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

Attached files

file	filename
EX-32 - EXHIBIT 32 - GREAT WEST LIFE & ANNUITY INSURANCE CO	q22016gwla-exx32.htm
EX-31.2 - EXHIBIT 31.2 - GREAT WEST LIFE & ANNUITY INSURANCE CO	q22016gwla-exx312.htm
EX-31.1 - EXHIBIT 31.1 - GREAT WEST LIFE & ANNUITY INSURANCE CO	q22016gwla-ex311.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016



¨	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 August 1, 2016, 7,232,986 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 June 30, 2016, and December 31, 2015 (Unaudited)	3
		Condensed Consolidated Statements of Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)	5
		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016, and 2015 (Unaudited)	6
		Condensed Consolidated Statements of Stockholder’s Equity for the Six Months Ended June 30, 2016, and 2015 (Unaudited)	7
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016, and 2015 (Unaudited)	8
		Notes to Condensed Consolidated Financial Statements (Unaudited)	10
		Note 1 - Organization and Basis of Presentation	10
		Note 2 - Acquisition	10
		Note 3 - Application of Recent Accounting Pronouncements	11
		Note 4 - Dividends	13
		Note 5 - Summary of Investments	13
		Note 6 - Derivative Financial Instruments	18
		Note 7 - Summary of Offsetting Assets and Liabilities	23
		Note 8 - Fair Value Measurements	24
		Note 9 - Other Comprehensive Income	31
		Note 10 - Employee Benefit Plans	36
		Note 11 - Income Taxes	37
		Note 12 - Segment Information	37
		Note 13 - Commitments and Contingencies	40
		Note 14 - Subsequent Events	41
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	57
	Item 4	Controls and Procedures	58

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

		Signature	60

Part I Financial Information

Item1. Interim Financial Statements

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Balance Sheets

June 30, 2016, and December 31, 2015

(In Thousands, Except Share Amounts)

(Unaudited)



	June 30, 2016		December 31, 2015
Assets
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost $18,848,230 and $20,007,462)	$	20,170,588	$	20,531,627
Fixed maturities, held-for-trading, at fair value (amortized cost $316,261 and $612,899)	326,752		615,839
Mortgage loans on real estate (net of allowances of $2,882 and $2,890)	3,495,837		3,247,704
Policy loans	4,113,952		4,092,661
Short-term investments (amortized cost $2,413,192 and $267,026)	2,413,192		267,026
Limited partnership and other corporation interests	35,482		40,980
Other investments	15,035		15,189
Total investments	30,570,838		28,811,026

Other assets:
Cash	8,812		34,362
Reinsurance receivable	615,631		604,946
Deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”)	312,057		414,143
Investment income due and accrued	268,259		283,183
Collateral under securities lending agreements	79,780		—
Due from parent and affiliates	62,573		62,596
Goodwill	137,683		137,683
Other intangible assets	21,873		23,819
Other assets	1,065,140		874,918
Assets of discontinued operations	19,389		21,910
Separate account assets	27,251,404		26,631,193
Total assets	$	60,413,439	$	57,899,779



See notes to condensed consolidated financial statements.		(Continued)

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Balance Sheets

June 30, 2016, and December 31, 2015

(In Thousands, Except Share Amounts)

(Unaudited)



	June 30, 2016		December 31, 2015
Liabilities and stockholder’s equity
Policy benefit liabilities:
Future policy benefits	$	28,137,215	$	27,110,981
Policy and contract claims	369,741		354,899
Policyholders’ funds	289,666		299,577
Provision for policyholders’ dividends	53,604		55,481
Undistributed earnings on participating business	21,715		17,024
Total policy benefit liabilities	28,871,941		27,837,962

General liabilities:
Due to parent and affiliates	541,354		540,310
Commercial paper	99,669		93,371
Payable under securities lending agreements	79,780		—
Deferred income tax liabilities, net	376,435		137,116
Other liabilities	815,998		755,651
Liabilities of discontinued operations	19,389		21,910
Separate account liabilities	27,251,404		26,631,193
Total liabilities	58,055,970		56,017,513

Commitments and contingencies (See Note 13)

Stockholder’s equity:
Preferred stock, $1 par value, 50,000,000 shares authorized; none issued and outstanding	—		—
Common stock, $1 par value, 50,000,000 shares authorized; 7,232,986 shares issued and outstanding	7,233		7,233
Additional paid-in capital	842,338		840,874
Accumulated other comprehensive income	639,587		233,438
Retained earnings	868,311		800,721
Total stockholder’s equity	2,357,469		1,882,266
Total liabilities and stockholder’s equity	$	60,413,439	$	57,899,779



See notes to condensed consolidated financial statements.		(Concluded)

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Income (Loss)

Three and Six Months Ended June 30, 2016, and 2015

(In Thousands)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Revenues:
Premium income	$	76,818		$	74,717		$	231,745		$	220,420
Fee income	238,364			237,501			463,429			462,778
Other revenue	3,370			1,820			6,519			3,640
Net investment income	355,755			220,169			687,540			579,025
Realized investment gains (losses), net:
Total other-than-temporary gains (losses), net	—			—			(536		)	(558		)
Other-than-temporary (gains) losses, net, transferred to other comprehensive income (loss)	—			—			—			108
Other realized investment gains (losses), net	42,013			15,859			73,819			34,509
Total realized investment gains (losses), net	42,013			15,859			73,283			34,059
Total revenues	716,320			550,066			1,462,516			1,299,922
Benefits and expenses:
Life and other policy benefits	170,492			160,485			357,129			310,024
Decrease in future policy benefits	(68,746		)	(43,059		)	(82,761		)	(25,708		)
Interest credited or paid to contractholders	152,460			143,761			300,770			286,652
Provision for policyholders’ share of losses on participating business	(249		)	(49		)	(418		)	(501		)
Dividends to policyholders	9,314			11,181			25,295			29,523
Total benefits	263,271			272,319			600,015			599,990
General insurance expenses	294,507			268,645			571,036			513,127
Amortization of DAC and VOBA	36,354			10,151			36,893			27,707
Interest expense	8,679			9,645			18,403			19,282
Total benefits and expenses	602,811			560,760			1,226,347			1,160,106
Income (loss) before income taxes	113,509			(10,694		)	236,169			139,816
Income tax expense (benefit)	39,710			(3,679		)	63,748			48,218
Net income (loss)	$	73,799		$	(7,015	)	$	172,421		$	91,598

See notes to condensed consolidated financial statements.

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three and Six Months Ended June 30, 2016, and 2015

(In Thousands)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Net income (loss)	$	73,799		$	(7,015	)	$	172,421		$	91,598
Components of other comprehensive income (loss)
Unrealized holding gains (losses), net, arising on available-for-sale fixed maturity investments	393,130			(494,336		)	839,740			(312,961		)
Unrealized holding gains (losses), net, arising on cash flow hedges	6,102			(16,633		)	4,498			522
Reclassification adjustment for (gains) losses, net, realized in net income	(28,635		)	(5,038		)	(51,091		)	(35,475		)
Net unrealized gains (losses) related to investments	370,597			(516,007		)	793,147			(347,914		)
Future policy benefits, DAC and VOBA adjustments	(96,531		)	79,587			(172,771		)	44,458
Employee benefit plan adjustment	2,234			2,934			4,468			5,537
Other comprehensive income (loss) before income taxes	276,300			(433,486		)	624,844			(297,919		)
Income tax expense (benefit) related to items of other comprehensive income (loss)	96,704			(151,720		)	218,695			(104,272		)
Other comprehensive income (loss)⁽¹⁾	179,596			(281,766		)	406,149			(193,647		)
Total comprehensive income (loss)	$	253,395		$	(288,781	)	$	578,570		$	(102,049	)

⁽¹⁾Other comprehensive income (loss) includes the non-credit component of impaired gains (losses), net, on fixed maturities available-for-sale in the amounts of $(2,472) and $1,314 for the three months ended June 30, 2016, and 2015, respectively, and $(4,367) and $(1,229) for the six months ended June 30, 2016, and 2015, respectively.

See notes to condensed consolidated financial statements.

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Stockholder’s Equity

Six Months Ended June 30, 2016, and 2015

(In Thousands)

(Unaudited)



	Six Months Ended June 30, 2016

	Common stock		Additional paid-in capital		Accumulated other comprehensive income		Retained earnings			Total
Balances, January 1, 2016	$	7,233	$	840,874	$	233,438	$	800,721		$	1,882,266
Net income	—		—		—		172,421			172,421
Other comprehensive income, net of income taxes	—		—		406,149		—			406,149
Dividends	—		—		—		(104,831		)	(104,831		)
Capital contribution - stock-based compensation	—		1,059		—		—			1,059
Income tax benefit on stock-based compensation	—		405		—		—			405
Balances, June 30, 2016	$	7,233	$	842,338	$	639,587	$	868,311		$	2,357,469



	Six Months Ended June 30, 2015

	Common stock		Additional paid-in capital		Accumulated other comprehensive income			Retained earnings			Total
Balances, January 1, 2015	$	7,032	$	777,664	$	603,018		$	749,799		$	2,137,513
Net income	—		—		—			91,598			91,598
Other comprehensive loss, net of income taxes	—		—		(193,647		)	—			(193,647		)
Dividends	—		—		—			(112,110		)	(112,110		)
Capital contribution - stock-based compensation	—		781		—			—			781
Income tax benefit on stock-based compensation	—		594		—			—			594
Balances, June 30, 2015	$	7,032	$	779,039	$	409,371		$	729,287		$	1,924,729

See notes to condensed consolidated financial statements.

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2016, and 2015

(In Thousands)

(Unaudited)



	Six Months Ended June 30,
	2016			2015
Net cash provided by operating activities	$	457,457		$	356,792

Cash flows from investing activities:
Proceeds from sales, maturities and redemptions of investments:
Fixed maturities, available-for-sale	4,056,220			3,723,042
Mortgage loans on real estate	128,908			179,363
Limited partnership interests, other corporation interests and other investments	7,642			3,033
Purchases of investments:
Fixed maturities, available-for-sale	(2,837,403		)	(1,762,463		)
Mortgage loans on real estate	(374,710		)	(177,185		)
Limited partnership interests, other corporation interests and other investments	(3,234		)	(883		)
Net change in short-term investments	(2,150,029		)	(2,371,057		)
Net change in policy loans	6,723			(396		)
Purchases of furniture, equipment and software	(20,652		)	(40,551		)
Net cash used in investing activities	(1,186,535		)	(447,097		)

Cash flows from financing activities:
Contract deposits	1,766,662			1,090,823
Contract withdrawals	(978,575		)	(794,349		)
Net change in due to/from parent and affiliates	1,067			(9,444		)
Dividends paid	(104,831		)	(112,110		)
Payments for and interest paid on financing element derivatives, net	(5,111		)	(7,572		)
Net change in commercial paper borrowings	6,298			(100		)
Net change in book overdrafts	17,613			3,887
Income tax benefit on share-based compensation	405			594
Net cash provided by financing activities	703,528			171,729

Net (decrease) increase in cash	(25,550		)	81,424
Cash, beginning of year	34,362			12,775
Cash, end of period	$	8,812		$	94,199



See notes to condensed consolidated financial statements.		(Continued)

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2016, and 2015

(In Thousands)

(Unaudited)



	Six Months Ended June 30,
	2016			2015
Supplemental disclosures of cash flow information:
Net cash paid during the year for:
Income taxes	$	(16,391	)	$	(20,505	)
Interest	(18,798		)	(18,632		)

Non-cash investing and financing transactions during the years:
Share-based compensation expense	$	1,059		$	781



See notes to condensed consolidated financial statements.		(Concluded)

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

1. Organization and Basis of Presentation

Organization

Great-West Life & Annuity Insurance Company (“GWLA”) and its subsidiaries (collectively, the “Company”) is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a holding company. GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. Inc. (“Lifeco U.S.”) and an indirect wholly-owned subsidiary of Great-West Lifeco Inc. (“Lifeco”), a Canadian holding company. The Company offers a wide range of life insurance, retirement, and investment products to individuals, businesses, and other private and public organizations throughout the United States. The Company is an insurance company domiciled in the State of Colorado and is subject to regulation by the Colorado Division of Insurance.

Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and the accounts of its subsidiaries over which it exercises control and are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated balance sheet as of December 31, 2015, which was derived from the Company’s audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2016, have been prepared in accordance with the instructions for Form 10-Q. In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. As such, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

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 June 30, 2016, and for all periods presented. The condensed consolidated results of operations and condensed consolidated statement of cash flows for the six months ended June 30, 2016, are not necessarily indicative of the results or cash flows expected for the full year.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. Acquisitions

Putnam Retirement Business

Description of transaction

On January 1, 2015, the Company acquired the retirement business of Putnam Investments, LLC (“Putnam”), an affiliate of the Company. The transaction was accounted for as a combination between entities under common control. As such, the assets and liabilities acquired from Putnam were recorded at historical cost as of January 1, 2015. In exchange for cash paid in the amount of $4,114, the Company acquired $11,501 of other assets, assumed $7,717 of other liabilities, and recognized a dividend of $330.

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

3. Application of Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (Topic 810). The update primarily amends the criteria used to evaluate whether certain variable interest entities should be consolidated. The update also modifies the criteria used to determine whether partnerships and similar entities are variable interest entities (“VIEs”). The update is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted, including in the interim periods. The adoption of this ASU did not have a material effect on the Company’s consolidated financial position or results of operations; however, the Company has additional investments that meet the definition of VIE under this update. As such, the guidance was retrospectively applied and the December 31, 2015 carrying value and maximum exposure to loss in relation to the activities of the VIEs disclosed in Note 5 includes an additional $35,776 to conform to the current year presentation.

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

Future adoption of new accounting pronouncements

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). The update outlines a comprehensive model for accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. While the update does not apply to insurance contracts within the scope of Topic 944, it does apply to other fee income earned by the Company which includes fees from assets under management, assets under administration, shareholder servicing, administration and record-keeping services, and investment advisory services. The core principle of the model requires that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The update also requires increased disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. In adopting ASU No. 2014-09, the Company may use either a full retrospective or a modified retrospective approach. The update is effective for public business entities for interim and annual periods beginning after December 15, 2017, based upon an update issued by the FASB in August 2015. Early adoption is permitted as of accounting periods beginning after December 15, 2016. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In May 2015, the FASB issued ASU 2015-09, Financial Services-Insurance: Disclosures about Short-Duration Contracts (Topic 944). The update requires that all years in the claims development table that precede the current reporting period and the related disclosure about the history of claims duration should be presented as required supplementary information. The update also includes a disclosure objective of providing information about claim frequency along with a description of methodologies for determining claim frequency information, unless it is impracticable to do so. The update is effective for annual reporting periods beginning after December 15, 2015, and for interim reporting periods within annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by requiring equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income, simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, use of exit price notion when measuring the fair value of financial instruments for disclosure purposes, separate presentation of financial assets and liabilities by measurement category and form of financial assets (i.e. securities or loans and receivables) on the balance sheet or notes to the financial statements, eliminating the requirement to disclose the method and

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

significant assumptions used to estimate fair value of a financial instrument measured at amortized cost on the balance sheet, requiring entities to present separately in other comprehensive income the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (i.e. “own credit”) when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, and clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The ASU also permits early adoption of the own credit provision. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. This update requires organizations to recognize lease assets and lease liabilities on the balance sheet and also disclose key information about leasing arrangements. This ASU is effective for annual reporting periods beginning on or after December 15, 2018, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual period. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-05, Derivative Contract Novations. The amendments clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument or a change in critical term of the hedging relationship. The update is effective for fiscal years and interim periods within those beginning after December 15, 2016. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures. The amendments simplify the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence. The update is effective for fiscal years and interim periods within those beginning after December 15, 2016. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for this update is the same as the effective date for ASU 2014-09. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Account. The amendments simplify several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and cash flow statements. The update is effective for fiscal years and interim periods within those beginning after December 15, 2016. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. The amendments are intended to reduce the cost and complexity of applying the guidance on identifying promised goods or services and to improve the operability and understandability of the licensing implementation guidance. The effective date for this update is the same as the effective date for ASU 2014-09. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. The standard amends guidance in the new revenue standard on collectability, noncash consideration, presentation of sales tax, and transition and is intended to address implementation issues that were raised by stakeholders and provide additional practical expedients. The effective date for this update is the same as the effective date for ASU 2014-09. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments: Credit Losses: Measurement of Credit Losses on Financial Instruments. The standard amends guidance on the impairment of financial instruments by adding an impairment model that is based on expected losses rather than incurred losses and is intended to result in more timely recognition of losses. The standard also simplifies the accounting by decreasing the number of credit impairment models that an entity can use to

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

account for debt instruments. The update is effective for fiscal years and interim periods within those beginning after December 15, 2019 and early adoption is permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of this update on its consolidated financial statements.

4. Dividends

The maximum amount of dividends, which can be paid to stockholders by insurance companies domiciled in the State of Colorado, is subject to restrictions relating to statutory surplus and statutory net gain from operations. Prior to the payment of any dividends, the Company seeks approval from the Colorado Insurance Commissioner. During the six months ended June 30, 2016, and 2015, the Company paid dividends of $104,831 and $112,110, respectively, to its parent, GWL&A Financial.

5. Summary of Investments

The following tables summarize fixed maturity investments classified as available-for-sale and the non-credit-related component of other-than-temporary impairments (“OTTI”) in accumulated other comprehensive income (loss) (“AOCI”):



	June 30, 2016
	Amortized		Gross unrealized		Gross unrealized		Estimated fair value		OTTI (gain) loss
Fixed maturities:	cost		gains		losses		and carrying value		included in AOCI ⁽¹⁾
U.S. government direct obligations and U.S. agencies	$	1,090,483	$	90,927	$	120	$	1,181,290	$	—
Obligations of U.S. states and their subdivisions	1,929,763		344,059		181		2,273,641		—
Foreign government securities	2,209		—		4		2,205		—
Corporate debt securities ⁽²⁾	13,095,232		895,019		182,534		13,807,717		(1,672		)
Asset-backed securities	1,562,617		130,135		12,691		1,680,061		(79,080		)
Residential mortgage-backed securities	93,222		3,526		590		96,158		(26		)
Commercial mortgage-backed securities	1,036,035		56,508		1,740		1,090,803		—
Collateralized debt obligations	38,669		98		54		38,713		—
Total fixed maturities	$	18,848,230	$	1,520,272	$	197,914	$	20,170,588	$	(80,778	)

⁽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 $135,187 and estimated fair value of $97,019.

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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	December 31, 2015
	Amortized		Gross unrealized		Gross unrealized		Estimated fair value		OTTI (gain) loss
Fixed maturities:	cost		gains		losses		and carrying value		included in AOCI ⁽¹⁾
U.S. government direct obligations and U.S. agencies	$	3,291,167	$	55,193	$	4,608	$	3,341,752	$	—
Obligations of U.S. states and their subdivisions	1,988,214		238,862		7,903		2,219,173		50
Foreign government securities	2,291		—		5		2,286		—
Corporate debt securities ⁽²⁾	12,388,886		437,207		320,381		12,505,712		(1,810		)
Asset-backed securities	1,196,326		128,406		13,362		1,311,370		(86,474		)
Residential mortgage-backed securities	122,146		4,734		1,508		125,372		(123		)
Commercial mortgage-backed securities	1,009,320		19,117		11,529		1,016,908		—
Collateralized debt obligations	9,112		—		58		9,054		—
Total fixed maturities	$	20,007,462	$	883,519	$	359,354	$	20,531,627	$	(88,357	)

⁽²⁾ Includes perpetual debt investments with amortized cost of $149,062 and estimated fair value of $116,423.

See Note 8 for additional discussion regarding fair value measurements.

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



	June 30, 2016
	Amortized cost		Estimated fair value
Maturing in one year or less	$	628,975	$	655,798
Maturing after one year through five years	3,832,723		4,104,021
Maturing after five years through ten years	5,867,161		6,263,431
Maturing after ten years	5,059,694		5,478,203
Mortgage-backed and asset-backed securities	3,459,677		3,669,135
Total fixed maturities	$	18,848,230	$	20,170,588

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 June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Proceeds from sales	$	1,673,307	$	337,206	$	3,356,200	$	2,995,877
Gross realized gains from sales	26,810		8,584		46,667		31,935
Gross realized losses from sales	135		304		146		324

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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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



	June 30, 2016			December 31, 2015
Principal	$	3,491,994		$	3,242,627
Unamortized premium (discount) and fees, net	6,725			7,967
Mortgage provision allowance	(2,882		)	(2,890		)
Total mortgage loans	$	3,495,837		$	3,247,704

The following table summarizes the recorded investment of the mortgage loan portfolio by risk assessment category as of June 30, 2016, and December 31, 2015, respectively.



	June 30, 2016		December 31, 2015
Performing	$	3,497,254	$	3,249,129
Non-performing	1,465		1,465
Total	$	3,498,719	$	3,250,594

The following table summarizes activity in the mortgage provision allowance:



	Six Months Ended June 30, 2016			Year Ended December 31, 2015
	Commercial mortgages			Commercial mortgages
Beginning balance	$	2,890		$	2,890
Provision increases	536			—
Provision decreases	(544		)	—
Ending balance	$	2,882		$	2,890

Allowance ending balance by basis of impairment method:
Individually evaluated for impairment	$	536		$	—
Collectively evaluated for impairment	2,346			2,890

Recorded investment balance in the mortgage loan portfolio, gross of allowance, by basis of impairment method:	$	3,498,719		$	3,250,594
Individually evaluated for impairment	13,805			14,031
Collectively evaluated for impairment	3,484,914			3,236,563

Limited partnership and other corporation interests — At June 30, 2016, and December 31, 2015, the Company had $35,482 and $40,980, respectively, invested in limited partnership and other corporation interests. Limited partnership interests represent the Company’s minority ownership interests in pooled investment funds that primarily make private equity investments across diverse industries and geographical focuses. The Company has determined its interest in each limited partnership to be considered a variable interest entity (“VIE”). Consolidation is not required as the Company is not deemed to be the primary beneficiary of the VIEs.

The carrying value and maximum exposure to loss in relation to the activities of the VIEs was $33,031 and $38,504 at June 30, 2016, and December 31, 2015, respectively.

Special deposits — The Company had securities on deposit with government authorities as required by certain insurance laws with fair values of $8,281 and $14,000 at June 30, 2016, and December 31, 2015, respectively.

Securities lending — Securities with a cost or amortized cost of $133,509 and estimated fair values of $134,380 were on loan under the program at June 30, 2016. There were no securities on loan at December 31, 2015. The Company received cash of

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

$79,780 and securities with a fair value of $58,778 as collateral at June 30, 2016. The Company bears the risk of any deficiency in the amount of collateral available for return to a borrower due to a loss in an approved investment.

Under the securities lending program the collateral pledged is, by definition, the securities loaned against the assets borrowed.

The collateral pledged by the Company under the securities lending program was all classified as corporate debt securities at June 30, 2016.

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

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:



	June 30, 2016
	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	$	1,373	$	10	$	11,755	$	110	$	13,128	$	120
Obligations of U.S. states and their subdivisions	632		87		10,101		94		10,733		181
Foreign government securities	2,205		4		—		—		2,205		4
Corporate debt securities	918,217		44,939		975,449		137,595		1,893,666		182,534
Asset-backed securities	199,178		4,215		213,912		8,476		413,090		12,691
Residential mortgage-backed securities	796		2		17,110		588		17,906		590
Commercial mortgage-backed securities	62,458		440		48,887		1,300		111,345		1,740
Collateralized debt obligations	9,944		54		—		—		9,944		54
Total fixed maturities	$	1,194,803	$	49,751	$	1,277,214	$	148,163	$	2,472,017	$	197,914

Total number of securities in an unrealized loss position			98				143				241

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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	December 31, 2015
	Less than twelve months				Twelve months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
Fixed maturities:	fair value		loss and OTTI		fair value		loss and OTTI		fair value		loss and OTTI
U.S. government direct obligations and U.S. agencies	$	1,357,822	$	4,101	$	23,604	$	507	$	1,381,426	$	4,608
Obligations of U.S. states and their subdivisions	267,581		7,903		—		—		267,581		7,903
Foreign government securities	2,286		5		—		—		2,286		5
Corporate debt securities	4,412,965		202,874		552,791		117,507		4,965,756		320,381
Asset-backed securities	247,082		4,372		182,404		8,990		429,486		13,362
Residential mortgage-backed securities	—		—		18,625		1,508		18,625		1,508
Commercial mortgage-backed securities	429,175		11,154		44,498		375		473,673		11,529
Collateralized debt obligations	9,054		58		—		—		9,054		58
Total fixed maturities	$	6,725,965	$	230,467	$	821,922	$	128,887	$	7,547,887	$	359,354

Total number of securities in an unrealized loss position			558				106				664

Fixed maturity investments — Total unrealized losses and OTTI decreased by $161,440, or 45%, from December 31, 2015, to June 30, 2016. The overall decrease in unrealized losses was across all asset classes and reflects lower interest rates at June 30, 2016, compared to December 31, 2015, resulting in generally higher valuations of these fixed maturity securities.

Total unrealized losses greater than twelve months increased by $19,276 from December 31, 2015, to June 30, 2016. Corporate debt securities account for 93%, or $137,595, of the unrealized losses and OTTI greater than twelve months at June 30, 2016. Non-investment grade corporate debt securities account for $17,788 of the unrealized losses and OTTI greater than twelve months, and $12,838 of the losses are on perpetual debt investments issued by investment grade rated banks in the United Kingdom. Management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.

Asset-backed securities account for 6% of the unrealized losses and OTTI greater than twelve months at June 30, 2016. 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 June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Beginning balance	$	98,416		$	115,653		$	102,343		$	119,532
Initial impairments - credit loss on securities not previously impaired	—			—			—			450
Reductions due to increases in cash flows expected to be collected that are recognized over the remaining life of the security	(3,729		)	(8,740		)	(7,656		)	(13,069		)
Ending balance	$	94,687		$	106,913		$	94,687		$	106,913

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

6. Derivative Financial Instruments

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

The ISDA Master Agreements contain provisions that would allow the counterparties to require immediate settlement of all derivative instruments in a net liability position if the Company were to default on any debt obligations over a certain threshold. The MSFTA contain provisions which do not stipulate a threshold for default and only apply to debt obligations between the Company and the specific counterparty. The aggregate fair value, inclusive of accrued income and expense, of derivative instruments with credit-risk-related contingent features that were in a net liability position was $69,871 and $76,107 as of June 30, 2016, and December 31, 2015, respectively. The Company had pledged collateral related to these derivatives of $25,590 and $45,940 as of June 30, 2016, and December 31, 2015, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on June 30, 2016, the fair value of assets that could be required to settle the derivatives in a net liability position was $44,281.

At June 30, 2016, and December 31, 2015, the Company had pledged $25,590 and $50,924 of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $82,626 and $19,060 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.

At June 30, 2016, the Company estimated $6,493 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.

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 security investments and debt obligations from a floating rate to a fixed rate. Interest rate futures are used to manage the interest rate risks of forecasted acquisitions of fixed rate maturity investments and are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.

Fair value hedges

Interest rate swap agreements are used to convert the interest rate on certain debt securities from a fixed rate to a floating rate to manage the interest rate risk of the change in the fair value of certain fixed rate maturity investments.

Not designated as hedging instruments

The Company enters into certain transactions in which derivatives are hedging an economic risk but hedge accounting is not elected. These derivative instruments include: exchange-traded interest rate swap futures, over-the-counter (“OTC”) interest rate swaptions, OTC interest rate swaps, exchange-traded Eurodollar interest rate futures, and treasury interest rate futures. Certain of the Company’s OTC derivatives are cleared and settled through a central clearing counterparty while others are bilateral contracts between the Company and a counterparty.

The derivative instruments mentioned above are economic hedges and used to manage risk. These transactions are used to offset changes in liabilities including those in variable annuity products, hedge the economic effect of a large increase in interest rates, manage the potential variability in future interest payments due to a change in credited interest rates and the related change in cash flows due to increased surrenders, and manage interest rate risks of forecasted acquisitions of fixed rate maturity investments and forecasted liability pricing.

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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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

The Company uses futures on equity indices to offset changes in guaranteed lifetime withdrawal benefit liabilities; however, hedge accounting is not elected.

Other forward contracts

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

The following tables summarize the notional amount and fair value of derivative financial instruments, excluding embedded derivatives:



	June 30, 2016
			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	$	419,800	$	(9,501	)	$	14,649	$	24,150
Cross-currency swaps	480,997		50,855			52,287		1,432
Total cash flow hedges	900,797		41,354			66,936		25,582

Total derivatives designated as hedges	900,797		41,354			66,936		25,582

Derivatives not designated as hedges:
Interest rate swaps	408,100		22,520			33,083		10,563
Futures on equity indices	33,314		—			—		—
Interest rate futures	107,768		—			—		—
Interest rate swaptions	151,434		138			138		—
Other forward contracts	4,391,025		15,555			20,582		5,027
Cross-currency swaps	662,935		11,336			40,175		28,839
Total derivatives not designated as hedges	5,754,576		49,549			93,978		44,429
Total derivative financial instruments	$	6,655,373	$	90,903		$	160,914	$	70,011

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

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	December 31, 2015
			Net derivatives			Asset derivatives		Liability derivatives
	Notional amount		Fair value			Fair value ⁽¹⁾		Fair value ⁽¹⁾
Hedge designation/derivative type:
Derivatives designated as hedges:
Cash flow hedges:
Interest rate swaps	$	143,800	$	11,843		$	11,843	$	—
Cross-currency swaps	380,873		28,714			28,736		22
Total cash flow hedges	524,673		40,557			40,579		22

Total derivatives designated as hedges	524,673		40,557			40,579		22

Derivatives not designated as hedges:
Interest rate swaps	303,600		3,240			8,295		5,055
Futures on equity indices	29,310		—			—		—
Interest rate futures	117,200		—			—		—
Interest rate swaptions	151,204		189			189		—
Cross-currency swaps	662,935		(51,759		)	19,537		71,296
Total derivatives not designated as hedges	1,264,249		(48,330		)	28,021		76,351
Total derivative financial instruments	$	1,788,922	$	(7,773	)	$	68,600	$	76,373

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

Notional amounts are used to express the extent of the Company’s involvement in derivative transactions and represent a standard measurement of the volume of its derivative activity. Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received. The average notional outstanding during the six months ended June 30, 2016, was $700,900, $1,076,793, $158,462, $148,517, and $2,477,263 for interest rate swaps, cross-currency swaps, futures, swaptions, and other forward contracts, respectively. The average notional outstanding during the year ended December 31, 2015, was $443,589, $937,242, $111,801, $212,299, and $5,014,845 for interest rate swaps, cross-currency swaps, futures, swaptions, and other forward contracts, respectively.

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



	Gain (loss) recognized in OCI on derivatives (Effective portion)						Gain (loss) reclassified from OCI into net income (Effective portion)
	Three Months Ended June 30,						Three Months Ended June 30,
	2016			2015			2016			2015
Cash flow hedges:
Interest rate swaps	$	3,974		$	(2,515	)	$	1,337		$	1,837		(A)
Interest rate swaps	(24,733		)	—			(583		)	—			(B)
Cross-currency swaps	26,861			(14,118		)	1,209			276			(A)
Interest rate futures	—			—			—			(22		)	(A)
Total cash flow hedges	$	6,102		$	(16,633	)	$	1,963		$	2,091

(A) Net investment income.

(B) Interest expense.

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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Gain (loss) recognized in OCI on derivatives (Effective portion)						Gain (loss) reclassified from OCI into net income (Effective portion)
	Six Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Cash flow hedges:
Interest rate swaps	$	4,499		$	626		$	2,831		$	3,693		(A)
Interest rate swaps	(24,733		)	—			(583		)	—			(B)
Cross-currency swaps	24,732			(104		)	2,201			699			(A)
Interest rate futures	—			—			—			(43		)	(A)
Total cash flow hedges	$	4,498		$	522		$	4,449		$	4,349

(A) Net investment income.

(B) Interest expense.



	Gain (loss) on derivatives recognized in net income						Gain (loss) on hedged assets recognized in net income
	Three Months Ended June 30,						Three Months Ended June 30,
	2016		2015				2016		2015
Fair value hedges:
Interest rate swaps	$	—	$	569		(A)	$	—	$	—
Interest rate swaps	—		(188		)	(B)	—		—
Items hedged in interest rate swaps	—		—				—		(573		)	(A)
Items hedged in interest rate swaps	—		—				—		188			(B)
Total fair value hedges	$	—	$	381			$	—	$	(385	)

(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
	Six Months Ended June 30,						Six Months Ended June 30,
	2016		2015				2016		2015
Fair value hedges:
Interest rate swaps	$	—	$	(869	)	(A)	$	—	$	—
Interest rate swaps	—		442			(B)	—		—
Items hedged in interest rate swaps	—		—				—		870			(A)
Items hedged in interest rate swaps	—		—				—		(442		)	(B)
Total fair value hedges	$	—	$	(427	)		$	—	$	428

(A) Net investment income.

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

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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Gain (loss) on derivatives recognized in net income
	Three Months Ended June 30,
	2016				2015
Derivatives not designated as hedging instruments:
Futures on equity indices	$	(177	)	(A)	$	271		(A)
Futures on equity indices	(1,836		)	(B)	(266		)	(B)
Interest rate swaps	8,687			(A)	(8,749		)	(A)
Interest rate futures	(7		)	(A)	36			(A)
Interest rate futures	(34		)	(B)	37			(B)
Interest rate swaptions	(61		)	(A)	1,081			(A)
Interest rate swaptions	(22		)	(B)	(1,089		)	(B)
Other forward contracts	12,498			(A)	(34,585		)	(A)
Other forward contracts	9,158			(B)	7,250			(B)
Cross-currency swaps	48,076			(A)	(37,342		)	(A)
Total derivatives not designated as hedging instruments	$	76,282			$	(73,356	)

(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
	Six Months Ended June 30,
	2016				2015
Derivatives not designated as hedging instruments:
Futures on equity indices	$	(407	)	(A)	$	418		(A)
Futures on equity indices	(3,277		)	(B)	(989		)	(B)
Interest rate swaps	19,309			(A)	(5,927		)	(A)
Interest rate futures	(211		)	(A)	(115		)	(A)
Interest rate futures	(66		)	(B)	172			(B)
Interest rate swaptions	73			(A)	1,991			(A)
Interest rate swaptions	(217		)	(B)	(2,076		)	(B)
Other forward contracts	15,555			(A)	(17,760		)	(A)
Other forward contracts	12,096			(B)	(2,090		)	(B)
Cross-currency swaps	60,275			(A)	7,704			(A)
Total derivatives not designated as hedging instruments	$	103,130			$	(18,672	)

(A) Net investment income.

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

Embedded derivative - Guaranteed Lifetime Withdrawal Benefit

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

The estimated fair value of the GLWB was a liability position of $30,687 and $11,257 at June 30, 2016, and December 31, 2015, respectively. The changes in fair value of the GLWB were unrealized gains (losses) of $(8,980) and $6,258 for the three

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

months ended June 30, 2016, and 2015, respectively, and $(19,430) and $3,488 for the six months ended June 30, 2016, and 2015, respectively.

7. Summary of Offsetting Assets and Liabilities

The Company enters into derivative transactions with several approved counterparties. The Company’s derivative transactions are generally governed by MSFTA or ISDA Master Agreements which provide for legally enforceable set-off and close-out netting in the event of default or bankruptcy of the Company’s counterparties. The Company’s MSFTA and ISDA Master Agreements generally include provisions which require both the pledging and accepting of collateral in connection with its derivative transactions. These provisions have the effect of securing each party’s position to the extent of collateral held. 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:



	June 30, 2016
			Gross fair value not offset
			in balance sheets
	Gross fair value of		Financial			Cash collateral		Net
Financial instruments:	recognized assets/liabilities ⁽¹⁾		instruments			received		fair value
Derivative instruments (assets) ⁽²⁾	$	134,668	$	(37,891	)	$	82,059	$	14,718
Derivative instruments (liabilities) ⁽³⁾	37,891		(37,891		)	—		—

⁽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. Derivative transactions entered into under ISDA master agreements include income and expense accruals.

⁽³⁾The estimated fair value of derivative instrument liabilities is reported in other liabilities in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.



	December 31, 2015
			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⁾	$	66,435	$	(38,236	)	$	19,060		$	9,139
Derivative instruments (liabilities) ⁽³⁾	76,107		(38,236		)	(37,871		)	—

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

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

8. Fair Value Measurements

Recurring fair value measurements

The following tables present the Company’s financial assets and liabilities carried at fair value on a recurring basis by fair value hierarchy category:



	Assets and liabilities measured at fair value on a recurring basis
	June 30, 2016
	Quoted prices		Significant
	in active markets for identical assets (Level 1)		other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets
Fixed maturities available-for-sale:
U.S. government direct obligations and U.S. agencies	$	—	$	1,181,290	$	—	$	1,181,290
Obligations of U.S. states and their subdivisions	—		2,273,641		—		2,273,641
Foreign government securities	—		2,205		—		2,205
Corporate debt securities	—		13,792,661		15,056		13,807,717
Asset-backed securities	—		1,680,061		—		1,680,061
Residential mortgage-backed securities	—		96,158		—		96,158
Commercial mortgage-backed securities	—		1,090,803		—		1,090,803
Collateralized debt obligations	—		38,713		—		38,713
Total fixed maturities available-for-sale	—		20,155,532		15,056		20,170,588
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		268,691		—		268,691
Corporate debt securities	—		56,932		—		56,932
Commercial mortgage-backed securities	—		1,129		—		1,129
Total fixed maturities held-for-trading	—		326,752		—		326,752
Short-term investments	345,406		2,067,786		—		2,413,192
Collateral under securities lending agreements	79,780		—		—		79,780
Collateral under derivative counterparty collateral agreements	108,216		—		—		108,216
Derivative instruments designated as hedges:
Interest rate swaps	—		14,649		—		14,649
Cross-currency swaps	—		52,287		—		52,287
Derivative instruments not designated as hedges:
Interest rate swaps	—		33,083		—		33,083
Interest rate swaptions	—		138		—		138
Other forward contracts	—		20,582		—		20,582
Cross-currency swaps	—		40,175		—		40,175
Total derivative instruments	—		160,914		—		160,914
Separate account assets	15,193,369		12,058,035		—		27,251,404
Total assets	$	15,726,771	$	34,769,019	$	15,056	$	50,510,846

Liabilities
Payable under securities lending agreements	$	79,780	$	—	$	—	$	79,780
Collateral under derivative counterparty collateral agreements	82,626		—		—		82,626
Derivative instruments designated as hedges:
Interest rate swaps	—		24,150		—		24,150
Cross-currency swaps	—		1,432		—		1,432
Derivative instruments not designated as hedges:
Interest rate swaps	—		10,563		—		10,563
Other forward contracts	—		5,027		—		5,027
Cross-currency swaps	—		28,839		—		28,839
Total derivative instruments	—		70,011		—		70,011
Embedded derivatives - GLWB	—		—		30,687		30,687
Separate account liabilities ⁽¹⁾	6		368,282		—		368,288
Total liabilities	$	162,412	$	438,293	$	30,687	$	631,392

⁽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, 2015
	Quoted prices		Significant
	in active markets for identical assets (Level 1)		other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets
Fixed maturities available-for-sale:
U.S. government direct obligations and U.S. agencies	$	—	$	3,341,752	$	—	$	3,341,752
Obligations of U.S. states and their subdivisions	—		2,219,173		—		2,219,173
Foreign government securities	—		2,286		—		2,286
Corporate debt securities	—		12,501,174		4,538		12,505,712
Asset-backed securities	—		1,311,370		—		1,311,370
Residential mortgage-backed securities	—		125,372		—		125,372
Commercial mortgage-backed securities	—		1,016,908		—		1,016,908
Collateralized debt obligations	—		9,054		—		9,054
Total fixed maturities available-for-sale	—		20,527,089		4,538		20,531,627
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		558,208		—		558,208
Corporate debt securities	—		56,566		—		56,566
Commercial mortgage-backed securities	—		1,065		—		1,065
Total fixed maturities held-for-trading	—		615,839		—		615,839
Short-term investments	132,288		134,738		—		267,026
Collateral under derivative counterparty collateral agreements	69,984		—		—		69,984
Derivative instruments designated as hedges:
Interest rate swaps	—		11,843		—		11,843
Cross-currency swaps	—		28,736		—		28,736
Derivative instruments not designated as hedges:
Interest rate swaps	—		8,295		—		8,295
Interest rate swaptions	—		189		—		189
Cross-currency swaps	—		19,537		—		19,537
Total derivative instruments	—		68,600		—		68,600
Separate account assets	15,249,966		11,381,227		—		26,631,193
Total assets	$	15,452,238	$	32,727,493	$	4,538	$	48,184,269

Liabilities
Collateral under derivative counterparty collateral agreements	$	19,060	$	—	$	—	$	19,060
Derivative instruments designated as hedges:
Cross-currency swaps	—		22		—		22
Derivative instruments not designated as hedges:
Interest rate swaps	—		5,055		—		5,055
Cross-currency swaps	—		71,296		—		71,296
Total derivative instruments	—		76,373		—		76,373
Embedded derivatives - GLWB	—		—		11,257		11,257
Separate account liabilities ⁽¹⁾	24		290,293		—		290,317
Total liabilities	$	19,084	$	366,666	$	11,257	$	397,007

⁽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 generally based upon market prices from independent pricing services. In cases where market prices are not readily available, fair values are estimated by the Company. To determine estimated fair value for these instruments, the Company generally utilizes discounted cash flows models with market observable pricing inputs such as spreads, average life, and credit quality. Fair value estimates are made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty.

Short-term investments and securities lending agreements

The amortized cost of short-term investments, collateral under securities lending agreements, and payable under securities lending agreements is a reasonable estimate of fair value due to their short-term nature and high credit quality of the issuers.

Collateral under derivative counterparty collateral agreements

Included in other assets is cash collateral received from or pledged to derivative counterparties and included in other liabilities is the obligation to return the cash collateral to the counterparties. The carrying value of the collateral is a reasonable estimate of fair value.

Derivative instruments

Included in other assets and other liabilities are derivative financial instruments. The estimated fair values of OTC derivatives, primarily consisting of cross-currency swaps, interest rate swaps, interest rate swaptions, and other forward contracts, are the estimated amounts the Company would receive or pay to terminate the agreements at the end of each reporting period, taking into consideration current interest rates and other relevant factors.

Embedded derivative - GLWB

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

Separate account assets and liabilities

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

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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



	Recurring Level 3 financial assets and liabilities
	Three Months Ended June 30, 2016
	Assets			Liabilities
	Fixed maturities available-for-sale			Embedded
	Corporate			derivatives
	debt securities			- GLWB
Balances, April 1, 2016	$	15,542		$	21,707
Realized and unrealized gains (losses) included in:
Net income (loss)	—			8,980
Other comprehensive income (loss)	109			—
Settlements	(595		)	—
Balances, June 30, 2016	$	15,056		$	30,687
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at June 30, 2016	$	—		$	8,980



	Recurring Level 3 financial assets and liabilities
	Three Months Ended June 30, 2015
	Assets									Liabilities
	Fixed maturities available-for-sale									Embedded
	Corporate			Asset-backed						derivatives
	debt securities			securities			Total			- GLWB
Balances, April 1, 2015	$	5,329		$	33		$	5,362		$	9,177
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—			—			(6,258		)
Other comprehensive income (loss)	(49		)	—			(49		)	—
Settlements	(215		)	(2		)	(217		)	—
Balances, June 30, 2015	$	5,065		$	31		$	5,096		$	2,919
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at June 30, 2015	$	—		$	—		$	—		$	(6,258	)

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
	Six Months Ended June 30, 2016
	Assets			Liabilities
	Fixed maturities available-for-sale			Embedded
	Corporate			derivatives
	debt securities			- GLWB
Balances, January 1, 2016	$	4,538		$	11,257
Realized and unrealized gains (losses) included in:
Net income (loss)	—			19,430
Other comprehensive income (loss)	475			—
Settlements	(1,193		)	—
Transfers into Level 3 ⁽¹⁾	11,236			—
Balances, June 30, 2016	$	15,056		$	30,687
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at June 30, 2016	$	—		$	19,430

⁽¹⁾ Transfers into Level 3 are due primarily to decreased observability of inputs in valuation methodologies.



	Recurring Level 3 financial assets and liabilities
	Six Months Ended June 30, 2015
	Assets									Liabilities
	Fixed maturities available-for-sale									Embedded
	Corporate			Asset-backed						derivatives
	debt securities			securities			Total			- GLWB
Balances, January 1, 2015	$	5,842		$	36		$	5,878		$	6,407
Realized and unrealized gains (losses) included in:
Net income (loss)	—			—			—			(3,488		)
Other comprehensive income (loss)	(77		)	—			(77		)	—
Settlements	(700		)	(5		)	(705		)	—
Balances, June 30, 2015	$	5,065		$	31		$	5,096		$	2,919
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at June 30, 2015	$	—		$	—		$	—		$	(3,488	)

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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



	June 30, 2016
	Fair Value		Valuation Technique	Unobservable Input	Range
Embedded derivatives - GLWB	$	30,687	Risk neutral stochastic valuation methodology	Equity volatility	15% - 28%
				Swap curve	0.5% - 2.50%
				Mortality rate	Based on the Annuity 2000 Mortality Table
				Lapse rate	1% - 15%



	December 31, 2015
	Fair Value		Valuation Technique	Unobservable Input	Range
Embedded derivatives - GLWB	$	11,257	Risk neutral stochastic valuation methodology	Equity volatility	15% - 28%
				Swap curve	0.75% - 3.00%
				Mortality rate	Based on the Annuity 2000 Mortality Table
				Lapse rate	1% - 15%

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:



	June 30, 2016				December 31, 2015
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Assets
Mortgage loans on real estate	$	3,495,837	$	3,699,863	$	3,247,704	$	3,362,496
Policy loans	4,113,952		4,113,952		4,092,661		4,092,661
Limited partnership interests	29,905		29,140		35,039		34,882
Other investments	14,295		44,723		14,596		44,723

Liabilities
Annuity contract benefits without life contingencies	$	11,838,861	$	11,967,170	$	11,104,721	$	10,839,205
Policyholders’ funds	289,666		289,666		299,577		299,577
Commercial paper	99,669		99,669		93,371		93,371
Notes payable	530,956		527,132		532,575		563,633

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 financial instruments not carried at fair value on a recurring basis are summarized as follows:

Mortgage loans on real estate

Mortgage loan fair value estimates are generally based on discounted cash flows. A discount rate matrix is used where the discount rate valuing a specific mortgage generally corresponds to that mortgage’s remaining term and credit quality. Management believes the discount rate used is comparable to the credit, interest rate, term, servicing costs, and risks of loans similar to the portfolio loans that the Company would make today given its internal pricing strategy. The estimated fair value is classified as Level 2.

Policy loans

Policy loans are funds provided to policy holders in return for a claim on the policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the fair value of policy loans approximates carrying value. The estimated fair value is classified as Level 2.

Limited partnership interests

Limited partnership interests, accounted for using the cost method, represent the Company’s minority ownership interests in pooled investment funds. These funds employ varying investment strategies that primarily make private equity investments across diverse industries and geographical focuses. The estimated fair value was determined using the partnership financial statement reported capital account or net asset value adjusted for other relevant information which may impact the exit value of the investments. Distributions by these investments are generated from investment gains, from operating income generated by the underlying investments of the funds, and from liquidation of the underlying assets of the funds which are estimated to be liquidated over the next one to 10 years. The estimated fair value is classified as Level 3.

Other investments

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

Annuity contract benefits without life contingencies

The estimated fair value of annuity contract benefits without life contingencies is estimated by discounting the projected expected cash flows to the maturity of the contracts utilizing risk-free spot interest rates plus a provision for the Company’s credit risk. The estimated fair value is classified as Level 2.

Policyholders’ funds

The carrying amount of policyholders’ funds approximates the fair value since the Company can change the interest credited rates with 30 days notice. The estimated fair value is classified as Level 2.

Commercial paper

The amortized cost of commercial paper is a reasonable estimate of fair value due to its short-term nature and the high credit quality of the obligor. The estimated fair value is classified as Level 2.

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

Notes payable

The estimated fair value of the notes payable to GWL&A Financial is based upon quoted market prices from independent pricing services of securities with characteristics similar to those of the notes payable. The estimated fair value is classified as Level 2.

9. Other Comprehensive Income

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



	Three Months Ended June 30, 2016
	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, April 1, 2016	$	616,836		$	42,625		$	(115,341	)	$	(84,129	)	$	459,991
Other comprehensive income (loss) before reclassifications	255,535			3,967			(62,745		)	—			196,757
Amounts reclassified from AOCI	(17,337		)	(1,276		)	—			1,452			(17,161		)
Net current period other comprehensive income (loss)	238,198			2,691			(62,745		)	1,452			179,596
Balances, June 30, 2016	$	855,034		$	45,316		$	(178,086	)	$	(82,677	)	$	639,587



	Three Months Ended June 30, 2015
	Unrealized holding gains / losses arising on fixed maturities, available-for- sale			Unrealized holding gains / losses arising on cash flow hedges			Future policy benefits, DAC and VOBA adjustments			Employee benefit plan adjustment			Total
Balances, April 1, 2015	$	883,761		$	42,824		$	(131,028	)	$	(104,420	)	$	691,137
Other comprehensive income (loss) before reclassifications	(321,318		)	(10,812		)	51,732			—			(280,398		)
Amounts reclassified from AOCI	(1,916		)	(1,359		)	—			1,907			(1,368		)
Net current period other comprehensive income (loss)	(323,234		)	(12,171		)	51,732			1,907			(281,766		)
Balances, June 30, 2015	$	560,527		$	30,653		$	(79,296	)	$	(102,513	)	$	409,371

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Six Months Ended June 30, 2016
	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, 2016	$	339,520		$	45,284		$	(65,785	)	$	(85,581	)	$	233,438
Other comprehensive income (loss) before reclassifications	545,831			2,924			(112,301		)	—			436,454
Amounts reclassified from AOCI	(30,317		)	(2,892		)	—			2,904			(30,305		)
Net current period other comprehensive income (loss)	515,514			32			(112,301		)	2,904			406,149
Balances, June 30, 2016	$	855,034		$	45,316		$	(178,086	)	$	(82,677	)	$	639,587



	Six Months Ended June 30, 2015
	Unrealized holding gains / losses arising on fixed maturities, available-for- sale			Unrealized holding gains / losses arising on cash flow hedges			Future policy benefits, DAC and VOBA adjustments			Employee benefit plan adjustment			Total
Balances, January 1, 2015	$	784,183		$	33,141		$	(108,194	)	$	(106,112	)	$	603,018
Other comprehensive income (loss) before reclassifications	(203,424		)	339			28,898			(215		)	(174,402		)
Amounts reclassified from AOCI	(20,232		)	(2,827		)	—			3,814			(19,245		)
Net current period other comprehensive income (loss)	(223,656		)	(2,488		)	28,898			3,599			(193,647		)
Balances, June 30, 2015	$	560,527		$	30,653		$	(79,296	)	$	(102,513	)	$	409,371

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



	Three Months Ended June 30, 2016
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale	$	393,130		$	(137,595	)	$	255,535
Unrealized holding gains (losses), net, arising on cash flow hedges	6,102			(2,135		)	3,967
Reclassification adjustment for (gains) losses, net, realized in net income	(28,635		)	10,022			(18,613		)
Net unrealized gains (losses) related to investments	370,597			(129,708		)	240,889
Future policy benefits, DAC and VOBA adjustments	(96,531		)	33,786			(62,745		)
Net unrealized gains (losses)	274,066			(95,922		)	178,144
Employee benefit plan adjustment	2,234			(782		)	1,452
Other comprehensive income (loss)	$	276,300		$	(96,704	)	$	179,596

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Three Months Ended June 30, 2015
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale	$	(494,336	)	$	173,018		$	(321,318	)
Unrealized holding gains (losses), net, arising on cash flow hedges	(16,633		)	5,821			(10,812		)
Reclassification adjustment for (gains) losses, net, realized in net income	(5,038		)	1,763			(3,275		)
Net unrealized gains (losses) related to investments	(516,007		)	180,602			(335,405		)
Future policy benefits, DAC and VOBA adjustments	79,587			(27,855		)	51,732
Net unrealized gains (losses)	(436,420		)	152,747			(283,673		)
Employee benefit plan adjustment	2,934			(1,027		)	1,907
Other comprehensive income (loss)	$	(433,486	)	$	151,720		$	(281,766	)



	Six Months Ended June 30, 2016
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale	$	839,740		$	(293,909	)	$	545,831
Unrealized holding gains (losses), net, arising on cash flow hedges	4,498			(1,574		)	2,924
Reclassification adjustment for (gains) losses, net, realized in net income	(51,091		)	17,882			(33,209		)
Net unrealized gains (losses) related to investments	793,147			(277,601		)	515,546
Future policy benefits, DAC and VOBA adjustments	(172,771		)	60,470			(112,301		)
Net unrealized gains (losses)	620,376			(217,131		)	403,245
Employee benefit plan adjustment	4,468			(1,564		)	2,904
Other comprehensive income (loss)	$	624,844		$	(218,695	)	$	406,149



	Six Months Ended June 30, 2015
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale	$	(312,961	)	$	109,537		$	(203,424	)
Unrealized holding gains (losses), net, arising on cash flow hedges	522			(183		)	339
Reclassification adjustment for (gains) losses, net, realized in net income	(35,475		)	12,416			(23,059		)
Net unrealized gains (losses) related to investments	(347,914		)	121,770			(226,144		)
Future policy benefits, DAC and VOBA adjustments	44,458			(15,560		)	28,898
Net unrealized gains (losses)	(303,456		)	106,210			(197,246		)
Employee benefit plan adjustment	5,537			(1,938		)	3,599
Other comprehensive income (loss)	$	(297,919	)	$	104,272		$	(193,647	)

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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 June 30,
	2016				2015
Details about accumulated other comprehensive income (loss) components	Amount reclassified from accumulated other comprehensive income (loss)								Affected line item in the statement where net income is presented
Unrealized holding (gains) losses, net, arising on fixed maturities, available-for-sale	$	(26,672	)		$	(2,947	)		Other realized investment (gains) losses, net
	(26,672		)		(2,947		)		Total before tax
	(9,335		)		(1,031		)		Tax expense or benefit
	$	(17,337	)		$	(1,916	)		Net of tax

Unrealized holding (gains) losses, net, arising on cash flow hedges	$	(2,546	)		$	(2,091	)		Net investment income
	583				—				Interest Expense
	(1,963		)		(2,091		)		Total before tax
	(687		)		(732		)		Tax expense or benefit
	$	(1,276	)		$	(1,359	)		Net of tax

Amortization of employee benefit plan items
Prior service (benefits)	$	(151	)	⁽¹⁾	$	(181	)	⁽¹⁾
Actuarial (gains)	2,385			⁽¹⁾	3,115			⁽¹⁾
	2,234				2,934				Total before tax
	782				1,027				Tax expense or benefit
	$	1,452			$	1,907			Net of tax

Total reclassification	$	(17,161	)		$	(1,368	)		Net of tax

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

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Six Months Ended June 30,
	2016				2015
Details about accumulated other comprehensive income (loss) components	Amount reclassified from accumulated other comprehensive income (loss)								Affected line item in the statement where net income is presented
Unrealized holding (gains) losses, net, arising on fixed maturities, available-for-sale	$	(46,642	)		$	(31,126	)		Other realized investment (gains) losses, net
	(46,642		)		(31,126		)		Total before tax
	(16,325		)		(10,894		)		Tax expense or benefit
	$	(30,317	)		$	(20,232	)		Net of tax

Unrealized holding (gains) losses, net, arising on cash flow hedges	$	(5,032	)		$	(4,349	)		Net investment income
	583				—				Interest Expense
	(4,449		)		(4,349		)		Total before tax
	(1,557		)		(1,522		)		Tax expense or benefit
	$	(2,892	)		$	(2,827	)		Net of tax

Amortization of employee benefit plan items
Prior service costs (benefits)	$	(302	)	⁽¹⁾	$	(362	)	⁽¹⁾
Actuarial losses (gains)	4,770			⁽¹⁾	6,229			⁽¹⁾
Settlement	—			⁽¹⁾	—			⁽¹⁾
	4,468				5,867				Total before tax
	1,564				2,053				Tax expense or benefit
	$	2,904			$	3,814			Net of tax

Total reclassification	$	(30,305	)		$	(19,245	)		Net of tax

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

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

10. Employee Benefit Plans

Net periodic cost (benefit) of the Defined Benefit Pension, Post-Retirement Medical, and Supplemental Executive Retirement plans included in general insurance expenses in the accompanying condensed consolidated statements of income includes the following components:



	Three Months Ended June 30,
	Defined Benefit Pension Plan						Post-Retirement Medical Plan						Supplemental Executive Retirement Plan					Total
	2016			2015			2016			2015			2016			2015		2016			2015
Components of net periodic cost (benefit):
Service cost	$	1,335		$	1,509		$	293		$	264		$	73		$	70	$	1,701		$	1,843
Interest cost	6,282			5,997			175			126			444			531		6,901			6,654
Expected return on plan assets	(6,278		)	(7,087		)	—			—			—			—		(6,278		)	(7,087		)
Amortization of unrecognized prior service costs (benefits)	—			3			(276		)	(417		)	125			233		(151		)	(181		)
Amortization of losses (gains) from earlier periods	2,485			3,106			(85		)	(157		)	(15		)	166		2,385			3,115
Net periodic cost (benefit)	$	3,824		$	3,528		$	107		$	(184	)	$	627		$	1,000	$	4,558		$	4,344




	Six Months Ended June 30,
	Defined Benefit Pension Plan						Post-Retirement Medical Plan						Supplemental Executive Retirement Plan					Total
	2016			2015			2016			2015			2016			2015		2016			2015
Components of net periodic cost (benefit):
Service cost	$	2,670		$	3,017		$	586		$	528		$	146		$	141	$	3,402		$	3,686
Interest cost	12,564			11,994			350			253			888			1,061		13,802			13,308
Expected return on plan assets	(12,556		)	(14,174		)	—			—			—			—		(12,556		)	(14,174		)
Amortization of unrecognized prior service costs (benefits)	—			7			(552		)	(835		)	250			466		(302		)	(362		)
Amortization of losses (gains) from earlier periods	4,970			6,212			(170		)	(315		)	(30		)	332		4,770			6,229
Net periodic cost (benefit)	$	7,648		$	7,056		$	214		$	(369	)	$	1,254		$	2,000	$	9,116		$	8,687

On January 1, 2015, the Company acquired the retirement business of Putnam, an affiliate of the Company. See Note 2 for additional discussion regarding the acquisition. Per the terms of the Asset Transfer Agreement, the Company was required to give each Putnam employee full credit for the employee’s service period with Putnam 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 150 individuals became eligible participants of the Post-Retirement Medical Plan at January 1, 2015. The transaction was recorded as a prior service cost, which resulted in a $339 increase before tax to other liabilities and expenses and a decrease to accumulated other comprehensive income.

The Company expects to make payments of approximately $781 with respect to its Post-Retirement Medical Plan and $3,336 with respect to its Supplemental Executive Retirement Plan during the year ended December 31, 2016. The Company expects to make contributions of zero to its Defined Benefit Pension Plan during the year ended December 31, 2016. A December 31 measurement date is used for the employee benefit plans.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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



	Three Months Ended June 30,		Six Months Ended June 30,
	2016	2015	2016	2015
Payments to the Post-Retirement Medical Plan	187	391	391	524
Payments to the Supplemental Executive Retirement Plan	834	830	1,668	3,165

11. Income Taxes

The provision for income taxes is comprised of the following:



	Three Months Ended June 30,					Six Months Ended June 30,
	2016		2015			2016		2015
Current	$	32,483	$	10,042		$	43,124	$	38,137
Deferred	7,227		(13,721		)	20,624		10,081
Total income tax provision	$	39,710	$	(3,679	)	$	63,748	$	48,218

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



	Six Months Ended June 30,
	2016		2015
Statutory federal income tax rate	35.0	%	35.0	%
Income tax effect of:
Investment income not subject to federal tax	(2.7	)%	(2.7	)%
Tax credits	(8.8	)%	(0.4	)%
State income taxes, net of federal benefit	2.8	%	1.9	%
Other, net	0.7	%	0.7	%
Effective income tax rate	27.0	%	34.5	%

During the six months ended June 30, 2016, and 2015, the Company recorded an increase in unrecognized tax benefits in the amount of $2,477 and $4,927, respectively. The Company anticipates additional decreases to its unrecognized tax benefits of $5,000 to $6,000 in the next twelve months. The Company expects that the majority of the decrease in its unrecognized tax benefits will not impact the effective tax rate.

The Company files income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years 2011 and prior. Tax years 2012 through 2014 are open to federal examination by the Internal Revenue Service (“IRS”). The Company does not expect significant increases or decreases to unrecognized tax benefits relating to federal, state, or local audits.

12. Segment Information

The Chief Operating Decision Maker (“CODM”) of the Company is also the Chief Executive Officer (“CEO”) of the Company and Lifeco U.S. The CODM reviews the financial information for the purposes of assessing performance and allocating resources based upon the results of Lifeco U.S. and other U.S. affiliates prepared in accordance with International Financial Reporting Standards. The CODM, in his capacity as CEO of the Company, reviews the Company’s financial information only

in connection with the quarterly and annual reports that are filed with the Securities and Exchange Commission (“SEC”).

Consequently, the Company does not provide its discrete financial information to the CODM to be regularly reviewed to make

decisions about resources to be allocated or to assess performance. For purposes of SEC reporting requirements, the Company

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

has chosen to present its financial information in three segments, notwithstanding the above. The three segments are: Individual Markets, Empower Retirement (formerly known as “Retirement Services”), and Other.

Individual Markets

The Individual Markets reporting and operating segment distributes life insurance, annuity, and retirement products to both individuals and businesses through various distribution channels. Life insurance products in-force include participating and non-participating term life, whole life, universal life, and variable universal life.

Empower Retirement

The Empower Retirement reporting and operating segment provides various retirement plan products (including individual retirement accounts (“IRAs”)) and investment options as well as comprehensive administrative and record-keeping services for financial institutions and employers, which include educational, advisory, enrollment, and communication services for employer-sponsored defined contribution plans and associated defined benefit plans.

Other

The Company’s Other reporting segment is substantially comprised of activity under the assumption of reinsurance between Great-West Life & Annuity Insurance Company of South Carolina (“GWSC”), a wholly owned subsidiary, and The Canada Life Assurance Company (“CLAC”), corporate items not directly allocated to the other operating segments, and interest expense on long-term debt.

The accounting principles used to determine segment results are the same as those used in the consolidated financial statements. Inter-segment transactions and balances have been eliminated in consolidation. The Company’s operations are not materially dependent on one or a few customers, brokers, or agents.

The following tables summarize segment financial information:



	Three Months Ended June 30, 2016
	Individual		Empower
	Markets		Retirement		Other		Total
Revenue:
Premium income	$	51,053	$	362	$	25,403	$	76,818
Fee income	25,546		211,414		1,404		238,364
Other revenue	—		3,370		—		3,370
Net investment income	226,193		117,055		12,507		355,755
Realized investment gains (losses), net	14,771		27,242		—		42,013
Total revenues	317,563		359,443		39,314		716,320
Benefits and expenses:
Policyholder benefits	201,472		51,939		9,860		263,271
Operating expenses	54,010		266,857		18,673		339,540
Total benefits and expenses	255,482		318,796		28,533		602,811
Income (loss) before income taxes	62,081		40,647		10,781		113,509
Income tax expense (benefit)	21,247		14,486		3,977		39,710
Net income (loss)	$	40,834	$	26,161	$	6,804	$	73,799

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



	Three Months Ended June 30, 2015
	Individual		Empower
	Markets		Retirement			Other			Total
Revenue:
Premium income	$	51,253	$	16		$	23,448		$	74,717
Fee income	24,967		211,532			1,002			237,501
Other revenue	—		1,820			—			1,820
Net investment income	155,658		51,079			13,432			220,169
Realized investment gains (losses), net	3,552		12,211			96			15,859
Total revenues	235,430		276,658			37,978			550,066
Benefits and expenses:
Policyholder benefits	198,590		47,748			25,981			272,319
Operating expenses	31,424		240,176			16,841			288,441
Total benefits and expenses	230,014		287,924			42,822			560,760
Income (loss) before income taxes	5,416		(11,266		)	(4,844		)	(10,694		)
Income tax expense (benefit)	1,501		(3,614		)	(1,566		)	(3,679		)
Net income (loss)	$	3,915	$	(7,652	)	$	(3,278	)	$	(7,015	)




	Six Months Ended June 30, 2016
	Individual		Empower
	Markets		Retirement		Other			Total
Revenue:
Premium income	$	184,339	$	707	$	46,699		$	231,745
Fee income	48,269		412,336		2,824			463,429
Other revenue	—		6,519		—			6,519
Net investment income	433,886		227,589		26,065			687,540
Realized investment gains (losses), net	26,577		46,713		(7		)	73,283
Total revenues	693,071		693,864		75,581			1,462,516
Benefits and expenses:
Policyholder benefits	468,969		101,856		29,190			600,015
Operating expenses	91,231		498,500		36,601			626,332
Total benefits and expenses	560,200		600,356		65,791			1,226,347
Income (loss) before income taxes	132,871		93,508		9,790			236,169
Income tax expense (benefit)	45,081		15,137		3,530			63,748
Net income (loss)	$	87,790	$	78,371	$	6,260		$	172,421

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)




	Six Months Ended June 30, 2015
	Individual		Empower
	Markets		Retirement		Other			Total
Revenue:
Premium income	$	176,215	$	16	$	44,189		$	220,420
Fee income	46,469		414,353		1,956			462,778
Other revenue	—		3,640		—			3,640
Net investment income	373,311		178,809		26,905			579,025
Realized investment gains (losses), net	11,952		22,011		96			34,059
Total revenues	607,947		618,829		73,146			1,299,922
Benefits and expenses:
Policyholder benefits	454,914		96,792		48,284			599,990
Operating expenses	67,363		461,206		31,547			560,116
Total benefits and expenses	522,277		557,998		79,831			1,160,106
Income (loss) before income taxes	85,670		60,831		(6,685		)	139,816
Income tax expense (benefit)	29,724		20,766		(2,272		)	48,218
Net income (loss)	$	55,946	$	40,065	$	(4,413	)	$	91,598

13. Commitments and Contingencies

Commitments

The Company has a revolving credit facility agreement in the amount of $50,000 for general corporate purposes. The credit facility expires on March 1, 2018. Interest accrues at a rate dependent on various conditions and terms of borrowings. The agreement requires, among other things, the Company to maintain a minimum adjusted net worth of $1,100,000, as defined in the credit facility agreement (compiled on the statutory accounting basis prescribed by the National Association of Insurance Commissioners), at anytime. The Company was in compliance with all covenants at June 30, 2016, and December 31, 2015. At June 30, 2016, and December 31, 2015, 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 $1,172,660 and renews annually until it expires on July 3, 2027. The second letter of credit is for $70,000 and renews annually until it expires on December 31, 2017. At June 30, 2016, and December 31, 2015, there were no outstanding amounts related to the letters of credit.

In addition, the Company has other letters of credit with a total amount of $9,095, renewable annually for an indefinite period of time. At June 30, 2016, and December 31, 2015, 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 June 30, 2016, and December 31, 2015, were $309,070 and $50,692, of which $50,168 and $8,692 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

From time to time, the Company may be threatened with, or named as a defendant in, lawsuits, mediations, arbitrations, and administrative claims. Any such claims that are decided against the Company could harm the Company’s business. The Company is also subject to periodic regulatory audits and inspections which could result in fines or other disciplinary actions. Unfavorable outcomes in such matters may result in a material impact on the Company's financial position, results of operations, or cash flows.

The Company is defending lawsuits relating to the administration of its staff retirement plan, or to the costs and features of certain of its retirement or fund products. These actions have not reached the trial stage. Management believes the claims are without merit and will defend these actions. Based on the information known, these actions will not have a material adverse effect on the consolidated financial position of the Company.

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

14. Subsequent Events

On July 27, 2016, the Company’s Board of Directors declared a dividend of $20,860, payable on September 30, 2016, to its sole shareholder, GWL&A Financial.

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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. 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 six months ended June 30, 2016, compared with the same period in 2015. The discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to which the reader is directed for additional information.

Recent Events

Empower Retirement continues to incur strategic and business development expenses as it focuses on enhancements, which will improve the client-facing experience as well as streamline the back-office processing over the next several years. The Company anticipates investing approximately $150 million in total on this multi-year initiative, with over $136 million already invested by June 30, 2016. In 2015, these costs decreased net earnings by $34 million and are expected to decrease net earnings by approximately $20 million in 2016. For the three and six months ended June 30, 2016, these costs have decreased net earnings by $7 million and $13 million, respectively.

The Company has set an annual cost-savings target of $40 million to $50 million pre-tax. Integration activities are expected to be completed by the second quarter of 2017 with the annual reduction of operating costs fully reflected upon the completion of the business transformation in the next three to four years. These synergies are expected to be achieved through efficiencies from the conversion of business onto a single back-office platform, increased utilization of Great-West Global Business Services India Private Limited (“Great-West Global”), which launched in the third quarter of 2015, with 425 professionals based in India, as well as scale-driven cost improvements. Ongoing operations will include amortization expense from system and infrastructure enhancements. The Company expects that these enhancements will increase market share by driving future sales and improving the retention of participants and assets. Empower Retirement participant accounts have grown to over 8 million at June 30, 2016 from over 7.3 million at June 30, 2015.

On April 6, 2016, the U.S. Department of Labor issued a new rule redefining and expanding who is a fiduciary by reason of providing investment advice to a retirement plan or holder of an individual retirement account. Compliance with the rule will generally be required by April 10, 2017 (certain parts by January 1, 2018). The Company is in the process of analyzing the rule against current business practices in its Empower Retirement and Individual Markets businesses. The rule may require changes to certain aspects of product and service delivery but management does not expect that it will prevent the Company from executing on its overall business strategy and growth objectives.

Current Market Conditions

The S&P 500 index as at June 30, 2016 was up by 2% compared to March 31, 2016 and up by 3% compared to January 1, 2016. The S&P 500 index at June 30, 2015 was down by less than 1% compared to March 31, 2015 and was up by less than 1% compared to January 1, 2015. The average of the S&P 500 index was down by 1% and 3% during the three and six months ended June 30, 2016, respectively, when compared to same period in 2015.



	2016			2015
S&P 500 Index	Close	Average in Quarter	Average for Year to Date	Close	Average in Quarter	Average for Year to Date
June 30	2,099	2,074	2,013	2,063	2,102	2,083
March 31	2,060	1,952	1,952	2,068	2,064	2,064
January 1	2,044			2,059

Variable asset-based fees earned by the Company fluctuate with changes in participant account balances. Participant account balances change due to cash flow and unrealized market gains and losses, which are primarily associated with changes in the U.S. equities market. Fee income remained constant for the three and six months ended June 30, 2016, when compared to the same period in 2015, as a result of higher average account balances, partially offset by lower average performance of the U.S. equities market.

Interest rates decreased during 2016 as compared to 2015 when they were increasing. The 10-year U.S. Treasury rate as at June 30, 2016, was down by 29 basis points as compared to March 31, 2016 and was down by 78 basis points as compared to January 1, 2016. The rate as at June 30, 2015 was up by 41 basis points as compared to March 31, 2015 and was up by 18 basis points as compared to January 1, 2015. The average of the 10-year U.S. Treasury rate during the three months ended June 30, 2016, was down by 41 basis points when compared to 2015 and the rate during the six months ended June 30, 2016 was down by 18 basis points when compared to 2015.



	2016						2015
10-Year Treasury Rate	Close		Average in Quarter		Average for Year to Date		Close		Average in Quarter		Average for Year to Date
June 30	1.49	%	1.75	%	1.89	%	2.35	%	2.16	%	2.07	%
March 31	1.78	%	1.91	%	1.91	%	1.94	%	1.97	%	1.97	%
January 1	2.27	%					2.17	%

The Company employs hedging strategies for the purpose of managing the interest rate, foreign currency exchange rate, and equity market risks impacting the Company’s business. For those derivative instruments when hedge accounting is not elected, all gains or losses are recorded in the consolidated statement of income. As a result, fluctuations in interest rates, foreign currencies, or equity markets may cause the Company to experience volatility in its earnings. For the three and six months ended June 30, 2016, the Company recorded favorable changes in unrealized gains (losses), net, on forward settling to be announced (“TBA”) securities of $48 million and $33 million, respectively, as compared to 2015. Additionally, the realized gains (losses), net, on forward settling TBA securities had favorable changes of $2 million and $14 million for the three and six months ended June 30, 2016, as compared to 2015.

Unrealized gains on fixed maturity investments fluctuate with changes in the prevailing interest rates. When interest rates rise, market values of fixed maturity investments generally fall. During the three months ended June 30, 2016, fixed maturity investments' unrealized investment gains (losses), net, recognized in net income, had an unfavorable change of $3 million, as compared to 2015 and for the six months ended June 30, 2016 there was a favorable change of $11 million compared to 2015. The Company also recorded in other comprehensive income favorable changes in unrealized gains (losses), net, on fixed maturity investments, of $369 million and $798 million for the three and six months ended June 30, 2016, respectively, compared to unfavorable changes of $285 million and $345 million for the three and six months ended June 30, 2015, respectively. The realized gains (losses), net, on fixed maturity investments had a favorable change of $26 million and $25 million for the three and six months ended June 30, 2016, respectively, as compared to 2015.

Reconciliation of Net Income to Operating Income

The Company uses the same accounting policies and procedures to measure operating income as it uses to measure consolidated net income. The Company employs hedging strategies for the purpose of managing the interest rate, foreign currency exchange rate, and equity market risks impacting the Company’s business. For some derivative instruments, hedge accounting is not elected; therefore, all gains or losses from these transactions are recorded in the consolidated statement of income. As a result, fluctuations in interest rates, foreign currencies, or equity markets may cause the Company to experience volatility in net income. As such, the Company has defined operating income as net income, excluding realized and unrealized gains and losses on investments and derivatives and their related tax effect. Operating income should not be viewed as a substitute for net income prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In addition, the Company’s operating income measures may not be comparable to similarly titled measures reported by other companies.

Three months ended June 30, 2016 compared with the three months ended June 30, 2015

The Company believes that the presentation of operating income enhances the understanding of the Company’s performance by highlighting the results of operations and the underlying profitability drivers of the business. Operating income should not be viewed as a substitute for U.S. GAAP net income. The following is a summary of the contributions of each segment to the net income and a reconciliation of net income to operating income:



	Three Months Ended June 30,						Increase			Percentage
Income statement data (In millions)	2016			2015			(decrease)			change
Net (loss) income
Individual Markets segment	$	41		$	4		$	37		925	%
Empower Retirement segment	26			(8		)	34			425	%
Other segment	7			(3		)	10			333	%
Total net (loss) income	74			(7		)	81			1,157	%
Adjustments to net (loss) income
Unrealized investment gains (losses), net	55			(76		)	131			172	%
Realized investment gains (losses), net	42			16			26			163	%
Pro-rata tax (expense) benefit⁽¹⁾	(33		)	20			(53		)	(265	)%
Operating income (loss)	$	10		$	33		$	(23	)	(70	)%

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

Unrealized investment gains (losses), net, had a favorable change of $131 million, or 172%, from a loss of $76 million in 2015 to a gain of $55 million in 2016. The primary driver of the change was an $86 million favorable change from derivatives, in addition to a $48 million favorable change from forward settling TBA securities, partially offset by a $3 million unfavorable change from bonds.

Realized investment gains (losses), net, had a favorable change of $26 million, or 163%, to $42 million during the three months ended June 30, 2016, when compared to the same period in 2015. The change was primarily driven by a $26 million favorable change from bonds in addition to a $2 million favorable change from forward settling TBA securities, partially offset by a $1 million unfavorable change from mortgage gains.

Pro-rata tax expense (benefit) had an unfavorable change of $53 million, from a benefit of $20 million in 2015 to an expense of $33 million in 2016, resulting from the favorable change in total unrealized and realized investment gains (losses), net.

Six Months Ended June 30, 2016 compared with the six months ended June 30, 2015

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



	Six Months Ended June 30,						Increase			Percentage
Income statement data (In millions)	2016			2015			(decrease)			change
Net (loss) income
Individual Markets segment	$	88		$	56		$	32		57	%
Empower Retirement segment	78			40			38			95	%
Other segment	6			(4		)	10			250	%
Total net (loss) income	172			92			80			87	%
Adjustments to net (loss) income
Unrealized investment gains (losses), net	84			(13		)	97			746	%
Realized investment gains (losses), net	73			34			39			115	%
Pro-rata tax (expense) benefit⁽¹⁾	(55		)	(7		)	(48		)	(686	)%
Operating income (loss)	$	70		$	78		$	(8	)	(10	)%

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

Unrealized investment gains (losses), net, had a favorable change of $97 million from a loss of $13 million in 2015 to a gain of $84 million in 2016. The primary driver of the change was a $53 million favorable change in unrealized gains on derivatives. The remainder was a $33 million favorable change in unrealized gains on forward settling TBA securities and an $11 million favorable change in unrealized gains on bonds.

Realized investment gains (losses), net, had a favorable change of $39 million, or 115%, to $73 million during the six months ended June 30, 2016, when compared to the same period in 2015. The change was primarily driven by a favorable change of $25 million from gains on bonds and a $14 million favorable change in gains on forward settling TBA security transactions.

Pro-rata tax expense (benefit) had an unfavorable change of $48 million, or 686%, from a $7 million expense to a $55 million expense during the six months ended June 30, 2016, when compared to the same period in 2015, resulting from the favorable change in total unrealized and realized investment gains (losses), net.

Company Results of Operations

Three months ended June 30, 2016 compared with the three months ended June 30, 2015

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



	Three Months Ended June 30,				Increase			Percentage
Income statement data (In millions)	2016		2015		(decrease)			change
Premium income	$	77	$	75	$	2		3	%
Fee income	238		238		—			—	%
Other revenue	3		2		1			50	%
Net investment income	301		294		7			2	%
Total revenues	619		609		10			2	%
Policyholder benefits	263		272		(9		)	(3	)%
Operating expenses	340		288		52			18	%
Total benefits and expenses	603		560		43			8	%
Income before income taxes	16		49		(33		)	(67	)%
Income tax (benefit) expense	6		16		(10		)	(63	)%
Operating income (loss)	$	10	$	33	$	(23	)	(70	)%

The Company’s consolidated operating income had an unfavorable change of $23 million, or 70%, to $10 million for the three months ended June 30, 2016, when compared to the same period in 2015. The unfavorable change was primarily due to higher operating expenses, partially offset by higher net investment income, lower policyholder benefits, and lower income tax expense.

Net investment income had a favorable change of $7 million, or 2%, to $301 million during the three months ended June 30, 2016, when compared to the same period in 2015. The primary driver of the change was higher investment income on bonds, mortgages, and policy loans as a result of higher volume, partially offset by lower rates.

Policyholder benefits decreased by $9 million, or 3%, to $263 million for the three months ended June 30, 2016, when compared to the same period in 2015. The primary driver of the change was lower reserves for surrenders as compared to prior year.

Operating expenses increased by $52 million, or 18%, to $340 million for the three months ended June 30, 2016, when compared to the same period in 2015 primarily due to higher salaries and benefits as a result of higher headcount due to business growth. The remainder was due to higher deferred acquisition costs (“DAC”) amortization primarily due to higher current period gross profits as a result of higher realized investment gains.

Income tax expense had a favorable change of $10 million, from $16 million in 2015 to $6 million in 2016 primarily due to lower income taxes as a result of lower operating income before tax.

Six Months Ended June 30, 2016 compared with the six months ended June 30, 2015

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



	Six Months Ended June 30,				Increase			Percentage
Income statement data (In millions)	2016		2015		(decrease)			change
Premium income	$	232	$	220	$	12		5	%
Fee income	463		463		—			—	%
Other revenue	7		4		3			75	%
Net investment income	604		592		12			2	%
Total revenues	1,306		1,279		27			2	%
Policyholder benefits	600		600		—			—	%
Operating expenses	627		560		67			12	%
Total benefits and expenses	1,227		1,160		67			6	%
Income before income taxes	79		119		(40		)	(34	)%
Income tax (benefit) expense	9		41		(32		)	(78	)%
Operating income (loss)	$	70	$	78	$	(8	)	(10	)%

The Company’s consolidated operating income had an unfavorable change of $8 million, or 10%, to $70 million for the six months ended June 30, 2016, when compared to the same period in 2015. The change was primarily due to higher operating expenses, partially offset by lower income tax expense and higher premium income and net investment income.

Premium income increased by $12 million, or 5%, to $232 million for the six months ended June 30, 2016, when compared to the same period in 2015. This increase reflects higher sales for life insurance sold through banks.

Net investment income had a favorable change of $12 million, or 2%, to $604 million during the six months ended June 30, 2016, when compared to the same period in 2015. This was primarily due to higher investment income on bonds, mortgages, and policy loans as a result of higher invested asset balances, partially offset by lower yields.

Operating expenses increased by $67 million, or 12%, to $627 million for the six months ended June 30, 2016, when compared to the same period in 2015 primarily due to higher salaries and benefits as a result of higher headcount due to business growth. The remainder was due to higher DAC amortization primarily due to higher current period gross profits as a result of higher realized investment gains.

Income tax expense had a favorable change of $32 million or 78%, to $9 million for the six months ended June 30, 2016, when compared to the same period in 2015 primarily due to lower income taxes as a result of a management election to claim foreign tax credits in addition to a decrease in operating income before tax.

Individual Markets Segment Results of Operations

Three months ended June 30, 2016 compared with the three months ended June 30, 2015

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



	Three Months Ended June 30,				Increase			Percentage
Income statement data (In millions)	2016		2015		(decrease)			change
Premium income	$	52	$	51	$	1		2	%
Fee income	26		25		1			4	%
Net investment income	192		189		3			2	%
Total revenues	270		265		5			2	%
Policyholder benefits	202		198		4			2	%
Operating expenses	54		31		23			74	%
Total benefits and expenses	256		229		27			12	%
Income before income taxes	14		36		(22		)	(61	)%
Income tax expense	4		12		(8		)	(67	)%
Operating income (loss)	$	10	$	24	$	(14	)	(58	)%

Operating income for the Individual Markets segment had an unfavorable change of $14 million, or 58%, to $10 million, during the three months ended June 30, 2016, when compared to the same period in 2015. The change was primarily due to higher operating expense, partially offset by lower income tax expense.

Operating expenses increased by $23 million, or 74%, to $54 million for the three months ended June 30, 2016, when compared to the same period in 2015 primarily due to higher DAC amortization related to higher current period gross profits as a result of higher realized investment gains.

Income tax expense had a favorable change of $8 million, or 67%, to $4 million during the three months ended June 30, 2016, when compared to the same period in 2015 primarily due to lower income taxes as a result of lower operating income before tax.

Six Months Ended June 30, 2016 compared with the six months ended June 30, 2015

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



	Six Months Ended June 30,				Increase			Percentage
Income statement data (In millions)	2016		2015		(decrease)			change
Premium income	$	185	$	176	$	9		5	%
Fee income	48		47		1			2	%
Net investment income	378		375		3			1	%
Total revenues	611		598		13			2	%
Policyholder benefits	470		455		15			3	%
Operating expenses	91		67		24			36	%
Total benefits and expenses	561		522		39			7	%
Income before income taxes	50		76		(26		)	(34	)%
Income tax expense	16		26		(10		)	(38	)%
Operating income (loss)	$	34	$	50	$	(16	)	(32	)%

Operating income for the Individual Markets segment had an unfavorable change of $16 million, or 32%, to $34 million during the six months ended June 30, 2016, when compared to the same period in 2015. The change was primarily due to higher operating expenses and policyholder benefits. These were partially offset by lower income tax expense, higher premiums, and higher net investment income.

Premium income increased by $9 million, or 5%, to $185 million during the six months ended June 30, 2016, when compared to the same period in 2015. This increase reflects higher sales for life insurance sold through banks.

Net investment income had a favorable change of $3 million, or 1%, to $378 million for the six months ended June 30, 2016, when compared to the same period in 2015. This was due to higher investment income earned on bonds, mortgages, and policy loans as a result of higher invested asset balances, partially offset by lower yields.

Policyholder benefits increased by $15 million, or 3%, to $470 million for the six months ended June 30, 2016, when compared to the same period in 2015 primarily driven by higher death claims, partially offset by reserves released on death claims.

Operating expenses increased by $24 million, or 36%, to $91 million for the six months ended June 30, 2016, when compared to the same period in 2015. The increase was due to higher DAC amortization primarily due to higher current period gross profits as a result of higher realized investment gains.

Income tax expense had a favorable change of $10 million, or 38%, to $16 million during the six months ended June 30, 2016, when compared to the same period in 2015 primarily due to lower operating income before tax.

Empower Retirement Segment Results of Operations

Three months ended June 30, 2016 compared with the three months ended June 30, 2015

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



	Three Months Ended June 30,					Increase			Percentage
Income statement data (In millions)	2016			2015		(decrease)			change
Fee income	$	211		$	212	$	(1	)	—	%
Other revenue	3			2		1			50	%
Net investment income	96			92		4			4	%
Total revenues	310			306		4			1	%
Policyholder benefits	52			48		4			8	%
Operating expenses	267			240		27			11	%
Total benefits and expenses	319			288		31			11	%
Income (loss) before income taxes	(9		)	18		(27		)	(150	)%
Income tax (benefit) expense	(3		)	6		(9		)	(150	)%
Operating income (loss)	$	(6	)	$	12	$	(18	)	(150	)%

Operating income for the Empower Retirement segment had an unfavorable change of $18 million, or 150%, to a loss of $6 million for the three months ended June 30, 2016, when compared to the same period in 2015. The change was primarily due to higher operating expenses, partially offset by lower income tax expense.

Operating expenses increased by $27 million, or 11%, to $267 million for the three months ended June 30, 2016, when compared to the same period in 2015. The increase was primarily attributable to an increase in salaries and benefits as a result of increased headcount due to business growth.

Income tax (benefit) expense had a favorable change of $9 million from an expense of $6 million in 2015 to a benefit of $3 million in 2016 primarily as a result of lower operating income before tax.

Six Months Ended June 30, 2016 compared with the six months ended June 30, 2015

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



	Six Months Ended June 30,					Increase			Percentage
Income statement data (In millions)	2016			2015		(decrease)			change
Premium income	$	1		$	—	$	1		100	%
Fee income	412			414		(2		)	—	%
Other revenue	7			4		3			75	%
Net investment income	200			190		10			5	%
Total revenues	620			608		12			2	%
Policyholder benefits	102			97		5			5	%
Operating expenses	499			461		38			8	%
Total benefits and expenses	601			558		43			8	%
Income before income taxes	19			50		(31		)	(62	)%
Income tax (benefit) expense	(11		)	17		(28		)	(165	)%
Operating income (loss)	$	30		$	33	$	(3	)	(9	)%

Operating income for the Empower Retirement segment had an unfavorable change of $3 million, or 9%, to $30 million for the six months ended June 30, 2016, when compared to the same period in 2015. The change was primarily due to higher operating expenses and policyholder benefits, partially offset by lower income tax expense and higher net investment income.

Net investment income had a favorable change of $10 million, or 5%, to $200 million for the six months ended June 30, 2016, when compared to the same period in 2015. The primary driver of the change was higher investment income on bonds, mortgages, and policy loans as a result of higher invested asset balances, partially offset by lower yields.

Policyholder benefits increased by $5 million, or 5%, to $102 million for the six months ended June 30, 2016, when compared to the same period in 2015. The change was primarily due to higher interest credited or paid to contract holders as a result of higher average liabilities, partially offset by lower crediting rates.

Operating expenses increased by $38 million, or 8%, to $499 million for the six months ended June 30, 2016, when compared to the same period in 2015. The change was primarily attributable to higher salaries and benefits as a result of higher headcount due to business growth.

Income tax (benefit) expense had a favorable change of $28 million, or 165%, to a benefit of $11 million during the six months ended June 30, 2016, when compared to the same period in 2015. The change was primarily as a result of a management election to claim foreign tax credits in addition to lower operating income before tax.

Other Segment Results of Operations

Three months ended June 30, 2016 compared with the three months ended June 30, 2015

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



	Three Months Ended June 30,					Increase			Percentage
Income statement data (In millions)	2016		2015			(decrease)			change
Premium income	$	25	$	24		$	1		4	%
Fee income	1		1			—			—	%
Net investment income	13		13			—			—	%
Total revenues	39		38			1			3	%
Policyholder benefits	10		26			(16		)	(62	)%
Operating expenses	19		17			2			12	%
Total benefits and expenses	29		43			(14		)	(33	)%
Income (loss) before income taxes	10		(5		)	15			300	%
Income tax (benefit) expense	4		(2		)	6			300	%
Operating income (loss)	$	6	$	(3	)	$	9		300	%

Operating income for the Company’s Other segment had a favorable change of $9 million, or 300%, to $6 million for the three months ended June 30, 2016 compared to a loss of $3 million in 2015. The increase in operating income is primarily due to lower policyholder benefits, partially offset by higher income tax expense.

Policyholder benefits decreased by $16 million, or 62%, to $10 million for the three months ended June 30, 2016 primarily due to lower reserves for surrenders as compared to prior year.

Income tax expense had an unfavorable change of $6 million or 300%, to $4 million for the three months ended June 30, 2016 primarily due to higher income before income taxes.

Six Months Ended June 30, 2016 compared with the six months ended June 30, 2015

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



	Six Months Ended June 30,					Increase			Percentage
Income statement data (In millions)	2016		2015			(decrease)			change
Premium income	$	47	$	44		$	3		7	%
Fee income	3		2			1			50	%
Net investment income	26		27			(1		)	(4	)%
Total revenues	76		73			3			4	%
Policyholder benefits	29		48			(19		)	(40	)%
Operating expenses	37		32			5			16	%
Total benefits and expenses	66		80			(14		)	(18	)%
Income (loss) before income taxes	10		(7		)	17			243	%
Income tax (benefit) expense	4		(2		)	6			300	%
Operating income (loss)	$	6	$	(5	)	$	11		220	%

Operating income for the Company’s Other segment had a favorable change of $11 million or 220%, to $6 million for the six months ended June 30, 2016, when compared to a loss of $5 million in the same period in 2015. The change in operating income is primarily due to lower policyholder benefits, partially offset by higher income tax expense.

Policyholder benefits decreased by $19 million, or 40%, to $29 million for the six months ended June 30, 2016 primarily due to lower reserves for surrenders as compared to prior year.

Income tax expense had an unfavorable change of $6 million or 300%, to $4 million for the six months ended June 30, 2016 primarily due to higher income before income taxes.

Investment Operations

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

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

The following table presents the percentage distribution of the carrying values of the Company’s general account investment portfolio:



(In millions)	June 30, 2016				December 31, 2015
Fixed maturities, available-for-sale	$	20,171	66.0	%	$	20,532	71.3	%
Fixed maturities, held-for-trading	327		1.1	%	616		2.1	%
Mortgage loans on real estate	3,496		11.4	%	3,248		11.3	%
Policy loans	4,114		13.5	%	4,093		14.2	%
Short-term investments	2,413		7.9	%	266		0.9	%
Limited partnership and other corporation interests	35		0.1	%	41		0.1	%
Other investments	15		—	%	15		0.1	%
Total investments	$	30,571	100.0	%	$	28,811	100.0	%

Fixed Maturity Investments

Fixed maturity investments include public and privately placed corporate bonds, government bonds, and mortgage-backed and asset-backed securities. Included in available-for-sale fixed maturities are perpetual debt investments which primarily consist of junior subordinated debt instruments that have no stated maturity date but pay fixed or floating interest in perpetuity. The Company’s strategy related to mortgage-backed and asset-backed securities is to focus on those investments with low prepayment risk and minimal credit risk.

Private placement investments are generally less marketable than publicly traded assets, yet they typically offer enhanced covenant protection that allows the Company, if necessary, to take appropriate action to protect its investment. The Company believes that the cost of the additional monitoring and analysis required by private placement investments is more than offset by their enhanced yield.

One of the Company’s primary objectives is to ensure that its fixed maturity portfolio is maintained at a high average credit quality to limit credit risk. All securities are internally rated by the Company on a basis intended to be similar to that of the rating agencies. The Company’s internal rating methodology generally takes into account ratings from Standard & Poor’s Ratings Services, Fitch Ratings, and Moody’s Investor Services, Inc. In addition, the National Association of Insurance Commissioners (“NAIC”) implemented a ratings methodology for residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), and other structured securities. The Company may also utilize inputs from this ratings process to develop its internal rating.

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



Credit Rating	June 30, 2016		December 31, 2015
AAA	19.4	%	27.8	%
AA	16.4	%	14.8	%
A	33.5	%	29.5	%
BBB	29.6	%	26.9	%
BB and below (Non-investment grade)	1.1	%	1.0	%
Total	100.0	%	100.0	%

The June 30, 2016, AAA rating percentage decreased as compared to December 31, 2015, as the Company sold AAA-rated government agency MBS pools to enter into forward settling TBA contracts which are treated as derivatives.

The percentage distribution of the estimated fair value of the corporate sector fixed maturity portfolio, calculated as a percentage of fixed maturities, is summarized as follows:



Sector	June 30, 2016		December 31, 2015
Utility	19.9	%	17.6	%
Finance	11.0	%	10.2	%
Consumer	10.6	%	9.3	%
Natural resources	7.1	%	6.5	%
Transportation	3.9	%	3.2	%
Other	15.1	%	13.0	%

Mortgage Loans on Real Estate

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

Derivatives

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

Summary of Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to adopt accounting policies to enable them to make a significant variety of accounting and actuarial estimates and assumptions. These estimates and assumptions are evaluated on an ongoing basis based on historical developments, market conditions, industry trends, and other information that is reasonable given the facts and circumstances for the Company. These critical estimates and assumptions affect, among other things, the reported amounts of assets and liabilities, the disclosure of contingent liabilities, and the reported amounts of revenues and expenses. Actual results can differ from the amounts previously estimated, which were based on information available at the time the estimates were made.

The Company has identified the following accounting policies, judgments, and estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:

· Valuation of investments;

· Impairment of investments;

· Valuation of derivatives and related hedge accounting;

· Valuation of DAC and related amortization (including unlocking of assumptions); and

· Valuation of policy benefit liabilities

A discussion of each of these critical accounting policies may be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Application of Recent Accounting Pronouncements

See Note 3 to the accompanying condensed consolidated financial statements for a discussion of the application of recent accounting pronouncements.

Liquidity and Capital Resources

Liquidity refers to a company’s ability to generate sufficient cash flows to meet the short-term needs of its operations. The Company manages its operations to create stable, reliable, and cost-effective sources of cash flows to meet all of its obligations.

The principal sources of the Company’s liquidity are premiums and contract deposits, fees, investment income, and investment maturities and sales. Funds provided from these sources are reasonably predictable and normally exceed liquidity requirements for payment of policy benefits, payments to policy and contractholders in connection with surrenders and withdrawals, and general expenses. However, since the timing of available funds cannot always be matched precisely to commitments, imbalances may arise when demands for funds exceed those on hand. A primary liquidity concern regarding cash flows from operations is the risk of early policyholder and contractholder withdrawals. A primary liquidity concern regarding investment activity is the risk of defaults and market volatility.

In addition, a demand for funds may arise as a result of the Company taking advantage of current investment opportunities. The sources of the funds that may be required in such situations include the issuance of commercial paper or other debt instruments.

Management believes that the liquidity profile of its assets is sufficient to satisfy the short-term liquidity requirements of reasonably foreseeable scenarios.

Generally, the Company has met its operating requirements by utilizing cash flows from operations and maintaining appropriate levels of liquidity in its investment portfolio. Liquidity for the Company has remained strong, as evidenced by the amounts of short-term investments and cash that totaled $535 million and $301 million as of June 30, 2016, and December 31, 2015, respectively. The June 30, 2016, and December 31, 2015, short-term investments included above exclude any amounts held to settle TBA forward contracts. In addition, 99% of the fixed maturity portfolio carried an investment grade rating at June 30, 2016, and December 31, 2015, which provides 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 $93 million of commercial paper

outstanding as of June 30, 2016, and December 31, 2015, 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 with U.S. Bank, 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 six months ended June 30, 2016. 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 June 30, 2016, and December 31, 2015, were $309 million and $51 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 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 $59 million and zero as collateral at June 30, 2016, and December 31, 2015, respectively, which have not been recorded on the condensed consolidated balance sheets as the Company does not have effective control.

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, 2015, under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, with the participation of its President and Chief Executive Officer and its Principal 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”). The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and to ensure that the information required to be disclosed by the Company in reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, the President and Chief Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2016.

Changes in Internal Control over Financial Reporting

As disclosed in Item 9A, “Controls and Procedures,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, management concluded that the Company maintained effective internal control over financial reporting. There has been no significant change in the control environment for the three and six months ended June 30, 2016. Management is committed to continuing to improve its internal control processes and will continue to review its financial reporting controls and procedures.

Part II Other Information

Item 1. Legal Proceedings

Item 1A. Risk Factors

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


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


•	The insurance and financial services industries are heavily regulated and changes in regulation may reduce profitability.


•	A downgrade or potential downgrade in the Company’s financial strength or claims paying ratings could result in a loss of business and negatively affect results of operations and financial condition.


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


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


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


•	Interest rate fluctuations could have a negative impact on results of operations and financial condition.


•	Market fluctuations and general economic conditions may adversely affect results of operations and financial condition.


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


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


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


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


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


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

Item 6. Exhibits

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

Index to Exhibits



Exhibit Number	Title
31.1	Rule 13a-14(a)/15-d14(a) Certification
31.2	Rule 13a-14(a)/15-d14(a) Certification
32	18 U.S.C. 1350 Certification
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Great-West Life & Annuity Insurance Company



By:	/s/	Kara Roe	Date:	August 11, 2016
		Kara Roe
		Vice President, Controller, and Principal Accounting Officer

GREAT WEST LIFE & ANNUITY INSURANCE CO - FORM 10-Q - August 11, 2016

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GREAT WEST LIFE & ANNUITY INSURANCE CO Reports