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EXCEL - IDEA: XBRL DOCUMENT - GREAT WEST LIFE & ANNUITY INSURANCE COFinancial_Report.xls
EX-32 - EXHIBIT 32 - GREAT WEST LIFE & ANNUITY INSURANCE COq12015gwla-exx32.htm
EX-31.2 - EXHIBIT 31.2 - GREAT WEST LIFE & ANNUITY INSURANCE COq12015gwla-exx312.htm
EX-31.1 - EXHIBIT 31.1 - GREAT WEST LIFE & ANNUITY INSURANCE COq12015gwla-ex311.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015
 
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                to               
 
Commission file number 333-1173
 
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
 
COLORADO
 
84-0467907
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
8515 EAST ORCHARD ROAD, GREENWOOD VILLAGE, CO 80111
(Address of principal executive offices)
 
(303) 737-3000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x         No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes x         No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Act.
 
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer x
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act.
 
Yes ¨         No x
 
As of May 1, 2015, 7,032,000 shares of the registrant’s common stock were outstanding, all of which were owned by the registrant’s parent company.





Table of Contents
 
 
 
Page
 
 
 
Number
Part I
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
Item 3
 
Item 4
 
 
 
 
Part II
 
Item 1
 
Item 1A
 
Item 6
 
 
 
 
 
 


2



Part I     Financial Information
Item1.    Interim Financial Statements


 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Balance Sheets
March 31, 2015 and December 31, 2014
(In Thousands, Except Share Amounts)
(Unaudited)
 
 
March 31, 2015
 
December 31, 2014
Assets
 

 
 

Investments:
 

 
 

Fixed maturities, available-for-sale, at fair value (amortized cost $17,002,708 and $18,953,144)
$
18,367,667

 
$
20,162,078

Fixed maturities, held-for-trading, at fair value (amortized cost $122,978 and $331,081)
129,752

 
338,543

Mortgage loans on real estate (net of allowances of $2,890 and $2,890)
3,440,183

 
3,363,570

Policy loans
4,125,285

 
4,130,062

Short-term investments (amortized cost $2,434,626 and $263,501)
2,434,626

 
263,501

Limited partnership and other corporation interests
47,481

 
49,421

Other investments
15,485

 
16,068

Total investments
28,560,479

 
28,323,243

 
 
 
 
Other assets:
 

 
 

Cash
8,132

 
12,775

Reinsurance receivable
612,184

 
611,270

Deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”)
358,898

 
378,694

Investment income due and accrued
309,291

 
278,886

Collateral under securities lending agreements
89,906

 
13,741

Due from parent and affiliates
49,908

 
47,193

Goodwill
137,683

 
137,683

Other intangible assets
26,891

 
27,915

Other assets
843,525

 
773,651

Assets of discontinued operations
23,852

 
24,324

Separate account assets
28,611,411

 
27,718,844

Total assets
$
59,632,160

 
$
58,348,219

 
See notes to condensed consolidated financial statements.
 
(Continued)


3



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Balance Sheets
March 31, 2015 and December 31, 2014
(In Thousands, Except Share Amounts)
(Unaudited)
 
 
 
March 31, 2015
 
December 31, 2014
Liabilities and stockholder’s equity
 
 

 
 

Policy benefit liabilities:
 
 

 
 

Future policy benefits
 
$
26,141,356

 
$
25,968,411

Policy and contract claims
 
345,853

 
339,104

Policyholders’ funds
 
296,602

 
335,484

Provision for policyholders’ dividends
 
57,390

 
58,577

Undistributed earnings on participating business
 
20,990

 
20,050

Total policy benefit liabilities
 
26,862,191

 
26,721,626

 
 
 
 
 
General liabilities:
 
 

 
 

Due to parent and affiliates
 
566,048

 
547,266

Commercial paper
 
89,989

 
98,589

Payable under securities lending agreements
 
89,906

 
13,741

Deferred income tax liabilities, net
 
385,868

 
314,616

Other liabilities
 
755,160

 
771,700

Liabilities of discontinued operations
 
23,852

 
24,324

Separate account liabilities
 
28,611,411

 
27,718,844

Total liabilities
 
57,384,425

 
56,210,706

 
 
 
 
 
Commitments and contingencies (See Note 13)
 


 


 
 
 
 
 
Stockholder’s equity:
 
 

 
 

Preferred stock, $1 par value, 50,000,000 shares authorized; none issued and outstanding
 

 

Common stock, $1 par value, 50,000,000 shares authorized; 7,032,000 shares issued and outstanding
 
7,032

 
7,032

Additional paid-in capital
 
778,464

 
777,664

Accumulated other comprehensive income
 
691,137

 
603,018

Retained earnings
 
771,102

 
749,799

Total stockholder’s equity
 
2,247,735

 
2,137,513

Total liabilities and stockholder’s equity
 
$
59,632,160

 
$
58,348,219

 
See notes to condensed consolidated financial statements.
 
(Concluded)


4



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Income
Three Months Ended March 31, 2015 and 2014
(In Thousands)
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Revenues:
 
 

 
 

Premium income
 
$
145,703

 
$
131,854

Fee income
 
225,277

 
166,513

Other revenue
 
1,820

 

Net investment income
 
358,856

 
300,023

Realized investment gains (losses), net:
 
 

 
 

Total other-than-temporary gains (losses)
 
(558
)
 
(688
)
Other-than-temporary (gains) losses transferred to other comprehensive income (loss)
 
108

 

Other realized investment gains (losses), net
 
18,650

 
27,597

Total realized investment gains (losses), net
 
18,200

 
26,909

Total revenues
 
749,856

 
625,299

Benefits and expenses:
 
 

 
 

Life and other policy benefits
 
149,539

 
149,889

Increase in future policy benefits
 
17,351

 
4,580

Interest credited or paid to contractholders
 
142,891

 
132,133

Provision for policyholders’ share of losses on participating business
 
(451
)
 
(352
)
Dividends to policyholders
 
18,341

 
20,129

Total benefits
 
327,671

 
306,379

General insurance expenses
 
244,484

 
164,086

Amortization of DAC and VOBA
 
17,556

 
403

Interest expense
 
9,637

 
9,326

Total benefits and expenses
 
599,348

 
480,194

Income before income taxes
 
150,508

 
145,105

Income tax expense
 
51,896

 
50,354

Net income
 
$
98,612

 
$
94,751

 
See notes to condensed consolidated financial statements.


5



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2015 and 2014
(In Thousands)
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net income
 
$
98,612

 
$
94,751

Components of other comprehensive income
 
 

 
 

Unrealized holding gains (losses), net, arising on available-for-sale fixed maturity investments
 
181,375

 
311,298

Unrealized holding gains (losses), net, arising on cash flow hedges
 
17,155

 
884

Reclassification adjustment for (gains) losses, net, realized in net income
 
(30,437
)
 
(22,218
)
Net unrealized gains (losses) related to investments
 
168,093

 
289,964

Future policy benefits, DAC and VOBA adjustments
 
(35,129
)
 
(57,248
)
Employee benefit plan adjustment
 
2,603

 

Other comprehensive income before income taxes
 
135,567

 
232,716

Income tax expense related to items of other comprehensive income
 
47,448

 
81,450

Other comprehensive income(1)
 
88,119

 
151,266

Total comprehensive income
 
$
186,731

 
$
246,017

 
(1) Other comprehensive income includes the non-credit component of impaired gains (losses), net, on fixed maturities available-for-sale in the amounts of $(2,543) and $1,772 for the three months ended March 31, 2015 and 2014, respectively.
 
See notes to condensed consolidated financial statements.


6



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Stockholder’s Equity
Three Months Ended March 31, 2015 and 2014
(In Thousands)
(Unaudited)
 
 
 
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
 other
comprehensive
income
 
Retained
earnings
 
Total
Balances, January 1, 2015
 
$
7,032

 
$
777,664

 
$
603,018

 
$
749,799

 
$
2,137,513

Net income
 
 

 
 

 
 

 
98,612

 
98,612

Other comprehensive income, net of income taxes
 
 

 
 

 
88,119

 
 

 
88,119

Dividends
 
 

 
 

 
 

 
(77,309
)
 
(77,309
)
Capital contribution - stock-based compensation
 
 

 
525

 
 

 
 

 
525

Income tax benefit on stock-based compensation
 
 

 
275

 
 

 
 

 
275

Balances, March 31, 2015
 
$
7,032

 
$
778,464

 
$
691,137

 
$
771,102

 
$
2,247,735


 
 
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
income
 
Retained
earnings
 
Total
Balances, January 1, 2014
 
$
7,032

 
$
774,115

 
$
345,754

 
$
748,831

 
$
1,875,732

Net income
 
 

 
 

 
 

 
94,751

 
94,751

Other comprehensive income, net of income taxes
 
 

 
 

 
151,266

 
 

 
151,266

Dividends
 
 

 
 

 
 

 
(92,801
)
 
(92,801
)
Capital contribution - stock-based compensation
 
 

 
650

 
 

 
 

 
650

Income tax benefit on stock-based compensation
 
 

 
27

 
 

 
 

 
27

Balances, March 31, 2014
 
$
7,032

 
$
774,792

 
$
497,020

 
$
750,781

 
$
2,029,625

 
See notes to condensed consolidated financial statements.


7



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2015 and 2014
(In Thousands)
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net cash provided by operating activities
 
$
298,843

 
$
112,280

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from sales, maturities and redemptions of investments:
 
 

 
 

Fixed maturities, available-for-sale
 
3,024,890

 
2,648,898

Mortgage loans on real estate
 
54,923

 
40,355

Limited partnership interests, other corporation interests and other investments
 
1,174

 
4,574

Purchases of investments:
 
 

 
 

Fixed maturities, available-for-sale
 
(1,009,516
)
 
(409,356
)
Mortgage loans on real estate
 
(131,172
)
 
(89,239
)
Limited partnership interests, other corporation interests and other investments
 
(123
)
 
(606
)
Net change in short-term investments
 
(2,170,798
)
 
(2,367,889
)
Net change in policy loans
 
(141
)
 
(18
)
Purchases of furniture, equipment and software
 
(23,451
)
 
(5,365
)
Net cash used in investing activities
 
(254,214
)
 
(178,646
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Contract deposits
 
428,073

 
576,724

Contract withdrawals
 
(401,887
)
 
(436,178
)
Net change in due to/from parent and affiliates
 
16,067

 
43,388

Dividends paid
 
(77,309
)
 
(92,801
)
Payments for and interest (paid) received on financing element derivatives, net
 
(4,169
)
 
(4,029
)
Net change in commercial paper borrowings
 
(8,600
)
 
(299
)
Net change in book overdrafts
 
(1,722
)
 
(13,020
)
Income tax benefit of stock option exercises
 
275

 
27

Net cash (used in) provided by financing activities
 
(49,272
)
 
73,812

 
 
 
 
 
Net (decrease) increase in cash
 
(4,643
)
 
7,446

Cash, beginning of year
 
12,775

 
7,491

Cash, end of period
 
$
8,132

 
$
14,937

 
See notes to condensed consolidated financial statements.
 
(Continued)

8



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2015 and 2014
(In Thousands)
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Supplemental disclosures of cash flow information:
 
 

 
 
Net cash (paid) received during the year for:
 
 

 
 

Income taxes
 
$
(11,488
)
 
$
30,969

Interest
 
(56
)
 
(68
)
 
 
 
 
 
Non-cash investing and financing transactions during the years:
 
 
 
 
Share-based compensation expense
 
$
525

 
$
650

 
See notes to condensed consolidated financial statements.
 
(Concluded)


9

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)





1.  Organization and Basis of Presentation
 
Organization
 
Great-West Life & Annuity Insurance Company (“GWLA”) and its subsidiaries (collectively, the “Company”) is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a holding company.  GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. Inc. (“Lifeco U.S.”) and an indirect wholly-owned subsidiary of Great-West Lifeco Inc. (“Lifeco”), a Canadian holding company.  The Company offers a wide range of life insurance, retirement and investment products to individuals, businesses and other private and public organizations throughout the United States. The Company is an insurance company domiciled in the State of Colorado and is subject to regulation by the Colorado Division of Insurance.
 
Basis of Presentation
 
The condensed consolidated financial statements include the accounts of the Company and the accounts of its subsidiaries over which it exercises control and are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  Intercompany transactions and balances have been eliminated in consolidation.
 
The condensed consolidated balance sheet as of December 31, 2014, which was derived from the Company’s audited financial statements, and the unaudited interim condensed consolidated financial statements as of and for the three months ended March 31, 2015, have been prepared in accordance with the instructions for Form 10-Q.  In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.  As such, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
 
In the opinion of management, these statements include all normal recurring adjustments necessary to fairly present the Company’s condensed consolidated results of operations, financial position and cash flows as of March 31, 2015, and for all periods presented. The condensed consolidated results of operations and condensed consolidated statement of cash flows for the three months ended March 31, 2015 are not necessarily indicative of the results or cash flows expected for the full year.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


10

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



2.  Acquisition
 
Putnam Retirement Business

Description of transaction

On January 1, 2015, the Company acquired the retirement business of Putnam, an affiliated entity. The transaction was accounted for as a combination between entities under common control. As such, the assets and liabilities acquired from Putnam were recorded at historical cost as of January 1, 2015. In exchange for cash paid in the amount of $4,114, the Company acquired $11,501 of other assets, assumed $7,895 of other liabilities and recognized a dividend of $508. The 2015 amounts presented are aligned with the new business structure which includes the Putnam retirement business, while the 2014 comparative amounts reflect the previous structure which excludes the Putnam retirement business.

J.P. Morgan Retirement Plan Services

Description of transaction

On August 29, 2014, the Company completed the acquisition of all of the voting equity interests in the J.P. Morgan Retirement Plan Services (“RPS”) large-market record-keeping business. This acquisition transformed the Company, together with Putnam Investments, LLC (“Putnam”), an affiliate of the Company, into the second largest provider based on number of participants in the U.S. defined contribution market. The Company presented the allocation of the purchase price to the amounts of assets acquired, goodwill and liabilities assumed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Revenues and earnings of the acquiree

For the three months ended March 31, 2015, RPS contributed $48,628 in revenue and $1,000 in net income. These amounts are included in the condensed consolidated statements of income for the three months ended March 31, 2015.

Pro-forma information

Supplementary pro-forma revenue and net earnings for the combined entity, as though the acquisition date for this business combination had occurred on January 1, 2014, has not been included as historical records are not available.

3.  Application of Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In June 2014, the FASB issued ASU No. 2014-11 Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU No. 2014-11”). ASU No. 2014-11 amends the accounting for entities that enter into repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings. ASU No. 2014-11 requires new footnote disclosures for repurchase agreements and securities lending transactions accounted for as secured borrowings. The accounting changes in ASU 2014-11 are effective for public business entities for the first interim or annual period beginning after December 15, 2014. The disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The adoption of the accounting changes did not have an impact on the Company’s financial position or results of operations. The Company is currently evaluating the impact of the disclosure changes on its financial statements.


11

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Future adoption of new accounting pronouncements
 
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). The update outlines a comprehensive model for accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. While the update does not apply to insurance contracts within the scope of Topic 944, it does apply to other fee income earned by the Company which includes fees from assets under management, assets under administration, shareholder servicing, administration and record-keeping services and investment advisory services. The core principle of the model requires that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The update also requires increased disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In adopting ASU No. 2014-09, the Company may use either a full retrospective or a modified retrospective approach. The update is effective for public business entities for interim and annual periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact of this update on its financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40). The update will require management to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern. If there is substantial doubt about the Company’s ability to continue as a going concern, the Company will be required to disclose that fact, along with managements’ evaluation of the effectiveness of its plan to alleviate that doubt. The update defines substantial doubt as when it is probable that the Company will be unable to meet its obligations as they become due within one year of the date the financial statements are issued. The assessment and disclosure requirements, if applicable, will be required quarterly. The update is effective for the annual period ending after December 15, 2016, and for interim and annual periods thereafter. The Company does not expect this update to have an impact on the Company’s financial statements.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (Topic 810). The update primarily amends the criteria used to evaluate whether certain variable interest entities should be consolidated. The update also modifies the criteria used to determine whether partnerships and similar entities are variable interest entities. The update is effective for interim and annual periods beginning after December 15, 2016 with early adoption permitted, including in the interim periods. The Company is currently evaluating the impact of this update on its financial statements.

In April, 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (Subtopic 350-40). The update requires the Company to determine if the cloud computing arrangement contains a software license and if so, apply the accounting requirements for other intangible assets. The update also supersedes the requirement to apply lease accounting requirements by analogy for lease classification. If the arrangement is not a software license, then the Company applies accounting requirements for a service requirement. The update is effective for interim and annual periods beginning after December 15, 2015 with early adoption permitted. The Company is currently evaluating the impact of this update on its financial statements.

In May, 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (Topic 820). The update removes the requirement to categorize within the fair value hierarchy all investments measured using the net asset value per share practical expedient and related disclosures. The update is effective for interim and annual periods beginning after December 15, 2015. The Company is currently evaluating the impact of this update on its financial statements.

4.  Dividends
 
The maximum amount of dividends, which can be paid to stockholders by insurance companies domiciled in the State of Colorado, is subject to restrictions relating to statutory surplus and statutory net gain from operations.  Prior to the payment of any dividends, the Company seeks approval from the Colorado Insurance Commissioner.  During the three months ended March 31, 2015, and 2014, the Company paid dividends of $77,309 and $92,801, respectively, to its parent, GWL&A Financial.
 

12

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



5.  Summary of Investments
 
The following tables summarize fixed maturity investments classified as available-for-sale and the non-credit-related component of other-than-temporary impairments (“OTTI”) in accumulated other comprehensive income (loss) (“AOCI”): 
 
 
March 31, 2015
 
 
Amortized
 
Gross unrealized
 
Gross unrealized
 
Estimated fair value
 
OTTI (gain) loss
Fixed maturities:
 
cost
 
gains
 
losses
 
and carrying value
 
included in AOCI (1)
U.S. government direct obligations and U.S. agencies
 
$
1,081,949

 
$
74,740

 
$
390

 
$
1,156,299

 
$

Obligations of U.S. states and their subdivisions
 
2,051,020

 
311,136

 
1,463

 
2,360,693

 

Foreign government securities
 
2,414

 

 

 
2,414

 

Corporate debt securities (2)
 
11,536,443

 
873,106

 
79,718

 
12,329,831

 
(2,329
)
Asset-backed securities
 
1,284,772

 
151,734

 
11,461

 
1,425,045

 
(92,246
)
Residential mortgage-backed securities
 
157,318

 
6,637

 
1,509

 
162,446

 
(177
)
Commercial mortgage-backed securities
 
878,942

 
42,969

 
839

 
921,072

 

Collateralized debt obligations
 
9,850

 
17

 

 
9,867

 

Total fixed maturities
 
$
17,002,708

 
$
1,460,339

 
$
95,380

 
$
18,367,667

 
$
(94,752
)

 (1)  Indicates the amount of any OTTI (gain) loss included in AOCI that is included in gross unrealized gains and losses.  OTTI (gain) loss included in AOCI, as presented above, includes both the initial recognition of non-credit losses and the effects of subsequent increases and decreases in estimated fair value for those fixed maturity securities with previous non-credit impairment. The non-credit loss component of OTTI (gain) loss was in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2) Includes perpetual debt investments with amortized cost of $157,742 and estimated fair value of $129,358.
 
 
 
December 31, 2014
 
 
Amortized
 
Gross unrealized
 
Gross unrealized
 
Estimated fair value
 
OTTI (gain) loss
Fixed maturities:
 
cost
 
gains
 
losses
 
and carrying value
 
included in AOCI (1)
U.S. government direct obligations and U.S. agencies
 
$
3,478,153

 
$
70,597

 
$
1,494

 
$
3,547,256

 
$

Obligations of U.S. states and their subdivisions
 
1,885,715

 
287,668

 
899

 
2,172,484

 

Foreign government securities
 
2,455

 

 
4

 
2,451

 

Corporate debt securities (2)
 
11,258,517

 
763,036

 
82,104

 
11,939,449

 
(2,228
)
Asset-backed securities
 
1,263,089

 
149,152

 
13,702

 
1,398,539

 
(96,603
)
Residential mortgage-backed securities
 
167,793

 
7,368

 
1,932

 
173,229

 
(185
)
Commercial mortgage-backed securities
 
886,748

 
32,556

 
1,099

 
918,205

 

Collateralized debt obligations
 
10,674

 

 
209

 
10,465

 

Total fixed maturities
 
$
18,953,144

 
$
1,310,377

 
$
101,443

 
$
20,162,078

 
$
(99,016
)

 (1)  Indicates the amount of any OTTI (gain) loss included in AOCI that is included in gross unrealized gains and losses.  OTTI (gain) loss included in AOCI, as presented above, includes both the initial recognition of non-credit losses and the effects of subsequent increases and decreases in estimated fair value for those fixed maturity securities with previous non-credit impairment. The non-credit loss component of OTTI (gain) loss was in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2) Includes perpetual debt investments with amortized cost of $157,742 and estimated fair value of $131,799.
 

13

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



See Note 8 for additional discussion regarding fair value measurements.

The amortized cost and estimated fair value of fixed maturity investments classified as available-for-sale, based on estimated cash flows, are shown in the table below.  Actual maturities will likely differ from these projections because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 
 
March 31, 2015
 
Amortized cost
 
Estimated fair value
Maturing in one year or less
$
658,867

 
$
689,902

Maturing after one year through five years
3,603,240

 
3,922,438

Maturing after five years through ten years
4,427,116

 
4,729,717

Maturing after ten years
5,245,378

 
5,739,031

Mortgage-backed and asset-backed securities
3,068,107

 
3,286,579

 Total fixed maturities
$
17,002,708

 
$
18,367,667


Mortgage-backed (commercial and residential) and asset-backed securities include those issued by the U.S. government and U.S. agencies.
 
The following table summarizes information regarding the sales of securities classified as available-for-sale: 
 
Three Months Ended March 31,
 
2015
 
2014
Proceeds from sales
$
2,658,671

 
$
2,239,661

Gross realized gains from sales
23,351

 
19,773

Gross realized losses from sales
20

 
1,062


Mortgage loans on real estate — The following table summarizes the carrying value of the mortgage loan portfolio by component:  
 
March 31, 2015
 
December 31, 2014
Principal
$
3,433,510

 
$
3,356,374

Unamortized premium (discount) and fees, net
9,563

 
10,086

Mortgage provision allowance
(2,890
)
 
(2,890
)
Total mortgage loans
$
3,440,183

 
$
3,363,570

 
The recorded investment of the mortgage loan portfolio categorized as performing was $3,443,073 and $3,366,460 as of March 31, 2015 and December 31, 2014, respectively.  
 
Three Months Ended March 31, 2015
 
Year Ended December 31, 2014
 
Commercial mortgages
 
Commercial mortgages
Allowance ending balance by basis of impairment method:
 
 
 
Collectively evaluated for impairment
$
2,890

 
$
2,890

 
 
 
 
Recorded investment balance in the mortgage loan portfolio, gross of allowance, by basis of impairment method:
$
3,443,073

 
$
3,366,460

Individually evaluated for impairment
12,878

 
12,986

Collectively evaluated for impairment
3,430,195

 
3,353,474

 
Limited partnership and other corporation interests — At March 31, 2015 and December 31, 2014, the Company had $47,481 and $49,421, respectively, invested in limited partnership and other corporation interests. Included in limited

14

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



partnership interests are investments in low-income housing limited partnerships (“LIHLP”) that qualify for federal and state tax credits and ownership interests in pooled investment funds.
 
The Company has determined each investment in LIHLP to be considered a variable interest entity (“VIE”) but consolidation was not required because the Company has no power through voting rights or similar rights to direct the activities that most significantly impact the entities’ economic performance. As a 99% limited partner in various upper-tier LIHLPs, the Company expects to receive the tax credits allocated to the partnership and operating losses from depreciation and interest expense.  The general partner is most closely involved in the development and management of the LIHLP project and has a small ownership percentage of the partnership.
 
The carrying value and maximum exposure to loss in relation to the activities of the VIEs was $6,308 and $7,464 at March 31, 2015 and December 31, 2014, respectively.

Special deposits and securities lending — The Company had securities on deposit with government authorities as required by certain insurance laws with fair values of $14,785 and $14,612 at March 31, 2015 and December 31, 2014, respectively.
 
The Company participates in a securities lending program whereby securities are loaned to third parties.  Securities with a cost or amortized cost of $169,739 and $15,252 and estimated fair values of $170,659 and $15,423 were on loan under the program at March 31, 2015 and December 31, 2014, respectively.  The Company received cash of $89,906 and $13,741 and securities with a fair value of $85,137 and $2,131 as collateral at March 31, 2015 and December 31, 2014, respectively.

Unrealized losses on fixed maturity investments classified as available-for-sale — The following tables summarize unrealized investment losses, including the non-credit-related portion of OTTI losses reported in AOCI, by class of investment:
 
 
March 31, 2015
 
 
Less than twelve months
 
Twelve months or longer
 
Total
 
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
Fixed maturities:
 
fair value
 
loss and OTTI
 
fair value
 
loss and OTTI
 
fair value
 
loss and OTTI
U.S. government direct obligations and U.S. agencies
 
$
46,293


$
65


$
26,592


$
325


$
72,885


$
390

Obligations of U.S. states and their subdivisions
 
162,763


1,214


807


249


163,570


1,463

Corporate debt securities
 
773,294


23,499


381,146


56,219


1,154,440


79,718

Asset-backed securities
 
78,682


415


195,402


11,046


274,084


11,461

Residential mortgage-backed securities
 
3,945


10


22,622


1,499


26,567


1,509

Commercial mortgage-backed securities
 
60,370


699


24,939


140


85,309


839

Total fixed maturities
 
$
1,125,347


$
25,902


$
651,508


$
69,478


$
1,776,855


$
95,380

 
 

















Total number of securities in an unrealized loss position
 
 


122


 


89


 


211

 

15

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



 
 
December 31, 2014
 
 
Less than twelve months
 
Twelve months or longer
 
Total
 
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
Fixed maturities:
 
fair value
 
loss and OTTI
 
fair value
 
loss and OTTI
 
fair value
 
loss and OTTI
U.S. government direct obligations and U.S. agencies
 
$
566,335


$
503


$
74,322


$
991


$
640,657


$
1,494

Obligations of U.S. states and their subdivisions
 
18,280


218


41,064


681


59,344


899

Foreign government securities
 
2,451


4






2,451


4

Corporate debt securities
 
836,263


16,775


764,528


65,329


1,600,791


82,104

Asset-backed securities
 
88,312


849


200,072


12,853


288,384


13,702

Residential mortgage-backed securities
 
4,663


11


24,052


1,921


28,715


1,932

Commercial mortgage-backed securities
 
35,015


127


57,333


972


92,348


1,099

Collateralized debt obligations
 
10,465


209






10,465


209

Total fixed maturities
 
$
1,561,784


$
18,696


$
1,161,371


$
82,747


$
2,723,155


$
101,443

 
 

















Total number of securities in an unrealized loss position
 
 


134


 


153


 


287

 
Fixed maturity investments — Total unrealized losses and OTTI decreased by $6,063, or 6%, from December 31, 2014 to March 31, 2015. The overall decrease in unrealized losses was across most asset classes and reflects lower interest rates at March 31, 2015 compared to December 31, 2014 resulting in generally higher valuations of these fixed maturity securities.
 
Total unrealized losses greater than twelve months decreased by $13,269 from December 31, 2014 to March 31, 2015.  Corporate debt securities account for 81%, or $56,219, of the unrealized losses and OTTI greater than twelve months at March 31, 2015.  Non-investment grade corporate debt securities account for $10,420 of the unrealized losses and OTTI greater than twelve months and $9,731 of the losses are on perpetual debt investments issued by investment grade rated banks in the United Kingdom.  Management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.
 
Asset-backed securities account for 16% of the unrealized losses and OTTI greater than twelve months at March 31, 2015.  The present value of the cash flows expected to be collected is not less than amortized cost and management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.
 
Other-than-temporary impairment recognition — The OTTI on fixed maturity securities where the loss portion is bifurcated and the credit related component is recognized in realized investment gains (losses) is summarized as follows:
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Beginning balance
 
$
119,532

 
$
167,961

Initial impairments - credit loss on securities not previously impaired
 
450

 

Reductions due to increases in cash flows expected to be collected that are recognized over the remaining life of the security
 
(4,329
)
 

Ending balance
 
$
115,653

 
$
167,961

 

16

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



6.  Derivative Financial Instruments
 
Derivative transactions are generally entered into pursuant to International Swaps and Derivatives Association (“ISDA”) Master Agreements or Master Securities Forward Transaction Agreements (“MSFTA”) with approved counterparties that provide for a single net payment to be made by one party to the other on a daily basis, periodic payment dates, or at the due date, expiration or termination of the agreement.

The ISDA Master Agreements contain provisions that would allow the counterparties to require immediate settlement of all derivative instruments in a net liability position if the Company were to default on any debt obligations over a certain threshold.  The MSFTA contain provisions which do not stipulate a threshold for default and only apply to debt obligations between the Company and the specific counterparty.  The aggregate fair value, inclusive of accrued income and expense, of derivative instruments with credit-risk-related contingent features that were in a net liability position was $102,046 and $141,653 as of March 31, 2015 and December 31, 2014, respectively.  The Company had pledged collateral related to these derivatives of $57,443 and $106,110 as of March 31, 2015 and December 31, 2014, respectively, in the normal course of business.  If the credit-risk-related contingent features were triggered on March 31, 2015 the fair value of assets that could be required to settle the derivatives in a net liability position was $44,603.
 
At March 31, 2015 and December 31, 2014, the Company had pledged $57,443 and $106,110 of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $13,176 and $791 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.
 
At March 31, 2015, the Company estimated $7,128 of net derivative gains related to cash flow hedges included in AOCI will be reclassified into net income within the next twelve months. Gains and losses included in AOCI are reclassified into net income when the hedged item affects earnings.


17

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Types of derivative instruments and derivative strategies

Interest rate contracts
 
Cash flow hedges
 
Interest rate swap agreements are used to convert the interest rate on certain debt securities from a floating rate to a fixed rate.  Interest rate futures are used to manage the interest rate risks of forecasted acquisitions of fixed rate maturity investments and are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.
 
Fair value hedges
 
Interest rate swap agreements are used to convert the interest rate on certain debt securities from a fixed rate to a floating rate to manage the interest rate risk of the change in the fair value of certain fixed rate maturity investments.
 
Not designated as hedging instruments
 
The Company enters into certain transactions in which derivatives are hedging an economic risk but hedge accounting is not elected.  These derivative instruments include:  exchange-traded interest rate swap futures, over-the-counter (“OTC”) interest rate swaptions, OTC interest rate swaps, exchange-traded Eurodollar interest rate futures and treasury interest rate futures.  Certain of the Company’s OTC derivatives are cleared and settled through a central clearing counterparty while others are bilateral contracts between the Company and a counterparty.
 
The derivative instruments mentioned above are economic hedges and used to manage risk.  These transactions are used to offset changes in liabilities including those in variable annuity products, hedge the economic effect of a large increase in interest rates, manage the potential variability in future interest payments due to a change in credited interest rates and the related change in cash flows due to increased surrenders and manage interest rate risks of forecasted acquisitions of fixed rate maturity investments and forecasted liability pricing.

Cross-currency contracts
 
Cross-currency swaps are used to manage the foreign currency exchange rate risk associated with investments denominated in other than U.S. dollars.  The Company uses cross-currency swaps to convert interest and principal payments on foreign denominated debt instruments into U.S. dollars.  Cross-currency swaps may be designated as cash flow hedges; however, hedge accounting is not always elected.

Equity contracts
 
Futures on equity indices are used to reduce the Company’s exposure to equity market risks; however, hedge accounting is not elected.  The Company is hedging the risk of declining equity market values having an adverse effect on fee income collected on equity funds. The Company also uses futures on equity indices to offset changes in guaranteed lifetime withdrawal benefit liabilities.

Other forward contracts
 
The Company uses forward settling TBA securities to gain exposure to the investment risk and return of agency mortgage-backed securities (pass-throughs). These transactions enhance the return on the Company’s investment portfolio and provide a more liquid and cost effective method of achieving these goals than purchasing or selling individual agency mortgage-backed pools.  As the Company does not regularly accept delivery of such securities, they are accounted for as derivatives but hedge accounting is not elected. 


18

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The following tables summarize the notional amount and fair value of derivative financial instruments, excluding embedded derivatives:
 
March 31, 2015
 
 
 
Net derivatives
 
Asset derivatives
 
Liability derivatives
 
Notional amount
 
Fair value
 
Fair value (1)
 
Fair value (1)
Hedge designation/derivative type:
 


 


 


 

Derivatives designated as hedges:
 


 


 


 

Cash flow hedges:
 


 


 


 

Interest rate swaps
$
184,200


$
19,593


$
19,593


$

Cross-currency swaps
186,225


15,878


15,946


68

Total cash flow hedges
370,425


35,471


35,539


68

 











Fair value hedges:
 


 


 


 

Interest rate swaps
42,550


69


260


191

Total fair value hedges
42,550


69


260


191

 











Total derivatives designated as hedges
412,975


35,540


35,799


259

 











Derivatives not designated as hedges:
 


 


 


 

Interest rate swaps
195,600


7,206


10,527


3,321

Futures on equity indices
5,932







Interest rate futures
10,883







Interest rate swaptions
243,344


244


244



Other forward contracts
5,930,500


16,825


20,925


4,100

Cross-currency swaps
662,935


(80,823
)

14,197


95,020

Total derivatives not designated as hedges
7,049,194


(56,548
)

45,893


102,441

Total derivative financial instruments
$
7,462,169


$
(21,008
)

$
81,692


$
102,700


(1) The estimated fair value excludes accrued income and expense. The estimated fair value of all derivatives in an asset position is reported within other assets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the condensed consolidated balance sheets.


19

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



 
December 31, 2014
 
 
 
Net derivatives
 
Asset derivatives
 
Liability derivatives
 
Notional amount
 
Fair value
 
Fair value (1)
 
Fair value (1)
Hedge designation/derivative type:
 


 


 


 

Derivatives designated as hedges:
 


 


 


 

Cash flow hedges:
 


 


 


 

Interest rate swaps
$
184,200


$
17,746


$
17,746


$

Cross-currency swaps
174,245


2,322


5,143


2,821

Total cash flow hedges
358,445


20,068


22,889


2,821

 











Fair value hedges:
 


 


 


 

Interest rate swaps
78,000


1,506


1,637


131

Total fair value hedges
78,000


1,506


1,637


131

 











Total derivatives designated as hedges
436,445


21,574


24,526


2,952

 











Derivatives not designated as hedges:
 


 


 


 

Interest rate swaps
128,100


4,402


6,246


1,844

Futures on equity indices
5,505







Interest rate futures
17,958







Interest rate swaptions
293,964


271


271



Cross-currency swaps
662,935


(127,230
)

4,561


131,791

Total derivatives not designated as hedges
1,108,462


(122,557
)

11,078


133,635

Total derivative financial instruments
$
1,544,907


$
(100,983
)

$
35,604


$
136,587


(1) The estimated fair value excludes accrued income and expense. The estimated fair value of all derivatives in an asset position is reported within other assets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the condensed consolidated balance sheets.
 
Notional amounts are used to express the extent of the Company’s involvement in derivative transactions and represent a standard measurement of the volume of its derivative activity.  Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received. The average notional outstanding during the three months ended March 31, 2015 was $416,588, $846,165, $20,570, $278,999, and $4,551,500 for interest rate swaps, cross-currency swaps, futures, swaptions and other forward contracts, respectively. The average notional outstanding during the year ended December 31, 2014 was $340,262, $732,581, $21,702, $407,552, and $4,217,408 for interest rate swaps, cross-currency swaps, futures, swaptions and other forward contracts, respectively.
 


20

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)




The following tables present the effect of derivative instruments in the condensed consolidated statements of income reported by cash flow hedges, fair value hedges and economic hedges, excluding embedded derivatives: 

Gain (loss) recognized
in OCI on derivatives
(Effective portion)
 
Gain (loss) reclassified from OCI
into net income (Effective portion)
 
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
 
2015
 
2014
 
2015
 
2014
 
Cash flow hedges:
 

 
 

 
 

 
 

 
Interest rate swaps
$
3,141

 
$
1,244

 
$
1,856

 
$
563

(A)
Cross-currency swaps
14,014

 
(360
)
 
423

 

(A)
Interest rate futures

 

 
(21
)
 
17

(A)
Total cash flow hedges
$
17,155

 
$
884

 
$
2,258

 
$
580

 
 (A) Net investment income.
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on derivatives
recognized in net income
 
Gain (loss) on hedged assets
recognized in net income
 
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
 
2015
 
2014
 
2015
 
2014
 
Fair value hedges:
 

 
 

 
 

 
 

 
Interest rate swaps
$
(1,438
)
 
$
(1,067
)
(A)
$

 
$

 
Interest rate swaps
630

 

(B)

 

 
Items hedged in interest rate swaps

 

 
1,443

 
1,067

(A)
Items hedged in interest rate swaps

 

 
(630
)
 

(B)
Total fair value hedges
$
(808
)
 
$
(1,067
)
 
$
813

 
$
1,067

 
(A) Net investment income.
(B) Represents realized gains (losses) on closed positions recorded in realized investment gains (losses), net.
 
 
 
 
 
 
 
 
 
 
 
 
 
 




21

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



 
Gain (loss) on derivatives recognized in net income
 
 
Three Months Ended March 31,
 
 
2015
 
2014
 
Derivatives not designated as hedging instruments:
 

 
 

 
Futures on equity indices
$
147

(A)
$
77

(A)
Futures on equity indices
(723
)
(B)
(163
)
(B)
Interest rate swaps
2,822

(A)
1,109

(A)
Interest rate futures
(151
)
(A)
(3
)
(A)
Interest rate futures
135

(B)
(24
)
(B)
Interest rate swaptions
910

(A)
202

(A)
Interest rate swaptions
(987
)
(B)
(833
)
(B)
Other forward contracts
16,825

(A)
(6,343
)
(A)
Other forward contracts
(9,340
)
(B)
7,581

(B)
Cross-currency swaps
45,046

(A)
(1,632
)
(A)
Total derivatives not designated as hedging instruments
$
54,684

 
$
(29
)
 
(A) Net investment income.
(B) Represents realized gains (losses) on closed positions recorded in realized investment gains (losses), net.

Embedded derivative - Guaranteed Lifetime Withdrawal Benefit

The Company offers a guaranteed lifetime withdrawal benefit (“GLWB”) through a variable annuity or a contingent deferred annuity. The GLWB is deemed to be an embedded derivative. The GLWB is recorded at fair value within policyholders’ funds on the condensed consolidated balance sheets. Changes in fair value of GLWB are recorded in net investment income in the condensed consolidated statements of income.

The estimated fair value of the GLWB was $9,177 and $6,407 at March 31, 2015 and December 31, 2014, respectively. The changes in fair value of the GLWB were $2,770 and zero for the three months ended March 31, 2015 and 2014, respectively.


22

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



7.  Summary of Offsetting Assets and Liabilities
 
The Company enters into derivative transactions and short-term reverse repurchase agreements with several approved counterparties. The Company’s derivative transactions are generally governed by MSFTA or ISDA Master Agreements which provide for legally enforceable set-off and close-out netting in the event of default or bankruptcy of the Company’s counterparties.  The Company’s MSFTA and ISDA Master Agreements generally include provisions which require both the pledging and accepting of collateral in connection with its derivative transactions. These provisions have the effect of securing each party’s position to the extent of collateral held.  Short-term reverse repurchase agreements also include collateral provisions with the counterparty.  The following tables summarize the effect of master netting arrangements on the Company’s financial position in the normal course of business and in the event of default or bankruptcy of the Company’s counterparties: 
 

March 31, 2015
 

 
 
Gross fair value not offset
 
 
 

 
 
in balance sheets
 
 
 

Gross fair value of
 
Financial
 
Cash collateral
 
Net
Financial instruments (assets):

recognized assets (1)
 
instruments
 
received
 
fair value
Derivative instruments (2)

$
68,382


$
(45,795
)

$
13,176


$
9,411

Short-term reverse repurchase agreements (3)

600,000


(600,000
)




Total financial instruments (assets)

$
668,382


$
(645,795
)

$
13,176


$
9,411


 

March 31, 2015
 

 
 
Gross fair value not offset
 
 
 

 
 
in balance sheets
 
 
 

Gross fair value of
 
Financial
 
Cash collateral
 
Net
Financial instruments (liabilities):

recognized liabilities (1)
 
instruments
 
pledged
 
fair value
Derivative instruments (4)

$
101,899


$
(45,795
)

$
(56,099
)

$
5


(1) The gross fair value of derivative instrument and short-term reverse repurchase agreement assets are not netted against offsetting liabilities for presentation on the condensed consolidated balance sheets.
(2) The estimated fair value of derivative instrument assets is reported in other assets in the condensed consolidated balance sheets. The estimated fair value of derivative transactions entered into under ISDA master agreements include income and expense accruals.
(3) The estimated fair value of short-term reverse repurchase agreement assets is reported in short-term investments in the condensed consolidated balance sheets.  The collateral is held by an independent third-party custodian under a tri-party agreement.
(4) The estimated fair value of derivative instrument liabilities is reported in other liabilities in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.
 
 

December 31, 2014
 

 
 
Gross fair value not offset
 
 
 

 
 
in balance sheets
 
 
 

Gross fair value of
 
Financial
 
Cash collateral
 
Net
Financial instruments:

recognized assets/liabilities (1)
 
instruments
 
received/(pledged)
 
fair value
Derivative instruments (assets) (2)

$
32,895


$
(32,595
)

$
279


$
21

Derivative instruments (liabilities) (3)

140,655


(32,595
)

(105,929
)

2,131


(1) The gross fair value of derivative instrument assets is not netted against offsetting liabilities for presentation on the condensed consolidated balance sheets.
(2) The estimated fair value of derivative instrument assets is reported in other assets in the condensed consolidated balance sheets. The estimated fair value of derivative transactions entered into under ISDA master agreements include income and expense accruals.
(3) The estimated fair value of derivative instrument liabilities is reported in other liabilities in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.
 

23

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



8.  Fair Value Measurements
 
Recurring fair value measurements
 
The following tables present the Company’s financial assets and liabilities carried at fair value on a recurring basis by fair value hierarchy category:

Assets and liabilities measured at
fair value on a recurring basis
 
March 31, 2015
 
Quoted prices
 
Significant
 
 
 
 
 
in active
markets for
identical assets
(Level 1)
 
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Assets
 

 
 

 
 

 
 

Fixed maturities available-for-sale:
 

 
 

 
 

 
 

U.S. government direct obligations and U.S. agencies
$


$
1,156,299


$


$
1,156,299

Obligations of U.S. states and their subdivisions


2,360,693




2,360,693

Foreign government securities


2,414




2,414

Corporate debt securities


12,324,502


5,329


12,329,831

Asset-backed securities


1,425,012


33


1,425,045

Residential mortgage-backed securities


162,446




162,446

Commercial mortgage-backed securities


921,072




921,072

Collateralized debt obligations


9,867




9,867

Total fixed maturities available-for-sale


18,362,305


5,362


18,367,667

Fixed maturities held-for-trading:
 


 


 


 

U.S. government direct obligations and U.S. agencies


70,516




70,516

Corporate debt securities


58,120




58,120

Commercial mortgage-backed securities


1,116




1,116

Total fixed maturities held-for-trading


129,752




129,752

Short-term investments
273,572


2,161,054




2,434,626

Collateral under securities lending agreements
89,906






89,906

Collateral under derivative counterparty collateral agreements
70,619






70,619

Derivative instruments designated as hedges:
 


 


 


 

Interest rate swaps


19,853




19,853

Cross-currency swaps

 
15,946

 

 
15,946

Derivative instruments not designated as hedges:
 


 


 


 

Interest rate swaps


10,527




10,527

Interest rate swaptions


244




244

Other forward contracts


20,925




20,925

Cross-currency swaps


14,197




14,197

Total derivative instruments


81,692




81,692

Separate account assets
16,470,665


12,140,746




28,611,411

Total assets
$
16,904,762


$
32,875,549


$
5,362


$
49,785,673

 











Liabilities
 


 


 


 

Payable under securities lending agreements
$
89,906


$


$


$
89,906

Collateral under derivative counterparty collateral agreements
13,176

 

 

 
13,176

Derivative instruments designated as hedges:
 


 


 


 

Interest rate swaps


191




191

Cross-currency swaps


68




68

Derivative instruments not designated as hedges:
 


 


 


 

Interest rate swaps


3,321




3,321

Other forward contracts


4,100




4,100

Cross-currency swaps


95,020




95,020

Total derivative instruments


102,700




102,700

Embedded derivatives - GLWB

 

 
9,177

 
9,177

Separate account liabilities (1)
36


225,016




225,052

Total liabilities
$
103,118


$
327,716


$
9,177


$
440,011

 (1) Includes only separate account instruments which are carried at the fair value of the underlying liabilities owned by the separate accounts.

24

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)




Assets and liabilities measured at
fair value on a recurring basis
 
December 31, 2014
 
Quoted prices
 
Significant
 
 
 
 
 
in active
markets for
identical assets
(Level 1)
 
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Assets
 


 


 


 

Fixed maturities available-for-sale:
 


 


 


 

U.S. government direct obligations and U.S. agencies
$


$
3,547,256


$


$
3,547,256

Obligations of U.S. states and their subdivisions


2,172,484




2,172,484

Foreign government securities


2,451




2,451

Corporate debt securities


11,933,607


5,842


11,939,449

Asset-backed securities


1,398,503


36


1,398,539

Residential mortgage-backed securities


173,229




173,229

Commercial mortgage-backed securities


918,205




918,205

Collateralized debt obligations


10,465




10,465

Total fixed maturities available-for-sale


20,156,200


5,878


20,162,078

Fixed maturities held-for-trading:
 


 


 


 

U.S. government direct obligations and U.S. agencies


279,602




279,602

Corporate debt securities


57,850




57,850

Commercial mortgage-backed securities


1,091




1,091

Total fixed maturities held-for-trading


338,543




338,543

Short-term investments
156,935


106,566




263,501

Collateral under securities lending agreements
13,741






13,741

Collateral under derivative counterparty collateral agreements
106,901






106,901

Derivative instruments designated as hedges:
 


 


 


 

Interest rate swaps


19,383




19,383

Cross-currency swaps

 
5,143

 

 
5,143

Derivative instruments not designated as hedges:
 


 


 


 

Interest rate swaps


6,246




6,246

Interest rate swaptions


271




271

Cross-currency swaps


4,561




4,561

Total derivative instruments


35,604




35,604

Separate account assets
16,146,057


11,572,787




27,718,844

Total assets
$
16,423,634


$
32,209,700


$
5,878


$
48,639,212

 











Liabilities
 


 


 


 

Payable under securities lending agreements
$
13,741


$


$


$
13,741

Collateral under derivative counterparty collateral agreements
791

 

 

 
791

Derivative instruments designated as hedges:
 


 


 


 

Interest rate swaps


131




131

Cross-currency swaps


2,821




2,821

Derivative instruments not designated as hedges:
 


 


 


 

Interest rate swaps


1,844




1,844

Cross-currency swaps


131,791




131,791

Total derivative instruments


136,587




136,587

Embedded derivatives - GLWB

 

 
6,407

 
6,407

Separate account liabilities (1)
15


217,712




217,727

Total liabilities
$
14,547


$
354,299


$
6,407


$
375,253


 (1) Includes only separate account instruments which are carried at the fair value of the underlying liabilities owned by the separate accounts.


25

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The methods and assumptions used to estimate the fair value of the Company’s financial assets and liabilities carried at fair value on a recurring basis are as follows:

Fixed maturity investments
 
The fair values for fixed maturity investments are based upon market prices from independent pricing services.  In cases where market prices are not readily available, fair values are estimated by the Company.  To determine estimated fair value for these instruments, the Company generally utilizes discounted cash flows models with market observable pricing inputs such as spreads, average life and credit quality.  Fair value estimates are made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty.
 
Short-term investments and securities lending agreements
 
The amortized cost of short-term investments, collateral under securities lending agreements and payable under securities lending agreements is a reasonable estimate of fair value due to their short-term nature and high credit quality of the issuers.
 
Derivative counterparty collateral agreements
 
Included in other assets is cash collateral received from or pledged to derivative counterparties and included in other liabilities is the obligation to return the cash collateral to the counterparties.  The carrying value of the collateral is a reasonable estimate of fair value.
 
Derivative instruments
 
Included in other assets and other liabilities are derivative financial instruments. The estimated fair values of OTC derivatives, primarily consisting of cross-currency swaps, interest rate swaps, interest rate swaptions and other forward contracts, are the estimated amounts the Company would receive or pay to terminate the agreements at the end of each reporting period, taking into consideration current interest rates and other relevant factors.

Embedded derivative - GLWB

Significant unobservable inputs used in the fair value measurements of GLWB include long-term equity and interest rate implied volatility, mortality and policyholder behavior assumptions, such as benefit utilization, lapses and partial withdrawals.

Separate account assets and liabilities
 
Separate account assets and liabilities primarily include investments in mutual fund, fixed maturity and short-term securities.  Mutual funds are recorded at net asset value, which approximates fair value, on a daily basis.  The fixed maturity and short-term investments are valued in the same manner, and using the same pricing sources and inputs as the fixed maturity and short-term investments of the Company.
 

26

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The following tables present additional information about assets and liabilities measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

 
Recurring Level 3 financial assets and liabilities

Three Months Ended March 31, 2015
 
Assets
 
Liabilities
 
Fixed maturities available-for-sale
 
 
 
Embedded
 
Corporate
 
Asset-backed
 
Collateralized
 
 
 
derivatives
 
debt securities
 
securities
 
debt obligations
 
Total
 
- GLWB
Balance, January 1, 2015
$
5,842


$
36


$

 
$
5,878

 
$
6,407

Realized and unrealized gains (losses) included in:
 


 


 

 
 

 
 
Net income (loss)

 

 

 

 
2,770

Other comprehensive income (loss)
(28
)




 
(28
)
 

Settlements
(485
)

(3
)


 
(488
)
 

Balances, March 31, 2015
$
5,329


$
33


$

 
$
5,362

 
$
9,177

Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at March 31, 2015
$


$


$

 
$

 
$
2,770

 

Recurring Level 3 financial assets and liabilities

Three Months Ended March 31, 2014
 
Assets
 
Liabilities
 
Fixed maturities available-for-sale
 
 
 
Embedded
 
Corporate
 
Asset-backed
 
Collateralized
 
 
 
derivatives
 
debt securities
 
securities
 
debt obligations
 
Total
 
- GLWB
Balance, January 1, 2014
$
6,652


$
252,958


$
32

 
$
259,642

 
$

Realized and unrealized gains (losses) included in:
 


 


 

 
 

 
 
Other comprehensive income (loss)
58


6,813


(3
)
 
6,868

 

Settlements
(187
)

(13,746
)


 
(13,933
)
 

Balances, March 31, 2014
$
6,523


$
246,025


$
29

 
$
252,577

 
$

Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at March 31, 2014
$


$


$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

27

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The following tables present significant unobservable inputs used during the valuation of certain assets categorized within Level 3 of the recurring fair value measurements table:
 
 
March 31, 2015
 
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
Embedded derivatives - GLWB
 
$
9,177

 
Risk neutral stochastic valuation methodology
 
Equity volatility
 
15% - 28%
 
 
 
 
 
 
Swap curve
 
0.80% - 2.50%
 
 
 
 
 
 
Mortality rate
 
Based on the Annuity 2000 Mortality Table
 
 
 
 
 
 
Lapse rate
 
1% - 12%

 
 
December 31, 2014
 
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
Embedded derivatives - GLWB
 
$
6,407

 
Risk neutral stochastic valuation methodology
 
Equity volatility
 
15% - 28%
 
 
 
 
 
 
Swap curve
 
0.44% - 2.70%
 
 
 
 
 
 
Mortality rate
 
Based on the Annuity 2000 Mortality Table
 
 
 
 
 
 
Lapse rate
 
1% - 12%

Non-recurring fair value measurements - Certain assets are measured at estimated fair value on a non-recurring basis and are not included in the tables above. The Company held zero and $9,242 of adjusted cost basis limited partnership interests which were impaired at March 31, 2015 and December 31, 2014, respectively, based on the fair value disclosed in the limited partnership financial statements. These limited partnership interests were recorded at estimated fair value and represent a non-recurring fair value measurement. The estimated fair value was categorized as Level 3.

Fair value of financial instruments
 
The following tables summarize the carrying amounts and estimated fair values of the Company’s financial instruments not carried at fair value on a recurring basis:
 
March 31, 2015
 
December 31, 2014
 
Carrying
 
Estimated
 
Carrying
 
Estimated
 
amount
 
fair value
 
amount
 
fair value
Assets
 

 
 

 
 

 
 

Mortgage loans on real estate
$
3,440,183

 
$
3,682,669

 
$
3,363,570

 
$
3,558,111

Policy loans
4,125,285

 
4,125,285

 
4,130,062

 
4,130,062

Limited partnership interests
37,876

 
41,147

 
38,796

 
41,853

Other investments
15,021

 
44,591

 
15,614

 
43,263

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Annuity contract benefits without life contingencies
$
10,556,269

 
$
10,774,463

 
$
10,569,147

 
$
10,563,477

Policyholders’ funds
296,602

 
296,602

 
335,484

 
335,484

Commercial paper
89,989

 
89,989

 
98,589

 
98,589

Notes payable
541,812

 
591,782

 
532,547

 
564,904

 

28

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The methods and assumptions used to estimate the fair value of financial instruments not carried at fair value on a recurring basis are summarized as follows:
 
Mortgage loans on real estate
 
Mortgage loan fair value estimates are generally based on discounted cash flows.  A discount rate matrix is used where the discount rate valuing a specific mortgage generally corresponds to that mortgage’s remaining term and credit quality.  Management believes the discount rate used is comparable to the credit, interest rate, term, servicing costs and risks of loans similar to the portfolio loans that the Company would make today given its internal pricing strategy.  The estimated fair value is classified as Level 2.
 
Policy loans
 
Policy loans are funds provided to policy holders in return for a claim on the policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the fair value of policy loans approximates carrying value.  The estimated fair value is classified as Level 2.
 
Limited partnership interests
 
Limited partnership interests, accounted for using the cost method, represent the Company’s minority ownership interests in pooled investment funds.  These funds employ varying investment strategies that principally make private equity investments across diverse industries and geographical focuses.  The estimated fair value was determined using the partnership financial statement reported capital account or net asset value adjusted for other relevant information which may impact the exit value of the investments.  Distributions by these investments are generated from investment gains, from operating income generated by the underlying investments of the funds and from liquidation of the underlying assets of the funds which are estimated to be liquidated over the next one to 10 years.  The estimated fair value is classified as Level 3.

Other investments
 
Other investments primarily include real estate held for investment.  The estimated fair value for real estate is based on the unadjusted annual appraised value which includes factors such as comparable property sales, property income analysis, and capitalization rates.  The estimated fair value is classified as Level 2.

Annuity contract benefits without life contingencies
 
The estimated fair value of annuity contract benefits without life contingencies is estimated by discounting the projected expected cash flows to the maturity of the contracts utilizing risk-free spot interest rates plus a provision for the Company’s credit risk.  The estimated fair value is classified as Level 2.
 
Policyholders’ funds
 
The carrying amount of policyholders’ funds approximates the fair value since the Company can change the interest credited rates with 30 days notice. The estimated fair value is classified as Level 2.
 
Commercial paper
 
The amortized cost of commercial paper is a reasonable estimate of fair value due to its short-term nature and the high credit quality of the obligor.  The estimated fair value is classified as Level 2.


29

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



 Notes payable
 
The estimated fair value of the notes payable to GWL&A Financial is based upon quoted market prices from independent pricing services of securities with characteristics similar to those of the notes payable.  The estimated fair value is classified as Level 2.
 
9.  Other Comprehensive Income
 
The following tables present the accumulated balances for each classification of other comprehensive income (loss):
 
 
Three Months Ended March 31, 2015
 
Unrealized
holding gains
/ losses
arising on
fixed
maturities,
available-for-
sale
 
Unrealized
holding gains
/ losses
arising on
cash flow
hedges
 
Future policy
benefits, DAC
and VOBA
adjustments
 
Employee
benefit plan
adjustment
 
Total
Balances, January 1, 2015
$
784,183

 
$
33,141

 
$
(108,194
)
 
$
(106,112
)
 
$
603,018

Other comprehensive income (loss) before reclassifications
117,894

 
11,151

 
(22,834
)
 
(215
)
 
105,996

Amounts reclassified from AOCI
(18,316
)
 
(1,468
)
 

 
1,907

 
(17,877
)
Net current period other comprehensive income (loss)
99,578

 
9,683

 
(22,834
)
 
1,692

 
88,119

Balances, March 31, 2015
$
883,761

 
$
42,824

 
$
(131,028
)
 
$
(104,420
)
 
$
691,137

 
 
Three Months Ended March 31, 2014
 
Unrealized
holding gains
/ losses
arising on
fixed
maturities,
available-for-
sale
 
Unrealized
holding gains
/ losses
arising on
cash flow
hedges
 
Future policy
benefits, DAC
and VOBA
adjustments
 
Employee
benefit plan
adjustment
 
Total
Balances, January 1, 2014
$
434,023

 
$
25,517

 
$
(70,000
)
 
$
(43,786
)
 
$
345,754

Other comprehensive income (loss) before reclassifications
202,344

 
575

 
(37,211
)
 

 
165,708

Amounts reclassified from AOCI
(14,065
)
 
(377
)
 

 

 
(14,442
)
Net current period other comprehensive income (loss)
188,279

 
198

 
(37,211
)
 

 
151,266

Balances, March 31, 2014
$
622,302

 
$
25,715

 
$
(107,211
)
 
$
(43,786
)
 
$
497,020

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


30

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The following tables present the composition of other comprehensive income (loss):
 
 
Three Months Ended March 31, 2015
 
Before-tax
 
Tax (expense)
 
Net-of-tax
 
amount
 
benefit
 
amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale
$
181,375

 
$
(63,481
)
 
$
117,894

Unrealized holding gains (losses), net, arising on cash flow hedges
17,155

 
(6,004
)
 
11,151

Reclassification adjustment for (gains) losses, net, realized in net income
(30,437
)
 
10,653

 
(19,784
)
Net unrealized gains (losses) related to investments
168,093

 
(58,832
)
 
109,261

Future policy benefits, DAC and VOBA adjustments
(35,129
)
 
12,295

 
(22,834
)
Net unrealized gains (losses)
132,964

 
(46,537
)
 
86,427

Employee benefit plan adjustment
2,603

 
(911
)
 
1,692

Other comprehensive income (loss)
$
135,567

 
$
(47,448
)
 
$
88,119

 
 
Three Months Ended March 31, 2014
 
Before-tax
 
Tax (expense)
 
Net-of-tax
 
amount
 
benefit
 
amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale
$
311,298

 
$
(108,954
)
 
$
202,344

Unrealized holding gains (losses), net, arising on cash flow hedges
884

 
(309
)
 
575

Reclassification adjustment for (gains) losses, net, realized in net income
(22,218
)
 
7,776

 
(14,442
)
Net unrealized gains (losses) related to investments
289,964

 
(101,487
)
 
188,477

Future policy benefits, DAC and VOBA adjustments
(57,248
)
 
20,037

 
(37,211
)
Net unrealized gains (losses)
232,716

 
(81,450
)
 
151,266

Other comprehensive income (loss)
$
232,716

 
$
(81,450
)
 
$
151,266


 
 
 
 
 
 

 
 
 
 
 
 


31

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The following tables presents the reclassifications out of accumulated other comprehensive income (loss):
 
 
 
Three Months Ended March 31,
 
 
 
 
2015
 
2014
 
 
Details about accumulated other 
comprehensive income (loss) components
 
Amount reclassified from accumulated other comprehensive income (loss)
 
Affected line item in the statement where net income is presented
Unrealized holding (gains) losses, net, arising on fixed maturities, available-for-sale
 
$
(28,179
)
 
$
(21,638
)
 
Other realized investment (gains) losses, net
 
 
(28,179
)
 
(21,638
)
 
Total before tax
 
 
(9,863
)
 
(7,573
)
 
Tax expense or benefit
 
 
$
(18,316
)
 
$
(14,065
)
 
Net of tax
 
 
 
 
 
 
 
Unrealized holding (gains) losses, net, arising on cash flow hedges
 
$
(2,258
)
 
$
(580
)
 
Net investment income
 
 
(2,258
)
 
(580
)
 
Total before tax
 
 
(790
)
 
(203
)
 
Tax expense or benefit
 
 
$
(1,468
)
 
$
(377
)
 
Net of tax
 
 
 
 
 
 
 
Amortization of employee benefit plan items
 
 
 
 
 
 
Prior service costs (benefits)
 
$
(181
)
(1) 
$

 
 
Actuarial losses (gains)
 
3,115

(1) 

 
 
 
 
2,934

 

 
Total before tax
 
 
1,027

 

 
Tax expense or benefit
 
 
$
1,907

 
$

 
Net of tax
 
 
 
 
 
 
 
Total reclassification
 
$
(17,877
)
 
$
(14,442
)
 
Net of tax

(1) These accumulated other comprehensive income components are included in the computation of net periodic (benefit) cost of employee benefit plans (see Note 10 for additional details).

 
 
 
 
 
 
 



32

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



10.  Employee Benefit Plans
 
Net periodic cost (benefit) of the Defined Benefit Pension, Post-Retirement Medical and Supplemental Executive Retirement plans included in general insurance expenses in the accompanying condensed consolidated statements of income includes the following components:
 
 
Three Months Ended March 31,
 
Defined Benefit 
Pension Plan
 
Post-Retirement 
Medical Plan
 
Supplemental Executive
Retirement Plan
 
Total
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Components of net periodic cost (benefit):
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Service cost
$
1,509

 
$
1,174

 
$
264

 
$
206

 
$
70

 
$
205

 
$
1,843

 
$
1,585

Interest cost
5,997

 
5,738

 
126

 
130

 
531

 
697

 
6,654

 
6,565

Expected return on plan assets
(7,087
)
 
(7,319
)
 

 

 

 

 
(7,087
)
 
(7,319
)
Amortization of unrecognized prior service costs (benefits)
3

 
13

 
(417
)
 
(426
)
 
233

 
233

 
(181
)
 
(180
)
Amortization of losses (gains) from earlier periods
3,106

 
645

 
(157
)
 
(130
)
 
166

 
92

 
3,115

 
607

Net periodic cost (benefit)
$
3,528

 
$
251

 
$
(184
)
 
$
(220
)
 
$
1,000

 
$
1,227

 
$
4,344

 
$
1,258

 
 
The Company expects to make payments of approximately $533 with respect to its Post-Retirement Medical Plan and $4,825 with respect to its Supplemental Executive Retirement Plan during the year ended December 31, 2015.  The Company expects to make contributions of zero to its Defined Benefit Pension Plan during the year ended December 31, 2015.  A December 31 measurement date is used for the employee benefit plans.
 
The following table summarizes contributions to the Defined Benefit Pension Plan and payments made to the Post-Retirement Medical Plan and the Supplemental Executive Retirement Plan:
 
 
Three Months Ended March 31,
 
2015
 
2014
Contributions to the Defined Benefit Pension Plan
$

 
$
2,024

Payments to the Post-Retirement Medical Plan
133

 
131

Payments to the Supplemental Executive Retirement Plan
2,335

 
908

 
 
 
 
 

33

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



11.  Income Taxes
 
The provision for income taxes is comprised of the following:
 
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Current
 
$
28,094


$
31,044

Deferred
 
23,802

 
19,310

Total income tax provision
 
$
51,896

 
$
50,354


The following table presents a reconciliation between the statutory federal income tax rate and the Company’s effective income tax rate:
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Statutory federal income tax rate
 
35.0
 %
 
35.0
 %
Income tax effect of:
 
 

 
 

Investment income not subject to federal tax
 
(2.0
)%
 
(2.1
)%
Tax credits
 
(0.2
)%
 
(0.2
)%
State income taxes, net of federal benefit
 
1.3
 %
 
1.5
 %
Other, net
 
0.4
 %
 
0.5
 %
Effective income tax rate
 
34.5
 %
 
34.7
 %
 
During the three months ended March 31, 2015 and 2014, the Company recorded an increase in unrecognized tax benefits in the amount of $2,695 and $1,992, respectively. The Company anticipates additional increases to its unrecognized tax benefits of $4,000 to $5,000 in the next twelve months. The Company expects that the majority of the increase in its unrecognized tax benefits will not impact the effective tax rate.
 
The Company files income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years 2010 and prior.  Tax years 2011 through 2013 are open to federal examination by the Internal Revenue Service (“IRS”).  The Company does not expect significant increases or decreases to unrecognized tax benefits relating to federal, state or local audits.
 

34

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



12.  Segment Information
 
The Chief Operating Decision Maker (“CODM”) of the Company is also the Chief Executive Officer (“CEO”) of Lifeco U.S. The CODM reviews the financial information for the purposes of assessing performance and allocating resources based upon the results of Lifeco U.S. and other U.S. affiliates prepared in accordance with International Financial Reporting Standards. The CODM, in his capacity as CEO of the Company, reviews the Company’s financial information only in connection with the quarterly and annual reports that are filed with the Securities and Exchange Commission (“SEC”). Consequently, the Company does not provide its discrete financial information to the CODM to be regularly reviewed to make decisions about resources to be allocated or to assess performance. For purposes of SEC reporting requirements, the Company has chosen to present its financial information in three segments, notwithstanding the above. The three segments are: Individual Markets, Empower Retirement (formerly known as “Retirement Services”) and Other. 

Individual Markets
 
The Individual Markets reporting and operating segment distributes life insurance, annuity and retirement products to both individuals and businesses through various distribution channels.  Life insurance products in-force include participating and non-participating term life, whole life, universal life and variable universal life.
 
Empower Retirement
 
The Empower Retirement reporting and operating segment provides various retirement plan products (including individual retirement accounts (“IRAs”)) and investment options as well as comprehensive administrative and record-keeping services for financial institutions and employers, which include educational, advisory, enrollment and communication services for employer-sponsored defined contribution plans and associated defined benefit plans.
 
Other
 
The Company’s Other reporting segment is substantially comprised of activity under the assumption of reinsurance between Great-West Life & Annuity Insurance Company of South Carolina (“GWSC”), a wholly owned subsidiary, and The Canada Life Assurance Company (“CLAC”), corporate items not directly allocated to the other operating segments and interest expense on long-term debt.
 
The accounting principles used to determine segment results are the same as those used in the consolidated financial statements.  Inter-segment transactions and balances have been eliminated in consolidation.  The Company’s operations are not materially dependent on one or a few customers, brokers or agents.
 

35

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The following tables summarize segment financial information:
 
 
 
Three Months Ended March 31, 2015
 
 
Individual
 
Empower
 
 
 
 
 
 
Markets
 
Retirement
 
Other
 
Total
Revenue:
 
 

 
 

 
 

 
 

Premium income
 
$
124,962

 
$

 
$
20,741

 
$
145,703

Fee income
 
21,502

 
202,821

 
954

 
225,277

Other revenue
 

 
1,820

 

 
1,820

Net investment income
 
217,653

 
127,730

 
13,473

 
358,856

Realized investment gains (losses), net
 
8,400

 
9,800

 

 
18,200

Total revenues
 
372,517

 
342,171

 
35,168

 
749,856

Benefits and expenses:
 
 

 
 

 
 

 
 

Policyholder benefits
 
256,323

 
49,045

 
22,303

 
327,671

Operating expenses
 
35,941

 
221,030

 
14,706

 
271,677

Total benefits and expenses
 
292,264

 
270,075

 
37,009

 
599,348

Income (loss) before income taxes
 
80,253

 
72,096

 
(1,841
)
 
150,508

Income tax expense (benefit)
 
28,222

 
24,380

 
(706
)
 
51,896

Net income (loss)
 
$
52,031

 
$
47,716

 
$
(1,135
)
 
$
98,612

 
 
 
Three Months Ended March 31, 2014
 
 
Individual
 
Empower
 
 
 
 
 
 
Markets
 
Retirement
 
Other
 
Total
Revenue:
 
 

 
 

 
 

 
 

Premium income
 
$
112,777

 
$
572

 
$
18,505

 
$
131,854

Fee income
 
23,630

 
141,881

 
1,002

 
166,513

Net investment income
 
185,520

 
101,174

 
13,329

 
300,023

Realized investment gains (losses), net
 
6,735

 
20,154

 
20

 
26,909

Total revenues
 
328,662

 
263,781

 
32,856

 
625,299

Benefits and expenses:
 
 

 
 

 
 

 
 

Policyholder benefits
 
238,997

 
48,480

 
18,902

 
306,379

Operating expenses
 
35,338

 
123,986

 
14,491

 
173,815

Total benefits and expenses
 
274,335

 
172,466

 
33,393

 
480,194

Income (loss) before income taxes
 
54,327

 
91,315

 
(537
)
 
145,105

Income tax expense
 
18,965

 
31,310

 
79

 
50,354

Net income (loss)
 
$
35,362

 
$
60,005

 
$
(616
)
 
$
94,751

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

36

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



13.  Commitments and Contingencies
 
Commitments

The Company has a revolving credit facility agreement in the amount of $50,000 for general corporate purposes.  The credit facility expires on March 1, 2018.  Interest accrues at a rate dependent on various conditions and terms of borrowings.  The agreement requires, among other things, the Company to maintain a minimum adjusted net worth, of $1,100,000, as defined in the credit facility agreement (compiled on the unconsolidated statutory accounting basis prescribed by the National Association of Insurance Commissioners), at anytime.  The Company was in compliance with all covenants at March 31, 2015 and December 31, 2014.  At March 31, 2015 and December 31, 2014, there were no outstanding amounts related to the credit facility.

GWSC and CLAC are parties to a reinsurance agreement pursuant to which GWSC assumes term life insurance from CLAC.  GWL&A Financial obtained two letters of credit for the benefit of the Company as collateral under the GWSC and CLAC reinsurance agreement for policy liabilities and capital support.  The first letter of credit is for $1,168,810 and renews annually until it expires on July 3, 2027.  The second letter of credit is for $70,000 and renews annually until it expires on December 31, 2017.  At March 31, 2015 and December 31, 2014, there were no outstanding amounts related to the letters of credit.
 
In addition, the Company has other letters of credit with a total amount of $9,095, renewable annually for an indefinite period of time. At March 31, 2015 and December 31, 2014, there were no outstanding amounts related to those letters of credit.

The Company makes commitments to fund partnership interests, mortgage loans on real estate and other investments in the normal course of its business.  The amounts of these unfunded commitments at March 31, 2015 and December 31, 2014 were $224,055 and $166,356, of which $5,066 and $4,997 were related to cost basis limited partnership interests, respectively, all of which is due within one year from the dates indicated.
 
Contingencies
 
The Company is involved in various legal proceedings that arise in the ordinary course of its business.  In the opinion of management, after consultation with counsel, the likelihood of loss from the resolution of these proceedings is remote and/or the estimated loss is not expected to have a material effect on the Company’s consolidated financial position, results of its operations or cash flows.

The Company is currently evaluating the interpretation of Internal Revenue Code rules related to certain product investments. If the Company’s interpretation is not upheld, which is reasonably possible, the potential exposure is estimated to be up to $21,000.
 
The Company received a $20,000 demand letter related to a vehicle accident involving an employee.  The amount is fully indemnified by a third-party insurer.


14.  Subsequent Events

On May 1, 2015, the Company’s Board of Directors declared a dividend of $34,801, payable on June 30, 2015, to its sole shareholder, GWL&A Financial.


37



Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
General
 
As used in this Form 10-Q, the “Company” refers to Great-West Life & Annuity Insurance Company, a stock life insurance company originally organized on March 28, 1907 and domiciled in the state of Colorado, and its subsidiaries.
 
This Form 10-Q contains forward-looking statements.  Forward-looking statements are statements not based on historical information and that relate to future operations, strategies, financial results, or other developments.  In particular, statements using words such as “may,” “would,” “could,” “should,” “estimates,” “expected,” “anticipate,” “believe,” or words of similar import generally involve forward-looking statements.  Without limiting the foregoing, forward-looking statements include statements that represent the Company’s beliefs concerning future or projected levels of sales of its products, investment spreads or yields, or the earnings or profitability of the Company’s activities.
 
Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control and many of which, with respect to future business decisions, are subject to change.  Some of these risks are described in “Risk Factors” in Item 1A of this report.  These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company.  Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be global or national in scope, such as general economic conditions and interest rates, some of which may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation and others of which may relate to the Company specifically, such as credit, volatility and other risks associated with its investment portfolio and other factors.  Readers should also consider other matters, including any risks and uncertainties, discussed in documents filed by the Company and certain of its subsidiaries with the Securities and Exchange Commission.
 
The following discussion addresses the Company’s results of operations for the three months ended March 31, 2015 compared with the same period in 2014. The discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to which the reader is directed for additional information.

Recent Events

Acquisition of Putnam Retirement Business

On January 1, 2015, the Company acquired the retirement business of Putnam, an affiliated entity. The 2015 figures are aligned with the new business structure which includes the Putnam retirement business, while the 2014 comparative figures reflect the previous structure which excludes the Putnam retirement business. For the full year in 2014, Putnam’s retirement services business recorded a net loss of approximately $20 million. In 2015, this business is integrated within the Empower Retirement segment.

Empower Retirement

On October 30, 2014, the Company announced that its retirement business will officially be named Empower Retirement. Empower Retirement is the retirement services business of the Company, which in addition to completing the acquisition of RPS, integrated the retirement business of Putnam. For the three months ended March 31, 2015, the Company incurred $10 million of costs related to Empower Retirement business integration. These amounts are included in the Empower Retirement segment.

Acquisition of J.P. Morgan Retirement Plan Services

On August 29, 2014, the Company completed the acquisition of RPS. For the three months ended March 31, 2015, RPS contributed $49 million in revenue and $1 million in net income which are primarily included in the Empower Retirement segment.


38



Reconciliation of Net Income to Operating Income

The Company uses the same accounting policies and procedures to measure operating income as it uses to measure consolidated net income. The Company employs hedging strategies for the purpose of managing the interest rate, foreign currency exchange rate and equity market risks impacting the Company’s business.  For some derivative instruments, hedge accounting is not elected; therefore all gains or losses from these transactions are recorded in the consolidated statement of income.  As a result, fluctuations in interest rates, foreign currencies or equity markets may cause the Company to experience volatility in net income.

As such, the Company has defined operating income as net income, excluding realized and unrealized gains and losses on investments and derivatives and their related tax effect. Operating income should not be viewed as a substitute for net income prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP). In addition, the Company’s operating income measures may not be comparable to similarly titled measures reported by other companies.
 
Three months ended March 31, 2015 compared with the three months ended March 31, 2014
 
The Company believes that the presentation of operating income enhances the understanding of the Company’s performance by highlighting the results of operations and the underlying profitability drivers of the business. Operating income should not be viewed as a substitute for U.S. GAAP net income. The following is a summary of the contributions of each segment to the net income and a reconciliation of net income to operating income:
 
 
Three Months Ended March 31,
 
Increase
 
Percentage
Income statement data (In millions)
 
2015
 
2014
 
(decrease)
 
change
Net income
 
 
 
 
 
 
 
 
Individual Markets segment
 
$
52

 
$
35

 
$
17

 
49
 %
Empower Retirement segment
 
48

 
60

 
(12
)
 
(20
)%
Other segment
 
(1
)
 
(1
)
 

 
 %
Total net income
 
99

 
94

 
5

 
5
 %
Adjustments to net income
 
 
 
 
 
 
 
 
Unrealized investment gains (losses), net
 
62

 
(1
)
 
63

 
(6,300
)%
Realized investment gains (losses), net
 
18

 
27

 
(9
)
 
(33
)%
Pro-rata tax (expense) benefit (1)
 
(28
)
 
(10
)
 
(18
)
 
180
 %
Operating income
 
$
47

 
$
78

 
$
(31
)
 
(40
)%
(1) Calculated utilizing estimated tax rate of 35%.

Unrealized investment gains (losses), net, increased by $63 million, from a loss of $1 million in 2014 to a gain of $62 million in 2015. The primary driver of the change was a $45 million increase in unrealized gains on derivatives. In addition, there was a $23 million increased in unrealized gains on forward settling to be announced (“TBA) securities. Offsetting the increase was a $5 million decrease in unrealized gains on bonds.

Realized investment gains (losses), net, decreased by $9 million, or 33%, to $18 million during the three months ended March 31, 2015 when compared to 2014. The fluctuation was driven primarily by a decrease in gains of $17 million on forward settling TBA security transactions. Offsetting the decrease was a $7 million increase in gains on bonds and a $1 million increase in gains on mortgages and limited partnership investments.

Pro-rata tax expense increased by $18 million to $28 million during the three months ended March 31, 2015 when compared to 2014 resulting from the increase in total unrealized investment gains (losses), net partially offset by the decease in realized investment gains (losses), net.

39



Company Results of Operations
 
Three months ended March 31, 2015 compared with the three months ended March 31, 2014
 
The following is a summary of certain financial data of the Company:
  
 
 
Three Months Ended March 31,
 
Increase
 
Percentage
Income statement data (In millions)
 
2015
 
2014
 
(decrease)
 
change
Premium income
 
$
146

 
$
132

 
$
14

 
11
 %
Fee income
 
225

 
167

 
58

 
35
 %
Other revenue
 
2

 

 
2

 
100
 %
Net investment income
 
297

 
300

 
(3
)
 
(1
)%
Total revenues
 
670

 
599

 
71

 
12
 %
Policyholder benefits
 
328

 
306

 
22

 
7
 %
Operating expenses
 
272

 
175

 
97

 
55
 %
Total benefits and expenses
 
600

 
481

 
119

 
25
 %
Income before income taxes
 
70

 
118

 
(48
)
 
(41
)%
Income tax expense
 
23

 
40

 
(17
)
 
(43
)%
Operating income
 
$
47

 
$
78

 
$
(31
)
 
(40
)%

The Company’s consolidated operating income decreased by $31 million, or 40%, to $47 million for the three months ended March 31, 2015 when compared to 2014. The decrease was primarily due to higher operating expenses and higher policyholder benefits partially offset by higher fee income and higher premium income.
 
Premium income increased by $14 million, or 11%, to $146 million for the three months ended March 31, 2015 when compared to 2014. This increase was primarily related to the Company’s Individual Markets segment which had an increase of $13 million primarily due to the amounts assessed for mortality coverage earned from the Company’s single premium universal life (“SPUL) product. The average in-force amount for the SPUL product increased from $1,381 to $2,050.

Fee income increased by $58 million, or 35%, to $225 million for the three months ended March 31, 2015 when compared to 2014. The increase was primarily related to the $49 million in fees earned by RPS as well as the impact of the transfer of the defined contribution business from Putnam. In the first quarter of 2014, Putnam fee income included $2 million in incremental fees related to the transfered defined contribution business. Additionally, the Company had an increase in asset-based variable fee income resulting from increased average asset levels driven by sales growth and higher average equity market levels. The equity market performance was evidenced by the 12% increase in the average S&P 500 index during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014.
 
Net investment income decreased by $3 million, or 1%, to $297 million during the three months ended March 31, 2015 when compared to 2014. The decrease was due to lower investment income earned on limited partnership investments.
 
Policyholder benefits increased by $22 million, or 7%, to $328 million for the three months ended March 31, 2015 when compared to 2014 primarily due to the Company’s Individual Markets segment which had an increase of $18 million. The increase was driven by higher interest credited or paid to contractholders as a result of increased average liabilities partially offset by a decrease in crediting rate on the Company’s executive benefits market. In addition, death claims and accident and disability claims were higher partially offset by lower annuity payments for the three months ended March 31, 2015 when compared to 2014.

Operating expenses increased by $97 million, or 55%, to $272 million for the three months ended March 31, 2015 when compared to 2014 primarily due to the Company’s Empower Retirement segment which had an increase of $96 million. The increase was primarily attributable to the $47 million incurred by RPS as well as the impact of the transfer of the defined contribution business from Putnam. In the first quarter of 2014, Putnam operating expense included $10 million in incremental expenses related to the transfered defined contribution business. Additionally, Empower Retirement is investing in significant strategic and business development initiatives as part of its integration plan. Enhancements are being made, which will improve the client facing experience as well as streamline the back office processing over the next several years. The Company incurred costs of $10 million related to this business integration. The remaining increase in operating expenses is due to

40



business growth and higher DAC amortization as a result of actual gross profits exceeding those previously estimated gross profits.
 
Income tax expense decreased by $17 million, or 43%, to $23 million during the three months ended March 31, 2015 when compared to 2014 primarily due to a decrease in operating income before tax.

Individual Markets Segment Results of Operations
 
Three months ended March 31, 2015 compared with the three months ended March 31, 2014
 
The following is a summary of certain financial data of the Individual Markets segment:

 
 
Three Months Ended March 31,
 
Increase
 
Percentage
Income statement data (In millions)
 
2015
 
2014
 
(decrease)
 
change
Premium income
 
$
125

 
$
112

 
$
13

 
12
 %
Fee income
 
22

 
24

 
(2
)
 
(8
)%
Net investment income
 
186

 
183

 
3

 
2
 %
Total revenues
 
333

 
319

 
14

 
4
 %
Policyholder benefits
 
257

 
239

 
18

 
8
 %
Operating expenses
 
36

 
35

 
1

 
3
 %
Total benefits and expenses
 
293

 
274

 
19

 
7
 %
Income before income taxes
 
40

 
45

 
(5
)
 
(11
)%
Income tax expense
 
14

 
15

 
(1
)
 
(7
)%
Operating income
 
$
26

 
$
30

 
$
(4
)
 
(13
)%
 
Operating income for the Individual Markets segment decreased by $4 million, or 13%, to $26 million, during the three months ended March 31, 2015 when compared to 2014. The decrease was primarily due to higher policyholder benefits partially offset by higher premium income.
 
Premium income increased by $13 million, or 12%, to $125 million for the three months ended March 31, 2015 when compared to 2014. This increase was primarily related to the amounts assessed for mortality coverage earned from the Company’s SPUL product. The average in-force amount for the SPUL product increased from $1,381 to $2,050.
 
Fee income decreased by $2 million, or 8%, to $22 million for the three months ended March 31, 2015 when compared to 2014. The decrease was primarily related to lower individual annuity fees.
 
Net investment income increased by $3 million, or 2%, to $186 million for the three months ended March 31, 2015 when compared to 2014. This was due to an increase in investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields.
 
Policyholder benefits increased by $18 million, or 8%, to $257 million for the three months ended March 31, 2015 when compared to 2014, primarily driven by higher interest credited or paid to contractholders as a result of increased average liabilities partially offset by a decrease in crediting rate on the Company’s executive benefits market. In addition, death claims and accident and disability claims were higher partially offset by lower annuity payments for the three months ended March 31, 2015 when compared to 2014.

Operating expenses increased by $1 million, or 3%, to $36 million for the three months ended March 31, 2015 when compared to 2014. The increase is primarily due to higher premium tax expense.
 
Income tax expense decreased by $1 million, or 7%, to $14 million during the three months ended March 31, 2015 when compared to 2014 primarily due to a decrease in operating income before tax.


41



Empower Retirement Segment Results of Operations
 
Three months ended March 31, 2015 compared with the three months ended March 31, 2014
 
The following is a summary of certain financial data of the Empower Retirement segment:
 
 
 
Three Months Ended March 31,
 
Increase
 
Percentage
Income statement data (In millions)
 
2015
 
2014
 
(decrease)
 
change
Premium income
 
$

 
$
1

 
$
(1
)
 
(100
)%
Fee income
 
202

 
142

 
60

 
42
 %
Other revenue
 
2

 

 
2

 
100
 %
Net investment income
 
98

 
104

 
(6
)
 
(6
)%
Total revenues
 
302

 
247

 
55

 
22
 %
Policyholder benefits
 
49

 
48

 
1

 
2
 %
Operating expenses
 
221

 
125

 
96

 
77
 %
Total benefits and expenses
 
270

 
173

 
97

 
56
 %
Income before income taxes
 
32

 
74

 
(42
)
 
(57
)%
Income tax expense
 
10

 
25

 
(15
)
 
(60
)%
Operating income
 
$
22

 
$
49

 
$
(27
)
 
(55
)%
  
Operating income for the Empower Retirement segment decreased by $27 million, or 55%, to $22 million for the three months ended March 31, 2015 when compared to 2014.  The decrease was primarily due to higher operating expenses partially offset by higher fee income.

Fee income increased by $60 million, or 42%, to $202 million for the three months ended March 31, 2015 when compared to 2014. The increase was primarily related to the $49 million in fees earned by RPS as well as the impact of the transfer of the defined contribution business from Putnam. In the first quarter of 2014, Putnam fee income included $2 million in incremental fees related to the transferred defined contribution business. Additionally, the Company had an increase in asset-based variable fee income resulting from increased average asset levels driven by sales growth and higher average equity market levels. The equity market performance was evidenced by the 12% increase in the average S&P 500 index during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014.

Net investment income decreased by $6 million, or 6%, to $98 million for the three months ended March 31, 2015 when compared to 2014. This was due to a decrease in investment income earned on bonds, mortgages and policy loans as a result of lower yields partially offset by higher invested assets balances.

Policyholder benefits increased by $1 million, or 2%, to $49 million for the three months ended March 31, 2015 when compared to 2014. The increase is due to higher annuity payments offset by lower interest credited or paid to contract holders as a result of lower crediting rates offset by increased average liabilities.

Operating expenses increased by $96 million, or 77%, to $221 million for the three months ended March 31, 2015 when compared to 2014. The increase was primarily attributable to the $47 million incurred by RPS as well as the impact of the transfer of the defined contribution business from Putnam. In the first quarter of 2014, Putnam operating expense included $10 million in incremental expenses related to the transferred defined contribution business. Additionally, Empower Retirement is investing in significant strategic and business development initiatives as part of its integration plan. Enhancements are being made, which will improve the client facing experience as well as streamline the back office processing over the next several years. The Company incurred costs of $10 million related to this business integration. The remaining increase in operating expenses is due to business growth and higher DAC amortization as a result of actual gross profits exceeding those previously estimated gross profits.
 
Income tax expense decreased by $15 million, or 60%, to $10 million for the three months ended March 31, 2015 when compared to 2014 primarily due to a decrease in operating income before tax.


42



Other Segment Results of Operations
 
Three months ended March 31, 2015 compared with the three months ended March 31, 2014
 
The following is a summary of certain financial data of the Company’s Other segment:
 
 
 
Three Months Ended March 31,
 
Increase
 
Percentage
Income statement data (In millions)
 
2015
 
2014
 
(decrease)
 
change
Premium income
 
$
21

 
$
19

 
$
2

 
11
%
Fee income
 
1

 
1

 

 
%
Net investment income
 
13

 
13

 

 
%
Total revenues
 
35

 
33

 
2

 
6
%
Policyholder benefits
 
22

 
19

 
3

 
16
%
Operating expenses
 
15

 
15

 

 
%
Total benefits and expenses
 
37

 
34

 
3

 
9
%
Income before income taxes
 
(2
)
 
(1
)
 
(1
)
 
100
%
Income tax benefit
 
(1
)
 

 
(1
)
 
100
%
Operating loss
 
$
(1
)
 
$
(1
)
 
$

 
%
  
Operating loss for the Company’s Other segment remained constant for the three months ended March 31, 2015 when compared to 2014.


43



Investment Operations
 
The Company’s primary investment objective is to acquire assets with duration and cash flow characteristics reflective of its liabilities, while meeting industry, size, issuer and geographic diversification standards.  Formal liquidity and credit quality parameters have also been established.

The Company follows rigorous procedures to control interest rate risk and observes strict asset and liability matching guidelines.  These guidelines ensure that even under changing market conditions, the Company’s assets should meet the cash flow and income requirements of its liabilities.  Using dynamic modeling to analyze the effects of a range of possible market changes upon investments and policyholder benefits, the Company works to ensure that its investment portfolio is appropriately structured to fulfill financial obligations to its policyholders.
 
The following table presents the percentage distribution of the carrying values of the Company’s general account investment portfolio: 
(In millions)

March 31, 2015

December 31, 2014
Fixed maturities, available-for-sale

$
18,368


64.3
%

$
20,162


71.1
%
Fixed maturities, held-for-trading

130


0.5
%

339


1.2
%
Mortgage loans on real estate

3,440


12.0
%

3,364


11.9
%
Policy loans

4,125


14.4
%

4,130


14.6
%
Short-term investments

2,435


8.5
%

263


0.9
%
Limited partnership and other corporation interests

47


0.2
%

49


0.2
%
Other investments

15


0.1
%

16


0.1
%
Total investments

$
28,560


100.0
%

$
28,323


100.0
%
 
The March 31, 2015 fixed maturities, available-for-sale amount decreased as compared to December 31, 2014 as the Company sold government agency mortgage-backed security (“MBS”) pools to enter into forward settling TBA contracts which are treated as derivatives.  There is a corresponding increase in short-term investments as the Company holds these investments in order to settle the forward settling TBA contracts.
 
Fixed Maturity Investments
 
Fixed maturity investments include public and privately placed corporate bonds, government bonds and mortgage-backed and asset-backed securities.  Included in available-for-sale fixed maturities are perpetual debt investments which primarily consist of junior subordinated debt instruments that have no stated maturity date but pay fixed or floating interest in perpetuity.  The Company’s strategy related to mortgage-backed and asset-backed securities is to focus on those investments with low prepayment risk and minimal credit risk.
 
Private placement investments are generally less marketable than publicly traded assets, yet they typically offer enhanced covenant protection that allows the Company, if necessary, to take appropriate action to protect its investment.  The Company believes that the cost of the additional monitoring and analysis required by private placement investments is more than offset by their enhanced yield.
 
One of the Company’s primary objectives is to ensure that its fixed maturity portfolio is maintained at a high average credit quality to limit credit risk.  All securities are internally rated by the Company on a basis intended to be similar to that of the rating agencies.  The Company’s internal rating methodology generally takes into account ratings from Standard & Poor’s Ratings Services, Fitch Ratings and Moody’s Investor Services, Inc.  In addition, the National Association of Insurance Commissioners (“NAIC”) implemented a ratings methodology for residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and other structured securities.  The Company may also utilize inputs from this ratings process to develop its internal rating.


44



The percentage distribution of the estimated fair value of the Company’s fixed maturity portfolio by the Company’s internal credit rating is summarized as follows:
Credit Rating
 
March 31, 2015
 
December 31, 2014
AAA
 
17.0
%
 
28.2
%
AA
 
18.1
%
 
15.3
%
A
 
32.7
%
 
28.2
%
BBB
 
31.3
%
 
27.5
%
BB and below (Non-investment grade)
 
0.9
%
 
0.8
%
Total
 
100.0
%
 
100.0
%
 
The March 31, 2015 AAA rating percentage decreased as compared to December 31, 2014 as the Company sold AAA-rated government agency MBS pools to enter into forward settling TBA contracts which are treated as derivatives.
 
The percentage distribution of the estimated fair value of the corporate sector fixed maturity portfolio, calculated as a percentage of fixed maturities, is summarized as follows:
Sector
 
March 31, 2015
 
December 31, 2014
Utility
 
20.9
%
 
18.3
%
Finance
 
11.2
%
 
10.0
%
Consumer
 
11.1
%
 
9.8
%
Natural resources
 
7.2
%
 
5.9
%
Transportation
 
3.5
%
 
3.2
%
Other
 
13.2
%
 
11.3
%
 
Securities Lending, Reverse Repurchase Agreements and Cash Collateral Reinvestment Practices
 
Cash collateral related to the securities lending program and reverse repurchase agreements is invested in U.S. Government or U.S. Government Agency securities. In addition, the securities lending agent indemnifies the Company against borrower risk, meaning that the lending agent agrees contractually to replace securities not returned due to a borrower default.  As of March 31, 2015 and December 31, 2014, the Company had fixed maturities with estimated fair values of $171 million and $15 million, respectively, out on loan and $600 million and zero, respectively, in short-term reverse repurchase agreements, all of which are fully collateralized as described above.  The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio.
 
Mortgage Loans on Real Estate
 
The Company’s mortgage loans on real estate are comprised exclusively of domestic commercial collateralized real estate loans.  The mortgage loan portfolio is diversified with regard to geographical markets and commercial real estate property types within the United States.  The Company originates, directly or through correspondents, real estate mortgages with the intent to hold to maturity.  The Company’s portfolio includes loans which are fully amortizing, amortizing with a balloon balance at maturity, interest only to maturity and interest only for a number of years followed by an amortizing period.

Derivatives
 
The Company uses certain derivatives, such as futures, swaps and interest rate swaptions, for purposes of managing the interest rate, foreign currency exchange rate and equity market risks impacting the Company’s business.  These derivatives, when taken alone, may subject the Company to varying degrees of market and credit risk; however, since used for hedging purposes, these instruments are intended to reduce risk.  For derivative instruments where hedge accounting is not elected, changes in interest rates, foreign currencies or equity markets may generate derivative gains or losses which may cause the Company to experience volatility in net income.  The Company also uses forward settling TBA securities to gain exposure to the investment risk and return of agency mortgage-backed securities (pass-throughs).  These transactions enhance the return on the Company’s investment portfolio and provide a more liquid and cost effective method of achieving these goals than purchasing or selling individual agency mortgage-backed pools.  The Company controls the credit risk of its over-the-counter derivative contracts through credit approvals, limits, monitoring procedures and in most cases, requiring collateral.  Risk of loss is generally limited to the portion of the fair value of derivative instruments that exceeds the value of the collateral held and not to the notional or contractual amounts of the derivatives. 

45



Summary of Critical Accounting Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to adopt accounting policies to enable them to make a significant variety of accounting and actuarial estimates and assumptions.  These estimates and assumptions are evaluated on an ongoing basis based on historical developments, market conditions, industry trends and other information that is reasonable given the facts and circumstances for the Company. These critical estimates and assumptions affect, among other things, the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses.  Actual results can differ from the amounts previously estimated, which were based on information available at the time the estimates were made.
 
The Company has identified the following accounting policies, judgments and estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
 
·             Valuation of investments;
·             Impairment of investments;
·             Valuation of derivatives and related hedge accounting;
·             Valuation of DAC and related amortization (including unlocking of assumptions); and
·             Valuation of policy benefit liabilities
 
A discussion of each of these critical accounting policies may be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Application of Recent Accounting Pronouncements
 
See Note 3 to the accompanying condensed consolidated financial statements for a discussion of the application of recent accounting pronouncements.
 
Liquidity and Capital Resources
 
Liquidity refers to a company’s ability to generate sufficient cash flows to meet the short-term needs of its operations.  The Company manages its operations to create stable, reliable and cost-effective sources of cash flows to meet all of its obligations.
 
The principal sources of the Company’s liquidity are premiums and contract deposits, fees, investment income and investment maturities and sales.  Funds provided from these sources are reasonably predictable and normally exceed liquidity requirements for payment of policy benefits, payments to policy and contractholders in connection with surrenders and withdrawals and general expenses.  However, since the timing of available funds cannot always be matched precisely to commitments, imbalances may arise when demands for funds exceed those on hand.  A primary liquidity concern regarding cash flows from operations is the risk of early policyholder and contractholder withdrawals.  A primary liquidity concern regarding investment activity is the risk of defaults and market volatility.  In addition, a demand for funds may arise as a result of the Company taking advantage of current investment opportunities.  The sources of the funds that may be required in such situations include the issuance of commercial paper or other debt instruments.  Management believes that the liquidity profile of its assets is sufficient to satisfy the short-term liquidity requirements of reasonably foreseeable scenarios.
 
Generally, the Company has met its operating requirements by utilizing cash flows from operations and maintaining appropriate levels of liquidity in its investment portfolio.  Liquidity for the Company has remained strong, as evidenced by the amounts of short-term investments and cash that totaled $155 million and $276 million as of March 31, 2015 and December 31, 2014, respectively.  The March 31, 2015 and December 31, 2014 short-term investments included above exclude any amounts held to settle TBA forward contracts.  In addition, 99% of the fixed maturity portfolio carried an investment grade rating at March 31, 2015 and December 31, 2014, thereby providing significant liquidity to the Company’s overall investment portfolio.
 
The Company continues to be well capitalized, with sufficient borrowing capacity.  Additionally, the Company anticipates that cash on hand and expected net cash generated by operating activities will exceed the forecasted needs of the business over the next 12 months.  The Company’s financial strength provides the capacity and flexibility to enable it to raise funds in the capital markets through the issuance of commercial paper.  The Company had $90 million and $99 million of commercial paper outstanding at March 31, 2015 and December 31, 2014, respectively.  The commercial paper has been given a rating of A-1+ by Standard & Poor’s Ratings Services and a rating of P-1 by Moody’s Investors Service, each being the highest rating available.  Through the recent financial market volatility, the Company continued to have the ability to access the capital markets for

46



funds.  The loss of this access in the future would not have a significant impact to the Company’s liquidity as commercial paper is not used to fund daily operations and is an insignificant amount in relation to total invested assets.
 
The Company also has available a revolving credit facility agreement, which expires on March 1, 2018, in the amount of $50 million for general corporate purposes.  The Company had no borrowings under this credit facility as of or during the three months ended March 31, 2015.  The Company does not anticipate the need for borrowings under this facility and the loss of its availability would not significantly impact its liquidity.
 
Capital resources provide protection for policyholders and financial strength to support the underwriting of insurance risks and allow for continued business growth.  The amount of capital resources that may be needed is determined by the Company’s senior management and Board of Directors, as well as by regulatory requirements.  The allocation of resources to new long-term business commitments is designed to achieve an attractive return, tempered by considerations of risk and the need to support the Company’s existing business.
 
Off-Balance Sheet Arrangements
 
The Company makes commitments to fund partnership interests, mortgage loans on real estate and other investments in the normal course of its business.  The amounts of these unfunded commitments at March 31, 2015 and December 31, 2014 were $224 million and $166 million, respectively.  The precise timing of the fulfillment of the commitment cannot be predicted; however, these amounts are due within one year of the dates indicated.  There are no other obligations or liabilities arising from such arrangements that are reasonably likely to become material.
 
The Company participates in a short-term reverse repurchase program for the purpose of enhancing the total return on its investment portfolio.  This type of transaction involves the purchase of securities with a simultaneous agreement to sell similar securities at a future date at an agreed-upon price.  In exchange, the financial institutions put non-cash collateral on deposit with a third-party custodian on behalf of the Company.  The amount of securities purchased in connection with these transactions was $600 million and zero at March 31, 2015 and December 31, 2014, respectively.  Non-cash collateral on deposit with the third-party custodian on the Company’s behalf was $612 million and zero at March 31, 2015 and December 31, 2014, respectively, which cannot be sold or re-pledged and which has not been recorded on the condensed consolidated balance sheets.

The Company participates in a securities lending program in which the Company lends securities that are held as part of its general account investment portfolio to third parties for the purpose of enhancing the total return on its investment portfolio.  The Company generally requires initial collateral in an amount greater than or equal to 102% of the fair value of domestic securities loaned and 105% of foreign securities loaned.  The Company received securities with a fair value of $85 million and $2 million as collateral at March 31, 2015 and December 31, 2014, respectively, which have not been recorded on the condensed consolidated balance sheets.

Item 3.         Quantitative and Qualitative Disclosures about Market Risk
 
The Company has established processes and procedures to effectively identify, monitor, measure and manage the risks associated with its invested assets and its interest rate sensitive insurance and annuity products.  Management has identified investment portfolio management, including the use of derivative instruments, insurance and annuity product design and asset/liability management as three critical means to accomplish a successful risk management program.
 
The major risks to which the Company is exposed include the following: 

Market risk - the potential of loss arising from adverse fluctuations in interest rates and equity market prices and the levels of their volatility.
Insurance risk - the potential of loss resulting from claims, persistency and expense experience exceeding that assumed in the liabilities held.
Credit risk - the potential of loss arising from an obligator’s inability or unwillingness to meet its obligations to the Company.
Operational and corporate risk - the potential of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from other external events.
  
A discussion of each of these risk factors may be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”
 

47



Item 4.         Controls and Procedures
 
Disclosure Controls and Procedures
 
The Company’s management, with the participation of the President and Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”) as of March 31, 2015.  Based upon that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that due to the material weakness in our internal control over financial reporting as it relates to complex accounting matters as further described under Item 9A, “Controls and Procedures,” of our Annual Report on Form 10-K for the year ended December 31, 2014, our disclosure controls and procedures were not effective as of March 31, 2015.
 
Notwithstanding the material weakness that existed as of March 31, 2015, management has concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles.
 
Changes in Internal Control over Financial Reporting
 
Beginning in the fourth quarter of 2013, management began to design and implement certain remediation measures to address the above-described material weakness and enhance the Company’s system of internal control over financial reporting. These measures include creating a comprehensive database of all complex accounting memorandums; formalizing a process for identifying all significant accounting transactions and ensuring they are reviewed on a timely basis for proper accounting treatment; and formalizing a process for refreshing all significant accounting policies and procedures on an annual basis or sooner for significant changes in accounting guidance.

A discussion of the changes in internal control over financial reporting may be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, under Item 9A, “Changes and Procedures”.

In the first quarter of 2015, management implemented additional remediation measures including re-designing the roles and responsibilities of key finance and accounting positions and verifying that the complex accounting policies are being applied in practice.

Management believes the remediation measures described above will strengthen the Company’s internal control over financial reporting and remediate the material weaknesses management has identified. Management is committed to continuing to improve the Company’s internal control processes and will continue to diligently review the financial reporting controls and procedures in order to ensure compliance with the criteria set forth in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) so that management can conclude that the Company maintained effective control over financial reporting in a future period. However, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that the control objectives will be met.

Other than as described above, the President and Chief Executive Officer and the Chief Financial Officer hereby confirm that there were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II          Other Information
 
Item 1.         Legal Proceedings
 
The Company is currently evaluating the interpretation of Internal Revenue Code rules related to certain product investments. If the Company’s interpretation is not upheld, which is reasonably possible, the potential exposure is estimated to be up to $21 million.
 
During the fourth quarter, the Company received a $20 million demand letter related to a vehicle accident involving an employee.  The amount is fully indemnified by a third-party insurer.



48



Item 1A. Risk Factors
 
In the normal course of its business, the Company is exposed to certain operational, regulatory and financial risks and uncertainties.  The most significant risks include the following:

Competition could negatively affect the ability of the Company to maintain or increase market share or profitability.

The insurance and financial services industries are heavily regulated and changes in regulation may reduce profitability.
 
A downgrade or potential downgrade in the Company’s financial strength or claims paying ratings could result in a loss of business and negatively affect results of operations and financial condition.

Deviations from assumptions regarding future persistency, mortality and interest rates used in calculating liabilities for future policyholder benefits and claims could adversely affect the Company’s results of operations and financial condition.

The Company may be required to accelerate the amortization of DAC or VOBA, or recognize impairment in the value of goodwill, which could adversely affect its results of operations and financial condition.

If the companies that provide reinsurance default or fail to perform or the Company is unable to obtain adequate reinsurance for some of the risks underwritten, the Company could incur significant losses adversely affecting results of operations and financial condition.

Interest rate fluctuations could have a negative impact on results of operations and financial condition.
  
Market fluctuations and general economic conditions may adversely affect results of operations and financial condition.

Changes in U.S. federal income tax law could make some of the Company’s products less attractive to consumers and increase its tax costs.

The Company may be subject to litigation resulting in substantial awards or settlements and this may adversely affect its reputation and results of operations.

The Company’s risk management policies and procedures may leave it exposed to unidentified or unanticipated risk, which could adversely affect its business, results of operations and financial condition.

The Company may experience difficulty in marketing and distributing products through its current and future distribution channels.

A failure in cyber or information security systems could result in a loss or disclosure of confidential information, damage the Company’s reputation and could impair its ability to conduct business effectively.

The Company could face difficulties, unforeseen liabilities, or asset impairments arising from business acquisitions or integrations and managing growth of such businesses.


49



Item 6.         Exhibits
 
The documents identified below are filed as a part of this report:
 
Index to Exhibits
 
Exhibit Number
Title
31.1
Rule 13a-14(a)/15-d14(a) Certification
31.2
Rule 13a-14(a)/15-d14(a) Certification
32
18 U.S.C. 1350 Certification
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Great-West Life & Annuity Insurance Company
 
By:
/s/
Kara Roe
 
Date:
May 13, 2015
 
 
Kara Roe
 
 
 
 
 
Vice President, Controller and Principal Accounting Officer
 
 
 


50