GREAT WEST LIFE & ANNUITY INSURANCE CO - FORM 10-Q

Attached files

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EX-32 - EXHIBIT 32 - GREAT WEST LIFE & ANNUITY INSURANCE CO	q32015gwla-exx32.htm
EX-31.2 - EXHIBIT 31.2 - GREAT WEST LIFE & ANNUITY INSURANCE CO	q32015gwla-exx312.htm
EX-31.1 - EXHIBIT 31.1 - GREAT WEST LIFE & ANNUITY INSURANCE CO	q32015gwla-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 September 30, 2015



¨	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 November 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	Financial Information
	Item 1	Interim Financial Statements	3
		Condensed Consolidated Balance Sheets at September 30, 2015, and December 31, 2014 (Unaudited)	3
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)	5
		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015, and 2014 (Unaudited)	6
		Condensed Consolidated Statements of Stockholder’s Equity for the Nine Months Ended September 30, 2015, and 2014 (Unaudited)	7
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015, and 2014 (Unaudited)	8
		Notes to Condensed Consolidated Financial Statements (Unaudited)	10
		Note 1 - Organization and Basis of Presentation	10
		Note 2 - Acquisition	11
		Note 3 - Application of Recent Accounting Pronouncements	11
		Note 4 - Dividends	12
		Note 5 - Summary of Investments	13
		Note 6 - Derivative Financial Instruments	17
		Note 7 - Summary of Offsetting Assets and Liabilities	24
		Note 8 - Fair Value Measurements	25
		Note 9 - Other Comprehensive Income	32
		Note 10 - Employee Benefit Plans	37
		Note 11 - Income Taxes	38
		Note 12 - Segment Information	39
		Note 13 - Commitments and Contingencies	42
		Note 14 - Subsequent Events	42
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	57
	Item 4	Controls and Procedures	58

Part II	Other Information		58
	Item 1	Legal Proceedings	58
	Item 1A	Risk Factors	59
	Item 6	Exhibits	60

		Signature	60

Part I Financial Information

Item1. Interim Financial Statements

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Balance Sheets

September 30, 2015, and December 31, 2014

(In Thousands, Except Share Amounts)

(Unaudited)



	September 30, 2015		December 31, 2014
Assets
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost $17,640,135 and $18,953,144)	$	18,494,354	$	20,162,078
Fixed maturities, held-for-trading, at fair value (amortized cost $121,983 and $331,081)	127,214		338,543
Mortgage loans on real estate (net of allowances of $2,890 and $2,890)	3,324,597		3,363,570
Policy loans	4,150,476		4,130,062
Short-term investments (amortized cost $2,463,175 and $263,501)	2,463,175		263,501
Limited partnership and other corporation interests	43,829		49,421
Other investments	15,368		16,068
Total investments	28,619,013		28,323,243

Other assets:
Cash	58,116		12,775
Reinsurance receivable	606,751		611,270
Deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”)	402,615		378,694
Investment income due and accrued	300,531		278,886
Collateral under securities lending agreements	45,726		13,741
Due from parent and affiliates	62,381		47,193
Goodwill	137,683		137,683
Other intangible assets	24,843		27,915
Other assets	844,581		773,651
Assets of discontinued operations	22,527		24,324
Separate account assets	26,367,569		27,718,844
Total assets	$	57,492,336	$	58,348,219



See notes to condensed consolidated financial statements.		(Continued)

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Balance Sheets

September 30, 2015, and December 31, 2014

(In Thousands, Except Share Amounts)

(Unaudited)



	September 30, 2015		December 31, 2014
Liabilities and stockholder’s equity
Policy benefit liabilities:
Future policy benefits	$	26,738,069	$	25,968,411
Policy and contract claims	364,261		339,104
Policyholders’ funds	266,438		335,484
Provision for policyholders’ dividends	57,299		58,577
Undistributed earnings on participating business	19,395		20,050
Total policy benefit liabilities	27,445,462		26,721,626

General liabilities:
Due to parent and affiliates	546,768		547,266
Commercial paper	96,284		98,589
Payable under securities lending agreements	45,726		13,741
Deferred income tax liabilities, net	222,238		314,616
Other liabilities	778,911		771,700
Liabilities of discontinued operations	22,527		24,324
Separate account liabilities	26,367,569		27,718,844
Total liabilities	55,525,485		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	779,942		777,664
Accumulated other comprehensive income	410,617		603,018
Retained earnings	769,260		749,799
Total stockholder’s equity	1,966,851		2,137,513
Total liabilities and stockholder’s equity	$	57,492,336	$	58,348,219



See notes to condensed consolidated financial statements.		(Concluded)

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Income

Three and Nine Months Ended September 30, 2015, and 2014

(In Thousands)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Revenues:
Premium income	$	154,017		$	169,543		$	374,437		$	363,893
Fee income	225,242			181,991			688,020			520,509
Other revenue	1,820			—			5,460			—
Net investment income	363,057			292,061			942,082			911,694
Realized investment gains (losses), net:
Total other-than-temporary gains (losses), net	(363		)	(2,405		)	(921		)	(4,334		)
Other-than-temporary (gains) losses, net, transferred to other comprehensive income (loss)	—			—			108			—
Other realized investment gains (losses), net	22,914			25,935			57,423			91,829
Total realized investment gains (losses), net	22,551			23,530			56,610			87,495
Total revenues	766,687			667,125			2,066,609			1,883,591
Benefits and expenses:
Life and other policy benefits	176,926			163,713			486,950			472,660
Increase (decrease) in future policy benefits	20,226			26,922			(5,482		)	(12,052		)
Interest credited or paid to contractholders	147,177			156,420			433,829			423,736
Provision for policyholders’ share of earnings (losses) on participating business	44			(389		)	(457		)	(868		)
Dividends to policyholders	13,241			15,325			42,763			47,591
Total benefits	357,614			361,991			957,603			931,067
General insurance expenses	263,608			194,344			776,735			532,923
Amortization of DAC and VOBA	37,538			11,179			65,245			41,106
Interest expense	9,646			9,320			28,928			27,966
Total benefits and expenses	668,406			576,834			1,828,511			1,533,062
Income before income taxes	98,281			90,291			238,098			350,529
Income tax expense	30,708			29,790			78,926			120,324
Net income	$	67,573		$	60,501		$	159,172		$	230,205

See notes to condensed consolidated financial statements.

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three and Nine Months Ended September 30, 2015, and 2014

(In Thousands)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net income	$	67,573		$	60,501		$	159,172		$	230,205
Components of other comprehensive income (loss)
Unrealized holding gains (losses), net, arising on available-for-sale fixed maturity investments	(5,568		)	(100,800		)	(318,529		)	471,537
Unrealized holding gains (losses), net, arising on cash flow hedges	14,804			7,408			15,326			11,302
Reclassification adjustment for (gains) losses, net, realized in net income	(8,036		)	(6,738		)	(43,511		)	(35,492		)
Net unrealized gains (losses) related to investments	1,200			(100,130		)	(346,714		)	447,347
Future policy benefits, DAC and VOBA adjustments	(2,383		)	405			42,075			(86,563		)
Employee benefit plan adjustment	3,098			989			8,635			989
Other comprehensive income (loss) before income taxes	1,915			(98,736		)	(296,004		)	361,773
Income tax expense (benefit) related to items of other comprehensive income (loss)	669			(34,557		)	(103,603		)	126,621
Other comprehensive income (loss)⁽¹⁾	1,246			(64,179		)	(192,401		)	235,152
Total comprehensive income (loss)	$	68,819		$	(3,678	)	$	(33,229	)	$	465,357

⁽¹⁾Other comprehensive income (loss) includes the non-credit component of impaired gains (losses), net, on fixed maturities available-for-sale in the amounts of $(1,979) and $(996) for the three months ended September 30, 2015, and 2014, respectively, and $(3,208) and $(3,812) for the nine months ended September 30, 2015, and 2014, respectively.

See notes to condensed consolidated financial statements.

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Stockholder’s Equity

Nine Months Ended September 30, 2015, and 2014

(In Thousands)

(Unaudited)



	Nine Months Ended September 30, 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								159,172			159,172
Other comprehensive loss, net of income taxes					(192,401		)				(192,401		)
Dividends								(139,711		)	(139,711		)
Capital contribution - stock-based compensation			1,247								1,247
Income tax benefit on stock-based compensation			1,031								1,031
Balances, September 30, 2015	$	7,032	$	779,942	$	410,617		$	769,260		$	1,966,851



	Nine Months Ended September 30, 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							230,205			230,205
Other comprehensive income, net of income taxes					235,152					235,152
Dividends							(178,401		)	(178,401		)
Capital contribution - stock-based compensation			2,812							2,812
Income tax benefit on stock-based compensation			47							47
Balances, September 30, 2014	$	7,032	$	776,974	$	580,906	$	800,635		$	2,165,547

See notes to condensed consolidated financial statements.

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2015, and 2014

(In Thousands)

(Unaudited)



	Nine Months Ended September 30,
	2015			2014
Net cash provided by operating activities	$	575,631		$	517,224

Cash flows from investing activities:
Proceeds from sales, maturities and redemptions of investments:
Fixed maturities, available-for-sale	4,196,254			3,540,606
Mortgage loans on real estate	277,454			323,332
Limited partnership interests, other corporation interests and other investments	4,001			6,674
Purchases of investments:
Fixed maturities, available-for-sale	(2,791,939		)	(1,811,311		)
Mortgage loans on real estate	(233,924		)	(362,962		)
Limited partnership interests, other corporation interests and other investments	(1,496		)	(2,335		)
Net change in short-term investments	(2,198,699		)	(2,785,846		)
Net change in policy loans	(7,481		)	(10,413		)
Acquisition of business	—			(28,356		)
Purchases of furniture, equipment and software	(60,321		)	(17,076		)
Net cash used in investing activities	(816,151		)	(1,147,687		)

Cash flows from financing activities:
Contract deposits	1,760,310			2,046,736
Contract withdrawals	(1,308,587		)	(1,279,520		)
Net change in due to/from parent and affiliates	(15,686		)	69,219
Dividends paid	(139,711		)	(178,401		)
Proceeds from financing element derivatives	—			4,263
Payments for and interest paid on financing element derivatives, net	(8,027		)	(5,961		)
Net change in commercial paper borrowings	(2,305		)	999
Net change in book overdrafts	(1,164		)	(12,163		)
Income tax benefit of stock option exercises	1,031			47
Net cash provided by financing activities	285,861			645,219

Net increase in cash	45,341			14,756
Cash, beginning of year	12,775			7,491
Cash, end of period	$	58,116		$	22,247



See notes to condensed consolidated financial statements.		(Continued)

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2015, and 2014

(In Thousands)

(Unaudited)



	Nine Months Ended September 30,
	2015			2014
Supplemental disclosures of cash flow information:
Net cash (paid) received during the year for:
Income taxes	$	(29,791	)	$	50,888
Interest	(18,697		)	(18,708		)

Non-cash investing and financing transactions during the years:
Contingent consideration (See Note 2)	$	—		$	(33,739	)
Share-based compensation expense	$	1,247		$	2,812



See notes to condensed consolidated financial statements.		(Concluded)

Table of Contents

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 and nine months ended September 30, 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 September 30, 2015, and for all periods presented. The condensed consolidated results of operations and condensed consolidated statement of cash flows for the nine months ended September 30, 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.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

2. Acquisitions

Putnam Retirement Business

Description of transaction

On January 1, 2015, the Company acquired the retirement business of Putnam Investments, LLC (“Putnam”), an affiliate of the Company. 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 as the amounts are considered immaterial.

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, 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

RPS contributed revenue and net income (loss), included in the condensed consolidated statements of income, as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2015			2014		2015		2014
Revenue	$	42,260		$	14,261	$	137,206	$	14,261
Net income (loss)	(1,061		)	494		237		494

3. Application of Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In June 2014, the Financial Accounting Standards Board (“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 for the March 31, 2015 interim financial statements did not have an impact on the Company’s financial position or results of operations. The Company has included additional disclosures in Note 5 to these condensed consolidated financial statements around collateral pledged for secured lending transactions on a prospective basis.

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

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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, 2017, based upon an update issued by the FASB in July 2015. Early adoption is not permitted. The Company is currently evaluating the impact of this update on its 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, 2015, 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.

In May 2015, the FASB issued ASU 2015-09, Financial Services-Insurance: Disclosures about Short-Duration Contracts (Topic 944). The update requires that all years in the claims development table that precede the current reporting period and the related disclosure about the history of claims duration should be presented as required supplementary information. The update also includes a disclosure objective of providing information about claim frequency along with a description of methodologies for determining claim frequency information, unless it is impracticable to do so. The update is effective for annual reporting periods beginning after December 15, 2015, and for interim reporting periods within annual reporting periods beginning after December 15, 2016, with early adoption permitted. 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 nine months ended September 30, 2015, and 2014, the Company paid dividends of $139,711 and $178,401, respectively, to its parent, GWL&A Financial.

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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”):



	September 30, 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	$	1,024,373	$	62,312	$	855	$	1,085,830	$	—
Obligations of U.S. states and their subdivisions	2,041,014		261,202		13,915		2,288,301		—
Foreign government securities	2,332		—		—		2,332		—
Corporate debt securities ⁽²⁾	12,245,679		579,837		199,040		12,626,476		(1,915		)
Asset-backed securities	1,216,655		143,264		10,150		1,349,769		(90,867		)
Residential mortgage-backed securities	132,881		5,445		1,416		136,910		(125		)
Commercial mortgage-backed securities	967,885		32,540		5,054		995,371		—
Collateralized debt obligations	9,316		49		—		9,365		—
Total fixed maturities	$	17,640,135	$	1,084,649	$	230,430	$	18,494,354	$	(92,907	)

⁽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 $149,062 and estimated fair value of $119,151.



	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	)

⁽²⁾ Includes perpetual debt investments with amortized cost of $157,742 and estimated fair value of $131,799.

See Note 8 for additional discussion regarding fair value measurements.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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.



	September 30, 2015
	Amortized cost		Estimated fair value
Maturing in one year or less	$	591,644	$	617,273
Maturing after one year through five years	3,654,433		3,917,068
Maturing after five years through ten years	5,053,440		5,204,264
Maturing after ten years	5,337,099		5,558,660
Mortgage-backed and asset-backed securities	3,003,519		3,197,089
Total fixed maturities	$	17,640,135	$	18,494,354

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 September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Proceeds from sales	$	192,100	$	118,810	$	3,187,977	$	2,418,114
Gross realized gains from sales	6,632		7,196		38,567		29,434
Gross realized losses from sales	478		—		802		1,090

Mortgage loans on real estate — The following table summarizes the carrying value of the mortgage loan portfolio by component:



	September 30, 2015			December 31, 2014
Principal	$	3,318,976		$	3,356,374
Unamortized premium (discount) and fees, net	8,511			10,086
Mortgage provision allowance	(2,890		)	(2,890		)
Total mortgage loans	$	3,324,597		$	3,363,570

The recorded investment of the mortgage loan portfolio categorized as performing was $3,327,487 and $3,366,460 as of September 30, 2015, and December 31, 2014, respectively.



	Nine Months Ended September 30, 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:	$	3,327,487	$	3,366,460
Individually evaluated for impairment	12,667		12,986
Collectively evaluated for impairment	3,314,820		3,353,474

Limited partnership and other corporation interests — At September 30, 2015, and December 31, 2014, the Company had $43,829 and $49,421, respectively, invested in limited partnership and other corporation interests. Included in limited 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.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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 $3,996 and $7,464 at September 30, 2015, and December 31, 2014, respectively.

Special deposits — The Company had securities on deposit with government authorities as required by certain insurance laws with fair values of $14,353 and $14,612 at September 30, 2015, and December 31, 2014, respectively.

Securities lending — 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 through an unaffiliated agent. The Company does not enter into these transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio.

The securities lending agreement 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. Cash collateral related to the securities lending program is generally invested in U.S. government or U.S. government agency securities. The Company bears the risk of any deficiency in the amount of collateral available for return to a borrower due to a loss in an approved investment. 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.

Securities with a cost or amortized cost of $188,328 and $15,252 and estimated fair values of $176,916 and $15,423 were on loan under the program at September 30, 2015, and December 31, 2014, respectively. The Company received cash of $45,726 and $13,741 and securities with a fair value of $138,288 and $2,131 as collateral at September 30, 2015, and December 31, 2014, respectively.

The following table summarizes the collateral pledged by the Company under the securities lending program, by class of investment. Under the securities lending program the collateral pledged is, by definition, the securities loaned against the assets borrowed.



	September 30, 2015		December 31, 2014
Securities lending transactions
U.S. government direct obligations and U.S. agencies	$	—	$	11,148
Corporate debt securities	176,916		4,275
Total secured borrowings	$	176,916	$	15,423

The Company’s securities lending agreements are open agreements, meaning the borrower can return and the Company can recall the loaned securities at any time. The assets and liabilities associated with securities lending program are not subject to master netting arrangements and are not offset in the condensed consolidated balance sheets.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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:



	September 30, 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	$	87,145	$	444	$	24,509	$	411	$	111,654	$	855
Obligations of U.S. states and their subdivisions	241,124		13,915		—		—		241,124		13,915
Corporate debt securities	2,981,555		116,739		496,123		82,301		3,477,678		199,040
Asset-backed securities	70,278		1,295		187,358		8,855		257,636		10,150
Residential mortgage-backed securities	—		—		19,729		1,416		19,729		1,416
Commercial mortgage-backed securities	199,669		4,858		24,746		196		224,415		5,054
Total fixed maturities	$	3,579,771	$	137,251	$	752,465	$	93,179	$	4,332,236	$	230,430

Total number of securities in an unrealized loss position			355				99				454



	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 increased by $128,987, or 127%, from December 31, 2014, to September 30, 2015. The increase in unrealized losses was primarily due to corporate debt securities which have been influenced by market conditions with widening credit spreads resulting in generally lower valuations of these fixed maturity securities.

Total unrealized losses greater than twelve months increased by $10,432 from December 31, 2014, to September 30, 2015. Corporate debt securities account for 88%, or $82,301, of the unrealized losses and OTTI greater than twelve months at September 30, 2015. Non-investment grade corporate debt securities account for $12,764 of the unrealized losses and OTTI greater than twelve months and $9,940 of the losses are on perpetual debt investments issued by investment grade rated banks

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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 10% of the unrealized losses and OTTI greater than twelve months at September 30, 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 September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Beginning balance	$	106,913		$	167,961		$	119,532		$	167,961
Initial impairments - credit loss on securities not previously impaired	—			—			450			—
Reductions:
Due to sales, maturities or payoffs during the period	(521		)	(646		)	(521		)	(646		)
Due to increases in cash flows expected to be collected that are recognized over the remaining life of the security	(13,057		)	(41,192		)	(26,126		)	(41,192		)
Ending balance	$	93,335		$	126,123		$	93,335		$	126,123

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 $101,896 and $141,653 as of September 30, 2015, and December 31, 2014, respectively. The Company had pledged collateral related to these derivatives of $66,769 and $106,110 as of September 30, 2015, and December 31, 2014, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on September 30, 2015, the fair value of assets that could be required to settle the derivatives in a net liability position was $35,127.

At September 30, 2015, and December 31, 2014, the Company had pledged $66,769 and $106,110 of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $15,168 and $791 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.

At September 30, 2015, the Company estimated $9,614 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.

Table of Contents

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 to be announced (“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.

Table of Contents

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:



	September 30, 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	$	175,800	$	13,960		$	13,960	$	—
Cross-currency swaps	342,834		16,392			17,375		983
Total cash flow hedges	518,634		30,352			31,335		983

Fair value hedges:
Interest rate swaps	8,750		18			18		—
Total fair value hedges	8,750		18			18		—

Total derivatives designated as hedges	527,384		30,370			31,353		983

Derivatives not designated as hedges:
Interest rate swaps	276,600		4,905			10,057		5,152
Futures on equity indices	34,778		—			—		—
Interest rate futures	120,000		—			—		—
Interest rate swaptions	142,704		193			193		—
Other forward contracts	5,137,500		14,778			23,519		8,741
Cross-currency swaps	662,935		(78,460		)	13,900		92,360
Total derivatives not designated as hedges	6,374,517		(58,584		)	47,669		106,253
Total derivative financial instruments	$	6,901,901	$	(28,214	)	$	79,022	$	107,236

⁽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.

Table of Contents

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.

The increase of $5,137,500 notional in other forward contracts since December 31, 2014 was due to the Company’s positions being closed at year end.

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 nine months ended September 30, 2015, was $439,045, $909,195, $101,382, $230,628, and $5,761,678 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.

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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 September 30,					Three Months Ended September 30,
	2015			2014		2015			2014
Cash flow hedges:
Interest rate swaps	$	(937	)	$	184	$	1,490		$	1,876		(A)
Cross-currency swaps	15,741			7,224		630			900			(A)
Cross-currency swaps	—			—		—			(154		)	(B)
Interest rate futures	—			—		(21		)	17			(A)
Total cash flow hedges	$	14,804		$	7,408	$	2,099		$	2,639

(A) Net investment income.

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



	Gain (loss) recognized in OCI on derivatives (Effective portion)					Gain (loss) reclassified from OCI into net income (Effective portion)
	Nine Months Ended September 30,					Nine Months Ended September 30,
	2015			2014		2015			2014
Cash flow hedges:
Interest rate swaps	$	(311	)	$	5,328	$	5,183		$	5,581		(A)
Cross-currency swaps	15,637			5,974		1,329			1,745			(A)
Cross-currency swaps	—			—		—			(154		)	(B)
Interest rate futures	—			—		(64		)	52			(A)
Total cash flow hedges	$	15,326		$	11,302	$	6,448		$	7,224

(A) Net investment income.

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



	Gain (loss) on derivatives recognized in net income						Gain (loss) on hedged assets recognized in net income
	Three Months Ended September 30,						Three Months Ended September 30,
	2015			2014			2015			2014
Fair value hedges:
Interest rate swaps	$	(620	)	$	395	(A)	$	—		$	—
Interest rate swaps	323			—		(B)	—			—
Items hedged in interest rate swaps	—			—			623			(406		)	(A)
Items hedged in interest rate swaps	—			—			(323		)	—			(B)
Total fair value hedges	$	(297	)	$	395		$	300		$	(406	)

(A) Net investment income.

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

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)




	Gain (loss) on derivatives recognized in net income							Gain (loss) on hedged assets recognized in net income
	Nine Months Ended September 30,							Nine Months Ended September 30,
	2015			2014				2015			2014
Fair value hedges:
Interest rate swaps	$	(1,489	)	$	(2,005	)	(A)	$	—		$	—
Interest rate swaps	765			—			(B)	—			—
Items hedged in interest rate swaps	—			—				1,493			1,994		(A)
Items hedged in interest rate swaps	—			—				(765		)	—		(B)
Total fair value hedges ⁽¹⁾	$	(724	)	$	(2,005	)		$	728		$	1,994

(A) Net investment income.

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



	Gain (loss) on derivatives recognized in net income
	Three Months Ended September 30,
	2015				2014
Derivatives not designated as hedging instruments:
Futures on equity indices	$	478		(A)	$	222		(A)
Futures on equity indices	1,111			(B)	(72		)	(B)
Interest rate swaps	6,480			(A)	467			(A)
Interest rate futures	(99		)	(A)	10			(A)
Interest rate futures	(117		)	(B)	65			(B)
Interest rate swaptions	928			(A)	835			(A)
Interest rate swaptions	—			(B)	(917		)	(B)
Other forward contracts	32,538			(A)	(16,147		)	(A)
Other forward contracts	8,504			(B)	16,894			(B)
Cross-currency swaps	36,845			(A)	17,500			(A)
Total derivatives not designated as hedging instruments	$	86,668			$	18,857

(A) Net investment income.

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

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Gain (loss) on derivatives recognized in net income
	Nine Months Ended September 30,
	2015				2014
Derivatives not designated as hedging instruments:
Futures on equity indices	$	896		(A)	$	312		(A)
Futures on equity indices	122			(B)	(431		)	(B)
Interest rate swaps	553			(A)	2,517			(A)
Interest rate futures	(214		)	(A)	(55		)	(A)
Interest rate futures	55			(B)	152			(B)
Interest rate swaptions	2,919			(A)	1,677			(A)
Interest rate swaptions	(2,076		)	(B)	(2,627		)	(B)
Other forward contracts	14,778			(A)	(2,087		)	(A)
Other forward contracts	6,414			(B)	56,471			(B)
Cross-currency swaps	44,549			(A)	10,415			(A)
Total derivatives not designated as hedging instruments	$	67,996			$	66,344

(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 future policy benefits 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 $9,777 and $6,407 at September 30, 2015, and December 31, 2014, respectively. The changes in fair value of the GLWB were $6,858 and $1,494 for the three months ended September 30, 2015, and 2014, respectively, and $3,370 and $2,103 for the nine months ended September 30, 2015, and 2014, respectively.

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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:



	September 30, 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⁾	$	67,807	$	(39,861	)	$	15,168	$	12,778
Short-term reverse repurchase agreements ⁽³⁾	75,000		(75,000		)	—		—
Total financial instruments (assets)	$	142,807	$	(114,861	)	$	15,168	$	12,778



	September 30, 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⁾	$	101,261	$	(39,861	)	$	(61,400	)	$	—

⁽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.

⁽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.

Table of Contents

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
	September 30, 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	$	—	$	1,085,830	$	—	$	1,085,830
Obligations of U.S. states and their subdivisions	—		2,288,301		—		2,288,301
Foreign government securities	—		2,332		—		2,332
Corporate debt securities	—		12,621,693		4,783		12,626,476
Asset-backed securities	—		1,349,729		40		1,349,769
Residential mortgage-backed securities	—		136,910		—		136,910
Commercial mortgage-backed securities	—		995,371		—		995,371
Collateralized debt obligations	—		9,365		—		9,365
Total fixed maturities available-for-sale	—		18,489,531		4,823		18,494,354
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		68,853		—		68,853
Corporate debt securities	—		57,268		—		57,268
Commercial mortgage-backed securities	—		1,093		—		1,093
Total fixed maturities held-for-trading	—		127,214		—		127,214
Short-term investments	605,962		1,857,213		—		2,463,175
Collateral under securities lending agreements	45,726		—		—		45,726
Collateral under derivative counterparty collateral agreements	81,937		—		—		81,937
Derivative instruments designated as hedges:
Interest rate swaps	—		13,978		—		13,978
Cross-currency swaps	—		17,375		—		17,375
Derivative instruments not designated as hedges:
Interest rate swaps	—		10,057		—		10,057
Interest rate swaptions	—		193		—		193
Other forward contracts	—		23,519		—		23,519
Cross-currency swaps	—		13,900		—		13,900
Total derivative instruments	—		79,022		—		79,022
Separate account assets	14,747,770		11,619,799		—		26,367,569
Total assets	$	15,481,395	$	32,172,779	$	4,823	$	47,658,997

Liabilities
Payable under securities lending agreements	$	45,726	$	—	$	—	$	45,726
Collateral under derivative counterparty collateral agreements	15,168		—		—		15,168
Derivative instruments designated as hedges:
Cross-currency swaps	—		983		—		983
Derivative instruments not designated as hedges:
Interest rate swaps	—		5,152		—		5,152
Other forward contracts	—		8,741		—		8,741
Cross-currency swaps	—		92,360		—		92,360
Total derivative instruments	—		107,236		—		107,236
Embedded derivatives - GLWB	—		—		9,777		9,777
Separate account liabilities ⁽¹⁾	6		357,468		—		357,474
Total liabilities	$	60,900	$	464,704	$	9,777	$	535,381

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

Table of Contents

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.

Table of Contents

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.

Table of Contents

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 September 30, 2015
	Assets										Liabilities
	Fixed maturities available-for-sale										Embedded
	Corporate			Asset-backed		Collateralized					derivatives
	debt securities			securities		debt obligations		Total			- GLWB
Balances, July 1, 2015	$	5,065		$	31	$	—	$	5,096		$	2,919
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—		—		—			6,858
Other comprehensive income (loss)	(66		)	—		—		(66		)	—
Settlements	(216		)	9		—		(207		)	—
Balances, September 30, 2015	$	4,783		$	40	$	—	$	4,823		$	9,777
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at September 30, 2015	$	—		$	—	$	—	$	—		$	6,858



	Recurring Level 3 financial assets and liabilities
	Three Months Ended September 30, 2014
	Assets												Liabilities
	Fixed maturities available-for-sale												Embedded
	Corporate			Asset-backed			Collateralized						derivatives
	debt securities			securities			debt obligations			Total			- GLWB
Balances, July 1, 2014	$	6,371		$	220,134		$	29		$	226,534		$	609
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—			(17		)	(17		)	1,494
Other comprehensive income (loss)	(111		)	(3,957		)	(12		)	(4,080		)	—
Settlements	(155		)	(6,250		)	—			(6,405		)	—
Balances, September 30, 2014	$	6,105		$	209,927		$	—		$	216,032		$	2,103
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at September 30, 2014	$	—		$	—		$	—		$	—		$	1,494

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Recurring Level 3 financial assets and liabilities
	Nine Months Ended September 30, 2015
	Assets										Liabilities
	Fixed maturities available-for-sale										Embedded
	Corporate			Asset-backed		Collateralized					derivatives
	debt securities			securities		debt obligations		Total			- GLWB
Balances, January 1, 2015	$	5,842		$	36	$	—	$	5,878		$	6,407
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—		—		—			3,370
Other comprehensive income (loss)	(143		)	—		—		(143		)	—
Settlements	(916		)	4		—		(912		)	—
Balances, September 30, 2015	$	4,783		$	40	$	—	$	4,823		$	9,777
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at September 30, 2015	$	—		$	—	$	—	$	—		$	3,370



	Recurring Level 3 financial assets and liabilities
	Nine Months Ended September 30, 2014
	Assets												Liabilities
	Fixed maturities available-for-sale												Embedded
	Corporate			Asset-backed			Collateralized						derivatives
	debt securities			securities			debt obligations			Total			- GLWB
Balances, January 1, 2014	$	6,652		$	252,958		$	32		$	259,642		$	—
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—			(17		)	(17		)	2,103
Other comprehensive income (loss)	(36		)	(9,551		)	(15		)	(9,602		)	—
Settlements	(511		)	(33,480		)	—			(33,991		)	—
Balances, September 30, 2014	$	6,105		$	209,927		$	—		$	216,032		2,103
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at September 30, 2014	$	—		$	—		$	—		$	—		$	2,103

Table of Contents

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 liabilities categorized within Level 3 of the recurring fair value measurements table:



	September 30, 2015
	Fair Value		Valuation Technique	Unobservable Input	Range
Embedded derivatives - GLWB	$	9,777	Risk neutral stochastic valuation methodology	Equity volatility	15% - 28%
				Swap curve	0.75% - 3.00%
				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 September 30, 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:



	September 30, 2015				December 31, 2014
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Assets
Mortgage loans on real estate	$	3,324,597	$	3,502,107	$	3,363,570	$	3,558,111
Policy loans	4,150,476		4,150,476		4,130,062		4,130,062
Limited partnership interests	36,474		37,339		38,796		41,853
Other investments	14,760		44,591		15,614		43,263

Liabilities
Annuity contract benefits without life contingencies	$	10,897,078	$	10,746,275	$	10,569,147	$	10,563,477
Policyholders’ funds	266,438		266,438		335,484		335,484
Commercial paper	96,284		96,284		98,589		98,589
Notes payable	541,826		569,320		532,547		564,904

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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.

Table of Contents

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 September 30, 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, July 1, 2015	$	560,527		$	30,653		$	(79,296	)	$	(102,513	)	$	409,371
Other comprehensive income (loss) before reclassifications	(3,619		)	9,623			(1,549		)	(7		)	4,448
Amounts reclassified from AOCI	(3,859		)	(1,364		)	—			2,021			(3,202		)
Net current period other comprehensive income (loss)	(7,478		)	8,259			(1,549		)	2,014			1,246
Balances, September 30, 2015	$	553,049		$	38,912		$	(80,845	)	$	(100,499	)	$	410,617



	Three Months Ended September 30, 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, July 1, 2014	$	790,332		$	25,068		$	(126,529	)	$	(43,786	)	$	645,085
Other comprehensive income (loss) before reclassifications	(65,520		)	4,815			263			(2,159		)	(62,601		)
Amounts reclassified from AOCI	(2,664		)	(1,716		)	—			2,802			(1,578		)
Net current period other comprehensive income (loss)	(68,184		)	3,099			263			643			(64,179		)
Balances, September 30, 2014	$	722,148		$	28,167		$	(126,266	)	$	(43,143	)	$	580,906

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Nine Months Ended September 30, 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	(207,043		)	9,962			27,349			(222		)	(169,954		)
Amounts reclassified from AOCI	(24,091		)	(4,191		)	—			5,835			(22,447		)
Net current period other comprehensive income (loss)	(231,134		)	5,771			27,349			5,613			(192,401		)
Balances, September 30, 2015	$	553,049		$	38,912		$	(80,845	)	$	(100,499	)	$	410,617



	Nine Months Ended September 30, 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	306,499			7,346			(56,266		)	(2,159		)	255,420
Amounts reclassified from AOCI	(18,374		)	(4,696		)	—			2,802			(20,268		)
Net current period other comprehensive income (loss)	288,125			2,650			(56,266		)	643			235,152
Balances, September 30, 2014	$	722,148		$	28,167		$	(126,266	)	$	(43,143	)	$	580,906

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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 September 30, 2015
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale	$	(5,568	)	$	1,949		$	(3,619	)
Unrealized holding gains (losses), net, arising on cash flow hedges	14,804			(5,181		)	9,623
Reclassification adjustment for (gains) losses, net, realized in net income	(8,036		)	2,813			(5,223		)
Net unrealized gains (losses) related to investments	1,200			(419		)	781
Future policy benefits, DAC and VOBA adjustments	(2,383		)	834			(1,549		)
Net unrealized gains (losses)	(1,183		)	415			(768		)
Employee benefit plan adjustment	3,098			(1,084		)	2,014
Other comprehensive income (loss)	$	1,915		$	(669	)	$	1,246



	Three Months Ended September 30, 2014
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale	$	(100,800	)	$	35,280		$	(65,520	)
Unrealized holding gains (losses), net, arising on cash flow hedges	7,408			(2,593		)	4,815
Reclassification adjustment for (gains) losses, net, realized in net income	(6,738		)	2,358			(4,380		)
Net unrealized gains (losses) related to investments	(100,130		)	35,045			(65,085		)
Future policy benefits, DAC and VOBA adjustments	405			(142		)	263
Net unrealized gains (losses)	(99,725		)	34,903			(64,822		)
Employee benefit plan adjustment	989			(346		)	643
Other comprehensive income (loss)	$	(98,736	)	$	34,557		$	(64,179	)



	Nine Months Ended September 30, 2015
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale	$	(318,529	)	$	111,486		$	(207,043	)
Unrealized holding gains (losses), net, arising on cash flow hedges	15,326			(5,364		)	9,962
Reclassification adjustment for (gains) losses, net, realized in net income	(43,511		)	15,229			(28,282		)
Net unrealized gains (losses) related to investments	(346,714		)	121,351			(225,363		)
Future policy benefits, DAC and VOBA adjustments	42,075			(14,726		)	27,349
Net unrealized gains (losses)	(304,639		)	106,625			(198,014		)
Employee benefit plan adjustment	8,635			(3,022		)	5,613
Other comprehensive income (loss)	$	(296,004	)	$	103,603		$	(192,401	)

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Nine Months Ended September 30, 2014
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale	$	471,537		$	(165,038	)	$	306,499
Unrealized holding gains (losses), net, arising on cash flow hedges	11,302			(3,956		)	7,346
Reclassification adjustment for (gains) losses, net, realized in net income	(35,492		)	12,422			(23,070		)
Net unrealized gains (losses) related to investments	447,347			(156,572		)	290,775
Future policy benefits, DAC and VOBA adjustments	(86,563		)	30,297			(56,266		)
Net unrealized gains (losses)	360,784			(126,275		)	234,509
Employee benefit plan adjustment	989			(346		)	643
Other comprehensive income (loss)	$	361,773		$	(126,621	)	$	235,152

The following tables presents the reclassifications out of accumulated other comprehensive income (loss):



	Three Months Ended September 30,
	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	$	(5,937	)		$	(4,099	)		Other realized investment (gains) losses, net
	(5,937		)		(4,099		)		Total before tax
	(2,078		)		(1,435		)		Tax expense or benefit
	$	(3,859	)		$	(2,664	)		Net of tax

Unrealized holding (gains) losses, net, arising on cash flow hedges	$	(2,099	)		$	(2,639	)		Net investment income
	(2,099		)		(2,639		)		Total before tax
	(735		)		(923		)		Tax expense or benefit
	$	(1,364	)		$	(1,716	)		Net of tax

Amortization of employee benefit plan items
Prior service costs (benefits)	$	(159	)	⁽¹⁾	$	(542	)	⁽¹⁾
Actuarial losses (gains)	3,268			⁽¹⁾	2,187			⁽¹⁾
Settlement	—			⁽¹⁾	2,666			⁽¹⁾
	3,109				4,311				Total before tax
	1,088				1,509				Tax expense or benefit
	$	2,021			$	2,802			Net of tax

Total reclassification	$	(3,202	)		$	(1,578	)		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).

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Nine Months Ended September 30,
	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	$	(37,063	)		$	(28,268	)		Other realized investment (gains) losses, net
	(37,063		)		(28,268		)		Total before tax
	(12,972		)		(9,894		)		Tax expense or benefit
	$	(24,091	)		$	(18,374	)		Net of tax

Unrealized holding (gains) losses, net, arising on cash flow hedges	$	(6,448	)		$	(7,224	)		Net investment income
	(6,448		)		(7,224		)		Total before tax
	(2,257		)		(2,528		)		Tax expense or benefit
	$	(4,191	)		$	(4,696	)		Net of tax

Amortization of employee benefit plan items
Prior service costs (benefits)	$	(520	)	⁽¹⁾	$	(542	)	⁽¹⁾
Actuarial losses (gains)	9,497			⁽¹⁾	2,187			⁽¹⁾
Settlement	—			⁽¹⁾	2,666			⁽¹⁾
	8,977				4,311				Total before tax
	3,142				1,509				Tax expense or benefit
	$	5,835			$	2,802			Net of tax

Total reclassification	$	(22,447	)		$	(20,268	)		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).

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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 September 30,
	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	$	1,521		$	1,364		$	254		$	327		$	70	$	30	$	1,845		$	1,721
Interest cost	5,996			5,824			167			171			531		503		6,694			6,498
Expected return on plan assets	(7,084		)	(7,328		)	—			—			—		—		(7,084		)	(7,328		)
Amortization of unrecognized prior service costs (benefits)	3			12			(395		)	(427		)	233		234		(159		)	(181		)
Amortization of losses (gains) from earlier periods	3,086			885			16			(77		)	166		165		3,268			973
Settlement	—			—			—			—			—		2,666		—			2,666
Net periodic cost (benefit)	$	3,522		$	757		$	42		$	(6	)	$	1,000	$	3,598	$	4,564		$	4,349



	Nine Months Ended September 30,
	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	$	4,538		$	3,713		$	781		$	739		$	211	$	440	$	5,530		$	4,892
Interest cost	17,990			17,301			420			431			1,592		1,896		20,002			19,628
Expected return on plan assets	(21,258		)	(21,966		)	—			—			—		—		(21,258		)	(21,966		)
Amortization of unrecognized prior service costs (benefits)	10			38			(1,230		)	(1,280		)	700		700		(520		)	(542		)
Amortization of losses (gains) from earlier periods	9,298			2,174			(298		)	(337		)	497		350		9,497			2,187
Settlement	—			—			—			—			—		2,666		—			2,666
Net periodic cost (benefit)	$	10,578		$	1,260		$	(327	)	$	(447	)	$	3,000	$	6,052	$	13,251		$	6,865

The Company expects to make payments of approximately $1,466 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.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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 September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Contributions to the Defined Benefit Pension Plan	$	—	$	6,003	$	—	$	10,717
Payments to the Post-Retirement Medical Plan	576		178		1,100		393
Payments to the Supplemental Executive Retirement Plan	830		14,255		3,995		16,044

11. Income Taxes

The provision for income taxes is comprised of the following:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Current	$	29,568	$	18,062	$	67,705	$	71,658
Deferred	1,140		11,728		11,221		48,666
Total income tax provision	$	30,708	$	29,790	$	78,926	$	120,324

The following table presents a reconciliation between the statutory federal income tax rate and the Company’s effective income tax rate:



	Nine Months Ended September 30,
	2015		2014
Statutory federal income tax rate	35.0	%	35.0	%
Income tax effect of:
Investment income not subject to federal tax	(2.8	)%	(2.0	)%
Tax credits	(0.3	)%	(0.3	)%
State income taxes, net of federal benefit	1.9	%	1.5	%
Other, net	(0.7	)%	0.1	%
Effective income tax rate	33.1	%	34.3	%

During the nine months ended September 30, 2015, and 2014, the Company recorded an increase in unrecognized tax benefits in the amount of $1,008 and $1,401, respectively. The Company anticipates additional increases to its unrecognized tax benefits of $6,000 to $7,000 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 2011 and prior. Tax years 2012 through 2014 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.

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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 the Company and 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.

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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 September 30, 2015
	Individual		Empower
	Markets		Retirement		Other			Total
Revenue:
Premium income	$	132,761	$	477	$	20,779		$	154,017
Fee income	19,745		204,488		1,009			225,242
Other revenue	—		1,820		—			1,820
Net investment income	222,445		127,160		13,452			363,057
Realized investment gains (losses), net	8,304		14,247		—			22,551
Total revenues	383,255		348,192		35,240			766,687
Benefits and expenses:
Policyholder benefits	270,614		54,401		32,599			357,614
Operating expenses	49,407		242,841		18,544			310,792
Total benefits and expenses	320,021		297,242		51,143			668,406
Income (loss) before income taxes	63,234		50,950		(15,903		)	98,281
Income tax expense (benefit)	21,539		14,884		(5,715		)	30,708
Net income (loss)	$	41,695	$	36,066	$	(10,188	)	$	67,573



	Three Months Ended September 30, 2014
	Individual		Empower
	Markets		Retirement		Other			Total
Revenue:
Premium income	$	151,831	$	173	$	17,539		$	169,543
Fee income	20,781		160,241		969			181,991
Net investment income	181,944		96,771		13,346			292,061
Realized investment gains (losses), net	9,458		13,777		295			23,530
Total revenues	364,014		270,962		32,149			667,125
Benefits and expenses:
Policyholder benefits	282,985		51,396		27,610			361,991
Operating expenses	46,463		153,970		14,410			214,843
Total benefits and expenses	329,448		205,366		42,020			576,834
Income (loss) before income taxes	34,566		65,596		(9,871		)	90,291
Income tax expense (benefit)	11,598		21,912		(3,720		)	29,790
Net income (loss)	$	22,968	$	43,684	$	(6,151	)	$	60,501

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Nine Months Ended September 30, 2015
	Individual		Empower
	Markets		Retirement		Other			Total
Revenue:
Premium income	$	308,976	$	493	$	64,968		$	374,437
Fee income	66,214		618,841		2,965			688,020
Other revenue	—		5,460		—			5,460
Net investment income	595,757		305,969		40,356			942,082
Realized investment gains (losses), net	20,256		36,257		97			56,610
Total revenues	991,203		967,020		108,386			2,066,609
Benefits and expenses:
Policyholder benefits	725,526		151,194		80,883			957,603
Operating expenses	116,770		704,047		50,091			870,908
Total benefits and expenses	842,296		855,241		130,974			1,828,511
Income (loss) before income taxes	148,907		111,779		(22,588		)	238,098
Income tax expense (benefit)	51,262		35,651		(7,987		)	78,926
Net income (loss)	$	97,645	$	76,128	$	(14,601	)	$	159,172



	Nine Months Ended September 30, 2014
	Individual		Empower
	Markets		Retirement		Other			Total
Revenue:
Premium income	$	302,070	$	1,213	$	60,610		$	363,893
Fee income	71,349		446,201		2,959			520,509
Net investment income	554,508		316,724		40,462			911,694
Realized investment gains (losses), net	26,182		60,933		380			87,495
Total revenues	954,109		825,071		104,411			1,883,591
Benefits and expenses:
Policyholder benefits	700,694		151,397		78,976			931,067
Operating expenses	123,892		433,529		44,574			601,995
Total benefits and expenses	824,586		584,926		123,550			1,533,062
Income (loss) before income taxes	129,523		240,145		(19,139		)	350,529
Income tax expense (benefit)	44,516		82,271		(6,463		)	120,324
Net income (loss)	$	85,007	$	157,874	$	(12,676	)	$	230,205

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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 September 30, 2015, and December 31, 2014. At September 30, 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 $1,179,820 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 September 30, 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 September 30, 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 September 30, 2015, and December 31, 2014, were $148,077 and $166,356, of which $28,277 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 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 $21,492.

The Company is defending a lawsuit related to a motor vehicle accident involving an employee. It received a $20,000 demand from the plaintiff’s attorney during the fourth quarter of 2014. The amount is fully indemnified by a third-party insurer.

The Company has been named as a defendant in a potential class action lawsuit that relates to its Key Guaranteed Portfolio Fund. A decision on whether the case should proceed as a class is not expected until next year. The Company is defending this lawsuit, and due to the early nature of the proceedings, the Company is unable to predict the outcome of the lawsuit or estimate a possible range of loss.

The Company is involved in other 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.

14. Subsequent Events

The Company evaluated subsequent events through the date the consolidated financial statements were issued. The Company concluded that no subsequent events have occurred that would require recognition or disclosure in the condensed consolidated financial statements.

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 and nine months ended September 30, 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 Investments, LLC (“Putnam”), an affiliate of the Company. 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

Empower Retirement continues to incur strategic and business development expenses as it focuses on enhancements, which will improve the client-facing experience as well as streamline the back-office processing over the next several years. The Company anticipates investing approximately $150 million on this multi-year initiative, with an expected decrease to net earnings of approximately $35 million in 2015 and $20 million in 2016. These cost have decreased net earnings by $9 million and $5 million for the three months ended September 30, 2015, and 2014, respectively, and $25 million and $5 million for the nine months ended September 30, 2015, and 2014, respectively. Ongoing operations will include amortization expense from system and infrastructure enhancements. The Company expects that these enhancements will increase market share by driving future sales and improving the retention of participants and assets.

The Company has set an annual costs savings target of $40 to $50 million pre-tax. Integration activities are expected to be completed by the second quarter of 2017 with the annual reduction of operating costs reflected upon the completion of the business transformation in the next three to four years. These synergies are expected to be achieved through efficiencies from the conversion of business onto a single back-office platform, increased utilization of Great-West Global, which launched in the third quarter of 2015 with over 250 Bangalore-based professionals, and scale-driven cost improvement.

Acquisition of RPS

On August 29, 2014, the Company completed the acquisition of RPS. This business is integrated within the Empower Retirement segment. RPS contributed revenue and net income, included in the condensed consolidated statements of income, as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
Income statement data (In millions)	2015			2014		2015		2014
Revenue	$	42		$	14	$	137	$	14
Net income (loss)	(1		)	—		—		—

Current Market Conditions

The financial markets experienced some volatility over 2015, while in 2014 the financial markets strengthened during the year. The S&P 500 index as at September 30, 2015 was down by 7% compared to June 30, 2015, and down by 7% compared to January 1, 2015. The S&P 500 index at September 30, 2014 was up by less than 1% when compared to June 30, 2014, and was up by 7% when compared to January 1, 2014. The average of the S&P 500 index during the three months ended September 30, 2015, was up by 3% when compared to the same period in 2014 and the average during the nine months ended September 30, 2015, was up by 8% when compared to the same period in 2014.



	2015			2014
S&P 500 Index	Close	Average in Quarter	Average for Year to Date	Close	Average in Quarter	Average for Year to Date
September 30	1,920	2,027	2,064	1,972	1,976	1,905
June 30	2,063	2,102	2,083	1,960	1,900	1,868
March 31	2,068	2,064	2,064	1,872	1,835	1,835
January 1	2,059			1,848

Variable asset-based fees earned by the Company fluctuate with changes in participant account balances. Participant account balances change due to cash flow and unrealized market gains and losses, which are primarily associated with changes in the United States equities market. Fee income increased by $43 million and $168 million for the three and nine months ended September 30, 2015, respectively, when compared to the same period in 2014. The increase was primarily related to fees earned by RPS as well as the impact of the acquisition of the defined contribution business from Putnam. In addition, the increase was related to higher variable fee income as a result of higher average account balances due to the improved average performance of the U.S. equities market.

Interest rates were volatile during the first nine months of 2015 as compared to the same period in 2014 when they decreased. The 10-year U.S. Treasury rate as at September 30, 2015, was down by 29 basis points as compared to June 30, 2015, and was down by 11 basis points as compared to January 1, 2015. The rate at September 30, 2014 was down by 1 basis point as compared to June 30, 2014, and was down by 52 basis points as compared to January 1, 2014. The average of the 10-year U.S. Treasury rate during the three months ended September 30, 2015, was down by 28 basis points when compared to the same period in 2014 and the rate during the nine months ended September 30, 2015, was down by 51 basis points when compared to the same period in 2014.



	2015						2014
10-Year Treasury Rate	Close		Average in Quarter		Average for Year to Date		Close		Average in Quarter		Average for Year to Date
September 30	2.06	%	2.22	%	2.12	%	2.52	%	2.50	%	2.63	%
June 30	2.35	%	2.16	%	2.07	%	2.53	%	2.62	%	2.69	%
March 31	1.94	%	1.97	%	1.97	%	2.73	%	2.77	%	2.77	%
January 1	2.17	%					3.04	%

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 those derivative instruments when hedge accounting is not elected, all gains or losses 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 its earnings. For three and nine months ended September 30, 2015, the Company recorded favorable changes in unrealized gains (losses), net, of $49 million and $17 million,

respectively, on forward settling to be announced (“TBA”) securities as compared to the same period in 2014. Additionally, the realized gains (losses), net, on forward settling TBA securities had unfavorable changes of $8 million and $50 million for the three and nine months ended September 30, 2015, respectively, as compared to the same period in 2014.

Unrealized gains on fixed maturity investments fluctuate with changes in the prevailing interest rates. When interest rates rise, market values of fixed maturity investments generally fall. During the three and nine months ended September 30, 2015, fixed maturity investments' unrealized investment gains (losses), net, recognized in net income, had a favorable change of $2 million and an unfavorable change of $5 million, respectively, as compared to the same period in 2014. The Company also recorded in other comprehensive income unfavorable changes in unrealized gains (losses), net, on fixed maturity investments, of $10 million and $355 million for the three and nine months ended September 30, 2015, respectively, and unfavorable changes of $965 million and $411 million for the three and nine months ended September 30, 2014, respectively. The realized gains (losses), net, on fixed maturity investments had an unfavorable change of $1 million and a favorable change of $8 million for the three and nine months ended September 30, 2015, respectively, as compared to the same period in 2014.

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 September 30, 2015, compared with the three months ended September 30, 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 September 30,						Increase			Percentage
Income statement data (In millions)	2015			2014			(decrease)			change
Net (loss) income
Individual Markets segment	$	42		$	23		$	19		83	%
Empower Retirement segment	36			44			(8		)	(18	)%
Other segment	(10		)	(6		)	(4		)	67	%
Total net (loss) income	68			61			7			11	%
Adjustments to net (loss) income
Unrealized investment gains (losses), net	69			2			67			3,350	%
Realized investment gains (losses), net	23			24			(1		)	(4	)%
Pro-rata tax (expense) benefit⁽¹⁾	(32		)	(9		)	(23		)	256	%
Operating income	$	8		$	44		$	(36	)	(82	)%

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

Unrealized investment gains (losses), net, had a favorable change of $67 million, from $2 million in 2014 to $69 million in 2015. The primary driver of the change was a $49 million favorable change in unrealized gains on forward settling TBA securities. The remainder was a $15 million favorable change in unrealized gains on derivatives. In addition, there was a favorable change in unrealized gains on bonds.

Realized investment gains (losses), net, had an unfavorable change of $1 million, or 4%, to $23 million during the three months ended September 30, 2015, when compared to the same period in 2014. The change was primarily driven by an $8 million unfavorable change in gains on forward settling TBA securities, partially offset by favorable changes of $7 million in gains on derivatives and equity investments.

Pro-rata tax expense increased by $23 million, from $9 million in 2014 to $32 million in 2015 resulting from the favorable change in unrealized investment gains (losses), net.

Nine months ended September 30, 2015, compared with the nine months ended September 30, 2014

The following is a summary of the contributions of each segment to the net income and a reconciliation of net income to operating income:



	Nine Months Ended September 30,						Increase			Percentage
Income statement data (In millions)	2015			2014			(decrease)			change
Net income
Individual Markets segment	$	98		$	85		$	13		15	%
Empower Retirement segment	76			158			(82		)	(52	)%
Other segment	(15		)	(13		)	(2		)	15	%
Total net income	159			230			(71		)	(31	)%
Adjustments to net income
Unrealized investment gains (losses), net	56			20			36			180	%
Realized investment gains (losses), net	57			87			(30		)	(34	)%
Pro-rata tax (expense) benefit ⁽¹⁾	(39		)	(38		)	(1		)	3	%
Operating income	$	85		$	161		$	(76	)	(47	)%

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

Unrealized investment gains (losses), net, had a favorable change of $36 million from $20 million in 2014 to $56 million in 2015. The primary driver of the change was a $23 million favorable change in unrealized gains on derivatives. The remainder was a $17 million favorable change in unrealized gains on forward settling TBA securities. The favorable change was partially offset by an unfavorable change in unrealized gains on bonds.

Realized investment gains (losses), net, had an unfavorable change of $30 million, or 34%, to $57 million during the nine months ended September 30, 2015, when compared to the same period in 2014. The change was primarily driven by a $50 million unfavorable change in gains on forward settling TBA security transactions, partially offset by favorable changes of $20 million in gains on bonds, derivatives, equity investments, and mortgages.

Pro-rata tax expense increased by $1 million, or 3%, to $39 million during the nine months ended September 30, 2015, when compared to the same period in 2014, resulting from the favorable change in total unrealized and realized investment gains (losses), net.

Company Results of Operations

Three months ended September 30, 2015, compared with the three months ended September 30, 2014

The following is a summary of certain financial data of the Company:



	Three Months Ended September 30,					Increase			Percentage
Income statement data (In millions)	2015			2014		(decrease)			change
Premium income	$	154		$	170	$	(16	)	(9	)%
Fee income	225			182		43			24	%
Other revenue	2			—		2			100	%
Net investment income	295			290		5			2	%
Total revenues	676			642		34			5	%
Policyholder benefits	358			362		(4		)	(1	)%
Operating expenses	311			215		96			45	%
Total benefits and expenses	669			577		92			16	%
Income before income taxes	7			65		(58		)	(89	)%
Income tax (benefit) expense	(1		)	21		(22		)	(105	)%
Operating income	$	8		$	44	$	(36	)	(82	)%

The Company’s consolidated operating income decreased by $36 million, or 82%, to $8 million for the three months ended September 30, 2015, when compared to the same period in 2014. The decrease was primarily due to higher operating expenses partially offset by higher fee income. In addition, premium income was lower.

Premium income decreased by $16 million, or 9%, to $154 million for the three months ended September 30, 2015, when compared to the same period in 2014. This decrease was primarily related to the Company’s Individual Markets segment which had a decrease of $19 million due to certain reserving changes made during the three months ended September 30, 2014 resulting in higher cost of insurance for certain products for that period.

Fee income increased by $43 million, or 24%, to $225 million for the three months ended September 30, 2015, when compared to the same period in 2014. The increase was primarily related to $42 million in fees earned by RPS in 2015 compared to $14 million in fees earned by RPS in 2014. The increase was also related to the impact of the acquisition of the defined contribution business from Putnam. During the three months ended September 30, 2014, the Putnam defined contribution business earned $2 million in fee income. 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 3% increase in the average S&P 500 index during the three months ended September 30, 2015, as compared to the three months ended September 30, 2014.

Net investment income increased by $5 million, or 2%, to $295 million during the three months ended September 30, 2015, when compared to the same period in 2014. The increase was due to higher investment income on equity and other investments.

Policyholder benefits decreased by $4 million, or 1%, to $358 million for the three months ended September 30, 2015, when compared to the same period in 2014 primarily due to the Company’s Individual Markets segment which had a decrease of $12 million. The decrease was driven by certain reserving changes made during the three months ended September 30, 2014, partially offset by higher interest credited or paid to contractholders as a result of increased average liabilities. Offsetting the decrease was a $5 million and $3 million increase in the Company’s Other segment and Empower Retirement segment, respectively.

Operating expenses increased by $96 million, or 45%, to $311 million for the three months ended September 30, 2015, when compared to the same period in 2014 primarily due to the Company’s Empower Retirement segment which had an increase of $89 million. The increase was primarily attributable to $30 million increase from RPS as well as the impact of the acquisition of the defined contribution business from Putnam. During the three months ended September 30, 2014, the Putnam defined contribution business incurred $10 million in operating expense. 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 back office processing over the next several years. The Company

incurred costs of $14 million related to this business integration in 2015 compared to $8 million in 2014. The remaining increase in operating expenses is due to business growth.

Income tax expense had a favorable change of $22 million, from an expense of $21 million to a benefit of $1 million primarily due to a decrease in operating income before tax.

Nine months ended September 30, 2015, compared with the nine months ended September 30, 2014

The following is a summary of certain financial data of the Company:



	Nine Months Ended September 30,				Increase			Percentage
Income statement data (In millions)	2015		2014		(decrease)			change
Premium income	$	374	$	364	$	10		3	%
Fee income	688		520		168			32	%
Other revenue	5		—		5			100	%
Net investment income	887		892		(5		)	(1	)%
Total revenues	1,954		1,776		178			10	%
Policyholder benefits	958		931		27			3	%
Operating expenses	871		602		269			45	%
Total benefits and expenses	1,829		1,533		296			19	%
Income before income taxes	125		243		(118		)	(49	)%
Income tax expense	40		82		(42		)	(51	)%
Operating income	$	85	$	161	$	(76	)	(47	)%

The Company’s consolidated operating income decreased by $76 million, or 47%, to $85 million for the nine months ended September 30, 2015, when compared to the same period in 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 $10 million, or 3%, to $374 million for the nine months ended September 30, 2015, when compared to the same period in 2014. This increase was primarily related to the Company’s Individual Markets segment which had an increase of $7 million 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 $1,591 million to $2,118 million.

Fee income increased by $168 million, or 32%, to $688 million for the nine months ended September 30, 2015, when compared to the same period in 2014. The increase was primarily related to $137 million in fees earned by RPS in 2015 compared to $14 million in fees earned by RPS in 2014. The increase was also related to the impact of the acquisition of the defined contribution business from Putnam. During the nine months ended September 30, 2014, the Putnam defined contribution business earned $5 million in fee income. 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 8% increase in the average S&P 500 index during the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014.

Net investment income decreased by $5 million, or 1%, to $887 million during the nine months ended September 30, 2015, when compared to the same period in 2014. The decrease was due to lower investment income on bonds, mortgages, and policy loans as a result of lower yields partially offset by higher invested asset balances. The decrease was partially offset by higher gains on equity and other investments.

Policyholder benefits increased by $27 million, or 3%, to $958 million for the nine months ended September 30, 2015, when compared to the same period in 2014 primarily due to the Company’s Individual Markets segment which had an increase of $25 million. The increase was 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.

Operating expenses increased by $269 million, or 45%, to $871 million for the nine months ended September 30, 2015, when compared to the same period in 2014 primarily due to the Company’s Empower Retirement segment which had an increase of $270 million. The increase was primarily attributable to $123 million increase from RPS as well as the impact of the

acquisition of the defined contribution business from Putnam. During the nine months ended September 30, 2014, the Putnam defined contribution business incurred $31 million in operating expense. 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 back office processing over the next several years. The Company incurred costs of $39 million related to this business integration in 2015 compared to $8 million in 2014. The remaining increase in operating expenses is due to business growth.

Income tax expense decreased by $42 million, or 51%, to $40 million for the nine months ended September 30, 2015, when compared to the same period in 2014 primarily due to a decrease in operating income before tax.

Individual Markets Segment Results of Operations

Three months ended September 30, 2015, compared with the three months ended September 30, 2014

The following is a summary of certain financial data of the Individual Markets segment:



	Three Months Ended September 30,				Increase			Percentage
Income statement data (In millions)	2015		2014		(decrease)			change
Premium income	$	133	$	152	$	(19	)	(13	)%
Fee income	20		21		(1		)	(5	)%
Net investment income	191		183		8			4	%
Total revenues	344		356		(12		)	(3	)%
Policyholder benefits	271		283		(12		)	(4	)%
Operating expenses	49		47		2			4	%
Total benefits and expenses	320		330		(10		)	(3	)%
Income before income taxes	24		26		(2		)	(8	)%
Income tax expense	8		9		(1		)	(11	)%
Operating income	$	16	$	17	$	(1	)	(6	)%

Operating income for the Individual Markets segment decreased by $1 million, or 6%, to $16 million, during the three months ended September 30, 2015, when compared to the same period in 2014. The decrease is primarily due to lower premiums partially offset by lower policyholder benefits. Further offsetting the decrease was higher net investment income.

Premium income decreased by $19 million, or 13%, to $133 million for the three months ended September 30, 2015, when compared to the same period in 2014. This decrease was primarily related to certain reserving changes made during the three months ended September 30, 2014 resulting in higher cost of insurance for certain products for that period.

Fee income decreased by $1 million, or 5%, to $20 million for the three months ended September 30, 2015, when compared to the same period in 2014. The decrease was primarily related to lower individual annuity fees.

Net investment income increased by $8 million, or 4%, to $191 million for the three months ended September 30, 2015, when compared to the same period in 2014. This was due to an increase in investment income earned on bonds, mortgages, and policy loans as a result of higher invested asset balances partially offset by lower yields.

Policyholder benefits decreased by $12 million, or 4%, to $271 million for the three months ended September 30, 2015, when compared to the same period in 2014, primarily driven by certain reserving changes made during the three months ended September 30, 2014, partially offset by higher interest credited or paid to contractholders as a result of increased average liabilities.

Operating expenses increased by $2 million, or 4%, to $49 million for the three months ended September 30, 2015, when compared to the same period in 2014. The increase was primarily due to lower DAC deferral due to lower commissions and premium tax expense and higher DAC amortization due to lower realized investment gains (losses), net. The increase was partially offset by a decrease in the allocation of shared services expense to the Individual Markets segment as expenses increased in the Empower Retirement segment and lower commissions and premium tax expense as a result of reduction in sales.

Income tax expense decreased by $1 million, or 11%, to $8 million during the three months ended September 30, 2015, when compared to the same period in 2014 primarily due to a decrease in operating income before tax.

Nine months ended September 30, 2015, compared with the nine months ended September 30, 2014

The following is a summary of certain financial data of the Individual Markets segment:



	Nine Months Ended September 30,				Increase			Percentage
Income statement data (In millions)	2015		2014		(decrease)			change
Premium income	$	309	$	302	$	7		2	%
Fee income	66		71		(5		)	(7	)%
Net investment income	566		547		19			3	%
Total revenues	941		920		21			2	%
Policyholder benefits	726		701		25			4	%
Operating expenses	117		124		(7		)	(6	)%
Total benefits and expenses	843		825		18			2	%
Income before income taxes	98		95		3			3	%
Income tax expense	33		32		1			3	%
Operating income	$	65	$	63	$	2		3	%

Operating income for the Individual Markets segment increased by $2 million, or 3%, to $65 million during the nine months ended September 30, 2015, when compared to the same period in 2014. The increase was primarily due to higher premiums partially offset by higher policyholder benefits, higher net investment income, and lower operating expenses.

Premium income increased by $7 million, or 2%, to $309 million during the nine months ended September 30, 2015, when compared to the same period in 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 $1,591 million to $2,118 million.

Fee income decreased by $5 million, or 7%, to $66 million for the nine months ended September 30, 2015, when compared to the same period in 2014. The decrease was primarily related to lower individual annuity fees.

Net investment income increased by $19 million, or 3%, to $566 million for the nine months ended September 30, 2015, when compared to the same period in 2014. This was due to higher investment income earned on bonds, mortgages, and policy loans as a result of higher invested asset balances partially offset by lower yields.

Policyholder benefits increased by $25 million, or 4%, to $726 million for the nine months ended September 30, 2015, when compared to the same period in 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.

Operating expenses decreased by $7 million, or 6%, to $117 million for the nine months ended September 30, 2015, when compared to the same period in 2014. The decrease was primarily due to a decrease in the allocation of shared services expense to the Individual Markets segment as expenses increased in the Empower Retirement segment and lower commissions and premium tax expense as a result of reduction in sales. The decrease was partially offset by lower DAC deferral due to lower commissions and premium tax expense and higher DAC amortization due to lower realized investment gains (losses), net.

Income tax expense increased by $1 million, or 3%, to $33 million during the nine months ended September 30, 2015, when compared to the same period in 2014 primarily due to an increase in operating income before tax.

Empower Retirement Segment Results of Operations

Three months ended September 30, 2015, compared with the three months ended September 30, 2014

The following is a summary of certain financial data of the Empower Retirement segment:



	Three Months Ended September 30,					Increase			Percentage
Income statement data (In millions)	2015			2014		(decrease)			change
Fee income	$	204		$	160	$	44		28	%
Other revenue	2			—		2			100	%
Net investment income	91			94		(3		)	(3	)%
Total revenues	297			254		43			17	%
Policyholder benefits	54			51		3			6	%
Operating expenses	243			154		89			58	%
Total benefits and expenses	297			205		92			45	%
Income before income taxes	—			49		(49		)	(100	)%
Income tax (benefit) expense	(3		)	16		(19		)	(119	)%
Operating income	$	3		$	33	$	(30	)	(91	)%

Operating income for the Empower Retirement segment decreased by $30 million, or 91%, to $3 million for the three months ended September 30, 2015, when compared to the same period in 2014. The decrease was primarily due to higher operating expenses partially offset by higher fee income.

Fee income increased by $44 million, or 28%, to $204 million for the three months ended September 30, 2015, when compared to the same period in 2014. The increase was primarily related to $42 million in fees earned by RPS in 2015 compared to $14 million in fees earned by RPS in 2014. The increase was also related to the impact of the acquisition of the defined contribution business from Putnam. During the three months ended September 30, 2014, the Putnam defined contribution business earned $2 million in fee income. 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 3% increase in the average S&P 500 index during the three months ended September 30, 2015, as compared to the three months ended September 30, 2014.

Net investment income decreased by $3 million, or 3%, to $91 million for the three months ended September 30, 2015, when compared to the same period in 2014. The primary driver of the change was lower investment income on bonds, mortgages, and policy loans as a result of lower yields partially offset by higher invested asset balances.

Policyholder benefits increased by $3 million, or 6%, to $54 million for the three months ended September 30, 2015, when compared to the same period in 2014. The increase was due to higher surrender activities.

Operating expenses increased by $89 million, or 58%, to $243 million for the three months ended September 30, 2015, when compared to the same period in 2014. The increase was primarily attributable to $30 million increase from RPS as well as the impact of the acquisition of the defined contribution business from Putnam. During the three months ended September 30, 2014, the Putnam defined contribution business incurred $10 million in operating expense. 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 back office processing over the next several years. The Company incurred costs of $11 million related to this business integration in 2015 compared to $6 million in 2014. The remaining increase in operating expenses was due to business growth.

Income tax expense had a favorable change of $19 million from an expense of $16 million in 2014 to a benefit of $3 million in 2015. The change was primarily due to a decrease in operating income before income taxes.

Nine months ended September 30, 2015, compared with the nine months ended September 30, 2014

The following is a summary of certain financial data of the Empower Retirement segment:



	Nine Months Ended September 30,				Increase			Percentage
Income statement data (In millions)	2015		2014		(decrease)			change
Premium income	$	—	$	1	$	(1	)	(100	)%
Fee income	619		446		173			39	%
Other revenue	5		—		5			100	%
Net investment income	281		305		(24		)	(8	)%
Total revenues	905		752		153			20	%
Policyholder benefits	151		151		—			—	%
Operating expenses	704		434		270			62	%
Total benefits and expenses	855		585		270			46	%
Income before income taxes	50		167		(117		)	(70	)%
Income tax expense	15		56		(41		)	(73	)%
Operating income	$	35	$	111	$	(76	)	(68	)%

Operating income for the Empower Retirement segment decreased by $76 million, or 68%, to $35 million for the nine months ended September 30, 2015, when compared to the same period in 2014 due to higher operating expenses partially offset by higher fee income. In addition, net investment income was lower.

Fee income increased by $173 million, or 39%, to $619 million for the nine months ended September 30, 2015, when compared to the same period in 2014. The increase was primarily related to $137 million in fees earned by RPS in 2015 compared to $14 million in fees earned by RPS in 2014. The increase was also related to the impact of the acquisition of the defined contribution business from Putnam. During the nine months ended September 30, 2014, the Putnam defined contribution business earned $5 million in fee income. 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 8% increase in the average S&P 500 index during the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014.

Net investment income decreased by $24 million, or 8%, to $281 million for the nine months ended September 30, 2015, when compared to the same period in 2014. The primary driver of the change was lower investment income on bonds, mortgages, and policy loans as a result of lower yields partially offset by higher invested asset balances.

Policyholder benefits remained constant for the nine months ended September 30, 2015, when compared to the same period in 2014.

Operating expenses increased by $270 million, or 62%, to $704 million for the nine months ended September 30, 2015, when compared to the same period in 2014. The increase was primarily attributable to $123 million increase from RPS as well as the impact of the acquisition of the defined contribution business from Putnam. During the nine months ended September 30, 2014, the Putnam defined contribution business incurred $31 million in operating expense. 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 back office processing over the next several years. The Company incurred costs of $33 million related to this business integration in 2015 compared to $6 million in 2014. The remaining increase in operating expenses was due to business growth.

Income tax expense decreased by $41 million, or 73%, to $15 million during the nine months ended September 30, 2015, when compared to the same period in 2014. The decrease was primarily due to a decrease in operating income before income taxes.

Other Segment Results of Operations

Three months ended September 30, 2015, compared with the three months ended September 30, 2014

The following is a summary of certain financial data of the Company’s Other segment:



	Three Months Ended September 30,						Increase			Percentage
Income statement data (In millions)	2015			2014			(decrease)			change
Premium income	$	21		$	18		$	3		17	%
Fee income	1			1			—			—	%
Net investment income	13			13			—			—	%
Total revenues	35			32			3			9	%
Policyholder benefits	33			28			5			18	%
Operating expenses	19			14			5			36	%
Total benefits and expenses	52			42			10			24	%
Income before income taxes	(17		)	(10		)	(7		)	70	%
Income tax benefit	(6		)	(4		)	(2		)	50	%
Operating loss	$	(11	)	$	(6	)	$	(5	)	83	%

Operating loss for the Company’s Other segment increased by $5 million to $11 million for the three months ended September 30, 2015, when compared to the same period in 2014. The increase in operating loss was primarily related to higher policy benefits due to fewer lapses on term life insurance policies as compared to the same period in prior year and higher operating expenses due to higher commissions.

Nine months ended September 30, 2015, compared with the nine months ended September 30, 2014

The following is a summary of certain financial data of the Company’s Other segment:



	Nine Months Ended September 30,						Increase			Percentage
Income statement data (In millions)	2015			2014			(decrease)			change
Premium income	$	65		$	61		$	4		7	%
Fee income	3			3			—			—	%
Net investment income	40			40			—			—	%
Total revenues	108			104			4			4	%
Policyholder benefits	81			79			2			3	%
Operating expenses	50			44			6			14	%
Total benefits and expenses	131			123			8			7	%
Income before income taxes	(23		)	(19		)	(4		)	21	%
Income tax benefit	(8		)	(6		)	(2		)	33	%
Operating loss	$	(15	)	$	(13	)	$	(2	)	15	%

Operating loss for the Company’s Other segment increased by $2 million to $15 million for the nine months ended September 30, 2015, when compared to the same period in 2014. The increase in operating loss was primarily related to higher operating expenses due to higher commissions and cost related to business integration.

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)	September 30, 2015				December 31, 2014
Fixed maturities, available-for-sale	$	18,495	64.6	%	$	20,162	71.1	%
Fixed maturities, held-for-trading	127		0.4	%	339		1.2	%
Mortgage loans on real estate	3,325		11.6	%	3,364		11.9	%
Policy loans	4,150		14.5	%	4,130		14.6	%
Short-term investments	2,463		8.6	%	263		0.9	%
Limited partnership and other corporation interests	44		0.2	%	49		0.2	%
Other investments	15		0.1	%	16		0.1	%
Total investments	$	28,619	100.0	%	$	28,323	100.0	%

The September 30, 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.

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	September 30, 2015		December 31, 2014
AAA	16.8	%	28.2	%
AA	17.3	%	15.3	%
A	33.6	%	28.2	%
BBB	31.0	%	27.5	%
BB and below (Non-investment grade)	1.3	%	0.8	%
Total	100.0	%	100.0	%

The September 30, 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	September 30, 2015		December 31, 2014
Utility	20.4	%	18.3	%
Finance	11.3	%	10.0	%
Consumer	10.9	%	9.8	%
Natural resources	7.4	%	5.9	%
Transportation	3.5	%	3.2	%
Other	14.6	%	11.3	%

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.

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 $464 million and $276 million as of September 30, 2015, and December 31, 2014, respectively. The September 30, 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 September 30, 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 $96 million and $99 million of commercial paper outstanding at September 30, 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 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 nine months ended September 30, 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 September 30, 2015, and December 31, 2014, were $148 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 $75 million and zero at September 30, 2015, and December 31, 2014, respectively. Non-cash collateral on deposit with the third-party custodian on the Company’s behalf was $77 million and zero at September 30, 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. Collateral related to the reverse repurchase agreements generally consists of U.S. government or U.S. government agency securities.

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 $138 million and $2 million as collateral at September 30, 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.”

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, with the participation of its President and Chief Executive Officer and its Principal Accounting 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”). The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and to ensure that the information required to be disclosed by the Company in reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, the President and Chief Executive Officer and Principal Accounting Officer have concluded that the Company’s disclosure controls and procedures are effective as of September 30, 2015.

Changes in Internal Control over Financial Reporting

As disclosed in Item 9A, “Controls and Procedures,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, management concluded that a material weakness existed in its internal control over financial reporting as it related to complex accounting matters. Specifically, the Company’s controls to ensure that appropriate interpretation and application of accounting principles and the resulting accounting entries and disclosures were properly reflected in the financial statements as it relates to complex accounting matters were not designed at a sufficient level of precision to mitigate the risk of material misstatement.

Management designed and implemented certain remediation measures to address the above-described material weakness and enhance the Company’s system of internal control over financial reporting. These measures included re-designing the roles and responsibilities of key finance and accounting positions; 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; verifying that the complex accounting policies are being applied in practice; and formalizing a process for refreshing all significant accounting policies and procedures on an annual basis or sooner for significant changes in accounting guidance.

These improvements to the internal control infrastructure were implemented from the fourth quarter of 2013 through the second quarter of 2015, and were in place in connection with the preparation of its financial statements for the three and nine months ended September 30, 2015. As such, management believes that the remediation initiative outlined above was sufficient to remediate the material weakness in internal control over financial reporting as of June 30, 2015. Management is committed to continuing to improve its internal control processes and will continue to review its financial reporting controls and procedures.

Part II Other Information

Item 1. Legal Proceedings

The Company is defending a lawsuit related to a motor vehicle accident involving an employee. It received a $20 million demand letter from the plaintiff’s attorney during the fourth quarter of 2014. The amount is fully indemnified by a third-party insurer.

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.

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:	November 12, 2015
		Kara Roe
		Vice President, Controller, and Principal Accounting Officer

GREAT WEST LIFE & ANNUITY INSURANCE CO - FORM 10-Q - November 12, 2015

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GREAT WEST LIFE & ANNUITY INSURANCE CO Reports