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

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EXCEL - IDEA: XBRL DOCUMENT - GREAT WEST LIFE & ANNUITY INSURANCE CO	Financial_Report.xls
EX-10.10 - EXHIBIT - GREAT WEST LIFE & ANNUITY INSURANCE CO	greatwest-exx1010.htm
EX-31.1 - EXHIBIT - GREAT WEST LIFE & ANNUITY INSURANCE CO	greatwest-ex311.htm
EX-32 - EXHIBIT - GREAT WEST LIFE & ANNUITY INSURANCE CO	greatwest-exx32.htm
EX-31.2 - EXHIBIT - GREAT WEST LIFE & ANNUITY INSURANCE CO	greatwestex-312.htm

Table of Contents

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, 2014



¨	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, 2014, 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, 2014 and December 31, 2013 (Unaudited)	3

		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)	5

		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)	6

		Condensed Consolidated Statements of Stockholder’s Equity for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)	7

		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)	8

		Notes to Condensed Consolidated Financial Statements (Unaudited)	10

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	62

	Item 4	Controls and Procedures	62

Part II	Other Information		63

	Item 1	Legal Proceedings	63

	Item 1A	Risk Factors	63

	Item 6	Exhibits	64

		Signature	64

Table of Contents

Part I Financial Information

Item1. Interim Financial Statements

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Balance Sheets

September 30, 2014 and December 31, 2013

(In Thousands, Except Share Amounts)

(Unaudited)



	September 30, 2014		December 31, 2013
Assets
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost $16,182,197 and $17,807,359)	$	17,293,066	$	18,469,544
Fixed maturities, held for trading, at fair value (amortized cost $214,312 and $333,892)	219,558		336,055
Mortgage loans on real estate (net of allowances of $2,890 and $2,890)	3,175,683		3,134,255
Policy loans	4,179,059		4,185,472
Short-term investments (amortized cost $3,071,133 and $294,287)	3,071,133		294,287
Limited partnership and other corporation interests	55,011		79,236
Other investments	16,344		17,574
Total investments	28,009,854		26,516,423

Other assets:
Cash	22,247		7,491
Reinsurance receivable	617,780		588,533
Deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”)	319,890		343,288
Investment income due and accrued	293,188		270,024
Collateral under securities lending agreements	62,887		18,534
Due from parent and affiliates	31,320		91,057
Goodwill	155,504		105,255
Other intangible assets	12,871		15,155
Other assets	747,058		707,856
Assets of discontinued operations	25,075		29,007
Separate account assets	27,481,866		26,630,904
Total assets	$	57,779,540	$	55,323,527



See notes to condensed consolidated financial statements.		(Continued)

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Balance Sheets

September 30, 2014 and December 31, 2013

(In Thousands, Except Share Amounts)

(Unaudited)



	September 30, 2014		December 31, 2013
Liabilities and stockholder’s equity
Policy benefit liabilities:
Future policy benefits	$	25,705,979	$	24,609,155
Policy and contract claims	338,587		345,261
Policyholders’ funds	306,293		345,689
Provision for policyholders’ dividends	62,897		62,797
Undistributed earnings on participating business	19,068		10,776
Total policy benefit liabilities	26,432,824		25,373,678

General liabilities:
Due to parent and affiliates	551,275		541,793
Commercial paper	99,989		98,990
Payable under securities lending agreements	62,887		18,534
Deferred income tax liabilities, net	276,383		106,849
Other liabilities	683,694		648,040
Liabilities of discontinued operations	25,075		29,007
Separate account liabilities	27,481,866		26,630,904
Total liabilities	55,613,993		53,447,795

Commitments and contingencies (See Note 14)

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	776,974		774,115
Accumulated other comprehensive income	580,906		345,754
Retained earnings	800,635		748,831
Total stockholder’s equity	2,165,547		1,875,732
Total liabilities and stockholder’s equity	$	57,779,540	$	55,323,527



See notes to condensed consolidated financial statements.		(Concluded)

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Income

Three and Nine Months Ended September 30, 2014 and 2013

(In Thousands)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues:
Premium income	$	169,543		$	137,401		$	363,893		$	382,080
Fee income	181,991			152,343			520,509			453,596
Other revenue	—			—			—			7,355
Net investment income	292,061			375,041			911,694			909,006
Realized investment gains (losses), net:
Total other-than-temporary gains (losses)	(2,405		)	—			(4,334		)	(61		)
Other-than-temporary (gains) losses transferred to other comprehensive income (loss)	—			—			—			(434		)
Other realized investment gains (losses), net	25,935			(55,820		)	91,829			(64,900		)
Total realized investment gains (losses), net	23,530			(55,820		)	87,495			(65,395		)
Total revenues	667,125			608,965			1,883,591			1,686,642
Benefits and expenses:
Life and other policy benefits	163,713			161,908			472,660			471,544
Increase (decrease) in future policy benefits	26,922			26,209			(12,052		)	38,495
Interest credited or paid to contractholders	156,420			131,401			423,736			380,128
Provision for policyholders’ share of (losses) earnings on participating business	(389		)	(506		)	(868		)	3,990
Dividends to policyholders	15,325			15,452			47,591			50,172
Total benefits	361,991			334,464			931,067			944,329
General insurance expenses	194,344			160,120			532,923			482,302
Amortization of DAC and VOBA	11,179			(211		)	41,106			30,091
Interest expense	9,320			9,334			27,966			28,008
Total benefits and expenses	576,834			503,707			1,533,062			1,484,730
Income before income taxes	90,291			105,258			350,529			201,912
Income tax expense	29,790			33,287			120,324			67,159
Net income	$	60,501		$	71,971		$	230,205		$	134,753

See notes to condensed consolidated financial statements.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three and Nine Months Ended September 30, 2014 and 2013

(In Thousands)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net income	$	60,501		$	71,971		$	230,205		$	134,753
Components of other comprehensive income (loss)
Unrealized holding gains (losses) arising on available-for-sale fixed maturity investments	(100,800		)	(20,574		)	471,537			(650,447		)
Unrealized holding gains (losses) arising on cash flow hedges	7,408			(49,908		)	11,302			(33,000		)
Reclassification adjustment for (gains) losses realized in net income	(6,738		)	(13,454		)	(35,492		)	(35,510		)
Net unrealized gains (losses) related to investments	(100,130		)	(83,936		)	447,347			(718,957		)
Future policy benefits, DAC and VOBA adjustments	405			26,455			(86,563		)	162,987
Employee benefit plan adjustment	989			—			989			—
Other comprehensive income (loss) before income taxes	(98,736		)	(57,481		)	361,773			(555,970		)
Income tax expense (benefit) related to items of other comprehensive income	(34,557		)	(20,117		)	126,621			(194,589		)
Other comprehensive income (loss)⁽¹⁾	(64,179		)	(37,364		)	235,152			(361,381		)
Total comprehensive income (loss)	$	(3,678	)	$	34,607		$	465,357		$	(226,628	)

⁽¹⁾Other comprehensive income (loss) includes the non-credit component of impaired gains (losses) on fixed maturities available-for-sale in the amounts of $(996) and $3,173 for the three months ended September 30, 2014 and 2013, respectively, and $(3,812) and $9,818 for the nine months ended September 30, 2014 and 2013, respectively.

See notes to condensed consolidated financial statements.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Stockholder’s Equity

Nine Months Ended September 30, 2014 and 2013

(In Thousands)

(Unaudited)



	Nine Months Ended September 30, 2014

	Common stock		Additional paid-in capital		Accumulated other comprehensive income (loss)		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 (loss), 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



	Nine Months Ended September 30, 2013

	Common stock		Additional paid-in capital		Accumulated other comprehensive income (loss)			Retained earnings			Total
Balances, January 1, 2013	$	7,032	$	771,041	$	635,699		$	722,525		$	2,136,297
Net income								134,753			134,753
Other comprehensive income (loss), net of income taxes					(361,381		)				(361,381		)
Dividends								(90,936		)	(90,936		)
Capital contribution - stock-based compensation			1,928								1,928
Income tax benefit on stock-based compensation			110								110
Balances, September 30, 2013	$	7,032	$	773,079	$	274,318		$	766,342		$	1,820,771

See notes to condensed consolidated financial statements.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2014 and 2013

(In Thousands)

(Unaudited)



	Nine Months Ended September 30,
	2014			2013
				(Restated, See Note 2)
Net cash provided by operating activities	$	517,224		$	466,408

Cash flows from investing activities:
Proceeds from sales, maturities and redemptions of investments:
Fixed maturities, available-for-sale	3,540,606			3,433,511
Mortgage loans on real estate	323,332			200,913
Limited partnership interests, other corporation interests and other investments	6,674			22,132
Purchases of investments:
Fixed maturities, available-for-sale	(1,811,311		)	(2,152,210		)
Mortgage loans on real estate	(362,962		)	(354,591		)
Limited partnership interests, other corporation interests and other investments	(2,335		)	(2,518		)
Net change in short-term investments	(2,785,846		)	(1,994,378		)
Net change in policy loans	(10,413		)	(4,083		)
Acquisition of business	(28,356		)	—
Purchases of furniture, equipment and software	(17,076		)	(15,668		)
Net cash used in investing activities	(1,147,687		)	(866,892		)

Cash flows from financing activities:
Contract deposits	2,046,736			1,809,511
Contract withdrawals	(1,279,520		)	(1,324,295		)
Change in due to/from parent and affiliates	69,219			(4,580		)
Dividends paid	(178,401		)	(90,936		)
Proceeds from financing element derivatives	4,263			51,832
Payments for and interest (paid) received on financing element derivatives, net	(5,961		)	(7,388		)
Net commercial paper borrowings	999			2,001
Change in book overdrafts	(12,163		)	82
Income tax benefit of stock option exercises	47			110
Net cash provided by financing activities	645,219			436,337

Net increase in cash	14,756			35,853
Cash, beginning of year	7,491			11,387
Cash, end of period	$	22,247		$	47,240



See notes to condensed consolidated financial statements.		(Continued)

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2014 and 2013

(In Thousands)

(Unaudited)



	Nine Months Ended September 30,
	2014			2013
				(Restated, See Note 2)
Supplemental disclosures of cash flow information:
Net cash received (paid) during the year for:
Income taxes	$	50,888		$	63
Interest	(18,708		)	(18,750		)

Non-cash investing and financing transactions during the years:
Contingent consideration (See Note 3)	$	(33,739	)	$	—
Share-based compensation expense	2,812			1,928
Assets received from limited partnership investment distributions	—			(5,119		)
Fixed maturity investments, available-for-sale acquired in reinsurance termination (See Note 6)	—			(44,104		)
Policy loans acquired in reinsurance termination (See Note 6)	—			(6,468		)



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 formed in 1998. 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, 2013, 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, 2014, 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. The Company believes that the disclosures made are adequate such that the information presented is not misleading.

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, 2014, and for all periods presented. 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, 2013.

The condensed consolidated results of operations and condensed consolidated statement of cash flows for the nine months ended September 30, 2014 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. Significant estimates are required to account for items and matters such as, but not limited to, the valuation of investments and derivatives in the absence of quoted market values, impairment of investments, accounting for derivative financial instruments, valuation of DAC, valuation of policy benefit liabilities, valuation of employee benefit plan obligations, the valuation of deferred tax assets or liabilities, net, and valuation of contingent consideration. 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. Restatement of the September 30, 2013 Statement of Cash Flows

The accompanying statement of cash flows for the nine months ended September 30, 2013 has been restated to reflect the following corrections of misstatements identified subsequent to the issuance of the September 30, 2013 quarterly financial statements:

•

During the fourth quarter of 2013, the Company recorded a cumulative out-of-period adjustment in connection with certain derivative instruments not qualifying for hedge accounting due to ineffectiveness. These derivative instruments were deemed to have a financing element at inception which should be classified as a financing activity instead of an operating activity within the statement of cash flows. As a result, net cash provided by operating activities was overstated by $44,444 and net cash provided by financing activities was understated by the same amount for the nine months ended September 30, 2013. The Company believes the effects of this error are immaterial to the prior period.

•

The Company holds certain forward settling to be announced (“TBA”) securities that are accounted for as derivative instruments as the Company does not regularly accept delivery of such securities when issued. In certain limited circumstances, the Company will accept delivery of the securities from one broker and then immediately deliver the securities to another broker. In these limited circumstances, the Company recorded the purchase and sale of the securities as an equal and offsetting purchase and sale of investments in the net cash provided by investing activities. Because the Company did not hold the securities as an investment, the cash flows should be accounted for net within operating activities. As a result of this misstatement, both proceeds from sales, maturities and redemptions of investments and purchases of investments were overstated by $5,723,818 for the nine months ended September 30, 2013. The Company believes the effects of this error are immaterial to the prior period.

The following table summarizes the effect of the adjustments the Company made to its financial statements:



	Nine Months Ended September 30, 2013
	As previously reported			Adjustments			As restated
Statements of Cash Flows
Net cash provided by operating activities	$	510,852		$	(44,444	)	$	466,408
Proceeds from sales, maturities and redemptions of investments:
Fixed maturities, available-for-sale	9,157,329			(5,723,818		)	3,433,511
Purchases of investments:
Fixed maturities, available-for-sale	(7,876,028		)	5,723,818			(2,152,210		)
Proceeds from financing element derivatives	—			51,832			51,832
Payments for and interest (paid) received on financing element derivatives, net	—			(7,388		)	(7,388		)
Net cash provided by financing activities	391,893			44,444			436,337

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

3. Acquisition

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 recordkeeping business. This acquisition transformed the Company, together with Putnam Investments, LLC, an affiliate of the Company, into the second largest provider in the U.S. defined contribution market.

Allocation of purchase price

As of September 30, 2014, the initial accounting for the acquisition is incomplete pending the completion of a comprehensive valuation of the net assets acquired. Determination of the fair values of the acquired assets and assumed liabilities requires significant judgment. Balance sheet items that are incomplete include the identification and valuation of intangible assets and the valuation of contingent consideration. As such, provisional amounts for intangible assets have not been separately identified and valued within the assets of the purchase price allocation. As a result, the excess of the purchase price over the fair value of the net assets acquired representing goodwill could be adjusted during future reporting periods. The amounts assigned to the assets acquired, goodwill, liabilities assumed and contingent consideration on August 29, 2014 as reported at September 30, 2014 are below and reflect management’s best estimate of the purchase price allocation:



Assets acquired and goodwill:
Goodwill ⁽¹⁾	$	50,249
Other assets
Fixed assets⁽²⁾	12,680
Accounts receivable⁽⁴⁾	24,050
Other⁽⁴⁾	1,224
Total other assets	37,954
Total assets acquired and goodwill	88,203

Liabilities assumed and contingent consideration:
Other liabilities
Accrued expenses and other ⁽⁴⁾	26,108
Contingent consideration ⁽³⁾	33,739
Total other liabilities	59,847
Total liabilities assumed and contingent consideration	59,847

⁽¹⁾ Goodwill

Goodwill is calculated as the excess of the purchase price over the net assets recognized and represents the future economic benefits arising from other assets acquired and liabilities assumed that could not be individually identified (Level 3). Total goodwill resulting from the acquisition, in the amount of $50,249, is allocated to the Retirement Services segment. No portion of goodwill is expected to be deductible for tax purposes.

⁽²⁾Fixed Assets

The fair value of property, plant and equipment and software was determined using a cost approach and a market approach (Level 2). The cost approach is based on current replacement cost and/or reproduction costs of the assets as new less depreciation attributable to physical, functional and economic factors. The market approach is based on market data for similar assets.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

⁽³⁾ Contingent consideration

In addition to the cash paid on August 29, 2014, the Company is obligated to make an additional earnout payment based on the retention of aggregated revenue, as defined in the Purchase and Sale Agreement, 24 months after the close date. As such, the remaining earnout payment is due on August 29, 2016. The potential undiscounted amount of the earnout payment that the Company could be required to make under the contingent consideration arrangement is between zero and $50,000. The fair value of the contingent consideration of $33,739 was estimated by a discounted cash flow model (Level 3) which calculates the present value of a probability-weighted earnout using a discount rate of 3.0%.

⁽⁴⁾ Accounts receivable, other assets and accrued expenses and other liabilities

Accounts receivable, other assets and accrued expenses and other liabilities are current assets and liabilities that are generally carried at fair value which is approximated from the carrying value (Level 2).

Contingencies

At the date of the acquisition, RPS was the named defendant in four pending lawsuits. Per the terms of the acquisition, the Company is indemnified from any and all losses incurred in conjunction with the pending lawsuits. Due to the Company’s limited involvement with the pending legal proceedings, it is unable to make an estimate of the possible loss and related indemnity associated with these claims.

Revenues and earnings of the acquiree

From date of acquisition to September 30, 2014, RPS contributed $14,261 in revenue and $494 in net income. These amounts are included in the condensed consolidated statements of income for the three and nine months ended September 30, 2014.

Costs related to acquisition

The Company incurred $2,685 of acquisition costs for the three and nine months ended September 30, 2014. Such costs have been expensed as incurred and are included in general insurance expenses.

Pro-forma information

Supplementary pro-forma revenue and net earnings for the combined entity, as though the acquisition date for this business combination had been as of January 1, 2013, has not been included as it is impracticable since historical records have not yet been made available.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

4. Application of Recent Accounting Pronouncements

Future adoption of new accounting pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-01 Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (“ASU No. 2014-01”). ASU No. 2014-01 permits reporting entities to make an accounting election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those pre-existing investments. ASU 2014-01 is effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The Company currently uses the effective yield method for its investments in qualified affordable housing projects. As such, the Company does not expect the adoption of this ASU to have a material effect on the Company's financial position or results of operations.

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

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

In August 2014, The FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40). The update will require management to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern. If there is substantial doubt about the Company’s ability to continue as a going concern, the Company will be required to disclose that fact, along with managements’ evaluation of the effectiveness of its plan to alleviate that doubt. The update defines substantial doubt as when it is probable that the Company will be unable to meet its obligations as they become due within one year of the date the financial statements are issued. The assessment and disclosure requirements, if applicable, will be required quarterly. The update is effective for the annual period ending after December 14, 2016, and for interim and annual periods thereafter. The Company does not expect this update to have an impact on the Company’s financial statements.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

5. 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 capital and surplus and statutory net gain from operations. Prior to the payment of any dividends, the Company provides notice to the Colorado Insurance Commissioner. During the nine months ended September 30, 2014, and 2013, the Company paid dividends of $178,401 and $90,936, respectively, to its parent, GWL&A Financial.

6. Related Party Transactions

On January 1, 2013, the Company terminated its reinsurance agreement with an affiliate, The Canada Life Assurance Company (“CLAC”), pursuant to which it had ceded certain participating life business on a coinsurance basis. As a result of that termination, on January 1, 2013, the Company recorded the following increases in its statement of income in connection with the termination of the reinsurance agreement:



Premium income	$	42,297
Other revenue	7,355
Total	49,652

Increase (decrease) in future policy benefits	41,297
Dividends to policyholders	1,000
Total	42,297

Participating policyholders’ net income before income taxes	7,355
Income tax expense	2,574
Participating policyholders’ income	4,781

Provision for policyholders’ share of (losses) earnings on participating business	4,781
Net income available to shareholder	$	—

Participating policyholders share in the financial results of the participating business in the form of policyholder dividends. The policyholder dividends can be distributed directly to the policyholders in the form of cash or through an increase in benefits such as paid-up additions. The participating policyholder earnings that cannot be distributed to the Company’s shareholder and have not been distributed to participating policyholders are not included in the Company’s net income and are reflected in liabilities in undistributed earnings on participating business in the Company’s balance sheets. As such, the transaction above had no impact on net income available to the Company’s shareholder.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

7. 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, 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	$	845,069	$	59,509	$	3,309	$	901,269	—
Obligations of U.S. states and their subdivisions	1,902,663		264,962		2,746		2,164,879		—
Foreign government securities	2,496		—		2		2,494		—
Corporate debt securities ⁽²⁾	11,013,781		729,468		82,954		11,660,295		(2,299		)
Asset-backed securities	1,334,543		134,218		14,465		1,454,296		(90,795		)
Residential mortgage-backed securities	186,087		8,277		2,796		191,568		(283		)
Commercial mortgage-backed securities	886,633		25,111		4,136		907,608		—
Collateralized debt obligations	10,925		—		268		10,657		—
Total fixed maturities	$	16,182,197	$	1,221,545	$	110,676	$	17,293,066	$	(93,377	)

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

⁽²⁾ Includes perpetual debt investments with amortized cost of $157,742 and estimated fair value of $136,356.



	December 31, 2013
	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	$	3,044,185	$	43,827	$	23,373	$	3,064,639	—
Obligations of U.S. states and their subdivisions	1,763,797		196,742		16,952		1,943,587		—
Foreign government securities	2,617		—		14		2,603		—
Corporate debt securities ⁽²⁾	10,454,252		568,261		223,532		10,798,981		(2,553		)
Asset-backed securities	1,553,510		131,277		29,150		1,655,637		(98,502		)
Residential mortgage-backed securities	244,723		8,335		3,473		249,585		(129		)
Commercial mortgage-backed securities	731,688		21,951		11,515		742,124		—
Collateralized debt obligations	12,587		14		213		12,388		—
Total fixed maturities	$	17,807,359	$	970,407	$	308,222	$	18,469,544	$	(101,184	)

⁽²⁾ Includes perpetual debt investments with amortized cost of $172,054 and estimated fair value of $143,644.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

See Note 10 for additional discussion regarding fair value measurements.

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



	September 30, 2014
	Amortized cost		Estimated fair value
Maturing in one year or less	$	548,021	$	578,347
Maturing after one year through five years	3,643,813		3,968,142
Maturing after five years through ten years	3,852,033		4,085,469
Maturing after ten years	5,110,752		5,453,109
Mortgage-backed and asset-backed securities	3,027,578		3,207,999
	$	16,182,197	$	17,293,066

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,
	2014		2013		2014		2013
Proceeds from sales	$	118,810	$	2,661,364	$	2,418,114	$	8,022,277
Gross realized gains from sales	7,196		11,061		29,434		62,465
Gross realized losses from sales	—		2		1,090		26,914

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



	September 30, 2014			December 31, 2013
Principal	$	3,167,935		$	3,124,626
Unamortized premium (discount) and fees, net	10,638			12,519
Mortgage provision allowance	(2,890		)	(2,890		)
Total mortgage loans	$	3,175,683		$	3,134,255

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The recorded investment of the mortgage loan portfolio categorized as performing was $3,178,573 and $3,137,145 as of September 30, 2014 and December 31, 2013, respectively.

The following table summarizes activity in the mortgage provision allowance:



	Nine Months Ended September 30, 2014		Year Ended December 31, 2013
	Commercial mortgages		Commercial mortgages
Beginning balance	$	2,890	$	2,890
Provision increases	—		273
Charge-off	—		(273		)
Ending balance	$	2,890	$	2,890

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:	$	3,178,573	$	3,137,145
Individually evaluated for impairment	13,082		13,906
Collectively evaluated for impairment	3,165,491		3,123,239

Limited partnership and other corporation interests — At September 30, 2014 and December 31, 2013, the Company had $55,011 and $79,236, 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.

The Company has determined each investment in LIHLPs to be considered a variable interest entity (“VIE”). Although the Company is involved with the VIE, it determined that consolidation was not required because it has no power to direct the activities that most significantly impact the entities’ economic performance.

As a 99% limited partner in various upper-tier LIHLPs, the Company has few or no voting rights, but expects to receive the tax credits allocated to the partnership and operating losses from depreciation and interest expense. The Company is only an equity investor and views the LIHLP as a single investment. The general partner of the LIHLPs is most closely involved in the development and management of the LIHLP project. The general partner has a small ownership of the partnership, which requires a de minimus capital contribution. This equity investment is reduced based on fees paid at inception by the limited partner; therefore, the general partner does not qualify as having an equity investment at risk in the LIHLP project. However, the limited partner does not have the direct or indirect ability through voting rights or similar rights to make decisions about the general partner’s activities that have a significant effect on the success of the partnership.

The carrying value and maximum exposure to loss in relation to the activities of the VIEs was $13,103 and $31,563 at September 30, 2014 and December 31, 2013, respectively.

Special deposits and securities lending — The Company had securities on deposit with government authorities as required by certain insurance laws with fair values of $14,421 and $14,072 at September 30, 2014 and December 31, 2013, respectively.

The Company participates in a securities lending program whereby securities are loaned to third parties. Securities with a cost or amortized cost of $93,796 and $28,178 and estimated fair values of $94,099 and $27,166 were on loan under the program at September 30, 2014 and December 31, 2013, respectively. The Company received cash of $62,887 and $18,534 and securities with a fair value of $34,511 and $9,424 as collateral at September 30, 2014 and December 31, 2013, respectively.

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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, 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	$	37,264	$	115	$	126,905	$	3,194	$	164,169	$	3,309
Obligations of U.S. states and their subdivisions	53,528		600		53,547		2,146		107,075		2,746
Foreign government securities	2,493		2		—		—		2,493		2
Corporate debt securities	1,168,237		14,295		852,422		68,659		2,020,659		82,954
Asset-backed securities	150,583		2,352		220,335		12,113		370,918		14,465
Residential mortgage-backed securities	5,333		11		24,667		2,785		30,000		2,796
Commercial mortgage-backed securities	108,115		729		98,207		3,407		206,322		4,136
Collateralized debt obligations	10,657		268		—		—		10,657		268
Total fixed maturities	$	1,536,210	$	18,372	$	1,376,083	$	92,304	$	2,912,293	$	110,676

Total number of securities in an unrealized loss position			154				177				331



	December 31, 2013
	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	$	2,399,373	$	23,156	$	5,192	$	217	$	2,404,565	$	23,373
Obligations of U.S. states and their subdivisions	214,979		16,713		837		239		215,816		16,952
Foreign government securities	2,603		14		—		—		2,603		14
Corporate debt securities	2,632,093		144,367		511,376		79,165		3,143,469		223,532
Asset-backed securities	305,377		12,763		305,740		16,387		611,117		29,150
Residential mortgage-backed securities	32,131		3,454		1,011		19		33,142		3,473
Commercial mortgage-backed securities	177,395		6,703		48,825		4,812		226,220		11,515
Collateralized debt obligations	—		—		12,356		213		12,356		213
Total fixed maturities	$	5,763,951	$	207,170	$	885,337	$	101,052	$	6,649,288	$	308,222

Total number of securities in an unrealized loss position			458				109				567

Fixed maturity investments — Total unrealized losses and OTTI decreased by $197,546, or 64%, from December 31, 2013 to September 30, 2014. The majority, or $188,798, of the decrease was in the less than twelve months category. The decrease in unrealized losses was across most asset classes and reflects lower interest rates and tightening of credit spreads, although economic uncertainty in certain asset classes still remains.

Total unrealized losses greater than twelve months decreased by $8,748 from December 31, 2013 to September 30, 2014. Corporate debt securities account for 74%, or $68,659, of the unrealized losses and OTTI greater than twelve months at

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

September 30, 2014. Non-investment grade corporate debt securities account for $9,202 of the unrealized losses and OTTI greater than twelve months and $8,146 of the losses are on perpetual debt investments issued by banks in the United Kingdom, all of which have investment grade ratings. The Company determined the majority of the unrealized losses on perpetual securities were due to widening credit spreads and low London Interbank Offered Rate (“LIBOR”) based coupon rates on the securities, which are not expected to compromise the issuers’ ability to service the investments. Management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.

Asset-backed securities account for 13% of the unrealized losses and OTTI greater than twelve months at September 30, 2014. 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,
	2014			2013		2014			2013
Beginning balance	$	167,961		$	167,961	$	167,961		$	167,788
Additional credit loss recognized on securities previously impaired	—			—		—			173
Reductions:
Due to sales, maturities or payoffs during the period	(646		)	—		(646		)	—
Due to increases in cash flows expected to be collected that are recognized over the remaining life of the security	(41,192		)	—		(41,192		)	—
Ending balance	$	126,123		$	167,961	$	126,123		$	167,961

8. 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 of derivative instruments with credit-risk-related contingent features that were in a net liability position was $150,909 and $167,743 as of September 30, 2014 and December 31, 2013, respectively. The Company had pledged collateral related to these derivatives of $128,810 and $143,540 as of September 30, 2014 and December 31, 2013, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on September 30, 2014 the fair value of assets that could be required to settle the derivatives in a net liability position was $22,099.

At September 30, 2014 and December 31, 2013, the Company had pledged $131,303 and $143,710, respectively, of unrestricted cash collateral to counterparties in the normal course of business.

At September 30, 2014, the Company estimated $8,336 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.

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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. These derivatives 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 minimum withdrawal benefit liabilities.

Other contracts

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

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The following tables summarize derivative financial instruments:



	September 30, 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	$	15,284		$	15,284	$	—
Cross-currency swaps	174,245		(3,461		)	1,301		4,762
Total cash flow hedges	358,445		11,823			16,585		4,762

Fair value hedges:
Interest rate swaps	78,000		2,946			3,046		100
Total fair value hedges	78,000		2,946			3,046		100

Total derivatives designated as hedges	436,445		14,769			19,631		4,862

Derivatives not designated as hedges:
Interest rate swaps	90,600		429			1,840		1,411
Futures on equity indices	7,784		—			—		—
Interest rate futures	20,548		—			—		—
Interest rate swaptions	344,584		424			424		—
Other forward contracts	6,134,300		(2,087		)	2,347		4,434
Cross-currency swaps	627,828		(141,533		)	2,055		143,588
Total derivatives not designated as hedges	7,225,644		(142,767		)	6,666		149,433
Total derivative financial instruments	$	7,662,089	$	(127,998	)	$	26,297	$	154,295

⁽¹⁾ 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.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	December 31, 2013
			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	$	13,829		$	13,829	$	—
Cross-currency swaps	102,545		(7,843		)	—		7,843
Total cash flow hedges	286,745		5,986			13,829		7,843

Fair value hedges:
Interest rate swaps	78,000		4,951			5,098		147
Total fair value hedges	78,000		4,951			5,098		147

Total derivatives designated as hedges	364,745		10,937			18,927		7,990

Derivatives not designated as hedges:
Interest rate swaps	55,600		(2,038		)	1,454		3,492
Futures on equity indices	3,483		—			—		—
Interest rate futures	16,233		—			—		—
Interest rate swaptions	494,774		1,176			1,176		—
Cross-currency swaps	557,676		(154,340		)	1,921		156,261
Total derivatives not designated as hedges	1,127,766		(155,202		)	4,551		159,753
Total derivative financial instruments	$	1,492,511	$	(144,265	)	$	23,478	$	167,743

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

Notional amounts are used to express the extent of the Company’s involvement in derivative transactions and represent a standard measurement of the volume of its derivative activity. Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received. The average notional outstanding during the nine months ended September 30, 2014 was $329,450, $701,202, $20,807, $432,428, and $4,525,207 for interest rate swaps, cross-currency swaps, futures, swaptions and other forward contracts, respectively. The average notional outstanding during the year ended December 31, 2013 was $351,579, $608,787, $46,564, $606,374, and $3,543,173 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:



	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,
	2014		2013			2014			2013
Cash flow hedges:
Interest rate swaps	$	184	$	(991	)	$	1,876		$	575	(A)
Cross-currency swaps	7,224		(48,917		)	900			—		(A)
Cross-currency swaps	—		—			(154		)	—		(B)
Interest rate futures	—		—			17			16		(A)
Total cash flow hedges	$	7,408	$	(49,908	)	$	2,639		$	591

(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,
	2014		2013			2014			2013
Cash flow hedges:
Interest rate swaps	$	5,328	$	(10,792	)	$	5,581		$	4,491	(A)
Cross-currency swaps	5,974		(22,208		)	1,745			—		(A)
Cross-currency swaps	—		—			(154		)	—		(B)
Interest rate futures	—		—			52			48		(A)
Total cash flow hedges	$	11,302	$	(33,000	)	$	7,224		$	4,539

(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,
	2014		2013				2014			2013
Fair value hedges:
Interest rate swaps	$	395	$	(1,756	)	(A)	$	—		$	—
Interest rate swaps	—		2,094			(B)	—			—
Items hedged in interest rate swaps	—		—				(406		)	1,768			(A)
Items hedged in interest rate swaps	—		—				—			(2,106		)	(B)
Total fair value hedges ⁽¹⁾	$	395	$	338			$	(406	)	$	(338	)

⁽¹⁾ Hedge ineffectiveness of ($11) and zero was recognized for the three months ended September 30, 2014 and 2013, respectively.

(A) Net investment income.

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

Table of Contents

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,
	2014			2013			2014		2013
Fair value hedges:
Interest rate swaps	$	(2,005	)	$	5,324	(A)	$	—	$	—
Interest rate swaps	—			1,909		(B)	—		—
Items hedged in interest rate swaps	—			—			1,994		(4,290		)	(A)
Items hedged in interest rate swaps	—			—			—		(2,943		)	(B)
Total fair value hedges ⁽¹⁾	$	(2,005	)	$	7,233		$	1,994	$	(7,233	)

⁽¹⁾ Hedge ineffectiveness of ($11) and zero was recognized for the nine months ended September 30, 2014 and 2013, respectively.

(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,
	2014				2013
Derivatives not designated as hedging instruments:
Futures on equity indices	$	222		(A)	$	(25	)	(A)
Futures on equity indices	(72		)	(B)	(330		)	(B)
Interest rate swaps	467			(A)	(597		)	(A)
Interest rate swaps	—			(B)	14			(B)
Interest rate futures	10			(A)	(143		)	(A)
Interest rate futures	65			(B)	39			(B)
Interest rate swaptions	835			(A)	709			(A)
Interest rate swaptions	(917		)	(B)	(735		)	(B)
Other forward contracts	(16,147		)	(A)	86,590			(A)
Other forward contracts	16,894			(B)	(66,093		)	(B)
Cross-currency swaps	17,500			(A)	—			(A)
Total derivatives not designated as hedging instruments	$	18,857			$	19,429

(A) Net investment income.

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

Table of Contents

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,
	2014				2013
Derivatives not designated as hedging instruments:
Futures on equity indices	$	312		(A)	$	61		(A)
Futures on equity indices	(431		)	(B)	(1,442		)	(B)
Interest rate swaps	2,517			(A)	(1,912		)	(A)
Interest rate swaps	—			(B)	(622		)	(B)
Interest rate futures	(55		)	(A)	(663		)	(A)
Interest rate futures	152			(B)	529			(B)
Interest rate swaptions	1,677			(A)	2,293			(A)
Interest rate swaptions	(2,627		)	(B)	(2,043		)	(B)
Other forward contracts	(2,087		)	(A)	55,530			(A)
Other forward contracts	56,471			(B)	(98,828		)	(B)
Cross-currency swaps	10,415			(A)	—			(A)
Total derivatives not designated as hedging instruments	$	66,344			$	(47,097	)

(A) Net investment income.

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

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

9. 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 ISDA or MSFTA 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 ISDA and MSFTA 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, 2014
			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⁾	$	25,952	$	(25,618	)	$	78	$	256
Short-term reverse repurchase agreements ⁽³⁾	750,000		(750,000		)	—		—
Total financial instruments (assets)	$	775,952	$	(775,618	)	$	78	$	256



	September 30, 2014
			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⁾	$	157,673	$	(25,618	)	$	(129,344	)	$	2,711

⁽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. 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, 2013
			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⁾	$	25,250	$	(25,023	)	$	—		$	227
Derivative instruments (liabilities) ⁽³⁾	171,387		(25,023		)	(143,540		)	2,824

⁽¹⁾The gross fair value of derivative instrument assets is not netted against offsetting liabilities for presentation on the condensed consolidated balance sheets.

⁽²⁾The estimated fair value of derivative instrument assets is reported in other assets in the condensed consolidated balance sheets and includes income and expense accruals.

⁽³⁾The estimated fair value of derivative instrument liabilities is reported in other liabilities in the condensed consolidated balance sheets and includes income and expense accruals.

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

10. 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, 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	$	—	$	901,269	$	—	$	901,269
Obligations of U.S. states and their subdivisions	—		2,164,879		—		2,164,879
Foreign government securities	—		2,494		—		2,494
Corporate debt securities	—		11,654,190		6,105		11,660,295
Asset-backed securities	—		1,244,369		209,927		1,454,296
Residential mortgage-backed securities	—		191,568		—		191,568
Commercial mortgage-backed securities	—		907,608		—		907,608
Collateralized debt obligations	—		10,657		—		10,657
Total fixed maturities available-for-sale	—		17,077,034		216,032		17,293,066
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		160,390		—		160,390
Corporate debt securities	—		58,103		—		58,103
Commercial mortgage-backed securities	—		1,065		—		1,065
Total fixed maturities held for trading	—		219,558		—		219,558
Short-term investments	434,732		2,636,401		—		3,071,133
Collateral under securities lending agreements	62,887		—		—		62,887
Collateral under derivative counterparty collateral agreements	131,303		—		—		131,303
Derivative instruments designated as hedges:
Interest rate swaps	—		18,330		—		18,330
Cross-currency swaps	—		1,301		—		1,301
Derivative instruments not designated as hedges:
Interest rate swaps	—		1,840		—		1,840
Interest rate swaptions	—		424		—		424
Other forward contracts	—		2,347		—		2,347
Cross-currency swaps	—		2,055		—		2,055
Total derivative instruments	—		26,297		—		26,297
Separate account assets	15,583,106		11,898,760		—		27,481,866
Total assets	$	16,212,028	$	31,858,050	$	216,032	$	48,286,110

Liabilities
Payable under securities lending agreements	$	62,887	$	—	$	—	$	62,887
Derivative instruments designated as hedges:
Interest rate swaps	—		100		—		100
Cross-currency swaps	—		4,762		—		4,762
Derivative instruments not designated as hedges:
Interest rate swaps	—		1,411		—		1,411
Other forward contracts	—		4,434		—		4,434
Cross-currency swaps	—		143,588		—		143,588
Total derivative instruments	—		154,295		—		154,295
Separate account liabilities ⁽¹⁾	—		80,567		—		80,567
Total liabilities	$	62,887	$	234,862	$	—	$	297,749

⁽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, 2013
	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	$	—	$	3,064,639	$	—	$	3,064,639
Obligations of U.S. states and their subdivisions	—		1,943,587		—		1,943,587
Foreign government securities	—		2,603		—		2,603
Corporate debt securities	—		10,792,329		6,652		10,798,981
Asset-backed securities	—		1,402,679		252,958		1,655,637
Residential mortgage-backed securities	—		249,585		—		249,585
Commercial mortgage-backed securities	—		742,124		—		742,124
Collateralized debt obligations	—		12,356		32		12,388
Total fixed maturities available-for-sale	—		18,209,902		259,642		18,469,544
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		236,000		—		236,000
Corporate debt securities	—		58,171		—		58,171
Asset-backed securities	—		40,858		—		40,858
Commercial mortgage-backed securities	—		1,026		—		1,026
Total fixed maturities held for trading	—		336,055		—		336,055
Short-term investments	254,378		39,909		—		294,287
Collateral under securities lending agreements	18,534		—		—		18,534
Collateral under derivative counterparty collateral agreements	143,710		—		—		143,710
Derivative instruments designated as hedges:
Interest rate swaps	—		18,927		—		18,927
Derivative instruments not designated as hedges:
Interest rate swaps	—		1,454		—		1,454
Interest rate swaptions	—		1,176		—		1,176
Cross-currency swaps	—		1,921		—		1,921
Total derivative instruments	—		23,478		—		23,478
Separate account assets	14,861,680		11,769,224		—		26,630,904
Total assets	$	15,278,302	$	30,378,568	$	259,642	$	45,916,512

Liabilities
Payable under securities lending agreements	$	18,534	$	—	$	—	$	18,534
Derivative instruments designated as hedges:
Interest rate swaps	—		147		—		147
Cross-currency swaps	—		7,843		—		7,843
Derivative instruments not designated as hedges:
Interest rate swaps	—		3,492		—		3,492
Cross-currency swaps	—		156,261		—		156,261
Total derivative instruments	—		167,743		—		167,743
Separate account liabilities ⁽¹⁾	2		166,325		—		166,327
Total liabilities	$	18,536	$	334,068	$	—	$	352,604

⁽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, such as for private fixed maturity investments, fair values are estimated by the Company. To determine estimated fair value for these instruments, the Company generally utilizes discounted cash flows calculated at current market rates on investments of similar quality and term. 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.

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, 2014
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations			Total
Balance, July 1, 2014	$	6,371		$	220,134		$	29		$	226,534
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—			(17		)	(17		)
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
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at September 30, 2014	$	—		$	—		$	—		$	—



	Recurring Level 3 financial assets and liabilities
	Three Months Ended September 30, 2013
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations		Total
Balance, July 1, 2013	$	1,796		$	260,768		$	32	$	262,596
Realized and unrealized gains (losses) included in:
Other comprehensive income (loss)	(5		)	6,667			—		6,662
Settlements	1			(12,086		)	—		(12,085		)
Balances, September 30, 2013	$	1,792		$	255,349		$	32	$	257,173
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at September 30, 2013	$	—		$	—		$	—	$	—



	Recurring Level 3 financial assets and liabilities
	Nine Months Ended September 30, 2014
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations			Total
Balance, January 1, 2014	$	6,652		$	252,958		$	32		$	259,642
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—			(17		)	(17		)
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
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at September 30, 2014	$	—		$	—		$	—		$	—

Table of Contents

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, 2013
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations		Total
Balance, January 1, 2013	$	1,822		$	265,538		$	32	$	267,392
Realized and unrealized gains (losses) included in:
Other comprehensive income (loss)	(28		)	25,261			—		25,233
Settlements	(2		)	(35,450		)	—		(35,452		)
Balance at September 30, 2013	$	1,792		$	255,349		$	32	$	257,173
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at September 30, 2013	$	—		$	—		$	—	$	—

The following tables present significant unobservable inputs used during the valuation of certain assets categorized within Level 3 of the recurring fair value measurements table:



	September 30, 2014
	Fair Value		Valuation Technique	Unobservable Input	Weighted Average
Fixed maturities available-for-sale:
Asset-backed securities ⁽¹⁾	$	209,888	Internal model pricing	Prepayment speed assumption	8
				Constant default rate assumption	5
				Adjusted ABX Index spread assumption ⁽²⁾	505

⁽¹⁾ Includes home improvement loans only.

⁽²⁾ Includes an internally calculated liquidity premium adjustment of 217.

At September 30, 2014, after adjusting the Asset Backed Securities Index (“ABX Index”) spread assumption by the liquidity premium, the overall discount rate ranged from 293 to 613 basis points. The constant default rate assumption ranged from 2.0 to 12.7.



	December 31, 2013
	Fair Value		Valuation Technique	Unobservable Input	Weighted Average
Fixed maturities available-for-sale:
Asset-backed securities ⁽¹⁾	$	252,902	Internal model pricing	Prepayment speed assumption	9
				Constant default rate assumption	5
				Adjusted ABX Index spread assumption ⁽²⁾	455

⁽¹⁾ Includes home improvement loans only.

⁽²⁾ Includes an internally calculated liquidity premium adjustment of 217.

At December 31, 2013, after adjusting the ABX Index spread assumption by the liquidity premium, the overall discount rate ranged from 327 to 647 basis points. The constant default rate assumption ranged from 2.0 to 12.9.

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The significant unobservable inputs used in the fair value measurement of asset-backed securities are prepayment speed assumptions, constant default rate assumptions and the ABX Index spread adjusted by an internally calculated liquidity premium with the primary inputs being the constant default rate assumption and the adjusted ABX Index spread assumption. As the constant default rate assumption or the adjusted ABX Index spread assumption increases, the price and therefore, the fair value, of the securities decreases.

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 $9,242 and zero of adjusted cost basis limited partnership interests which were impaired at September 30, 2014 and December 31, 2013, 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, 2014				December 31, 2013
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Assets
Mortgage loans on real estate	$	3,175,683	$	3,338,668	$	3,134,255	$	3,197,292
Policy loans	4,179,059		4,179,059		4,185,472		4,185,472
Limited partnership interests	38,772		43,754		44,551		42,433
Other investments	15,790		42,809		16,643		42,814

Liabilities
Annuity contract benefits without life contingencies	$	10,499,021	$	10,390,024	$	10,263,043	$	9,986,464
Policyholders’ funds	306,293		306,293		345,689		345,689
Commercial paper	99,989		99,989		98,990		98,990
Notes payable	541,798		574,260		532,519		541,918

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.

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

Limited partnership interests

Limited partnership interests, accounted for using the cost method, represent the Company’s minor 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.

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.

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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

11. Goodwill

The balance of goodwill, all of which is within the Retirement Services segment, is as follows:



	Goodwill
	2014		2013
Balances, January 1	$	105,255	$	105,255
Acquisitions⁽¹⁾	50,249		—
Balances, September 30	$	155,504	$	105,255

⁽¹⁾ At August 29, 2014, the Company acquired goodwill of $50,249 from the acquisition of RPS. See Note 3 for for additional discussion regarding the acquisition.

12. Other Comprehensive Income

The following tables present the accumulated balances for each classification of other comprehensive income (loss):



	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



	Three Months Ended September 30, 2013
	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, 2013	$	506,490		$	33,386		$	(105,399	)	$	(122,795	)	$	311,682
Other comprehensive income (loss) before reclassifications	(13,373		)	(32,440		)	17,194			—			(28,619		)
Amounts reclassified from AOCI	(8,361		)	(384		)	—			—			(8,745		)
Net current period other comprehensive income (loss)	(21,734		)	(32,824		)	17,194			—			(37,364		)
Balances, September 30, 2013	$	484,756		$	562		$	(88,205	)	$	(122,795	)	$	274,318

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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	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



	Nine Months Ended September 30, 2013
	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, 2013	$	927,678		$	24,962		$	(194,146	)	$	(122,795	)	$	635,699
Other comprehensive income (loss) before reclassifications	(422,791		)	(21,450		)	105,941			—			(338,300		)
Amounts reclassified from AOCI	(20,131		)	(2,950		)	—			—			(23,081		)
Net current period other comprehensive income (loss)	(442,922		)	(24,400		)	105,941			—			(361,381		)
Balances, September 30, 2013	$	484,756		$	562		$	(88,205	)	$	(122,795	)	$	274,318

The following tables present the composition of other comprehensive income (loss):



	Three Months Ended September 30, 2014
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses) arising on fixed maturities, available-for-sale	$	(100,800	)	$	35,280		$	(65,520	)
Unrealized holding gains (losses) arising on cash flow hedges	7,408			(2,593		)	4,815
Reclassification adjustment for (gains) losses 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	)

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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Three Months Ended September 30, 2013
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses) arising on fixed maturities, available-for-sale	$	(20,574	)	$	7,201		$	(13,373	)
Unrealized holding gains (losses) arising on cash flow hedges	(49,908		)	17,468			(32,440		)
Reclassification adjustment for (gains) losses realized in net income	(13,454		)	4,709			(8,745		)
Net unrealized gains (losses) related to investments	(83,936		)	29,378			(54,558		)
Future policy benefits, DAC and VOBA adjustments	26,455			(9,261		)	17,194
Net unrealized gains (losses)	(57,481		)	20,117			(37,364		)
Other comprehensive income (loss)	$	(57,481	)	$	20,117		$	(37,364	)



	Nine Months Ended September 30, 2014
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses) arising on fixed maturities, available-for-sale	$	471,537		$	(165,038	)	$	306,499
Unrealized holding gains (losses) arising on cash flow hedges	11,302			(3,956		)	7,346
Reclassification adjustment for (gains) losses 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



	Nine Months Ended September 30, 2013
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses) arising on fixed maturities, available-for-sale	$	(650,447	)	$	227,656		$	(422,791	)
Unrealized holding gains (losses) arising on cash flow hedges	(33,000		)	11,550			(21,450		)
Reclassification adjustment for (gains) losses realized in net income	(35,510		)	12,429			(23,081		)
Net unrealized gains (losses) related to investments	(718,957		)	251,635			(467,322		)
Future policy benefits, DAC and VOBA adjustments	162,987			(57,046		)	105,941
Net unrealized gains (losses)	(555,970		)	194,589			(361,381		)
Other comprehensive income (loss)	$	(555,970	)	$	194,589		$	(361,381	)

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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



	Three Months Ended September 30, 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 arising on fixed maturities, available-for-sale	$	(4,099	)		Other realized investment (gains) losses, net
	(4,099		)		Total before tax
	(1,435		)		Tax expense or benefit
	$	(2,664	)		Net of tax

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

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

Total reclassification	$	(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 13 for additional details).



	Three Months Ended September 30, 2013
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 arising on fixed maturities, available-for-sale	$	(12,863	)	Other realized investment (gains) losses, net
	(12,863		)	Total before tax
	(4,502		)	Tax expense or benefit
	$	(8,361	)	Net of tax

Unrealized holding (gains) losses arising on cash flow hedges	$	(591	)	Net investment income
	(591		)	Total before tax
	(207		)	Tax expense or benefit
	$	(384	)	Net of tax

Total reclassification	$	(8,745	)	Net of tax

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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
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 arising on fixed maturities, available-for-sale	$	(28,268	)		Other realized investment (gains) losses, net
	(28,268		)		Total before tax
	(9,894		)		Tax expense or benefit
	$	(18,374	)		Net of tax

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

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

Total reclassification	$	(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 13 for additional details).



	Nine Months Ended September 30, 2013
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 arising on fixed maturities, available-for-sale	$	(30,971	)	Other realized investment (gains) losses, net
	(30,971		)	Total before tax
	(10,840		)	Tax expense or benefit
	$	(20,131	)	Net of tax

Unrealized holding (gains) losses arising on cash flow hedges	$	(4,539	)	Net investment income
	(4,539		)	Total before tax
	(1,589		)	Tax expense or benefit
	$	(2,950	)	Net of tax

Total reclassification	$	(23,081	)	Net of tax

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

13. 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
	2014			2013			2014			2013			2014		2013
Components of net periodic cost (benefit):
Service cost	$	1,364		$	1,627		$	327		$	246		$	30	$	251
Interest cost	5,824			5,328			171			138			503		637
Expected return on plan assets	(7,328		)	(6,317		)	—			—			—		—
Amortization of unrecognized prior service costs (benefits)	12			13			(427		)	(413		)	234		233
Amortization of losses (gains) from earlier periods	885			4,212			(77		)	(55		)	165		325
Settlement	—			—			—			—			2,666		—
Net periodic cost (benefit)	$	757		$	4,863		$	(6	)	$	(84	)	$	3,598	$	1,446



	Nine Months Ended September 30,
	Defined Benefit Pension Plan						Post-Retirement Medical Plan						Supplemental Executive Retirement Plan
	2014			2013			2014			2013			2014		2013
Components of net periodic cost (benefit):
Service cost	$	3,713		$	4,146		$	739		$	710		$	440	$	752
Interest cost	17,301			15,673			431			384			1,896		1,911
Expected return on plan assets	(21,966		)	(18,375		)	—			—			—		—
Amortization of unrecognized prior service costs (benefits)	38			38			(1,280		)	(1,237		)	700		699
Amortization of losses (gains) from earlier periods	2,174			12,001			(337		)	(262		)	350		975
Settlement	—			—			—			—			2,666		—
Net periodic cost (benefit)	$	1,260		$	13,483		$	(447	)	$	(405	)	$	6,052	$	4,337

On August 1, 2014, the Company made a lump-sum benefit payment from the Supplemental Executive Retirement Plan. The lump-sum distribution resulted in the settlement of 21% of the Supplemental Executive Retirement Plan’s projected benefit obligation and exceeded the total of the projected service cost and interest cost for the plan year. In connection with this settlement during the third quarter of 2014, the Company: (i) remeasured the Supplemental Executive Retirement Plan’s funded status, resulting in a $1,955 increase before tax to other liabilities with an offsetting decrease to accumulated other comprehensive income; and (ii) reclassified a $2,666 loss before tax to earnings from accumulated other comprehensive income. The discount rate used to remeasure the benefit obligation was based on the rates of return on high-quality fixed-income investments currently available and expected to be available during the period the benefits will be paid. It was 4.12% as of the remeasurement date.

On August 29, 2014, the Company completed the acquisition of RPS. See Note 3 for additional discussion regarding the acquisition. Per the terms of the Purchase and Sale Agreement, the Company was required to give each RPS employee full

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

credit for the employee’s service period with RPS prior to the closing date, for the purpose of eligibility to participate, vesting and level of benefits under the Post-Retirement Medical Plan. As a result, approximately 980 individuals became eligible participants of the Post-Retirement Medical Plan at the acquisition date. In connection with the RPS acquisition, the Company remeasured the Post-Retirement Medical Plan’s funded status, resulting in a $1,368 increase before tax to other liabilities with an offsetting decrease to accumulated other comprehensive income and a $3,311 increase before tax to other liabilities with an offsetting increase to goodwill. The discount rate used to remeasure the benefit obligation was based on the rates of return on high-quality fixed-income investments currently available and expected to be available during the period the benefits will be paid. It was 4.07% as of the remeasurement date.

The Company expects to make payments of approximately $524 with respect to its Post-Retirement Medical Plan and $16,917 with respect to its Supplemental Executive Retirement Plan during the year ended December 31, 2014. The Company expects to make contributions of $10,717 to its Defined Benefit Pension Plan during the year ended December 31, 2014. A December 31 measurement date is used for the employee benefit plans.

The following table summarizes contributions to the Defined Benefit Pension Plan and payments made to the Post-Retirement Medical Plan and the Supplemental Executive Retirement Plan:



	Three Months Ended September 30,
	2014		2013
Contributions to the Defined Benefit Pension Plan	$	6,003	$	14,624
Payments to the Post-Retirement Medical Plan	178		109
Payments to the Supplemental Executive Retirement Plan	14,255		915



	Nine Months Ended September 30,
	2014		2013
Contributions to the Defined Benefit Pension Plan	$	10,717	$	16,649
Payments to the Post-Retirement Medical Plan	393		391
Payments to the Supplemental Executive Retirement Plan	16,044		2,775

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

14. Income Taxes

The provision for income taxes is comprised of the following:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
Current	$	18,062	$	46,389		$	71,658	$	72,291
Deferred	11,728		(13,102		)	48,666		(5,132		)
Total income tax provision	$	29,790	$	33,287		$	120,324	$	67,159

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,
	2014		2013
Statutory federal income tax rate	35.0	%	35.0	%
Income tax effect of:
Investment income not subject to federal tax	(2.0	)%	(2.7	)%
Tax credits	(0.3	)%	(1.4	)%
State income taxes, net of federal benefit	1.5	%	2.0	%
Other, net	0.1	%	0.4	%
Effective income tax rate	34.3	%	33.3	%

During the nine months ended September 30, 2014 and 2013, the Company recorded an increase in unrecognized tax benefits in the amount of $1,401 and $12,965, 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 2010 and prior. Tax years 2011 through 2013 are open to federal examination by the Internal Revenue Service (“IRS”). The Company does not expect significant increases or decreases to unrecognized tax benefits relating to federal, state or local audits.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

15. Segment Information

The Company has three reportable segments: Individual Markets, Retirement Services and Other.

Individual Markets

The Individual Markets reporting and operating segment distributes life insurance, annuity and retirement products (including individual retirement accounts (“IRAs”)) 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.

Retirement Services

The Retirement Services reporting and operating segment provides various retirement plan products 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 CLAC (“the GWSC operating segment”), 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. The Company evaluates performance of its reportable segments based on their profitability from operations after income taxes. 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.

The following tables summarize segment financial information:



	Three Months Ended September 30, 2014
	Individual		Retirement
	Markets		Services		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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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Three Months Ended September 30, 2013
	Individual			Retirement
	Markets			Services			Other			Total
Revenue:
Premium income	$	120,489		$	1,484		$	15,428		$	137,401
Fee income	20,018			131,103			1,222			152,343
Net investment income	201,727			159,547			13,767			375,041
Realized investment gains (losses), net	(12,797		)	(43,023		)	—			(55,820		)
Total revenues	329,437			249,111			30,417			608,965
Benefits and expenses:
Policyholder benefits	261,716			53,201			19,547			334,464
Operating expenses	33,768			123,810			11,665			169,243
Total benefits and expenses	295,484			177,011			31,212			503,707
Income (loss) before income taxes	33,953			72,100			(795		)	105,258
Income tax expense (benefit)	10,716			22,866			(295		)	33,287
Net income (loss)	$	23,237		$	49,234		$	(500	)	$	71,971



	Nine Months Ended September 30, 2014
	Individual		Retirement
	Markets		Services		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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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Nine Months Ended September 30, 2013
	Individual		Retirement
	Markets		Services			Other			Total
Revenue:
Premium income	$	303,073	$	2,669		$	76,338		$	382,080
Fee income	67,393		382,809			3,394			453,596
Other revenue	7,355		—			—			7,355
Net investment income	551,167		320,179			37,660			909,006
Realized investment gains (losses), net	3,957		(69,365		)	13			(65,395		)
Total revenues	932,945		636,292			117,405			1,686,642
Benefits and expenses:
Policyholder benefits	715,691		146,562			82,076			944,329
Operating expenses	107,178		385,039			48,184			540,401
Total benefits and expenses	822,869		531,601			130,260			1,484,730
Income (loss) before income taxes	110,076		104,691			(12,855		)	201,912
Income tax expense (benefit)	38,349		33,509			(4,699		)	67,159
Net income (loss)	$	71,727	$	71,182		$	(8,156	)	$	134,753

16. 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, as defined, of $1,147,500 plus 50% of its net income, if positive and as defined in the credit facility agreement (both compiled on the unconsolidated statutory accounting basis prescribed by the National Association of Insurance Commissioners), for each quarter ending after December 31, 2012. The Company was in compliance with all covenants at September 30, 2014 and December 31, 2013. At September 30, 2014 and December 31, 2013, there were no outstanding amounts related to the credit facility.

GWSC and CLAC are parties to a reinsurance agreement pursuant to which GWSC assumes term life insurance from CLAC. GWL&A Financial obtained two letters of credit for the benefit of the Company as collateral under the GWSC and CLAC reinsurance agreement for policy liabilities and capital support. The first letter of credit is for $1,168,800 and renews annually until it expires on December 31, 2025. The second letter of credit is for $70,000 and renews annually until it expires on December 31, 2017. At September 30, 2014 and December 31, 2013, 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 $7,975, renewable annually for an indefinite period of time. At September 30, 2014 and December 31, 2013, 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, 2014 and December 31, 2013 were $217,231 and $196,933, of which $5,372 and $7,498 were related to cost basis limited partnership interests, respectively, all of which is due within one year from the dates indicated.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

Contingencies

The Company is involved in various legal proceedings that arise in the ordinary course of its business. In the opinion of management, after consultation with counsel, the likelihood of loss from the resolution of these proceedings is remote and/or the estimated loss is not expected to have a material effect on the Company’s consolidated financial position, results of its operations or cash flows.

17. Subsequent Events

On October 31, 2014, the Company’s Board of Directors declared a dividend of $138,000, payable on December 18, 2014, to its sole shareholder, GWL&A Financial.

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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, 2014 compared with the same period in 2013. The discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to which the reader is directed for additional information.

On August 29, 2014, the Company completed the acquisition of the J.P. Morgan Retirement Plan Services (“RPS”) large-market recordkeeping business.

The RPS business comprises approximately 200 clients with 2.1 million participants and $180 billion in assets under administration. It also includes the more than 1,000 personnel affiliated with RPS, including sales staff, consultant relations, relationship managers and client service specialists.

This acquisition transformed the Company, together with Putnam Investments, LLC ("Putnam"), an affiliate with the Company, into the second largest provider in the U.S. defined contribution market with nearly 7 million participants and more than $400 billion in retirement plan assets under administration.

Revenues and Earnings of the Acquiree

From date of acquisition to September 30, 2014, RPS contributed $14 million in revenue and $0.5 million in net income. These amounts are included in the condensed consolidated statements of income for the three and nine months ended September 30, 2014.

Costs Related to Acquisition

The Company incurred $3 million of acquisition costs for the three and nine months ended September 30, 2014. Such costs have been expensed as incurred and are included in general insurance expenses.

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(In millions)
Premium income	$	42
Other revenue	7
Total	49

Increase (decrease) in future policy benefits	41
Dividends to policyholders	1
Total	42

Participating policyholders’ net income before income taxes	7
Income tax expense	2
Participating policyholders’ income	5

Provision for policyholders’ share of (losses) earnings on participating business	5
Net income available to shareholder	$	—

On March 20, 2014, Great-West Lifeco Inc. announced its intent to combine the retirement business of Putnam with the retirement business of the Company. The transaction will be accounted for as a combination between entities under common control and is expected to take place on January 1, 2015. The Putnam retirement business comprises 375 clients with approximately 199,000 participants and $15 billion in assets under administration.

One of the Company’s institutional clients, Federated Retirement Plan Services (“FRPS”), assigned its retirement plan business to the Company October 1, 2014. The FRPS retirement plan business comprised $3.5 billion in assets from over 400 plans and approximately 69,000 participants. It’s distributed through more than 50 banks, which potentially opens new distribution opportunities for the Company.

On October 30, 2014, the Company announced that its retirement business will officially be named "Empower." Empower is the retirement services business of the Company, which recently completed its acquisition of the J.P. Morgan RPS large-market recordkeeping business and is integrating the retirement business of Putnam. Empower serves every segment of the employer-sponsored retirement plan market: small, midsize, and large corporate 401(k) clients, government 457 plans and non-profit 403(b) entities, as well as private label recordkeeping clients.

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.

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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, 2014 compared with the three months ended September 30, 2013

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)	2014			2013			(decrease)			change
Net income
Individual Markets segment	$	23		$	23		$	—		—	%
Retirement Services segment	44			50			(6		)	(12	)%
Other segment	(6		)	(1		)	(5		)	500	%
Total net income	61			72			(11		)	(15	)%
Adjustments to net income
Unrealized investment gains (losses)	2			89			(87		)	(98	)%
Realized investment gains (losses)	24			(56		)	80			(143	)%
Pro-rata tax (expense) benefit⁽¹⁾	(9		)	(12		)	3			(25	)%
Operating income	$	44		$	51		$	(7	)	(14	)%

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

Unrealized investment gains (losses) decreased by $87 million, or 98%, to $2 million during the three months ended September 30, 2014 when compared to 2013. The primary driver of the change was a $103 million decrease in unrealized gains from forward settling to be announced ("TBA") securities and a $3 million decrease in unrealized gains from bonds. Offsetting the decrease was a $19 million increase in unrealized gains on derivatives.

Realized investment gains (losses), net, increased by $80 million to $24 million during the three months ended September 30, 2014 when compared to 2013. The fluctuation was driven primarily by an increase in gains of $83 million on forward settling TBA security transactions. Offsetting the increase was a $2 million decrease in gains on derivatives.

Pro-rata tax expense decreased by $3 million, or 25%, to $9 million during the three months ended September 30, 2014 when compared to 2013 resulting from a decrease in total unrealized and realized investment gains (losses).

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Nine months ended September 30, 2014 compared with the nine months ended September 30, 2013

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)	2014			2013			(decrease)			change
Net income
Individual Markets segment	$	85		$	72		$	13		18	%
Retirement Services segment	158			71			87			123	%
Other segment	(13		)	(8		)	(5		)	63	%
Total net income	230			135			95			70	%
Adjustments to net income
Unrealized investment gains (losses)	20			55			(35		)	(64	)%
Realized investment gains (losses)	87			(65		)	152			(234	)%
Pro-rata tax (expense) benefit ⁽¹⁾	(38		)	4			(42		)	(1,050	)%
Operating income	$	161		$	141		$	20		14	%

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

Unrealized investment gains (losses) decreased by $35 million, or 64%, to $20 million during the nine months ended September 30, 2014 when compared to 2013. The primary driver of the change was a $58 million decrease in unrealized gains from forward settling TBA securities. Offsetting the decrease was a $19 million and $4 million increase in unrealized gains on derivatives and bonds, respectively.

Realized investment gains (losses), net, increased by $152 million from a loss of $65 million in 2013 to a gain of $87 million in 2014. The fluctuation was driven primarily by an increase in gains on forward settling TBA security transactions.

Pro-rata tax expense increased by $42 million from a benefit of $4 million in 2013 to an expense of $38 million in 2013 resulting from an increase in total unrealized and realized investment gains (losses).

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Company Results of Operations

Three months ended September 30, 2014 compared with the three months ended September 30, 2013

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



	Three Months Ended September 30,				Increase			Percentage
Income statement data (In millions)	2014		2013		(decrease)			change
Premium income	$	170	$	138	$	32		23	%
Fee income	182		152		30			20	%
Net investment income	290		286		4			1	%
Total revenues	642		576		66			11	%
Policyholder benefits	362		335		27			8	%
Operating expenses	215		169		46			27	%
Total benefits and expenses	577		504		73			14	%
Income before income taxes	65		72		(7		)	(10	)%
Income tax expense	21		21		—			—	%
Operating income	$	44	$	51	$	(7	)	(14	)%

The Company’s consolidated operating income decreased by $7 million, or 14%, to $44 million for the three months ended September 30, 2014 when compared to 2013. The decrease was primarily due to higher operating expenses partially offset by higher fee income and higher policyholder benefits partially offset by higher premium income.

Premium income increased by $32 million, or 23%, to $170 million for the three months ended September 30, 2014 when compared to 2013. This increase was primarily related to the Company’s Individual Markets segment which had an increase of $31 million primarily due to the amounts assessed for mortality coverage earned from the Company's single premium universal life ("SPUL") product. The SPUL product is considered an investment contract, and as such, SPUL sales are recognized as deposits rather than as premium income. However, amounts assessed for mortality coverage are recognized as income in the Company’s condensed consolidated statements of income. The average in-force for the SPUL product increased from $1,231 million for the three months ended September 30, 2013 to $1,801 million for the three months ended September 30, 2014.

Fee income increased by $30 million, or 20%, to $182 million for the three months ended September 30, 2014 when compared to 2013. The increase was primarily related to a $15 million, or 16%, 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 18% increase in the average S&P 500 index during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. In addition, during the three months ended September 30, 2014, RPS earned $14 million in fees since the acquisition date.

Net investment income increased by $4 million, or 1%, to $290 million during the three months ended September 30, 2014 when compared to 2013. The increase 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.

Total benefits and expenses increased by $73 million, or 14%, to $577 million for the three months ended September 30, 2014 when compared to 2013. Policyholder benefits increased by $27 million, or 8%, primarily driven by higher interest credited or paid to contractholders as a result of increased average liabilities and an increase in crediting rate on the Company’s SPUL product. The Company also experienced higher death claims offset by lower annuity payments and accident and disability claims. Operating expenses increased by $46 million, or 27%, as a result of higher commissions resulting from increased sales and average asset levels, RPS related operating, acquisition and integration costs, higher DAC amortization and higher incentive compensation due to plan sales in 2014.

Income tax expense remained constant for the three months ended September 30, 2014 when compared to 2013.

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Nine months ended September 30, 2014 compared with the nine months ended September 30, 2013

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



	Nine Months Ended September 30,				Increase			Percentage
Income statement data (In millions)	2014		2013		(decrease)			change
Premium income	$	364	$	382	$	(18	)	(5	)%
Fee income	520		454		66			15	%
Other revenue	—		7		(7		)	(100	)%
Net investment income	892		854		38			4	%
Total revenues	1,776		1,697		79			5	%
Policyholder benefits	931		944		(13		)	(1	)%
Operating expenses	602		541		61			11	%
Total benefits and expenses	1,533		1,485		48			3	%
Income before income taxes	243		212		31			15	%
Income tax expense	82		71		11			15	%
Operating income	$	161	$	141	$	20		14	%

The Company’s consolidated operating income increased by $20 million, or 14%, to $161 million for the nine months ended September 30, 2014 when compared to 2013 primarily due to increased investment income primarily driven by higher income on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields and higher income on other investments. Offsetting the increase was a decrease in other revenue as a result of the termination of the reinsurance agreement with CLAC in 2013. In addition, the Company had lower premium income partially offset by lower policyholder benefits and higher fee income partially offset by higher operating expenses.

Premium income decreased by $18 million, or 5%, to $364 million for the nine months ended September 30, 2014 when compared to 2013. This decrease was primarily related to the Company’s Other segment which had a decrease of $15 million due to fewer policies in-force as a result of lapses on a block of 10-year term insurance policies whose original term ended in 2013. Within the Individual Markets segment, the Company had a decrease in premium income of $42 million driven by the amounts received in 2013 in conjunction with the termination of the reinsurance agreement with CLAC. The decrease was partially offset by an increase primarily related to the amounts assessed for mortality coverage earned from the Company's SPUL product. The average in-force for the SPUL product increased from $1,122 million for the nine months ended September 30, 2013 to $1,591 million for the nine months ended September 30, 2014.

Fee income increased by $66 million, or 15%, to $520 million for the nine months ended September 30, 2014 when compared to 2013. The increase was primarily related to a $47 million, or 18%, 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 19% increase in the average S&P 500 index during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. In addition, during the nine months ended September 30, 2014, RPS earned $14 million in fee income since the acquisition date.

Other revenue decreased by $7 million for the nine months ended September 30, 2014 when compared to 2013 as a result of the termination of the reinsurance agreement with CLAC in 2013.

Net investment income increased by $38 million, or 4%, to $892 million during the nine months ended September 30, 2014 when compared to 2013. The primary driver of the change was an increase of $32 million in investment income on bonds, mortgages and policy loans as a result of higher invested asset balances partially offset by lower yields and an increase of $5 million in investment income primarily on equity investments.

Total benefits and expenses increased by $48 million, or 3%, to $1,533 million for the nine months ended September 30, 2014 when compared to 2013. Operating expenses increased by $61 million, or 11%, as a result of higher commissions and incentive compensation resulting from increased sales and average asset levels, RPS related operating, acquisition and integration costs and higher DAC amortization. This was offset by policyholder benefits which decreased by $13 million, or 1%, primarily driven by the $41 million received in 2013 in conjunction with the termination of the reinsurance agreement with CLAC partially offset by higher interest credited or paid to contractholders as a result of increased average liabilities and an increase in

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crediting rate on the Company’s SPUL product. The Company also experienced higher death claims offset by lower annuity payments and accident and disability claims.

Income tax expense increased by $11 million, or 15%, to $82 million for the nine months ended September 30, 2014 when compared to 2013 primarily due to an increase in operating income before tax.

Individual Markets Segment Results of Operations

Three months ended September 30, 2014 compared with the three months ended September 30, 2013

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)	2014		2013		(decrease)		change
Premium income	$	152	$	121	$	31	26	%
Fee income	21		20		1		5	%
Net investment income	183		178		5		3	%
Total revenues	356		319		37		12	%
Policyholder benefits	283		262		21		8	%
Operating expenses	47		34		13		38	%
Total benefits and expenses	330		296		34		11	%
Income before income taxes	26		23		3		13	%
Income tax expense	9		6		3		50	%
Operating income	$	17	$	17	$	—	—	%

Operating income for the Individual Markets segment remained constant during the three months ended September 30, 2014 when compared to 2013.

Premium income increased by $31 million, or 26%, to $152 million for the three months ended September 30, 2014 when compared to 2013. This increase was primarily related to the amounts assessed for mortality coverage earned from the Company's SPUL product. The average in-force for the SPUL product increased from $1,231 million for the three months ended September 30, 2013 to $1,801 million for the three months ended September 30, 2014.

Fee income increased by $1 million, or 5%, to $21 million for the three months ended September 30, 2014 when compared to 2013. The increase was primarily related to fees earned in the executive benefits market due to increased assets resulting from higher sales.

Net investment income increased by $5 million, or 3%, to $183 million for the three months ended September 30, 2014 when compared to 2013. This was due to an increase in investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields.

Total benefits and expenses increased by $34 million, or 11%, to $330 million during the three months ended September 30, 2014 when compared to 2013. Policyholder benefits increased by $21 million, or 8%, primarily driven by higher interest credited or paid to contractholders as a result of increased average liabilities and an increase in crediting rate on the Company’s SPUL product. The Company also experienced higher death claims offset by lower annuity payments and accident and disability claims. Operating expenses increased by $13 million, or 38%, as a result of higher DAC amortization and higher incentive compensation as a result of sales of the SPUL product and executive benefits products.

Income tax expense increased by $3 million, or 50%, to $9 million during the three months ended September 30, 2014 when compared to 2013 primarily due to an increase in operating income before tax.

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Nine months ended September 30, 2014 compared with the nine months ended September 30, 2013

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)	2014		2013		(decrease)			change
Premium income	$	302	$	303	$	(1	)	—	%
Fee income	71		68		3			4	%
Other revenue	—		7		(7		)	(100	)%
Net investment income	547		534		13			2	%
Total revenues	920		912		8			1	%
Policyholder benefits	701		716		(15		)	(2	)%
Operating expenses	124		107		17			16	%
Total benefits and expenses	825		823		2			—	%
Income before income taxes	95		89		6			7	%
Income tax expense	32		31		1			3	%
Operating income	$	63	$	58	$	5		9	%

Operating income for the Individual Markets segment increased by $5 million, or 9%, to $63 million during the nine months ended September 30, 2014 when compared to 2013 primarily due to increased investment income primarily driven by higher income on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields. Offsetting the increase was a decrease in other revenue as a result of the termination of the reinsurance agreement with CLAC in 2013.

Premium income decreased by $1 million, or less than 1%, to $302 million during the nine months ended September 30, 2014 when compared to 2013. This decrease was primarily driven by the $42 million received in 2013 in conjunction with the termination of the reinsurance agreement with CLAC. The decrease was partially offset by an increase primarily related to the amounts assessed for mortality coverage earned from the Company's SPUL product. The average in-force for the SPUL product increased from $1,122 million for the nine months ended September 30, 2013 to $1,591 million for the nine months ended September 30, 2014.

Fee income increased by $3 million, or 4%, to $71 million for the nine months ended September 30, 2014 when compared to 2013. The increase was primarily related to fees earned in the executive benefits market due to increased assets resulting from higher sales.

Other revenue decreased by $7 million for the nine months ended September 30, 2014 when compared to 2013 as a result of the termination of the reinsurance agreement with CLAC in 2013.

Net investment income increased by $13 million, or 2%, to $547 million for the nine months ended September 30, 2014 when compared to 2013. This was due to higher investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields.

Total benefits and expenses increased by $2 million, or less than 1%, to $825 million during the nine months ended September 30, 2014 when compared to 2013 due to an increase of $17 million in operating expenses partially offset by a decrease of $15 million in policyholder benefits. The increase in operating expenses was due to higher DAC amortization and higher incentive compensation as a result of sales of the SPUL product and executive benefits products. The decrease in policyholder benefits was primarily driven by the $41 million received in 2013 in conjunction with the termination of the reinsurance agreement with CLAC partially offset by higher interest credited or paid to contractholders as a result of increased average liabilities and an increase in crediting rate on the Company’s SPUL product. The Company also experienced higher death claims offset by lower annuity payments and accident and disability claims.

Income tax expense increased by $1 million, or 3%, to $32 million during the nine months ended September 30, 2014 when compared to 2013 primarily due to an increase in operating income before tax.

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Retirement Services Segment Results of Operations

Three months ended September 30, 2014 compared with the three months ended September 30, 2013

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



	Three Months Ended September 30,				Increase			Percentage
Income statement data (In millions)	2014		2013		(decrease)			change
Premium income	$	—	$	1	$	(1	)	(100	)%
Fee income	160		131		29			22	%
Net investment income	94		94		—			—	%
Total revenues	254		226		28			12	%
Policyholder benefits	51		53		(2		)	(4	)%
Operating expenses	154		123		31			25	%
Total benefits and expenses	205		176		29			16	%
Income before income taxes	49		50		(1		)	(2	)%
Income tax expense	16		16		—			—	%
Operating income	$	33	$	34	$	(1	)	(3	)%

Operating income for the Retirement Services segment remained relatively constant, decreasing by $1 million, or 3%, to $33 million for the three months ended September 30, 2014 when compared to 2013.

Fee income increased by $29 million, or 22%, to $160 million for the three months ended September 30, 2014 when compared to 2013. The increase was primarily related to a $15 million, or 16%, 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 18% increase in the average S&P 500 index during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. In addition, during the three months ended September 30, 2014, RPS earned $14 million in fee income since the acquisition date.

Net investment income remained constant for the three months ended September 30, 2014 when compared to 2013.

Total benefits and expenses increased by $29 million, or 16%, to $205 million for the three months ended September 30, 2014 when compared to 2013. The increase was primarily attributable to a $31 million increase in operating expenses as a result of RPS operating, acquisition and integration costs, higher asset-based commissions due to increased average asset levels and higher incentive compensation due to larger plan sales in 2014.

Income tax expense remained constant for the three months ended September 30, 2014 when compared to 2013.

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Nine months ended September 30, 2014 compared with the nine months ended September 30, 2013

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



	Nine Months Ended September 30,				Increase			Percentage
Income statement data (In millions)	2014		2013		(decrease)			change
Premium income	$	1	$	3	$	(2	)	(67	)%
Fee income	446		383		63			16	%
Net investment income	305		282		23			8	%
Total revenues	752		668		84			13	%
Policyholder benefits	151		146		5			3	%
Operating expenses	434		386		48			12	%
Total benefits and expenses	585		532		53			10	%
Income before income taxes	167		136		31			23	%
Income tax expense	56		45		11			24	%
Operating income	$	111	$	91	$	20		22	%

Operating income for the Retirement Services segment increased by $20 million, or 22%, to $111 million for the nine months ended September 30, 2014 when compared to 2013 due to increased investment income primarily driven by higher income on bonds, mortgages and policy loans as a result of higher invested asset balances partially offset by lower yields. In addition, higher fee income was partially offset by higher operating expenses.

Fee income increased by $63 million, or 16%, to $446 million for the nine months ended September 30, 2014 when compared to 2013. The increase was primarily related to a $47 million, or 18%, 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 19% increase in the average S&P 500 index during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. In addition, during the nine months ended September 30, 2014, RPS earned $14 million in fee income since the acquisition date.

Net investment income increased by $23 million, or 8%, to $305 million for the nine months ended September 30, 2014 when compared to 2013. This was due to higher investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields.

Total benefits and expenses increased by $53 million, or 10%, to $585 million for the nine months ended September 30, 2014 when compared to 2013. The increase was primarily attributable to a $48 million increase in operating expenses as a result of RPS operating, acquisition and integration costs, higher asset-based commissions due to increased average asset levels and higher incentive compensation due to larger plan sales in 2014. Additionally, the Company had higher policyholder benefits due to higher interest credited or paid to contractholders as a result of increased average liabilities.

Income tax expense increased by $11 million, or 24%, to $56 million during the nine months ended September 30, 2014 when compared to 2013. The increase was primarily due to an increase in operating income before income taxes.

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Other Segment Results of Operations

Three months ended September 30, 2014 compared with the three months ended September 30, 2013

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)	2014			2013			(decrease)			change
Premium income	$	18		$	16		$	2		13	%
Fee income	1			1			—			—	%
Net investment income	13			14			(1		)	(7	)%
Total revenues	32			31			1			3	%
Policyholder benefits	28			20			8			40	%
Operating expenses	14			12			2			17	%
Total benefits and expenses	42			32			10			31	%
Income before income taxes	(10		)	(1		)	(9		)	900	%
Income tax benefit	(4		)	—			(4		)	100	%
Operating loss	$	(6	)	$	(1	)	$	(5	)	500	%

Operating loss for the Company’s Other segment increased by $5 million to $6 million for the three months ended September 30, 2014. Policyholder benefits increased by $8 million due to reserves changes in 2013 related to lapses on a block of 10-year term insurance policies whose original term ended in 2013.

Nine months ended September 30, 2014 compared with the nine months ended September 30, 2013

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)	2014			2013			(decrease)			change
Premium income	$	61		$	76		$	(15	)	(20	)%
Fee income	3			3			—			—	%
Net investment income	40			38			2			5	%
Total revenues	104			117			(13		)	(11	)%
Policyholder benefits	79			82			(3		)	(4	)%
Operating expenses	44			48			(4		)	(8	)%
Total benefits and expenses	123			130			(7		)	(5	)%
Income before income taxes	(19		)	(13		)	(6		)	46	%
Income tax benefit	(6		)	(5		)	(1		)	20	%
Operating loss	$	(13	)	$	(8	)	$	(5	)	63	%

Operating loss for the Company’s Other segment increased by $5 million to $13 million for the nine months ended September 30, 2014. The increase in the operating loss is primarily related to premium income which decreased by $15 million due to fewer policies in-force as a result of lapses on a block of 10-year term insurance policies whose original term ended in 2013. The decrease in premium income was partially offset by a decrease in operating expenses due to lower commissions.

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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.

A summary of the Company’s general account investment assets and the assets as a percentage of total general account investments follows:



(In millions)	September 30, 2014				December 31, 2013
Fixed maturities, available-for-sale	$	17,293	61.7	%	$	18,470	69.6	%
Fixed maturities, held for trading	220		0.8	%	336		1.3	%
Mortgage loans on real estate	3,176		11.3	%	3,134		11.8	%
Policy loans	4,179		14.9	%	4,185		15.8	%
Short-term investments	3,071		11.0	%	294		1.1	%
Limited partnership and other corporation interests	55		0.2	%	79		0.3	%
Other investments	16		0.1	%	18		0.1	%
Total investments	$	28,010	100.0	%	$	26,516	100.0	%

The September 30, 2014 fixed maturities, available-for-sale amount decreased as compared to December 31, 2013 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.

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The distribution of the Company’s fixed maturity portfolio by the Company’s internal credit rating is summarized as follows:



Credit Rating	September 30, 2014		December 31, 2013
AAA	17.9	%	28.4	%
AA	17.0	%	15.3	%
A	32.0	%	26.5	%
BBB	32.0	%	28.6	%
BB and below (Non-investment grade)	1.1	%	1.2	%
Total	100.0	%	100.0	%

The September 30, 2014 AAA rating percentage decreased as compared to December 31, 2013 as the Company sold AAA rated government agency MBS pools to enter into forward settling TBA contracts which are treated as derivatives.

The following table contains the sector distribution of the Company’s corporate fixed maturity investment portfolio, calculated as a percentage of fixed maturities:



Sector	September 30, 2014		December 31, 2013
Utility	21.1	%	18.5	%
Finance	12.0	%	10.0	%
Consumer	11.1	%	9.9	%
Natural resources	6.2	%	5.2	%
Transportation	3.6	%	3.0	%
Other	12.9	%	11.1	%

Fair Value Measurement of Fixed Maturity Investments Classified as Available-for-Sale

Each fixed maturity investment is categorized in a hierarchy based on the observability of inputs into the valuation methodology with Level 3 being the least observable. Management uses some judgment in determining the observability of valuation inputs. Level 3 assets at September 30, 2014 were $216 million, or 1%, of total net assets and liabilities carried at fair value compared to Level 3 assets of $260 million, or 1%, at December 31, 2013. The decrease in Level 3 assets is primarily due to principal reductions.

Securities Lending, Reverse Repurchase Agreements and Cash Collateral Reinvestment Practices

Cash collateral related to the securities lending program and reverse repurchase agreements is invested in U.S. Government or U.S. Government Agency securities. In addition, the securities lending agent indemnifies the Company against borrower risk, meaning that the lending agent agrees contractually to replace securities not returned due to a borrower default. As of September 30, 2014 and December 31, 2013, the Company had $94 million and $27 million, respectively, of securities out on loan and $750 million and zero, respectively, in short-term reverse repurchase agreements, all of which are fully collateralized as described above. The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio.

Mortgage Loans on Real Estate

The Company’s mortgage loans on real estate are comprised exclusively of domestic commercial collateralized real estate loans. The mortgage loan portfolio is diversified with regard to geographical markets and commercial real estate property types within the United States. The Company originates, directly or through correspondents, real estate mortgages with the intent to hold to maturity. The Company’s portfolio includes loans which are fully amortizing, amortizing with a balloon balance at maturity, interest only to maturity and interest only for a number of years followed by an amortizing period.

Derivatives

The Company uses certain derivatives, such as futures, swaps and interest rate swaptions, for purposes of managing the interest rate, foreign currency exchange rate and equity market risks impacting the Company’s business. These derivatives, when taken alone, may subject the Company to varying degrees of market and credit risk; however, since used for hedging purposes, these instruments are intended to reduce risk. For derivative instruments where hedge accounting is not elected, changes in interest rates, foreign currencies or equity markets may generate derivative gains or losses which may cause the Company to experience

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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 accounting principles generally accepted in the United States of America (“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 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.

Critical accounting estimates are those that management believes are important to the portrayal of the Company’s results of operations and financial condition and which require them to make difficult, subjective and/or complex judgments. Critical accounting estimates cover accounting and actuarial matters that are inherently uncertain because the future resolution of such matters is unknown. Many of these policies, estimates and related judgments are common in the insurance and financial services industries. The Company believes that its most critical accounting estimates include the following:


•	Valuation of investments and derivatives in the absence of quoted market values;


•	Impairment of investments;


•	Accounting for derivative financial instruments;


•	Valuation of policy benefit liabilities; and


•	Valuation of DAC (deferred acquisition costs)

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, 2013, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Application of Recent Accounting Pronouncements

See Note 4 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 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 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 $498 million and $302 million as of September 30, 2014 and December 31, 2013, respectively. The September 30, 2014 and December 31, 2013 short-term investments included above exclude any amounts held to settle TBA forward contracts. In addition, 99% of the fixed maturity portfolio carried an

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investment grade rating at September 30, 2014 and December 31, 2013, 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 $100 million and $99 million of commercial paper outstanding at September 30, 2014 and December 31, 2013, 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, 2014. 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, 2014 and December 31, 2013 were $217 million and $197 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 $750 million and zero at September 30, 2014 and December 31, 2013, respectively. Non-cash collateral on deposit with the third-party custodian on the Company’s behalf was $765 million and zero at September 30, 2014 and December 31, 2013, respectively, which cannot be sold or re-pledged and which has not been recorded on the condensed consolidated balance sheets.

The Company participates in a securities lending program in which the Company lends securities that are held as part of its general account investment portfolio to third parties for the purpose of enhancing the total return on its investment portfolio. The Company generally requires initial collateral in an amount greater than or equal to 102% of the fair value of domestic securities loaned and 105% of foreign securities loaned. The Company received securities with a fair value of $35 million and $9 million as collateral at September 30, 2014 and December 31, 2013, respectively, which have not been recorded on the condensed consolidated balance sheets.

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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, 2013, 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 the President and Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”) as of September 30, 2014. Based upon that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that due to the material weakness in our internal control over financial reporting as it relates to complex accounting matters as further described under Item 9A, “Controls and Procedures,” of our Annual Report on Form 10-K for the year ended December 31, 2013, our disclosure controls and procedures were not effective as of September 30, 2014.

Notwithstanding the material weakness that existed as of September 30, 2014, management has concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles.

Changes in Internal Control over Financial Reporting

Management is in the process of remediating the internal control deficiency. The remediation plan is being implemented by the Chief Financial Officer.

Other than as described above, the President and Chief Executive Officer and the Chief Financial Officer hereby confirm that there were no changes in the Company’s internal control over financial reporting during the nine months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II Other Information

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.

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 (value of business acquired), 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.

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Item 6. Exhibits

The documents identified below are filed as a part of this report:

Index to Exhibits



Exhibit Number	Title
10.10	Letter of Offer of Employment to Louis J. Mannello, Jr., dated July 11, 2014
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/	Louis J. Mannello, Jr.	Date:	November 12, 2014
		Louis J. Mannello, Jr.
		Senior Vice President and Chief Financial Officer

GREAT WEST LIFE & ANNUITY INSURANCE CO - FORM 10-Q - November 12, 2014

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GREAT WEST LIFE & ANNUITY INSURANCE CO Reports