALANCE SHEETS	2
STATEMENTS OF INCOME (LOSS)	4
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	5
STATEMENTS OF STOCKHOLDER’S EQUITY	6
STATEMENTS OF CASH FLOWS	7
NOTES TO FINANCIAL STATEMENTS (unaudited)	9
Note 1. Summary of Significant Accounting Policies	9
Note 2. Fair Value of Financial Instruments	12
Note 3. Investments	20
Note 4. Value of Business Acquired, Deferred Policy Acquisition Costs and Deferred Sales Inducements	32
Note 5. Variable Contracts Containing Guaranteed Benefits	33
Note 6. Income Taxes	34
Note 7. Accumulated Other Comprehensive Income	36
Note 8. Stockholder’s Equity and Statutory Accounting Principles	38
Note 9. Reinsurance	39
Note 10. Related Party Transactions	39
Note 11. Commitments and Contingencies	41
Note 12. Segment Information	42
Item 2. Management’s Narrative Analysis of Results of Operations	44
Item 3. Quantitative and Qualitative Disclosures About Market Risk	61
Item 4. Controls and Procedures	61
PART II Other Information	61
Item 1. Legal Proceedings	61
Item 1A. Risk Factors	61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3. Defaults upon Senior Securities	62
Item 4. Mine Safety Disclosures	62
Item 5. Other Information	62
Item 6. Exhibits	62
EXHIBIT INDEX	63
SIGNATURES	64

FINAL

PART I. Financial Information

Item 1. Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY-OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

BALANCE SHEETS


	September 30,		December 31,
(dollars in thousands, except share data)	2018		2017
	(unaudited)
ASSETS
Investments
Fixed maturity available-for-sale securities, at estimated fair value
(amortized cost: 2018 - $1,173,737; 2017 - $1,418,128)	$	1,224,520	$	1,548,638
Equity available-for-sale securities, at estimated fair value
(cost: 2018 - $0; 2017 - $25,473)		-		28,497
Equity securities, at estimated fair value
(cost: 2018 - $25,473; 2017 - $0)		27,687		-
Limited partnerships		1,184		1,375
Mortgage loans on real estate		26,013		24,962
Policy loans		590,689		608,183
Derivative assets		10,788		8,212
Total investments		1,880,881		2,219,867
Cash and cash equivalents		276,020		270,307
Accrued investment income		27,907		33,303
Deferred policy acquisition costs		27,836		30,207
Deferred sales inducements		6,325		6,867
Value of business acquired		209,360		201,299
Goodwill		2,800		2,800
Income tax asset		1,483		-
Reinsurance receivables		1,090		239
Receivable for investments sold - net		292		-
Other assets		38,746		37,777
Recoverable of ceded guaranteed minimum income benefit embedded derivatives, at fair value		9,321		25,325
Separate Accounts assets		5,561,785		5,793,834
Total Assets	$	8,043,846	$	8,621,825

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY-OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

BALANCE SHEETS - Continued


	September 30,			December 31,
(dollars in thousands, except share data)	2018			2017
	(unaudited)
LIABILITIES AND STOCKHOLDER’S EQUITY
Liabilities
Policyholder liabilities and accruals
Policyholder account balances	$	1,006,666		$	1,041,903
Future policy benefits		388,515			411,654
Claims and claims settlement expenses		36,960			37,679
Total policyholder liabilities and accruals		1,432,141			1,491,236
Payables for collateral under securities loaned, reverse repurchase agreements and derivatives		204,553			248,561
Checks not yet presented for payment		907			6,061
Derivative liabilities		344			2,226
Income tax liability		3,417			1,934
Affiliated payables - net		9,566			6,148
Affiliated short-term note payable		-			10,000
Reinsurance payables		184			194
Payable for investments purchased - net		-			93
Other liabilities		14,327			18,097
Separate Accounts liabilities		5,561,785			5,793,834
Total Liabilities		7,227,224			7,578,384

Stockholder’s Equity
Common stock ($10 par value; authorized 1,000,000 shares;
issued and outstanding: 250,000 shares)		2,500			2,500
Additional paid-in capital		1,381,038			1,378,311
Accumulated other comprehensive income, net of taxes		17,653			80,499
Retained Earnings (Deficit)		(584,569	)		(417,869	)
Total Stockholder’s Equity		816,622			1,043,441
Total Liabilities and Stockholder’s Equity	$	8,043,846		$	8,621,825

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY-OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF INCOME (LOSS)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2018			2017			2018			2017
	(unaudited)						(unaudited)
Revenues
Policy charge revenue	$	35,978		$	37,454		$	109,365		$	112,299
Net investment income (loss)		22,364			27,427			68,863			81,788
Net realized investment gains (losses)
Net realized investment gains (losses), excluding other-than-temporary impairment losses on securities		84			4,711			8,970			6,926
Net realized investment gains (losses)		84			4,711			8,970			6,926
Net derivative gains (losses)		(15,168	)		(9,239	)		(41,644	)		(40,007	)
Total Revenues		43,258			60,353			145,554			161,006

Benefits and Expenses
Interest credited to policyholder liabilities		12,661			13,207			40,835			39,560
Policy benefits (net of reinsurance recoveries:
2018 - $182; $3,035; 2017 - $212; $1,385)		(2,403	)		(963	)		33,973			1,436
Amortization (accretion) of deferred policy acquisition costs		1,200			1,139			2,404			2,876
Amortization (accretion) of value of business acquired		1,809			11,295			11,236			16,513
Insurance, General and Administrative Expenses		9,542			9,739			26,829			25,159
Total Benefits and Expenses		22,809			34,417			115,277			85,544
Income (Loss) Before Taxes		20,449			25,936			30,277			75,462
Income Tax Expense (Benefit)		-			-			-			575
Net Income (Loss)	$	20,449		$	25,936		$	30,277		$	74,887

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY-OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2018			2017			2018			2017
	(unaudited)						(unaudited)

Net Income (Loss)	$	20,449		$	25,936		$	30,277		$	74,887

Other Comprehensive Income (Loss)
Net unrealized gains (losses) on available-for-sale securities
Net unrealized holding gains (losses) arising during the period		(8,868	)		1,592			(66,678	)		26,039
Reclassification adjustment for (gains) losses included in net income (loss)		(1,212	)		-			(13,572	)		(79	)
		(10,080	)		1,592			(80,250	)		25,960
Net unrealized gains (losses) on cash flow hedges
Net unrealized gains (losses) on cash flow hedges arising during the period		66			(1,803	)		(1,050	)		888
Reclassification adjustment for (gains) losses included in net income (loss)		165			63			1,562			683
		231			(1,740	)		512			1,571
Net unrealized other-than-temporary impairments on securities
Change in previously recognized unrealized other-than-temporary impairments		591			407			524			1,076
		591			407			524			1,076
Adjustments
Value of business acquired		6,319			(780	)		19,391			(4,739	)
Total other comprehensive income (loss), net of taxes		(2,939	)		(521	)		(59,823	)		23,868
Comprehensive Income (Loss)	$	17,510		$	25,415		$	(29,546	)	$	98,755

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY-OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF STOCKHOLDER’S EQUITY

	Nine Months Ended			Twelve Months Ended
	September 30,			December 31,
(dollars in thousands)	2018			2017
	(unaudited)
Common Stock	$	2,500		$	2,500

Additional Paid-in Capital
Balance at beginning of period	$	1,378,311		$	1,425,816
Capital contributions from Transamerica Corporation		2,727			-
Return of capital to Transamerica Corporation		-			(47,505	)
Balance at end of period	$	1,381,038		$	1,378,311

Accumulated Other Comprehensive Income
Balance at beginning of period	$	80,499		$	55,350
Cumulative effect adjustment (a)		(3,023	)		-
Adjusted balance at beginning of period		77,476			55,350
Total other comprehensive income (loss), net of taxes		(59,823	)		25,149
Balance at end of period	$	17,653		$	80,499

Retained Earnings (Deficit)
Balance at beginning of period	$	(417,869	)	$	(377,274	)
Cumulative effect adjustment (a)		3,023			-
Adjusted balance at beginning of period		(414,846	)		(377,274	)
Net income (loss)		30,277			99,405
Cash dividend paid to Transamerica Corporation		(200,000	)		(140,000	)
Balance at end of period	$	(584,569	)	$	(417,869	)

Total Stockholder's Equity	$	816,622		$	1,043,441

(a)

See Notes to Financial Statements – Note 1, Summary of Significant Accounting Policies, Current Accounting Guidance, for discussion on the adjustment relating to Accounting Standards Update (“ASU”) 2016-01.

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY-OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF CASH FLOWS

	Nine Months Ended
	September 30,
(dollars in thousands)	2018			2017
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	30,277		$	74,887
Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by operating activities:
Change in deferred policy acquisition costs		2,371			2,859
Change in deferred sales inducements		542			671
Change in value of business acquired		11,236			16,513
Change in benefit reserves, net of change in ceded reinsurance recoverable		(7,901	)		(40,083	)
Change in income tax accruals		-			575
Change in claims and claims settlement expenses		(719	)		6,324
Change in other operating assets and liabilities - net		(5,986	)		(8,366	)
Change in checks not yet presented for payment		(5,154	)		1,417
Amortization (accretion) of investments		(502	)		(929	)
Interest credited to policyholder liabilities		40,835			39,560
Net derivative (gains) losses		41,644			40,007
Net realized investment (gains) losses		(8,970	)		(6,926	)
Change in unrealized (gains) losses related to limited partnerships		(20	)		(2,999	)
Change in unrealized (gains) losses related to equity securities		809			-
Net cash and cash equivalents provided by/(used in) operating activities		98,462			123,510

CASH FLOWS FROM INVESTING ACTIVITIES
Sales of available-for-sale securities and mortgage loans		264,464			243,669
Maturities of available-for-sale securities and mortgage loans		148,358			139,435
Purchases of available-for-sale securities and mortgage loans		(159,433	)		(356,979	)
Sales of limited partnerships		211			97,497
Purchases of limited partnerships		-			(66,065	)
Cash received in connection with derivatives		38,215			50,677
Cash paid in connection with derivatives		(85,560	)		(91,553	)
Proceeds from the maturity or prepayment of policy loans		49,503			51,465
Payments for the origination of policy loans		(32,009	)		(32,319	)
Net settlement on futures contracts		(1,122	)		525
Net cash and cash equivalents provided by/(used in) investing activities	$	222,627		$	36,352

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY-OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF CASH FLOWS - Continued

	Nine Months Ended
	September 30,
(dollars in thousands)	2018			2017
	(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder deposits	$	8,057		$	6,960
Policyholder withdrawals		(83,361	)		(84,737	)
Capital contributions from Transamerica Corporation		2,727			-
Cash dividend paid to Transamerica Corporation		(200,000	)		-
Return of capital to Transamerica Corporation		-			(35,760	)
Change in payables for collateral under securities loaned, reverse repurchase agreements and derivatives		(32,799	)		9,138
Cash receipts from affiliated short-term note payable		-			38,000
Cash paid on affiliated short term note payable		(10,000	)		(38,000	)
Net cash and cash equivalents provided by/(used in) financing activities		(315,376	)		(104,399	)

Net increase (decrease) in cash and cash equivalents (a)		5,713			55,463
Cash and cash equivalents, beginning of period		270,307			267,844
Cash and cash equivalents, end of period	$	276,020		$	323,307

(a)

Included in net increase (decrease) in cash and cash equivalents is interest paid (2018 - $132; 2017 - $98), interest received (2018 - $2; 2017 - $6), and income taxes paid (2018 - $0; 2017 - $0).

See Notes to Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY-OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

NOTES TO FINANCIAL STATEMENTS (unaudited)

(dollars in thousands)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

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

The Company is a life insurance company that conducts its business primarily in the annuity markets and, to a lesser extent, in the life insurance markets of the financial services industry. The Company is domiciled in the State of Arkansas and is currently licensed to sell insurance and annuities in forty-nine states, the District of Columbia, the U.S. Virgin Islands and Guam.

Basis of Reporting

The accompanying Financial Statements have been prepared in conformity with United States generally accepted accounting principles (“GAAP”). The Company also submits financial statements to insurance industry regulatory authorities, which are prepared on the basis of statutory accounting principles. The interim Financial Statements are unaudited; all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the Financial Statements have been included. These unaudited Financial Statements should be read in conjunction with the audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. For a complete discussion of the Company’s 2017 Financial Statements and accounting policies, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The nature of the Company’s business is such that results of any interim period are not necessarily indicative of results for a full year.

Income before taxes and net income for the nine months ended September 30, 2018 includes a net increase of $4,500, reflecting the correction of a prior period error. The Company’s annual comprehensive review of actuarial assumptions identified an error in the implementation of the mortality improvement factor changes during the third quarter of 2017, which caused amortization of value of business acquired to be incorrect. Management has evaluated the error and related correction and concluded it was not material to any previously reported quarterly or annual financial statements or to the current reporting period.

Accounting Estimates and Assumptions

The preparation of financial statements in conformity to GAAP requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: the fair value of certain investments (including derivatives), asset valuation allowances, deferred policy acquisition costs (“DAC”), deferred sales inducements (“DSI”), the value of business acquired (“VOBA”), goodwill, policyholder liabilities, income taxes, and the potential effects of unresolved litigation matters.

Investments

Fixed Maturity and Equity Securities

The Company’s investments consist principally of fixed maturity securities that are classified as available-for-sale (“AFS”) and are reported at estimated fair value. With the adoption of ASU 2016-01 the Company classified holdings in non-redeemable preferred stock as equity securities, which are reported at estimated fair value on the Balance Sheets, with valuation adjustments recorded through net investment income on the Statements of Income (Loss).

VOBA, DAC and DSI

Annually, the Company performs a comprehensive review of actuarial assumptions utilized in measuring insurance liabilities and expected gross profits used in amortizing VOBA, DAC and DSI. The assumptions include, but are not necessarily limited to, inputs such as mortality, policyholder behavior and expected future rates of returns on investments. As part of this review, the Company considers emerging trends, future expectations and other data, including any observable market data. In prior years, these assumptions were updated and implemented in the third quarter of each year, unless a material change in experience, indicative of a long-term trend, was observed during an interim period. Beginning in 2018, these annual assumption updates were made in the second quarter to align with Aegon N.V.’s semi-annual external reporting. If material changes in experience, indicative of a long-term trend, are observed during an interim period, updated assumptions would be implemented.

Future Policy Benefits

The Company’s liability for future policy benefits consists of liabilities for immediate annuities and liabilities for certain guaranteed benefits contained in the variable insurance products the Company manufactures. Liabilities for immediate annuities are equal to the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment generally depends on policyholder mortality. Interest rates used in establishing such liabilities were in the range of 0.01% to 9.6% during 2018. See Notes to Financial Statements - Note 5, Variable Contracts Containing Guaranteed Benefits, for further discussion.

Subsequent Events

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

Current Accounting Guidance

ASU 2016-15, Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments

In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15, Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this Update provide guidance on the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and they should be applied using a retrospective transition method to each period presented unless impracticable. The Company adopted this standard on January 1, 2018. Adoption of this ASU did not have a material impact on its Financial Statements.

ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. For the Company, the amendments in this guidance are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this guidance are to be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for those related to equity securities without readily determinable fair values (including disclosure requirements) which are to be applied prospectively to equity investments that exist as of the date of adoption of the Update. The Company adopted this standard on January 1, 2018. The Company has no equity securities without readily determinable fair value, however it has equity securities that are in scope. Therefore, adoption of this ASU resulted in a $3,023 beginning of period cumulative-effect adjustment for unrealized gains and current period had unrealized losses recorded through net investment income (loss) in the Statements of Income (Loss), which are not material to the Company’s Financial Statements. See the Statements of Comprehensive Income (Loss), Statements of Stockholder’s Equity and Note 7, Accumulated Other Comprehensive Income (“AOCI”), for Financial Statement and disclosure impacts related to the beginning of period cumulative-effect adjustment and Note 3, Investments, for current period disclosure impact.

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance unless the contracts are within the scope of other standards (for example, financial instruments, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance establishes a five-step process to achieve this core principle. An entity may use either of two transition methods: retrospective to each prior reporting period presented with certain practical expedients, or retrospective with the cumulative effect of initial application recognized at the date of initial application subject to certain additional disclosures. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations of Topic 606. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in a few narrow areas and adds some practical expedients to the guidance. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which affects narrow aspects of the guidance issued in Update 2014-09. In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323), which requires the Company to determine the appropriate financial statement disclosures about the potential material effects of ASU 2014-09 when adopted. In November 2017, the FASB issued ASU 2017-14, Income Statement – Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606) (SEC Update). In August 2015, the FASB issued ASU 2015-14, Deferral of the Effective Date, which defers the effective date by one year. As a result, these updates are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Update was adopted on January 1, 2018. The Company performed its evaluation and determined the majority of the Company’s revenue streams are out-of-scope (Accounting Standards Codification (“ASC”) 944), therefore adoption of this ASU did not have a material impact on its Financial Statements.

Future Accounting Guidance

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The amendments in this Update improve the effectiveness of disclosures about fair value measurements required under ASC 820 for recurring and nonrecurring fair value measurements by removing, modifying and adding certain disclosures. The amendments in this Update are effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact that adoption of this Update will have on its Financial Statements.

ASU 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts

In August 2018, the FASB issued 2018-12, Financial Services – Insurance (Topic 944). The amendments in this Update change how insurance companies account for and disclose long-duration contracts, such as life insurance, disability income, long-term care, and annuities, and how DAC are amortized. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is evaluating the impact that adoption of this Update will have on its Financial Statements.

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued new guidance on derivatives and hedging ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The objectives of the Update are to improve transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting by preparers. In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815) – Inclusion of Secured Overnight Financing Rate (SOFR) Oversight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which extends the scope of the targeted improvements to include an additional alternative for US Benchmark interest rates. The amendments in these Updates are effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is evaluating the impact that adoption of these Updates will have on its Financial Statements.

Note 2. Fair Value of Financial Instruments

Fair Value Measurements

ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.

Fair Value Hierarchy

The Company has categorized its financial instruments into the three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Assets and liabilities recorded at fair value on the Balance Sheets are categorized as follows:

Level 1. Unadjusted quoted prices for identical assets or liabilities in an active market.

Level 2. Quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

Quoted prices for similar assets or liabilities in active markets

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

Inputs other than quoted market prices that are observable

Inputs that are derived principally from or corroborated by observable market data through correlation or other means

Level 3. Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Both observable and unobservable inputs may be used to determine the fair value of positions classified in Level 3. The circumstances for using unobservable measurement includes those in which there is little, if any, market activity for the assets or liabilities. Therefore, the Company must make assumptions about inputs that a hypothetical market participant would use to value the assets and liabilities.

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

The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017:

	September 30, 2018
	Level 1		Level 2		Level 3		Total
Assets
Fixed maturity AFS securities (a)
Corporate securities	$	-	$	802,660	$	-	$	802,660
Asset-backed securities		-		40,248		-		40,248
Commercial mortgage-backed securities		-		60,078		-		60,078
Residential mortgage-backed securities		-		51,560		-		51,560
Municipals		-		900		-		900
Government and government agencies
United States		236,297		-		-		236,297
Foreign		1,416		25,986		-		27,402
Redeemable preferred stock		-		5,375		-		5,375
Total fixed maturity AFS securities	$	237,713	$	986,807	$	-	$	1,224,520
Equity securities (a)
Banking securities	$	-	$	27,687	$	-	$	27,687
Total equity securities	$	-	$	27,687	$	-	$	27,687
Cash equivalents (b)	$	30,368	$	228,912	$	-	$	259,280
Derivative assets (c)		-		10,788		-		10,788
Fair value recoverable of ceded guaranteed minimum income benefits (“GMIB”) embedded derivatives (d)		-		-		9,321		9,321
Investments measured at net asset value (“NAV”) (e)		-		-		-		5,562,969
Total assets	$	268,081	$	1,254,194	$	9,321	$	7,094,565

Liabilities
Future policy benefits (embedded derivatives only) (f)	$	-	$	-	$	26,091	$	26,091
Derivative liabilities (c)		-		344		-		344
Total liabilities	$	-	$	344	$	26,091	$	26,435

	December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets
Fixed maturity AFS securities (a)
Corporate securities	$	-	$	942,024	$	-	$	942,024
Asset-backed securities		-		52,642		4,264		56,906
Commercial mortgage-backed securities		-		73,321		-		73,321
Residential mortgage-backed securities		-		81,417		-		81,417
Municipals		-		881		-		881
Government and government agencies
United States		362,119		-		-		362,119
Foreign		1,444		24,836		-		26,280
Redeemable preferred stock		-		5,690		-		5,690
Total fixed maturity AFS securities	$	363,563	$	1,180,811	$	4,264	$	1,548,638
Equity AFS securities (a)
Banking securities	$	-	$	28,497	$	-	$	28,497
Total equity AFS securities	$	-	$	28,497	$	-	$	28,497
Cash equivalents (b)	$	20,812	$	247,941	$	-	$	268,753
Derivative assets (c)		-		8,212		-		8,212
Fair value recoverable of ceded GMIB embedded derivatives (d)		-		-		25,325		25,325
Investments measured at NAV (e)		-		-		-		5,795,209
Total assets	$	384,375	$	1,465,461	$	29,589	$	7,674,634

Liabilities
Future policy benefits (embedded derivatives only) (f)	$	-	$	-	$	38,471	$	38,471
Derivative liabilities (c)		-		2,226		-		2,226
Total liabilities	$	-	$	2,226	$	38,471	$	40,697

(a)

The fair values of debt securities are determined by management after taking into consideration several sources of data. When available, the Company uses quoted market prices in active markets to determine the fair value of its debt securities. The Company’s valuation policy utilizes a pricing hierarchy that dictates that publicly available prices are initially sought from indices and third-party pricing services. In the event that pricing is not available from these sources, securities are submitted to brokers to obtain quotes. The majority of brokers’ quotes are non-binding. As part of the pricing process, the Company assesses the appropriateness of each quote (e.g., the extent to which the quote is based on and reflects observable market transactions) to determine the most appropriate estimate of fair value. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use the following inputs: reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows.

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

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

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

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

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

Government and government agencies – Valuations of government and government agencies’ securities are monitored and reviewed on a monthly basis. When available, the Company uses quoted market prices in active markets to determine the fair value of its government and government agencies’ investments. When the Company cannot make use of quoted market prices, it uses market prices from indices or quotes from third-party pricing services or brokers.

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

(b)	Cash equivalents are primarily valued at amortized cost, which approximates fair value. Cash equivalents that receive a vendor price are classified as fair value Level 1. Operating cash is not included in the above table.

(c)

Level 2 derivatives include interest rate swaps, inflation swaps, variance swaps, total return swaps, credit default swaps (“CDS”), options and futures for which the Company utilized readily accessible quoted index levels and broker quotes. The fair value of exchange traded interest rate swaps is calculated based on the change in the underlying floating rate curve measured using the Overnight Index Swap at the reporting date, as compared to the fixed leg of the swap. The fair value of over-the-counter (“OTC”) traded interest rate swaps is calculated based on the change in the underlying floating rate curve measured using the London Inter-Bank Offered Rate (“LIBOR”) at the reporting date, as compared to the fixed leg of the swap. The fair value of inflation swaps is calculated as the difference between the consumer price index (or related readily accessible quoted inflation index level) at the reporting date and the last reset date, multiplied by the notional value of the swap. The fair value of variance swaps is calculated as the difference between the estimated volatility of the underlying Standard & Poor’s 500 Composite Price Index (“S&P”) at maturity and the actual volatility of the underlying S&P at initiation (i.e., strike) multiplied by the notional value of the swap. Total return swaps are valued based on the change in the underlying equity index as of the last reset date. The fair value of equity options is calculated using the Black-Scholes model and market observable inputs for the underlying market price and volatility surface. Credit default swaps are valued using a discounted cash flow model where future premium payments and protection payments are corrected for the probability of default, which is modeled using an arbitrage free credit spread model. The fair value of futures contracts is calculated as the day over day change at the end of the reporting period in the value of the underlying index or bond, multiplied by the number of contracts and the multiplier associated with the futures ticker.

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

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

		September 30, 2018								December 31, 2017
Investment:		Fair			Unfunded		Redemption	Redemption		Fair			Unfunded
Limited Partnerships		Value			Commitments		Frequency	Notice Period		Value			Commitments
Limited Partnership - Private Equity	$		1,184	$		-	None (g)	None	$		1,375	$		-
Separate Accounts			5,561,785			-	Daily	None			5,793,834			-
Investments measured at NAV	$		5,562,969	$		-			$		5,795,209	$		-

(f)

The Company recognizes liabilities for contracts containing guaranteed minimum withdrawal benefits (“GMWB”) and stand-alone living benefits (“SALB”), which are reported at fair value. The liabilities for the contracts containing GMWB are treated as embedded derivatives, which are required to be reported separately from the host contract. The fair value of these guarantees is calculated as the present value of future expected payments to policyholders less the present value of assessed fees attributable to the guarantees. Given the complexity and long-term nature of the guarantees, their fair values are determined using stochastic techniques under a variety of market return, discount rate and actuarial assumptions. Since two of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 of the fair value hierarchy.

(g)	The general partner would have to consent to any sale of limited partnership interest. The general partner has no obligation to liquidate any limited partner interest prior to the final dissolution of the Partnership.

For the nine months ended September 30, 2018 and twelve months ended December 31, 2017, there were no transfers between Level 1 and 2.

The following table summarizes the change in the fair value of the Company’s Level 3 fixed maturity AFS securities at September 30, 2018 and December 31, 2017:

	Nine Months Ended September 30, 2018			Twelve Months Ended December 31, 2017
	Fixed Maturity AFS			Fixed Maturity AFS
	Securities			Securities
Balance at beginning of period (a)	$	4,264		$	9,215
Change in unrealized gains (losses) (b)		(132	)		254
Purchases		-			4,000
Sales		(89	)		(5,242	)
Transfers into Level 3		-			3,000
Transfers out of Level 3		(4,043	)		(6,965	)
Changes in valuation (c)		-			1
Net realized investment gains (c)		-			1
Balance at end of period (a)	$	-		$	4,264

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

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

(c)	Recorded as a component of net realized investment gains (losses) on securities in the Statements of Income (Loss).

In certain circumstances, the Company will obtain non-binding broker quotes from brokers to assist in the determination of fair value. If those quotes can be corroborated by other market-observable data, the investments will be classified as Level 2 investments. If not, the investments are classified as Level 3 due to the unobservable nature of the brokers’ valuation processes. The decrease of Level 3 fixed maturity securities at September 30, 2018 was primarily driven by the transfer of an ABS security from Level 3 to Level 2 due to the availability of market observable data.

The Company’s Level 3 assets consist of GMIB reinsurance and Level 3 liabilities consist of provisions for GMWB and SALB. The fair value of these assets and liabilities is calculated as the present value of future expected payments to policyholders less the present value of assessed fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees, which are unlike instruments available in financial markets, their fair values are determined using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions. Changes in the Company’s credit spread and volatility assumptions have an inverse effect on the GMIB reinsurance assets. An increase (decrease) in the credit spread of GMWB and SALB in isolation would result in a lower (higher) fair value liability measurement and an increase (decrease) in volatility in isolation would result in a higher (lower) fair value liability measurement.

The expected market rates of return are based on risk-free rates, such as the current LIBOR forward curve. The credit spread, which is a significant unobservable input, is set by using the CDS spreads of a reference portfolio of life insurance companies, adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level (who have priority in payments to other creditors). The credit spread was 35 and 30 basis points (“bps”) at September 30, 2018 and December 31, 2017, respectively.

For equity volatility, the Company uses a term structure assumption with market-based implied volatility inputs for the first five years and a long-term forward rate assumption of 25%-30% thereafter. The volume of observable option trading from which volatilities are derived generally declines as the contracts’ term increases; therefore, the volatility curve grades from implied volatilities for five years to the ultimate rate. Correlations of market returns across underlying indices are based on historical market returns and their inter-relationships over a number of years preceding the valuation date. Assumptions regarding policyholder behavior, included in the models, such as lapses, are derived in the same way as the assumptions used to measure insurance liabilities. The Company reviews these assumptions at each valuation date and updated based on historical experience and observable market data as required.

The following table provides a summary of the changes in the fair value of the Company’s Level 3 liabilities (assets) at September 30, 2018 and December 31, 2017:

Nine Months Ended

Twelve Months Ended

September 30, 2018

December 31, 2017

GMIB

GMWB

Reinsurance

SALB

GMWB

Reinsurance

SALB

Balance at beginning of period (a)

37,566

(25,325

)

905

TRANSAMERICA ADVISORS LIFE INSURANCE Co 10-Q